<PAGE>
As filed with the Securities and Exchange Commission on May 7, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENGAGE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 7372 04-3281378
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
---------------
Engage Technologies, Inc.
100 Brickstone Square
Andover, MA 01810 (978) 684-3884
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------
Paul L. Schaut
President and Chief Executive Officer
Engage Technologies, Inc.
100 Brickstone Square
Andover, MA 01810 (978) 684-3884
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ.
THOMAS S. WARD, ESQ. ROPES & GRAY
HALE AND DORR LLP One International Place
60 State Street Boston, MA 02110
Boston, MA 02109 (617) 951-7000
(617) 526-6000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- -------------------------------------------------------------------------------
<CAPTION>
Title of each Class Proposed Maximum Amount of
of Securities to be Registered Aggregate Offering Price(1) Registration Fee
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per
share........................... $75,000,000 $20,850
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- -------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated , 1999.
Shares
Engage Technologies, Inc.
[LOGO OF ENGAGE TECHNOLOGIES APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of Engage Technologies, Inc. All
of the shares of common stock are being sold by Engage.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $ and $ . Application has been made for quotation of the common
stock on the Nasdaq National Market under the symbol "ENGA".
Upon completion of this offering, CMGI, Inc. will directly own approximately
% of the outstanding shares of Engage common stock and will continue to
control Engage.
Please see "Risk Factors" beginning on page 7 to read about factors you
should consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Engage............................ $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional shares from Engage at the initial public offering price less the
underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co.
Hambrecht & Quist
Bear, Stearns & Co. Inc.
-----------
Prospectus dated , 1999.
<PAGE>
The inside front cover contains the following:
[Graphical description of the product families offered by Engage. The page
contains an image of three smaller circles surrounding and overlapping a
larger circle. One small circle is labelled, "Targeted Delivery of Content and
Commerce". One small circle is labelled, "Targeted Delivery of Advertising".
One small circle is labelled, "Strategic Marketing Intelligence and Analysis".
The larger circle is labelled, "Engage Profiling Solutions".]
[Graphical depiction of how a profile is created and used. The page
contains an image of a person sitting before a computer screen; next to the
person is a box containing sample scores within a user profile. The same image
is repeated three times, with the scores in the profile box changed beneath
each of the images. The same image is again repeated at the bottom of the
page, adjacent to which are groups of three banner advertisements, three e-
commerce promotions and three types of editorial content. Arrows point from
these groups to a graphic of a computer screen that has one box labelled "Ad
Banner", another "Dynamic Content" and another "Promo".]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Engage's financial statements and the notes to those statements
appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Engage and our
industry. These forward-looking statements involve risks and uncertainties.
Engage's actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, as more fully
described in the "Risk Factors" section and elsewhere in this prospectus.
Engage undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Engage Technologies, Inc.
Our Business
Engage is a leading provider of profile-driven Internet marketing solutions.
Engage has developed proprietary technology that enables it and its customers
to create Web user profiles providing detailed information about individual
consumer preferences without personally identifiable user information. Based on
this technology, Engage has built the Engage Knowledge database, which
currently contains more than 30 million anonymous consumer profiles built with
data drawn from multiple, diverse Web sites. 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 profile database. The Web site can
then use the profile to target advertisements, content and e-commerce offerings
to that visitor based on his or her particular preferences, demographic
characteristics and geographic location.
Each Engage Knowledge profile contains interest codes that reflect a Web
user's inferred preference level in hundreds of standard categories and
subcategories, such as books, business, computers, fashion, sports and travel.
Categories can be further customized to meet the needs of a specific customer
or market. These profiles are continuously updated and refined based on a
visitor's browsing behavior across multiple Web sites, including pages selected
by the user, the duration of the user's visits and the responses of the user to
specific advertisements and promotions. Engage Knowledge profiles are designed
to protect the privacy of Web users because they do not contain information
about the identity of an individual user, such as name, home or e-mail address
or domain name.
Engage's products and services include:
. Engage Knowledge, a service that is currently being tested with customers
and will allow real-time access to Engage's centralized database of
anonymous global profiles of Web users;
. Engage ProfileServer, a software product used by customers to create and
deliver site-specific profiles of Web users;
. Accipiter AdManager, an online advertising management system that
automates the scheduling, targeting and delivery of ads on Web sites and
the reporting of advertising campaign results;
. Accipiter AdBureau, an outsourced online advertising management service
using AdManager technology;
. I/PRO services, which provide outsourced Web site traffic analysis and
audits; and
. Engage DecisionSupportServer, a software product that allows customers to
perform sophisticated analyses of the behavior and interests of their Web
site visitors.
As of April 30, 1999, Engage had sold its software and services to
approximately 300 customers including CNET, Dell, Lycos, Microsoft and
Sportsline USA.
3
<PAGE>
Our Market Opportunity
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 most relevant users,
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.
Our Strategy
Engage's strategy includes a number of elements designed to enhance its
position as a leading provider of profile-driven Internet marketing solutions:
Exploit position as leader in profiling technology. We believe we have the
opportunity to establish Engage as the recognized brand for audience
targeting on the Internet by developing a family of "Engage-enabled"
products and services that use our proprietary profiling technology.
Offer multiple solutions based on open Web architecture. To promote broad
acceptance of Engage profiles, we plan to continue to design our products
based on an open Web architecture to work both with our own applications and
third-party applications.
Continue to enhance profiles. We intend to continue to improve the quality
and usefulness of Engage Knowledge profiles by increasing our installed base
of subscribers to the Engage Knowledge data service, improving our profiling
algorithms and technology and refining our profile categories to provide
broader, more detailed and market-specific information.
Focus on specific markets. We plan to tailor our profiling solutions for
specific markets, including Web publishers and advertising networks and
vertical markets such as automotive, retail and other industry-specific
markets.
Leverage family of Engage solutions. We intend to cross-sell our products and
services to our existing installed base of customers.
Maintain position as trusted leader in Internet privacy. We plan to maintain
our commitment and leadership regarding issues of consumer privacy on the
Internet.
Our Offices
Engage was incorporated in Delaware on July 18, 1995. Our principal
executive offices are located at 100 Brickstone Square, Andover, MA 01810. Our
telephone number at that location is 978-684-3884. Our Internet address is
www.engage.com. The information contained on our Web site is not incorporated
by reference in this prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by Engage...................... shares
Shares to be outstanding after this offering.. shares(1)
Proposed Nasdaq National Market symbol........ ENGA
Use of proceeds............................... For general corporate purposes,
including working capital
</TABLE>
- --------
(1) Based on 19,679,569 shares of common stock outstanding as of April 30,
1999, plus shares of common stock issuable upon conversion of
outstanding convertible notes and convertible preferred stock as of that
date. Excludes 3,233,897 shares issuable upon the exercise of outstanding
stock options as of April 30, 1999.
Engage, the Engage logo, Accipiter, AdBureau, AdManager, ProfileServer,
DSServer, Engage Knowledge, Engage Technologies, I/AUDIT and I/PRO are
trademarks of Engage. All other trademarks and service marks are the property
of their respective owners.
Unless otherwise specifically stated, information throughout this prospectus
assumes:
. the underwriters' over-allotment option is not exercised;
. the conversion of $ of indebtedness to CMGI into shares of
convertible preferred stock prior to the closing of this offering;
. the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock upon the closing of this offering;
. the effectiveness of a -for- stock split immediately prior to the date
of this prospectus; and
. an initial public offering price of $ per share.
5
<PAGE>
Summary Financial Data
The following table summarizes our statement of operations data. This
financial information reflects the results of operations of Accipiter since
April 8, 1998 and does not reflect the results of operations of I/PRO, which
was acquired in April 1999.
<TABLE>
<CAPTION>
Six Months
Ended
July 18, 1995 Year Ended July 31, January 31,
(inception) -------------------- ----------------
to July 31, 1996 1997 1998 1998 1999
---------------- --------- --------- ------ --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ $ 25 $ 2,217 $ 164 $ 4,265
Cost of revenue......... -- 31 2,242 438 3,064
------- --------- --------- ------ --------
Gross (loss) profit... -- (6) (25) (274) 1,201
Operating expenses:
In-process research and
development........... -- -- 9,200 -- --
Research and
development........... 1,796 7,261 5,925 3,460 3,878
Selling and marketing.. 155 1,566 4,031 1,279 3,732
General and
administrative........ 428 1,429 2,333 484 1,586
Amortization of
goodwill and other
intangibles........... -- -- 1,273 -- 1,909
------- --------- --------- ------ --------
Total operating
expenses............. 2,379 10,256 22,762 5,223 11,105
------- --------- --------- ------ --------
Loss from operations.... (2,379) (10,262) (22,787) (5,497) (9,904)
Gain on sale of product
rights................. -- -- 9,240 9,240 --
Equity in loss of joint
venture................ -- -- -- -- (160)
Interest expense, net... -- -- (172) -- (339)
------- --------- --------- ------ --------
Net (loss) income....... $(2,379) $ (10,262) $ (13,719) $3,743 $(10,403)
======= ========= ========= ====== ========
Pro forma basic and
diluted net loss per
share.................. $ (1.64) $ (0.62)
========= ========
Weighted average shares
of common stock used in
computing pro forma
basic and diluted net
loss per share......... 8,375 16,824
========= ========
</TABLE>
The following table is a summary of our balance sheet at January 31, 1999
(1) on an actual basis, (2) on a pro forma basis after giving effect to the
conversion of all debt to CMGI into shares of convertible preferred stock and
the conversion of all outstanding convertible preferred stock into common stock
and (3) on a pro forma as adjusted basis to reflect the sale of shares of
common stock at an assumed initial public offering price of $ per share,
after deducting the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
January 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents............................. $ -- $ -- $
Working capital (deficit)........................ (14,754) (5,407)
Total assets..................................... 22,782 22,782
Debt to CMGI..................................... 9,347 --
Stockholders' equity............................. 4,345 13,692
</TABLE>
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below before you decide to buy our common stock. If any of
the following risks were to occur, our business, financial condition or results
of operations would likely suffer. In that event, the trading price of our
common stock could decline, and you may lose all or part of your investment.
We have only been in business for a short period of time and your basis for
evaluating us is limited
We were incorporated in July 1995 and we commenced operations in September
1995. You must consider the risks, expenses and uncertainties that an early
stage company like ours faces, particularly in the new and rapidly evolving
Internet market. Because we have only a limited operating history, our past
results and rates of growth may not be meaningful and you should not rely on
them as an indication of our future performance. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
detailed information on our limited operating history.
We have incurred substantial losses and anticipate continued losses
We have never been profitable. We incurred net losses of $10.4 million for
the six months ended January 31, 1999, $13.7 million for the fiscal year ended
July 31, 1998 and $10.3 million for the fiscal year ended July 31, 1997. We
expect to increase our spending significantly and therefore expect to continue
to incur significant losses for the foreseeable future.
We will need to generate significant additional revenue to achieve
profitability. We may not achieve profitability. If our revenue grows more
slowly than we anticipate or if our operating expenses either increase more
than we expect or cannot be reduced in light of lower revenue, our business,
financial condition and results of operations will be materially and adversely
affected.
We have recently begun to introduce our Engage Knowledge data service, and it
is uncertain whether it will achieve widespread customer acceptance
We have implemented our Engage Knowledge data service with customers on a
test basis and have not yet realized any revenue from sales of this service.
While we expect to implement this service on a commercial basis in July 1999,
we may encounter delays or difficulties in this commercial introduction. The
global profiling capabilities used to create and maintain the Engage Knowledge
data service serve as the platform for most of our current and planned profile-
driven products and services. We expect that a significant portion of our
future revenue will depend on sales of the Engage Knowledge data service and
other products and services incorporating our global profile technology. There
can be no assurance that our Engage Knowledge data service, or our 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 our business, financial condition and results of operations.
Profile-based targeting may not achieve its intended benefits and our revenue
therefore may not grow as expected
Our products and services are designed to enable Web publishers, advertisers
and merchants to target their intended audiences more effectively. Because
Engage profiling technology is new, we cannot be sure that the use of our
anonymous profiles will result in more effective targeting of advertisements or
other marketing and promotional activities. Our 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 our customers
are otherwise unable to generate a sufficient return on investment from the use
of our profiles. If the use of our profile-driven solutions does not
demonstrably improve the responsiveness of Web visitors, Engage's business,
financial condition and results of operations will be materially adversely
affected.
7
<PAGE>
The value of Engage Knowledge depends on continued contributions of data
from customers
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. Engage Knowledge customers currently can elect not to
contribute user data to the Engage global profile database. Customers may elect
not to contribute data due to concerns relating to sharing proprietary
information about their users and perceived privacy concerns. Decisions by
major customers not to contribute their data 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 our other
planned profile-based products. 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.
We may not be successful in developing profile-driven solutions for specific
vertical markets
We plan to develop Engage Knowledge data services that are tailored for the
requirements of specific vertical markets, such as the automotive, retail and
other industry-specific markets. Our success in introducing these services will
depend on our 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 strategic alliances with partners having
expertise in these markets. There can be no assurance that we will be
successful in obtaining this data or the necessary strategic alliances, and any
failure to do so would impair our ability to introduce our planned products and
services for these markets.
Our quarterly operating results are subject to significant fluctuations and
you should not rely on them as an indication of our future results
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our 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 our
customers' Web sites.
We are one of the first companies to offer profile-driven marketing
solutions. As a result, we must educate potential customers on the use and
benefits of our products and services. In addition, the implementation of the
Engage Knowledge data service requires a significant commitment of resources by
our customers. It can, in some cases, take our sales organization several
months to finalize a sale. This makes it difficult to predict the quarter in
which a sale may occur.
Many of our expenses, particularly personnel costs and rent, are relatively
fixed, and are incurred in part based on expectations of future revenue. We 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, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
may be below the expectations of public market analysts and investors. This
could cause the trading price of our common stock to decline.
We will continue to be controlled by CMGI, Inc., whose interests may differ
from other stockholders
CMGI, Inc. currently beneficially owns approximately 96% of the outstanding
shares of our common stock, and after the offering will own approximately % of
the outstanding shares of our common stock. Accordingly, CMGI will continue to
have the power to elect our entire board of directors and to approve or
disapprove any corporate transaction or other matter submitted to our
stockholders for approval, including the approval of mergers or other
significant corporate transactions. The interests of
8
<PAGE>
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 Engage
could be influenced by the possible need of CMGI to maintain control of Engage
in order for CMGI to avoid becoming a registered investment company. CMGI's
ownership may have the effect of delaying or preventing a change in control of
us or discouraging a potential acquiror from attempting to obtain control of
us, which in turn could adversely affect the market price of our common stock.
See "Transactions and Relationship Between Engage and CMGI".
A material portion of our growth to date has been attributable to sales to CMGI
affiliates
Eleven of our customers are affiliates of CMGI. To the extent that our
growth in revenue has been attributable to sales of products and services to
these affiliates, there can be no assurance that our historical rate of growth
is an indication of our future prospects. CMGI has been and continues to be
instrumental in introducing Engage to customers and other business partners. If
the relationship between Engage and CMGI ended or was fundamentally altered,
our business, financial condition and results of operations could be materially
adversely affected.
Growing concerns about the use of "cookies" may limit our 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. Our 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, privacy advocates and governmental bodies have
suggested limiting or eliminating the use of cookies. The effectiveness of our
technology could be limited by any reduction or limitation in the use of
cookies.
If the use or effectiveness of cookies is limited, we would likely have to
switch to other technology that allows us to gather demographic and behavioral
information. This could require significant reengineering time and resources,
might not be completed in time to avoid negative consequences to our business,
financial condition or results of operations, and might not be possible at all.
Legislation or regulations may be adopted that could affect our ability to
generate or use information for profiles and may hinder our 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 that would regulate
the collection and use of personal data from Internet users and additional
similar bills are being considered during the current congressional session.
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 our
products. However, legislation or regulations may in the future be adopted
which may limit our 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
9
<PAGE>
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 our activities and our customers. Any of the foregoing developments
could have a material adverse effect on our business, financial condition and
results of operations.
We may have difficulty managing our expanding operations
We have recently experienced a period of rapid growth. Our 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, and the number of our employees
increased from 67 as of July 31, 1997 to 209 as of April 30, 1999. A number of
our senior managers have been with us for less than a year. This growth has
placed a significant strain on our managerial, operational and financial
resources. To accommodate this growth, we must implement new or upgraded
operating and financial systems, procedures and controls throughout many
different locations. We may not succeed in these efforts. Our failure to expand
and integrate these areas in an efficient manner could have a material adverse
effect on our business, financial condition and results of operations. If we
continue to grow, we 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. We may not be able to
attract the staff we need.
The acceptance and effectiveness of Internet advertising is not yet fully
established
Our 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 we expect, our 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 as a significant
advertising medium. Our advertising customers may challenge or refuse to accept
our or third-party measurements of advertisement delivery requests from the Web
sites of Web publishers using our solutions.
The acceptance and effectiveness of the Internet as a medium for consumer
transactions is not yet fully established
Our 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, our business, financial
condition and results of operations could be materially and adversely affected.
We have 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. We compete 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. In addition, NetGravity, in concert with Aptex and
MatchLogic, and businesses that offer cash or other incentives to users to
voluntarily provide profile data, are expected to compete in the global
profiling solutions market. The primary competitors to our advertising
management software are systems provided by NetGravity
10
<PAGE>
and Real Media. In the outsourced ad serving market, we compete with providers
of ad serving services, including AdForce and DoubleClick. Our traffic
measurement and analysis services and software compete with software offered by
Accrue, Andromedia, net.Genesis and WebTrends, and our audit services compete
with ABC Interactive, BPA and PricewaterhouseCoopers. We also encounter
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 our 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 we do. 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. We cannot assure you that our competitors will not develop products
or services that are equal or superior to our solutions or that achieve greater
market acceptance than our 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. We cannot
assure you that we will be able to compete successfully or that competitive
pressures will not materially and adversely affect our business, financial
condition and results of operations.
Companies doing business on the Internet, including ours, must also compete
with television, radio, cable and print media for a share of advertisers' total
advertising budgets.
Our systems may fail or experience slowdowns and we could lose key data used in
our global user profiles
Substantially all of our 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 losing data used to
create our global user profiles. Our business, financial condition and results
of operations could be materially and adversely affected if our systems were
affected by any of these occurrences or if any data used in our Engage
Knowledge global database were lost. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or
interruptions in our systems or loss of data.
We may need additional financing which could be difficult to obtain
We intend to grow our business rapidly and expect to incur significant
operating losses for the foreseeable future. Therefore, we may require
significant external financing in the future. Obtaining additional financing
will be subject to a number of factors, including:
. market conditions;
. our 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 us. If we are unable to raise capital to
fund our growth, our business, financial condition and results of operations
would be materially and adversely affected.
Technological change may render our 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. Our success
depends on our ability to adapt to rapidly changing technologies and to improve
the performance,
11
<PAGE>
features and reliability of our services and products in response to changing
customer and industry demands. Furthermore, we 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 our current and
prospective customers or achieve any degree of significant market acceptance.
We face risks associated with our international operations
and plans for expansion
We have operations in a number of international markets. We intend to
continue to expand our international operations and international sales and
marketing efforts. To date, we have limited experience in developing localized
versions of our solutions and in marketing, selling and distributing our
solutions internationally. We have established a direct sales office in the
United Kingdom and a joint venture with Sumitomo to conduct operations in
Japan. We intend to enter other international markets primarily by partnering
with locally based third parties, including entering into joint ventures and
distribution arrangements. Our success in such markets is directly dependent on
the success of our business partners and our and their dedication of sufficient
resources to our 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 our business, results of
operations and financial condition.
We may not be successful in acquiring and integrating new technologies or
businesses
We have acquired in the past and intend in the future to continue to acquire
or make investments in complementary businesses, products, services or
technologies. We cannot assure you that we will be able to identify additional
acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make such acquisitions
or investments on commercially acceptable terms. We 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 us.
If we make other types of acquisitions, we could have difficulty in
assimilating the acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our
results of operations. Furthermore, we may incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity
securities could be dilutive to our existing stockholders.
We depend on the continued viability of the Internet infrastructure
Our 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 our 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, we may be
required to incur substantial expenditures to adapt our products to the new
technologies.
12
<PAGE>
Our business may suffer if we cannot protect our intellectual property
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we seek to protect
through a combination of patent, copyright, trade secret and trademark law. We
have filed patent applications and trademark registrations in the United States
and internationally. We cannot assure you that any of our patent applications
or trademark registrations will be approved, or even if approved, would not be
successfully challenged by others or invalidated. In addition, we cannot assure
you that we will be able to prevent misappropriation of our solutions or
technologies, particularly in foreign countries where laws or law enforcement
practices may not protect our proprietary rights as fully as in the United
States.
Our profiling technology collects and utilizes data derived from user
activity on our customers' Web sites. This data is used for advertising and
content targeting. Although we believe that we have the right to use such data
and the compilation of such data in our database, we cannot assure you that any
trade secret, copyright or other protection will be available for such
information. In addition, others may claim rights to such information.
Our business will suffer if we are unable to retain key personnel
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of our
Chief Executive Officer, Paul L. Schaut; our Chief Operating Officer, David A.
Fish; and our Chief Technology Officer, Daniel J. Jaye. The loss of the
services of any key employee could have a material adverse effect on our
business, financial condition and results of operations.
Year 2000 problems may disrupt our 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 our operations.
The failure of any of our systems or systems maintained by third parties to
be Year 2000 compliant could:
. cause us to incur significant expenses to remedy any problems;
. affect the availability and performance of our network; or
. otherwise seriously damage our business.
A significant Year 2000-related disruption to our network could cause our
users, advertisers or electronic commerce partners to be dissatisfied with our
network or could impose an unmanageable burden on our technical support staff.
Our failure to correct a material Year 2000 problem could have a material
adverse effect on our business, financial condition and results of operations.
We will have discretion as to the use of the proceeds of this offering
We currently have no specific uses planned for the net proceeds of this
offering. As a result, our management will have broad discretion in applying
the net proceeds of this offering, and could include uses with which
stockholders may disagree. The failure of management to apply such funds
effectively could have a material adverse effect on our business, financial
condition and results of operations. See "Use of Proceeds".
Our stock price is likely to be highly volatile
Following this offering, an active trading market may not develop or be
sustained for our common stock. The price at which our common stock will trade
after this offering is likely to be highly volatile and may fluctuate
substantially due to a number of factors, including:
. actual or anticipated fluctuations in our results of operations;
. changes in or our failure to meet securities analysts' expectations;
13
<PAGE>
. technological innovations;
. increased competition;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
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 our common stock, regardless of our 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. We 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 our business, financial
condition and results of operations.
Shares eligible for public sale after this offering could adversely affect
our stock price
After this offering, there will be outstanding shares of our common
stock, or shares if the underwriters' over-allotment option is exercised in
full. Of these shares, the shares sold in this offering will be freely
tradeable except for any shares purchased by our "affiliates" as defined in
Rule 144 under the Securities Act. Of the remaining shares of common stock
held by existing stockholders, are subject to a 180-day lock-up agreement
with Goldman, Sachs & Co. and are eligible for sale only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Securities Act. Subject to the provisions of Rules 144, 144(k) and
701, at least shares will be available for sale in the public market 180
days after the date of this prospectus, subject in the case of shares held by
affiliates to compliance with applicable volume restrictions. Sales of a large
number of shares could have an adverse effect on the market price of our common
stock.
Anti-takeover provisions could prevent or delay a change of control
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that a stockholder
might consider favorable. See "Description of Capital Stock".
You will suffer immediate and substantial dilution
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment. Please see "Dilution".
14
<PAGE>
USE OF PROCEEDS
Engage estimates that the net proceeds from its sale of shares of common
stock will be $ , after deducting the underwriting discount and estimated
offering expenses payable by Engage. If the underwriters' over-allotment option
is exercised in full, Engage estimates that the net proceeds will be $ .
Engage presently intends to use a portion of the net proceeds from this
offering for general corporate purposes, including working capital, product
development, increasing sales and marketing capabilities and expanding
international operations. Engage may also use a portion of the net proceeds to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. Engage has no specific understandings,
commitments or agreements with respect to any such acquisition or investment.
Pending these uses, the net proceeds of this offering will be invested in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
Engage has never declared or paid any cash dividends on its capital stock.
Engage presently intends to retain future earnings, if any, to finance the
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of Engage's board of directors after taking into account various
factors, including Engage's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
15
<PAGE>
CAPITALIZATION
The following table sets forth Engage's capitalization as of January 31,
1999:
. on an actual basis after giving effect to the -for- common stock split;
. on a pro forma basis to reflect the conversion of Engage's debt to CMGI
into convertible preferred stock and the conversion of all of Engage's
convertible preferred stock into common stock; and
. on a pro forma as adjusted basis to reflect the conversion of Engage's
debt to CMGI into convertible preferred stock, the conversion of all of
Engage's convertible preferred stock into common stock and the
application of the estimated net proceeds from the sale of common stock
in this offering, assuming an initial public offering price of $ per
share, after deducting the underwriting discount and estimated offering
expenses payable by Engage.
Historically, CMGI has funded Engage's operations as needed, with a
corresponding increase in Engage's debt to CMGI. Customer and other receipts
are transferred to CMGI and are applied to reduce Engage's obligations to
CMGI. Engage expects that it will continue to borrow funds from CMGI under
this arrangement until the closing of this offering and that the net
obligations incurred after the end of the fiscal quarter preceding the
closing, to the extent outstanding, will be converted into additional shares
of Engage common stock at the initial public offering price.
<TABLE>
<CAPTION>
January 31, 1999
------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ -------------
(in thousands, except share data)
<S> <C> <C> <C>
Debt to CMGI......................... $ 9,347 $ -- $
============ ============ =========
Stockholders' equity:
Series A convertible preferred
stock, par value $0.01; 1,500,000
shares authorized, issued and
outstanding (actual); no shares
authorized, issued or outstanding
(pro forma and pro forma as
adjusted).......................... $ 15 $ -- $
Series B convertible preferred
stock, par value $0.01; 238,597
shares authorized, issued and
outstanding (actual); no shares
authorized, issued or outstanding
(pro forma and pro forma as
adjusted).......................... 2 --
Common stock, par value $0.01;
20,000,000 shares authorized
(actual); shares authorized
(pro forma and pro forma as
adjusted); 107,570 shares issued
and outstanding (actual);
16,989,877 and shares issued
and outstanding (pro forma and pro
forma as adjusted)(1).............. 1 170
Additional paid-in capital........... 41,856 51,051
Deferred compensation................ (914) (914)
Accumulated other comprehensive
income.............................. 148 148
Accumulated deficit.................. (36,763) (36,763)
------------ ------------ ---------
Total stockholders' equity........... 4,345 13,692
------------ ------------ ---------
Total capitalization................ $ 4,345 $ 13,692 $
============ ============ =========
</TABLE>
- --------
(1) Excludes 2,428,500 shares of common stock issuable upon exercise of
outstanding options, as of January 31, 1999, at a weighted average
exercise price of $3.35 per share.
16
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of Engage as of January 31,
1999 was approximately ($3.1) million, or approximately $ per share of
common stock. Pro forma net tangible book value (deficit) per share represents
the amount of Engage's total tangible assets less total liabilities, divided by
the pro forma number of shares of common stock outstanding, after giving effect
to the conversion of Engage's debt to CMGI into convertible preferred stock and
the conversion of all of Engage's convertible preferrred stock into common
stock. After giving effect to the sale of the common stock offered by Engage in
this offering at an assumed initial public offering price of $ per share,
after deducting the underwriting discount and estimated offering expenses
payable by Engage, the pro forma net tangible book value of Engage, as
adjusted, as of January 31, 1999 would have been approximately $ million or
approximately $ per pro forma share of common stock. This represents an
immediate increase in net tangible book value of $ per share to Engage's
existing stockholders and an immediate dilution in net tangible book value of
$ per share to new investors of common stock in this offering. If the
initial public offering price is higher or lower, the dilution to the new
investors will be greater or less, respectively. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.................................. $
Pro forma net tangible book deficit per share at January 31, 1999.... $
Increase per share attributable to this offering.....................
----
Pro forma net tangible book value per share after this offering......
----
Dilution per share to new investors.................................... $
====
</TABLE>
The following table summarizes, on a pro forma basis, as of January 31,
1999, the number of shares of common stock purchased from Engage, the total
consideration provided to Engage and the average price per share provided by
existing stockholders and giving effect to the shares to be issued in
connection with this offering. The calculation below is based on an assumed
initial public offering price of $ per share, before deducting the
underwriting discount and estimated offering expenses payable by Engage.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- ---------------------- Price Per
Number Percentage Amount Percentage Share
------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... % $ % $
New investors..............
--- ----- --------- ----------
Total.................... 100.0% $ 100.0%
=== ===== ========= ==========
</TABLE>
This discussion and table assume no exercise of options outstanding under
Engage's 1995 Equity Incentive Plan. As of January 31, 1999, there were options
outstanding to purchase a total of 2,428,500 shares of common stock at a
weighted average exercise price of $3.35 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Engage's financial statements and notes to those statements and other financial
information included elsewhere in this prospectus. The statement of operations
data for the years ended July 31, 1996, 1997 and 1998 and the balance sheet
data as of July 31, 1997 and 1998 are derived from the audited financial
statements of Engage included in this prospectus. The statement of operations
data for the six month periods ended January 31, 1998 and 1999 and the balance
sheet data as of January 31, 1999 are derived from the unaudited financial
statements of Engage included in this prospectus. The balance sheet data as of
July 31, 1996 and the statement of operations for the period for July 18, 1995
(inception) to July 31, 1995 are derived from unaudited financial statements of
Engage not included in this prospectus. In the opinion of management, the
unaudited consolidated financial statements have been prepared on a basis
consistent with the audited consolidated financial statements which appear
elsewhere in this prospectus and include all adjustments, which are only normal
recurring adjustments, necessary for a fair statement of the financial position
and results of operations for the unaudited periods. The historical results
presented herein are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Six Months Ended
July 18, 1995 Year Ended July 31, January 31,
(inception) -------------------- ------------------
to July 31, 1996 1997 1998 1998 1999
---------------- --------- --------- -------- ---------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Product revenue........ $ -- $ 25 $ 1,742 $ 107 $ 2,640
Product revenue,
related parties....... -- -- 203 47 948
Services and support
revenue............... -- -- 240 -- 618
Services and support
revenue, related
parties............... -- -- 32 10 59
------- --------- --------- ------- ---------
Total revenue.......... -- 25 2,217 164 4,265
Cost of revenue......... -- 31 2,242 438 3,064
------- --------- --------- ------- ---------
Gross (loss) profit.... -- (6) (25) (274) 1,201
Operating expenses:
In-process research and
development........... -- -- 9,200 -- --
Research and
development........... 1,796 7,261 5,925 3,460 3,878
Selling and marketing.. 155 1,566 4,031 1,279 3,732
General and
administrative........ 428 1,429 2,333 484 1,586
Amortization of
goodwill and other
intangibles........... -- -- 1,273 -- 1,909
------- --------- --------- ------- ---------
Total operating
expenses.............. 2,379 10,256 22,762 5,223 11,105
------- --------- --------- ------- ---------
Loss from operations.... (2,379) (10,262) (22,787) (5,497) (9,904)
Gain on sale of product
rights................. -- -- 9,240 9,240 --
Equity in loss of joint
venture................ -- -- -- -- (160)
Interest expense, net... -- -- (172) -- (339)
------- --------- --------- ------- ---------
Net (loss) income....... $(2,379) $ (10,262) $ (13,719) $ 3,743 $ (10,403)
======= ========= ========= ======= =========
Pro forma basic and
diluted net loss per
share.................. $ (1.64) $ (0.62)
========= =========
Weighted average shares
of common stock used in
computing pro forma
basic and diluted net
loss per share......... 8,375 16,824
========= =========
</TABLE>
<TABLE>
<CAPTION>
July 31,
-------------------------- January 31,
1996 1997 1998 1999
------- -------- ------- -----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents.................... $ -- $ -- $ 96 $ --
Working capital (deficit)............... (4,427) (14,209) (8,609) (14,754)
Total assets............................ 2,403 1,782 22,400 22,782
Debt to CMGI............................ 3,507 14,018 7,753 9,347
Stockholders' (deficit) equity.......... (2,299) (12,539) 11,074 4,345
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Engage's
financial statements and notes to those statements and other financial
information appearing elsewhere in this prospectus. In addition to historical
information, the following discussion and other parts of this prospectus
contain forward-looking information that involves risks and uncertainties.
Engage's actual results could differ materially from those anticipated by such
forward-looking information due to certain factors, including, but not limited
to, those set forth under "Risk Factors" and elsewhere in this prospectus.
References to fiscal 1996, fiscal 1997 and fiscal 1998 mean the fiscal years
ended July 31, 1996, 1997 and 1998, respectively.
Overview
Engage is a leading provider of profile-driven Internet marketing solutions.
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 April 30, 1999, CMGI owned approximately 96% 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, I/PRO 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-
cancellable 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 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. In the
future, fees may 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 have entered into
maintenance contracts.
Engage began commercial shipments of its first software products,
ProfileServer and DecisionSupportServer, in the early part of fiscal 1998. In
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. As of April 30,
1999, Engage had implemented its Engage Knowledge data service with customers
on a test basis.
19
<PAGE>
While Engage has not recognized any revenue from the Engage Knowledge data
service through January 31, 1999, Engage expects that a significant portion of
its future revenue will be attributable to this service and other products and
services based on its global profiling technology. Engage expects that it will
begin to implement this service on a commercial basis in July 1999. 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.
Engage's revenue from sales to related parties consists of sales of products
and services to customers that are affiliates of CMGI. In the six months ended
January 31, 1999, Engage sold products and services to 11 affiliates of CMGI.
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 1,263,692 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 $29.5 million. Upon consummation of
the Accipiter acquisition, CMGI, in its consolidated financial statements,
reported an expense of approximately $18.0 million representing acquired in-
process research and development that had not yet reached technological
feasibility and had no alternative future use. On May 7, 1999, CMGI announced a
voluntary restatement of the in-process research and development charge related
to the Accipiter acquisition to address valuation methodologies suggested by
the Securities and Exchange Commission in a letter dated September 9, 1998 to
the American Institute of Certified Public Accountants SEC Regulations
Committee and as clarified through subsequent practice. Upon consideration of
this guidance and additional practice that has developed since the Commission's
letter was first made public, the $18.0 million charge as previously reported
by CMGI has been reduced to $9.2 million and amounts allocated to goodwill and
other intangible assets have been increased from $11.5 million to $20.3
million. Engage has reflected the Accipiter acquisition accounting in its
consolidated financial statements as adjusted for the current Commission
methodologies.
Approximately $1.7 million of deferred compensation was recorded during
fiscal 1998 relating to approximately 43,000 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. Amortization of goodwill and other
intangibles resulting from the acquisition of Accipiter was $1.3 million and
$1.9 million for fiscal 1998 and the six months ended January 31, 1999.
In August 1998, Engage acquired, for $1.5 million in cash, 49% of the shares
of Engage Technologies Japan, a joint venture with Sumitomo Corporation in
Japan. 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
20
<PAGE>
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 in Japan.
In April 1999, Engage acquired I/PRO, which provides Web site traffic
measurement and audit services, for approximately $30.0 million, consisting of
$1.7 million in cash, $20.4 million in CMGI shares and $7.9 million in Engage
shares and options. The acquisition will be accounted for using the purchase
method, and, accordingly, the purchase price will be allocated to the assets
purchased and liabilities assumed based upon their fair values at the dates of
acquisition. Engage anticipates that a portion of the purchase price may be
charged to expense as in-process research and development upon completion of a
valuation of I/PRO. Goodwill and other intangibles, expected to be
approximately $22.2 million, will be 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 various performance goals are met by
I/PRO one year after the closing. 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's corporate headquarters are shared with CMGI and several other CMGI
affiliates. CMGI allocates certain 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 has incurred significant net losses and negative cash flows from
operations since its inception, and as of January 31, 1999, had an accumulated
deficit of approximately $36.8 million. These losses have been funded primarily
through the issuance of preferred stock and from funds advanced by CMGI. 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.
Results of Operations
Comparison of the Six Months Ended January 31, 1998 and January 31, 1999
Revenue
Total revenue increased from $164,000 in the six months ended January 31,
1998 to $4.3 million in the six months ended January 31, 1999, primarily as a
result of the commencement of sales of Accipiter AdManager and AdBureau due to
the acquisition of Accipiter and, to a lesser extent, increased sales of
ProfileServer and DecisionSupportServer. Revenue from product licenses
accounted for approximately 94% of total revenue during the six-month period
ended January 31, 1998, compared to approximately 84% during the six-month
period ended January 31, 1999. Revenue from two customers accounted for
approximately 11% and 10% of total revenue during the six months ended January
31, 1999.
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Cost of Revenue
Cost of product revenue includes royalties paid to various parties for the
incorporation of their technology into Engage's products, as well as fees paid
for outsourced data center operations. 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 $7,000 in the six months ended
January 31, 1998 to $580,000 in the six months ended January 31, 1999. The
increase was due primarily to an increase in operational costs associated with
the introduction of Engage's AdBureau services.
Cost of service and support revenue increased from $431,000 in the six
months ended January 31, 1998 to $2.5 million in the six months ended January
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 five at
January 31, 1998 to 34 at January 31, 1999.
Operating Expenses
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
$3.5 million in the six months ended January 31, 1998 to $3.9 million in the
six months ended January 31, 1999. The increases were the result of the growth
of Engage's research and development activities and the inclusion of
Accipiter's operations. These increases in costs were partially offset by a
decrease in facility and related costs that resulted from lower allocated costs
from CMGI due to higher utilization rates of corporate facilities and increased
staffing at other entities within CMGI.
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 $1.3 million in the six
months ended January 31, 1998 to $3.7 million in the six months ended
January 31, 1999. The increase in costs was primarily due to the continuing
expansion of Engage's sales force and the inclusion of Accipiter's operations.
Engage's sales and marketing staff increased from 14 at January 31, 1998 to 38
at January 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 $484,000 in the six months ended January 31, 1998 to
$1.6 million in the six months ended January 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
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 was approximately $1.9 million during the six months ended January 31,
1999 due to 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 the six
months ended January 31, 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 $160,000 during
the six months ended January 31, 1999. In August 1998, Engage acquired 49% of
the shares of Engage Technologies Japan, a joint venture with
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Sumitomo Corporation in Japan. 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 the six months ended January 31, 1999 are
included in Engage's results of operations.
Interest Expense, Net
Interest expense, net was approximately $339,000 for the six months ended
January 31, 1999. No interest expense was recorded during the six months ended
January 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.
Comparison of Fiscal Years Ended July 31, 1996, 1997 and 1998
Revenue
Total revenue increased from zero in fiscal 1996 to $25,000 in fiscal 1997
and $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
service 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. For further information concerning this expense, see "In-Process
Research and Development" below.
Research and Development. Research and development expenses increased from
$1.8 million in fiscal 1996 to $7.3 million in fiscal 1997 and decreased to
$5.9 million in fiscal 1998. The increase in fiscal 1997 was due to significant
increases in personnel costs associated with the continued development of new
products. The decrease in fiscal 1998 was primarily due to a decrease in
staffing that occurred when Engage sold certain 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
$155,000 in fiscal 1996 to $1.6 million in fiscal 1997 and $4.0 million in
fiscal 1998. The increases were the result of significant growth in Engage's
sales force during this period, as well as increased advertising expenditures
in fiscal 1998.
General and Administrative. General and administrative expenses increased
from $428,000 in fiscal 1996 to $1.4 million in fiscal 1997 and $2.3 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 $1.3 million in fiscal 1998, resulting from the
acquisition of Accipiter in April 1998.
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Gain on Sale of Product Rights
Gain on sale of product rights was $9.2 million in fiscal 1998, as a result
of the sale of rights to certain data warehouse products to Red Brick.
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.
Combined Historical Quarterly Revenue
The following table sets forth unaudited combined historical revenue for the
six quarters ended January 31, 1999. Total revenue has been derived by adding
the quarterly historical revenue of Engage, Accipiter and I/PRO as if Engage
had acquired Accipiter and I/PRO on August 1, 1997. Engage acquired Accipiter
in April 1998 and I/PRO in April 1999. This data has been derived from
unaudited financial statements of Engage, Accipter and I/PRO and does not
necessarily reflect the total revenue that would have been achieved if Engage
had acquired Accipiter and I/PRO as of August 1, 1997. This data is not
necessarily indicative of the future quarterly revenue of Engage. See
"Unaudited Pro Forma Financial Data".
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
October 31, January 31, April 30, July 31, October 31, January 31,
1997 1998 1998 1998 1998 1999
----------- ----------- --------- -------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total revenue........... $1,137 $1,352 $1,827 $2,716 $2,873 $4,090
</TABLE>
Liquidity and Capital Resources
Since its inception, Engage has financed its operations primarily through
funds advanced from CMGI. In addition, Engage has funded its investing
activities, specifically its acquisition of Accipiter and I/PRO, through the
issuance of its convertible preferred stock.
Net cash used in operating activities amounted to approximately $2.0
million, $9.0 million, $10.5 million for fiscal 1996, fiscal 1997 and fiscal
1998, respectively, and amounted to approximately $5.3 million and $2.1 million
for the six months ended January 31, 1998 and 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, partially offset by the
non-cash write-off of in-process research and development costs. Net cash used
by operating activities during the six months ended January 31, 1998 included
net income of $3.7 million, attributable primarily to the non-cash gain on sale
of product rights of $9.2 million. Net cash used in operations during the six
months ended January 31, 1999 included approximately $1.7 million from the
increase in accrued expenses during the period, as well as $3.5 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 Engage's
products.
Net cash used in investing activities amounted to approximately $1.6
million, $490,000 and $1.5 million during fiscal 1996, fiscal 1997 and the six
months ended January 31, 1999, while investing activities provided $473,000 of
cash during fiscal 1998. Investing activities used $1.6 million, $490,000,
$216,000 and $118,000 during fiscal 1996, fiscal 1997 and fiscal 1998 and the
six months ended January 31, 1999 to acquire property and equipment required to
support the growth of the business. Investing activities during fiscal 1998
included $689,000 of net cash acquired from the acquisition of Accipiter.
Investing activities during the six months ended January 31, 1999 used
approximately $1.4 million in Engage's investment in a Japanese joint venture.
Net cash provided by financing activities amounted to approximately $3.6
million,
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$9.5 million, $10.1 million for fiscal 1996, fiscal 1997 and fiscal 1998,
respectively and amounted to $5.3 million and $3.5 million for the six months
ended January 31, 1998 and 1999, respectively. Cash provided in each period was
primarily related to funds advanced from CMGI to fund Engage'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
the six months ended January 31, 1999 includes net proceeds of $1.9 million
from the issuance of Series B convertible preferred stock.
Under an arrangement with CMGI, Engage has maintained a zero balance cash
account. CMGI has funded Engage's operations as needed, with a corresponding
increase in Engage's obligations to CMGI. Customer and other receipts have been
remitted to CMGI and have been applied to reduce Engage's obligations to CMGI.
The outstanding balance of Engage's obligations to CMGI at the end of each
fiscal quarter, commencing with the quarter ended January 31, 1998, have been
evidenced by demand promissory notes convertible into shares of Engage
convertible preferred stock at the fair market value of such stock as of the
end of the applicable quarter. As of January 31, 1999, there were outstanding
$9.4 million in principal amount of these notes to CMGI. Subsequent to January
31, 1999, Engage borrowed approximately $22.1 million from CMGI in connection
with the acquisition of I/PRO. Engage expects that it will continue to borrow
funds from CMGI under this arrangement until the closing of this offering and
that the net obligations incurred after the end of the fiscal quarter preceding
the closing, to the extent outstanding, will be converted into Engage common
stock at the initial public offering price.
Engage has experienced a substantial increase in its expenditures since
inception consistent with its growth in operations and staffing. Engage
anticipates that expenditures will continue to increase for the foreseeable
future as Engage accelerates the growth of its business. Additionally, Engage
will continue to evaluate investment opportunities in businesses that
management believes will complement its technologies and market strategies.
Engage currently anticipates that its available cash resources, together
with the net proceeds from this offering, will be sufficient to meet its
anticipated needs for working capital and capital expenditures for at least the
12 months following the date of this prospectus. However, Engage 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. If additional
funds are raised through the issuance of equity or convertible debt securities,
the percentage ownership of Engage's stockholders will be reduced and its
stockholders may experience additional dilution. Engage cannot assure you that
additional financing will be available on terms favorable to Engage, or at all.
If adequate funds are not available or are not available on acceptable terms,
Engage'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
Engage acquired Accipiter on April 8, 1998 for total purchase consideration
of $29.5 million. The portion of the purchase price allocated to in-process
research and development was $9.2 million, or approximately 31% 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
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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. 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 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
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"Disclosures About Segments of an Enterprise and Related Information". 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 is effective for Engage beginning with the year ended July 31, 1999.
Engage is in the process of determining the impact of these standards, if any,
on it's consolidated financial statements and related disclosures.
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 certain internal costs
related to the implementation of computer software obtained for internal use.
Engage 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 operation
or organizing a new entity. SOP 98-5 is effective for Engage's fiscal 1999
financial statements. Engage 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 2000, and expects that the adoption of SFAS 133 will not have a
material impact on 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. Engage 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.
State of Readiness
Engage has made an assessment of the Year 2000 readiness of its operating,
financial and administrative systems, including the hardware and software that
support Engage's systems. Engage'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;
. assessment of repair or replacement requirements;
. repair or replacement;
. testing;
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. implementation; and
. creation of contingency plans in the event of Year 2000 failures.
For its currently marketed software products, Engage has substantially
completed its Year 2000 compliance testing efforts and believes that its
products are Year 2000 compliant in all material respects. Engage also has
conducted less extensive testing of older versions of its products. While
Engage is not aware of any material respect in which its older products are not
Year 2000 compliant, it intends to offer customers using older products the
option to upgrade to current versions at no additional charge. Engage also has
tested and continues to test its internal and third-party provided systems that
are used to deliver customer services. Engage has received assurances from a
major third-party vendor that the vendor's system will be Year 2000 ready.
For all other systems, Engage's Year 2000 task force is currently conducting
an inventory of and developing testing procedures for 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 Engage uses, a
significant part of this effort will be to ensure that these third-party
systems are Year 2000 compliant. To date the internal evaluation has resulted
in the identification of a small number of desktop computers whose operating
systems are not Year 2000 compliant; these computers will be replaced by Engage
in the third quarter of fiscal 1999. Until such testing is completed and such
vendors and providers are contacted, Engage will not be able to completely
evaluate whether its systems will need to be revised or replaced. The testing
and implementation phases are expected to be completed by the end of June 1999.
Costs
Through January, 1999, Engage has spent approximately $100,000 on Year 2000
compliance issues and expects to incur an additional $550,000 in connection
with identifying, evaluating and addressing Year 2000 compliance issues and
replacing certain non-compliant computer hardware. Most of Engage'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 Engage's business,
financial condition and results of operations.
Risks
Engage 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 Engage's efforts to avoid or fix such problems. There can be no
assurance that Engage 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 Engage's material systems will not need to be revised or
replaced, all of which could be time-consuming and expensive. The failure of
Engage 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
Engage'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.
Engage is heavily dependent on a third-party vendor to provide outsourced
data services. A significant Year 2000 related disruption of the outsourced
data services that the third-party vendor provides to Engage could cause
customers to consider canceling services with Engage or cause an unmanageable
burden on Engage's technical support, which in turn could materially and
adversely affect Engage's business, financial condition and results of
operations.
In addition, there can be no assurance that governmental agencies, utility
companies,
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Internet access companies, third-party service providers and others outside of
Engage'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
Engage, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent Engage 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 Engage's business, financial
condition and results of operations.
Contingency Plan
As discussed above, Engage is engaged in an ongoing Year 2000 assessment and
does not have any contingency plans. The results of Engage's Year 2000
simulation testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans.
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BUSINESS
Engage
Engage is a leading provider of profile-driven Internet marketing solutions.
Engage offers a range of software 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
advertising management software and outsourced services, as well as its
services for measuring and analyzing Web site traffic. Engage is currently
testing its Engage Knowledge data service with customers, and plans to
implement this service on a commercial basis in July 1999. Engage Knowledge
will provide real-time access to Engage's database of more than 30 million
anonymous global profiles of Web users for more effective targeting of online
advertising, promotions and content. Engage expects that a significant portion
of its future growth will be attributable to sales of subscriptions to the
Engage Knowledge data service and other products and services that will be
based upon Engage's profiling technology. As of April 30, 1999, Engage had sold
its products and services to approximately 300 customers, including CNET, Dell,
Lycos, Microsoft and Sportsline USA.
Industry Background
Growth of the Internet and Internet Marketing, Commerce and Analysis
The Internet has emerged as a significant global communications medium. The
growth in the number of Web users is expected to continue as Internet access
becomes more widely available, bandwidth increases and Internet content
improves and incorporates more multimedia capabilities. International Data
Corporation (IDC) has estimated that the number of Web users worldwide will
increase from approximately 97 million at the end of 1998 to approximately 320
million by the end of 2002, representing a compound annual growth rate of 35%.
As the Internet grows, advertisers and marketers have the opportunity to
reach broad, global audiences. Jupiter Communications has estimated that
spending for advertising on the Internet in the United States will increase
from approximately $1.9 billion in 1998 to $7.7 billion by 2002, representing a
compound annual growth rate of 42%. The Direct Marketing Association has
estimated that spending on Internet direct marketing to consumers will grow
from an estimated $224 million in 1998 to $2.0 billion in 2003, representing a
compound annual growth rate of 55%. Due to the growth in the number of Web
users, the interactive nature of the Web and the Web's global reach,
advertisers and marketers are increasing their use of the Internet to promote
their products, services and brands. In particular, the Web allows advertisers
and marketers to target an advertisement or offering to each user in real-time
and receive direct user feedback.
The Internet also has emerged as a significant global medium for the
electronic transaction of business, or e-commerce. Forrester Research has
estimated that consumer purchases of goods and services over the Internet in
the United States will increase from approximately $8 billion in 1998 to
approximately $76 billion in 2002, representing a compound annual growth rate
of 76%. Consumers can benefit from the faster, more convenient and potentially
less expensive transactions that e-commerce can provide, while merchants can
cost-effectively reach a global audience. The Internet is also playing an
increasingly important role in facilitating offline transactions by providing
more and better information to consumers. For example, although very few
automobiles are actually sold online, Forrester Research has estimated that in
1998 approximately 2.0 million Web households, representing 13% of all new car
purchases, used the Internet to research and select a vehicle before visiting
the dealer and that 6.4 million households, representing 41% of all new car
purchases, will use the Internet prior to purchasing a vehicle by 2002. As
electronic commerce expands, traditional and Internet merchants are turning to
the Web to
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locate customers, advertise and market their products and facilitate
transactions.
By knowing more about their customers and their customers' preferences, Web
publishers and merchants can improve their sites to address the interests of
their audience. The interactive nature of the Web allows businesses to gather a
wealth of information. However, there are few tools currently available that
effectively use that data to measure and analyze the activities and behavior of
Web site visitors to facilitate strategic decision making.
Increasing Demand for Targeting Capabilities
Early Internet marketing efforts were directed primarily at placing
advertisements on the most frequently visited Web sites and pages within those
sites. As the Internet has matured, businesses have sought 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 offerings to the most relevant users, Internet marketers
seek to improve their response rates and brand awareness and reduce costs by
eliminating spending that is not directed at their intended audience.
As marketers have become more sophisticated in their approach to marketing
over the Internet, an increasing number of advertising-supported sites have
been established, increasing the number of competitors offering advertising
impressions and exerting downward pressure on advertising prices. In March
1999, Jupiter Communications estimated that between 70% and 80% of the
advertising inventory on Web sites was unsold. Web publishers are seeking to
sell more inventory at higher rates by offering advertisers the ability to
target advertisements based on the interests and demographic characteristics of
the visitor, rather than simply the content of the page being viewed.
Increasingly, Internet marketers are demanding a better return on
investment, or ROI. ROI is favorably affected by either increasing response
rate or brand awareness (return) or reducing costs of advertisements or
transactions (investment). Because the response rate for Internet advertising
is typically very low, businesses that can attain even a small absolute
increase in the advertising response rate can increase ROI substantially. In
addition, the large number of Web users and the global nature of the Internet
can lead to inefficient spending when merchants deliver untargeted
advertisements or promotional offerings to Web users. These merchants expect to
improve their ROI by targeting their advertising and offerings to those Web
users who meet their desired criteria. Although marketers can indirectly target
their messages by delivering advertisements to a specific Web site or Web page,
many businesses desire to improve their ROI further by directly targeting
advertisements, e-commerce offerings and other content using detailed data
about a visitor's preferences and demographic characteristics.
In addition, Web publishers and merchants are seeking to increase the
frequency and duration of Web user visits to their sites to enable them to sell
more advertising inventory and increase e-commerce revenue. By customizing the
content of Web pages to reflect users' interests and preferences, Web
publishers and merchants are seeking to attract more traffic to their Web
sites, increase visitor loyalty and improve the appeal of their e-commerce
offerings.
The Need for Solutions to Distinguish Web Users While Respecting Their Privacy
The Web offers the potential for Web publishers, advertisers and merchants
to better understand their respective audiences and to capitalize on the
individual targeting capability, real-time feedback and other marketing
advantages offered by the Internet. Significant information about Web site
visitors can be derived from an analysis of:
. the Web sites and page views selected by users;
. the pattern in which users move from one site or page to another;
. the duration of a user's visit to a site or page;
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. the purchasing and other activities of users while at a Web site; and
. the responses of visitors to specific advertisements and promotions.
While the Internet offers the opportunity to collect a wide variety of
information that could be used to improve audience targeting, Web users are
increasingly concerned about the potential for loss or abuse of their privacy.
Although Web site visitors can obtain significant benefits from a Web
publisher's or merchant's ability to personalize content and target e-commerce
offerings based on the user's tastes and preferences, many consumers do not
want specific identifiable information about themselves, such as their name,
home or e-mail address, made available to third parties.
To balance the desires of marketers and consumers, there is a need for a
solution that will enable Internet marketers to tailor offerings effectively to
each user while at the same time preserving the privacy and anonymity available
to individuals on the Internet.
The Engage Solution
Engage is a leading provider of profile-driven Internet marketing solutions.
Engage has developed proprietary technology that enables it and its customers
to create Web user profiles providing detailed information about individual
consumer preferences without personally identifiable user data. Based on this
technology, Engage has built the Engage Knowledge database, which currently
contains more than 30 million anonymous consumer profiles. Customers can use
these global profiles drawn from multiple, diverse Web sites to target relevant
advertisements, content and e-commerce offerings to individual Web users based
on their 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 codes 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 and provide a broader and more detailed 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 standardized interest codes,
as well as demographic and geographic information. The interest codes reflect
each Web user's inferred preference level in hundreds of standard categories
and subcategories, such as books, business, computers, fashion, sports and
travel. Categories can be further customized to meet the needs of a specific
customer or market. Engage software uses sophisticated proprietary algorithims
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 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.
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The following is an example of what a portion of an anonymous user profile
might contain:
Anonymous Web User Profile--ID#: 23987CKF87E99
<TABLE>
<CAPTION>
Interest Categories Score(1)
------------------- --------
<S> <C>
Automobile........................................................... .75
Automobile--Auto Types--Sport Utility Vehicle....................... .73
Automobile--Type of Need--Accessories............................... .23
Entertainment........................................................ .35
Entertainment--Music................................................ .35
Entertainment--Music--Classical..................................... .21
Fashion.............................................................. .39
Fashion--Footwear................................................... .26
Fashion--Business Clothing.......................................... .38
Major Events......................................................... .44
Major Events--Move within State..................................... .44
Money & Finance...................................................... .64
Money & Finance--Type of Need--Online Banking....................... .59
Money & Finance--Investment Types--IRA/401K......................... .34
Response Tendency.................................................... .81
Response Tendency--Commerce......................................... .60
Response Tendency--Commerce--Online Purchases....................... .76
Demographic Data ....................................................
Gender--Female...................................................... .91
Age--35-44 years.................................................... .75
Geographic Data .....................................................
Metro Statistical Areas (MSA)--Atlanta, GA.......................... .97
</TABLE>
- --------------------------------------------------------------------------------
(1)Interest level, based on a scale from 0 to 1.00.
Engage believes that its profiling technology provides a significantly more
meaningful picture of Web user preferences than other available targeting
solutions because:
. Engage builds and constantly updates its profiles based on a user's Web
browsing behavior, resulting in more detailed and current profiles than
could be created with registration or other declared data only;
. Engage profiles classify visitor information across hundreds of interest
categories and subcategories, allowing Web publishers, advertisers and
merchants to identify more precisely their target audience;
. Engage global profiles are developed from data gathered from many diverse
Web sites, generating more detailed and comprehensive information about
Web users than could be gathered from any single site; and
. The Engage Knowledge database currently contains more than 30 million
user profiles, enabling the use of targeting applications for a
significant proportion of Web site visitors.
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.
Building upon its profiling capabilities, Engage offers the following
profile-driven marketing solutions:
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 or profiles from the Engage Knowledge global database. 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
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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 ROI. Engage's advertising management products, when used in
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.
Targeted Delivery of Content and Commerce
Engage's profiling software and global profiles allow Web publishers and
merchants to customize the content of Web pages and target e-commerce offerings
and promotions 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. A Web site focusing on music
can dynamically alter a Web page to present, for example, a special offer on a
jazz CD only to those visitors whose profiles indicate strong interests in jazz
and offer a different promotion to visitors with classical music interests.
Strategic Marketing Intelligence 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.
Strategy
Our objective is to enhance our position as a leading provider of profile-
driven Internet marketing solutions for Web publishers, advertisers and
merchants. Our strategy to achieve this objective includes the following key
elements:
Exploit Position as Leader in Profiling Solutions
We believe that we have the opportunity to establish Engage as the
recognized brand for profile-driven marketing solutions on the Internet. To
capitalize on this opportunity, we are creating a family of "Engage-enabled"
products and services that incorporate our profiling technology to serve a
broad array of customer targeting needs on the Internet. Expanding from the
initial use of our profiling technology in targeting the delivery of
advertisements through our Accipiter advertisement management software, we plan
to integrate our profiling technology with our I/PRO market intelligence
services so that customers can better measure and analyze audience behavior at
their Web sites. We also plan to develop Engage-enabled solutions that will
allow Web publishers, advertisers and merchants to more effectively reach
customers in specific vertical markets, such as automotive retail and other
industry-specific markets. By implementing our solutions across a broad
spectrum of customers and customer applications, we will seek to establish our
profiling technology as the most widely-used platform for the targeting of
advertisements, content and e-commerce offerings on the Web.
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Offer Multiple Solutions Based on Open Web Architecture
We offer multiple products and services based on an open architecture that
facilitates the use of Engage's solutions with third-party applications. For
example, our customers can use Engage Knowledge to target advertisements in
conjunction with either our own Accipiter products or advertising management
software provided by other vendors. By enabling customers to choose
applications from third-party vendors, we believe we 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.
[Graphic consists of a box at bottom labelled "Engage Profiles" with arrows
immediately above it pointing upward at a box labelled "Engage or Third-Party
Applications" and within this box are subheadings labelled "Advertising
Delivery", "Content Publishing" and "E-Commerce Server". This box has arrows
immediately above it pointing toward three boxes labelled "Targeted Ad",
"Personalized Content" and "Customized Offer".]
Continue to Enhance Engage Global Profile Database
Each user visit to the Web site of a participating subscriber to the Engage
Knowledge data service contributes to the depth of the global profile database
and enhances its value to all customers. We will continue to increase the
quality and usefulness of Engage Knowledge profiles by:
. expanding the number of consumer profiles through an increase in our
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 our interest categories and subcategories to provide more
detailed and market-specific user profiles.
Focus on Specific Markets
We plan to develop and sell specific Internet marketing solutions for
different markets. We are initially focusing on Web publishers and advertising
networks that derive revenue from advertising on the Web. For this market, we
are Engage-enabling our Accipiter advertising management software and services
to allow Web publishers and advertising networks to use global profiles to
optimize utilization of their advertising space. In addition, we will seek to
increase our customers' advertising revenue by allowing them to offer a new
program to advertisers in which an advertiser will pay for the delivery of
advertising impressions only to those Web site visitors whose Engage profile
matches designated criteria. Our fees for this program will consist of a
portion of the advertising revenue generated when one of our profiles is used.
We also plan to focus on specific vertical markets, such as automotive,
retail and other industry-specific markets. For each vertical market, we plan
to develop and market tailored versions of our Engage Knowledge database that
will measure interest levels in categories specific to those markets. For the
automobile market, we will work with key automotive sites to capture specific
and detailed information about automotive users presently in the purchase cycle
and to provide manufacturers the ability to study consumer preferences for
specific automobiles or features. For the retail market, we will continue to
refine geographic-targeting capabilities so that national retailers can address
specific needs and preferences within each local audience through the Internet.
We also will aggressively pursue indirect channel opportunities with systems
integration partners and independent software vendors who can deploy our
profiling technologies for specific markets. Through these indirect channels,
we will seek to extend the deployment of Engage technology and expand our
customer base.
Leverage Family of Engage Solutions
We will seek to increase our sales to our installed base of customers by
offering a range of software and services that utilize common
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Engage profiling technology. For example, if a customer uses Accipiter
AdManager software to deliver Web advertisements, we will seek to sell a
subscription to the Engage Knowledge data service to enable the customer to
improve advertising response rates and brand awareness. We may also offer the
customer a subscription to our I/PRO services to measure and better understand
visitor behavior. Using our complementary 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 Trusted Leader in Internet Privacy
We believe that concerns about loss of privacy are increasingly important to
Internet users and therefore have designed the Engage Knowledge database with
the goal of being a leader in the protection of the privacy of individuals. We
have been an active participant in the establishment of technology, industry
and regulatory frameworks for Internet privacy and plan to continue to be
aggressive in promoting our commitment to privacy.
Expand into International Markets
We currently market our products and services worldwide through a sales
office in London, our U.S. headquarters and through a joint venture in Japan
established with Sumitomo in July 1998. In addition, we plan to open an office
in Germany in 1999. As of April 30, 1999, we had 22 customers in Europe and
seven elsewhere outside the United States. We plan to expand our penetration of
the international market primarily through joint ventures with partners abroad.
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Products and Services
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.
The following table shows the products and services offered by Engage:
<TABLE>
<CAPTION>
Products and
Services Description Benefits
- ------------------------------------------------------------------------------------------------
<C> <S> <C>
Profiling
Engage Knowledge Service providing real- Allows targeted online advertising, content
Data Service(1) time access to anonymous and e-commerce offerings, which can improve
global profiles of Web response rates, brand awareness and
users customer loyalty and reduce marketing costs
Engage ProfileServer Software to create and Permits customization of interest
deliver site-specific categories to track preferences specific to
local profiles of Web the customer's business. Can be used alone
users or together with Engage Knowledge global
profiles
- ------------------------------------------------------------------------------------------------
Advertising Management
Accipiter AdManager Automated online Automates online advertising management for
advertising delivery and Web sites, including scheduling, targeting
management software and serving of ads and reporting of
campaign results
Accipiter AdBureau Outsourced online Delivers the capabilities of Accipiter
advertising management Admanager without requiring the customer to
service using AdManager make the investment needed to create an
technology advertising management infrastructure
- ------------------------------------------------------------------------------------------------
Market Intelligence
Services
I/PRO NetLine Service Outsourced Web site Enables Web sites to better understand user
traffic measurement and traffic and behavior and thereby improve
analysis service their Web sites
Nielsen I/PRO I/Audit Outsourced service Allows media sellers to prove Web site
Services providing audits of site traffic volume and campaign results to
traffic and ad campaign media buyers
results
I/PRO Research Services Custom consulting Provides customized analysis and
services providing interpretation of visitor behavior to help
audience behavior customers formulate their Web strategies
analysis
Engage Site-based data Allows customers to perform sophisticated
DecisionSupportServer warehouse software for analysis of the behavior and profiles of
audience analysis their Web site visitors
Engage Knowledge Consulting services Allows customers to gain valuable market
Database Research based on global profile research by analyzing Web-wide user
Services(2) database behavior, interest trends and patterns
across the Engage Knowledge global database
</TABLE>
- --------------------------------------------------------------------------------
(1) Currently being tested with customers and expected to be implemented on a
commercial basis in July 1999.
(2) Expected to be introduced in July 1999.
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Engage Knowledge Data Service
The Engage Knowledge database contains anonymous user profiles collected
from participating sites across the Web. Engage Knowledge is based on Engage's
advanced database technology and proprietary systems and has been designed to
create, refine and deliver millions of profiles in real-time to meet the
demands of multiple Web-sites. These profiles 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
(currently stored as a browser cookie on the Web user's computer) to
distinguish each Web visitor. 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 standardized interest
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 "Children's Books". Engage
also maintains anonymous demographic and geographic information for each
profile by using declared information reported voluntarily by the visitor, such
as data contained on an online registration form, and by using computer
algorithms that infer demographic characteristics or geographic locations based
on Web browsing behavior. 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.
An Engage Knowledge subscription is combined with a license to the Engage
software modules necessary to identify visitors anonymously, collect and
transfer behavior records and access profile information. Periodic
subscriptions are usually offered on a quarterly basis and the fees vary
depending on traffic to the customer's site and the application with which the
service is used. Engage expects that fees in the future will also vary based on
the number of profiles used. Engage believes that most customers will
contribute their clickstream data to the Engage Knowledge global database in
exchange for reduced subscription rates and to enhance the quality of future
global profiles. Although data contribution is not required, customers who do
not contribute their site clickstream data to Engage Knowledge are required to
pay significantly higher fees for use of the Engage Knowledge profiles. Monthly
fees can range from a few thousand dollars for a low volume Web site to
hundreds of thousands of dollars for a large customer with multiple Web sites.
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As of April 30, 1999, Engage had implemented the Engage Knowledge data
service with customers on a test basis. Engage expects to implement the Engage
Knowledge data service on a commercial basis in July 1999.
Engage ProfileServer
Engage ProfileServer software collects Web visitor behavior data and self-
reported user information 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 the Engage Knowledge data service.
ProfileServer is offered to customers under perpetual or annual subscription
licenses with fees that vary based on the volume of visitor activity on the
customer's sites. ProfileServer software typically ranges in price from $12,000
for a basic configuration at a small Web site to up to $100,000 for a complete
feature installation at a high volume site.
Online Advertising Systems and Services
Engage's Accipiter ad management systems and services are designed to manage
and deliver advertising and direct marketing promotions on individual Web sites
and networks of Web sites.
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.
AdManager is offered to customers under perpetual licenses or annual
subscription licenses, with fees that vary based on the number of
advertisements served. A typical AdManager installation ranges in cost from
$12,000 to more than $100,000, with an additional monthly fee for access to the
Engage Knowledge database.
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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.
AdBureau is marketed primarily to start-up and mid-sized Web sites, as well
as advertising networks. AdBureau is offered to customers under an annual
agreement providing for fees based on the number of advertisements served, with
a $3,500 one-time set up fee and monthly fees based on the number of
advertisments served, ranging from $1,000 per month for the smallest Web sites
to more than $15,000 per month for high volume sites.
Market Intelligence Services
Engage's I/PRO services and DecisionSupportServer software provide Web site
traffic measurement and analysis and verification of site traffic and
advertising results. Through its I/PRO services, Engage currently measures over
seven billion page views per month across over 350 Web sites.
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. I/PRO NetLine is priced based
on the volume of traffic at the sites being measured and the number of reports
that are requested, and fees typically range from $2,500 to $5,000 per month.
I/PRO also offers extensive support by professional service account managers
and custom research capabilities.
Engage plans to offer I/PRO NetLine in conjunction with Engage Knowledge
services for global audience analysis. Using profile information from the
Engage Knowledge database, customers of I/PRO NetLine will be able to customize
reports to include more detailed and comprehensive user information, which will
enhance the I/PRO NetLine traffic measurement service.
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. Nielsen I/PRO I/Audit services are priced based
on the volume of traffic at the sites being audited and fees typically range
from $2,000 to $4,000 per month. I/PRO has a co-branding and reselling
agreement with Nielsen Media Research and pays royalties to Nielsen on sales of
I/PRO services.
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. Clients contract for research services on a project basis or at
a stated daily rate.
Engage DecisionSupportServer. Engage DecisionSupportServer is a data
warehouse management and analysis solution
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that is implemented at the customer's site. DecisionSupportServer supports a
complex, visitor-focused marketing analysis of Web site usage details 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. DecisionSupportServer can be used in conjunction with a variety of
decision support applications from Business Objects and other 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.
Engage DecisionSupportServer is offered to customers under perpetual
licenses or annual subscriptions with fees that vary based on the volume of
visitor activity on the customer's sites. Engage customizes and operates
DecisionSupportServer in-house for specific market segments and customer-
specific analytic consulting engagements. The license fee for
DecisionSupportServer typically ranges from $40,000 to more than $100,000.
Engage Knowledge Database Research Services. Engage plans to offer Engage
Knowledge Database Research Services, consisting of custom analysis, research
and consulting services that use information contained in the Engage Knowledge
global database. Using this service, customers can obtain analysis of Web-wide
user behavior to identify emerging trends.
Consulting, Maintenance and Support Services
Engage offers comprehensive services and product support to its customers.
Engage's service and support organization, consisting of 46 service
professionals as of April 30, 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. Engage's professional services are generally billed
at a daily rate for each consultant employed on a project.
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 hours per day, five
days per week basis and a dedicated technical support Web site on a 24 hours
per day, seven days per week basis. Engage's maintenance and support activities
are supplemented by training programs for customers, including introductory
training courses for new users and custom designed seminars for experienced
users of Engage products.
Engage's annual fees for maintenance and support services are based on a
percentage of the list price for the customer's software license fee, typically
ranging from 18% to 25%. To date, substantially all of Engage's customers have
entered into maintenance contracts.
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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 solutions
through its AdBureau advertising management service and its I/PRO NetLine
traffic management service. Engage had approximately 300 customers as of April
30, 1999, including the following:
Advertising Market Intelligence
Management Solutions Profiling Solutions Services
ADSmart Chicago Tribune
Ancestry.com AdValue Dell
beeb.com (BBC Ancestry.com InfoSpace
Worldwide) Carlton Online MediaOne
CNET Gallop + Gallop News Corporation (Fox)
Cyberian Outpost Lycos Quokka Sports
E!Online Magnitude Network Sportsline USA
LookSmart NetNoir Wall Street Journal
Microsoft Planet Direct Online
NBC Videoseeker Ticketmaster Weather.com
Sony Online 24/7 Media
Entertainment
WebTV Networks
Customer Case Studies
The following customer case studies illustrate the selection, use and
implementation of Engage products and services by some of Engage's significant
clients.
Ancestry.com -- Profile Driven Advertising and Analysis
Ancestry.com, an affiliate of CMGI, is a comprehensive genealogy resource on
the Web, providing users with a large online repository of family and historic
data. Site visitors have free access to genealogical records online. For a
nominal fee, subscribers have complete access to the site's 1,500 databases.
Ancestry.com needed a set of integrated tools for strategic market
intelligence, user profiling and ad management to enhance the online experience
for site visitors and to increase the effectiveness of promotions and
advertising at its site. Specifically, the site wanted to understand more about
its visitors, convert unregistered visitors to registered
visitors and deliver personalized advertising to its online audience.
Ancestry.com installed Engage Accipiter AdManager advertising management
software to serve online ads and intends to deliver personalized offers through
Engage ProfileServer. To expand its targeting capabilities beyond site-specific
customer information, the site has also subscribed to Engage Knowledge data
services. In addition, Ancestry.com is installing Engage DecisionSupportServer,
Engage's strategic market intelligence tool, to analyze the collected local
profile data, and uses the Nielsen I/PRO I/Audit services for third-party
verification of its site traffic data.
Through the use of Engage products and services, Ancestry.com will own a
growing proprietary database of local user profiles which it expects will
enable it to better understand the behavioral patterns of its online visitors.
Ancestry.com plans to use the Engage Knowledge data service to deliver targeted
advertising to its online audience.
Ticketmaster -- Profile Based Targeting of Electronic Commerce and Content
Ticketmaster Online is a leading automated ticketing services company.
Ticketmaster uses Engage ProfileServer to personalize online retailing based on
declared profiles and to target advertising based on both declared and observed
behavior online. In July 1998, Ticketmaster was seeking to address the
personalization requirements of its MyTicketmaster site, and needed a solution
that permitted profiles to drive other vendors' personalization applications.
Ticketmaster selected Engage because it offered application-independent
profiling technology that could
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meet its targeting requirements. Engage worked with Ticketmaster to integrate a
third party's content management application with Engage's ProfileServer
software. Ticketmaster currently has plans to integrate another third party's
advertising managment system. Engage ProfileServer software captures
registration details at the MyTicketmaster area of the site and the clickstream
behavior of visitors throughout its site. Engage ProfileServer creates user
profiles based on declared and behavior data and maintains them in a
centralized proprietary repository for visitor data. In addition, Ticketmaster
installed Engage's DecisionSupportServer strategic market intelligence tool to
analyze the collected data.
With its growing proprietary database of local user profiles, Ticketmaster
expects to be able to enhance the online experience of its repeat site visitors
by recommending events and providing customized offers that appeal to them
individually, thereby increasing the revenue potential of its site.
Weather.com -- Strategic Marketing Intelligence
Weather.com is the online arm of The Weather Channel. Weather.com uses I/PRO
NetLine to increase advertising revenue, to make resource allocation decisions
and to drive strategic partnerships. By understanding the total circulation of
different areas of the site, weather.com is able to charge a premium for high
traffic areas. I/PRO/NetLine reports user requests for weather information by
zip codes allowing weather.com to sell these impressions as highly targeted
advertising opportunities at a premium. I/PRO NetLine's ability to report
activity at the most detailed level facilitates resource allocation decisions
by allowing weather.com to understand the resources required to maintain
different parts of its site and the revenue each part generates. Weather.com
also uses I/PRO NetLine to help assess the opportunities for strategic
alliances that will increase traffic at its site and to monitor the performance
of these arrangements on an ongoing basis.
Weather.com also subscribes to the monthly Nielsen I/PRO I/Audit. The audit
report is used in sales presentations to existing and new advertisers to prove
traffic volumes and campaign results.
Sales and Marketing
United States
Our sales and marketing strategy in the United States is to sell:
. directly to prominent Web publishers, large advertisers and Web site
networks;
. through OEM, reseller and co-marketing arrangements to reach other
customers; and
. through Web design and systems integration firms.
As of April 30, 1999, our sales and marketing organization consisted of 66
employees. Our 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. Our sales
and marketing employees are located in four offices throughout the United
States.
The sales teams for our Accipiter ad management systems and I/PRO services
are organized as dedicated groups focused on sales in specific geographic
regions. A subset of the sales force for Engage Knowledge and Engage profiling
products are targeted to specific industry groups, thereby enabling them to
develop an in-depth understanding of the evolving needs of a particular
industry and the Web publishers, advertising networks and Web sites focused on
that industry. In addition, each sales force identifies cross-selling
opportunities for other Engage products.
An important element of our sales strategy is to form business relationships
with third
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parties to assist us in marketing and selling our products. We will seek to
enter into OEM relationships that permit us to embed our software products
within products sold by other vendors, such as e-commerce and Web serving
software and hardware systems. In addition, some of our indirect sales
channels will consist of either reseller arrangements, in which our partner
resells and possibly customizes our products, or co-marketing arrangements, in
which we will work together with our partner to promote and generate sales
referrals for each others' respective products. We also expect 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 our sales efforts and actively promote the Engage brand, we
conduct comprehensive marketing programs, including public relations, print
advertisements, online advertisements, seminars, trade shows and ongoing
customer communications programs.
International
We maintain a sales office in London and expect to open an additional
office in Germany in 1999. We intend to expand our operations outside the
United States primarily by partnering with locally-based third parties,
including entering into joint ventures and distribution arrangements. We have
formed a joint venture for the Japanese market with Sumitomo Corporation,
which is the leading investor in Japan's largest Internet service provider. As
part of this joint venture, Sumitomo markets a Japanese language version of
Engage software products and the Engage Knowledge data service throughout
Japan.
Privacy
The Web offers the potential for privacy by allowing parties to communicate
one-to-one without knowing each others' 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 has been designed to
operate anonymously and does not store personal information of individual
users such as name, home or e-mail address, IP address or domain name.
We maintain this level of privacy through a proprietary methodology known
as "dual blind" identification. We assign an anonymous numerical identifier
(currently stored as a browser cookie on the Web user's computer) to each Web
visitor and match this "blind" identifier only with information relating to
online usage of a specific computer and do not store or otherwise use any
personally identifying information. 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, we do not
maintain any information identifying particular users that a Web site may have
correlated with a visitor's local Web site identifier.
We also protect 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 has required new contributors to Engage Knowledge to post a privacy
policy statement on their Web sites disclosing their participation in Engage
Knowledge. The policy statement must include a link to the Engage Web site
where a Web users 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. We believe that these protections and our dual blind
identification technology are essential to allow sites to responsibly use
global anonymous profiles for their own enterprise applications.
We actively participate in the development of privacy standards for the
Internet and are a key contributor to industry groups that are developing
industry standards for privacy. For example, we are a co-author of several of
the
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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. We believe our products will
support the standards that are ultimately produced by this project. We 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. We are a participant on the board of advisors of TRUSTe, of which
we are a corporate sponsor, and are a member of the Online Privacy Alliance. We
actively monitor proposed privacy laws and regulations and seek to comply with
all applicable privacy requirements, both in the United States and throughout
the world.
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 AdBureau and Engage Knowledge operations. All of Engage's
production data is archived nightly to offline, offsite storage.
NaviSite's facilities are powered by multiple uninterruptible power supplies
and contain smoke and heat detection, fire suppression, fluid detection and
other disaster protection systems. Engage's data center operations are
controlled using strict password management and physical security measures.
Intellectual Property
We have filed for patents covering our profiling algorithm and our 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 our 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. We believe we have 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.
We rely upon a combination of patent, trade secret, copyright and trademark
laws to protect our intellectual property. We also limit access to and
distribution of our proprietary information. However, the steps we take to
protect our intellectual property may not be adequate to deter misappropriation
of our proprietary information. In addition, we may be unable to detect
unauthorized uses of and take appropriate steps to enforce our intellectual
property rights.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, we are subject to the risk that such a
claim may be asserted against us 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
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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.
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 Adforce and
DoubleClick.
Market Intelligence Services
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 April 30, 1999, Engage had 209 employees and 40 contractors. Employees
included 57 in development, 63 in customer support and operations, 66 in
selling and marketing, and 23 in administration. Of these, 203 employees were
located in the United States and 6 in Europe. Included in the 40 contractors
are 11 offshore contract developers in India.
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.
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Engage is not subject to any collective bargaining agreements and believes
that its relationship with its employees is good.
Facilities
Engage's principal executive offices are located in Andover, Massachusetts,
with an engineering center in Raleigh, North Carolina, and offices in Redwood
City and San Francisco, California and a sales office in London. Consisting of
an aggregate of approximately 55,000 square feet, these facilities are
currently leased to the Company under leases which are allocated to Engage from
CMGI on a headcount basis or expire in 1999, 2002 and 2004, respectively.
Engage also leases space for its sales and marketing efforts in New York and
the United Kingdom. Engage believes that suitable additional space to
accommodate the anticipated growth will be available in the future on
commercially reasonable terms.
Legal Proceedings
Engage is not a party to any material legal proceedings.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the directors and executive officers of
Engage, their ages and their positions with Engage as of April 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------
<S> <C> <C>
Paul L. Schaut............. 39 Chief Executive Officer, President and Director
David A. Fish.............. 44 Chief Operating Officer
Daniel J. Jaye............. 34 Chief Technology Officer
Stephen A. Royal........... 43 Chief Financial Officer and Treasurer
David S. Wetherell......... 44 Chairman of the Board of Directors
Edward A. Bennett.......... 52 Director
Christopher A. Evans....... 33 Director
Craig D. Goldman........... 55 Director
Andrew J. Hajducky III..... 45 Director
</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.
David S. Wetherell has served as a director and Chairman of the Board of
Engage since July 1995. Mr. Wetherell has served as Chairman of the Board,
President, Chief Executive Officer and Secretary of CMGI since 1986 and as a
member of CMG@Ventures I, LLC, a venture capital firm subsidiary of CMGI,
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and President of CMG@Ventures, Inc., the managing partner of CMG@Ventures I,
LLC, since January 1995. He is also a managing member of CMG@Ventures II, LLC,
CMG@Ventures III, LLC and @Ventures Management, LLC, which are also strategic
investment and development venture capital subsidiaries or affiliates of CMGI.
From 1982 until joining CMGI in 1986, Mr. Wetherell was a co-founder and
President of Softrend, Inc., a microcomputer software publisher. Mr. Wetherell
is also the founder of BookLink Technologies, Inc., a CMGI subsidiary that was
sold to America Online in 1994.
Edward A. Bennett has served as a director of Engage since January 1999 and
as President of Bennett Media Collaborative, a media consulting company, from
January 1997 until the present. From April 1995 until July 1996, Mr. Bennett
was Chief Executive Officer of Prodigy, Inc., an online service provider.
Prior to joining Prodigy, he served as President and Chief Executive Officer
of VH-1 cable music channel, a division of Viacom, Inc., from 1989 until 1993
and as Executive Vice President and Chief Operating Officer of Viacom Cable, a
division of Viacom from 1979 until 1989.
Christopher A. Evans has served as a director of Engage since January 1999.
Since May 1999 Mr. Evans has served as a private consultant to Engage. From
April 1998 to May 1999, Mr. Evans managed Engage's Accipiter business unit.
From October 1992 until June 1996, Mr. Evans was the principal owner of
Hotlinx, LLC, a printing and online publishing company. Prior to that, from
1985 until 1992, Mr. Evans served as Executive Vice President of DaVinci
Systems, a software company, which he co-founded.
Craig D. Goldman has served as a director of Engage since March 1998 and as
President and Chief Executive Officer of Cyber Consulting Services Corp. since
March 1996. Prior to that, Mr. Goldman held various positions at The Chase
Manhattan Bank, including Chief Information Officer from 1991 until February
1998.
Andrew J. Hajducky, III has served as a director of Engage since December
1995. Mr. Hajducky has served as Chief Financial Officer and Treasurer of CMGI
since October 1995 and as a member of CMG@Ventures I, LLC, a venture capital
firm subsidiary of CMGI, since January 1995. He is also a managing member of
CMG@Ventures II, LLC, CMG@Ventures III, LLC and @Ventures Management, LLC,
which are strategic investment and development venture capital subsidiaries or
affiliates of CMGI. From April 1984 to October 1995, Mr. Hajducky was the
Entrepreneurial Services Partner of the Merger and Acquisition division of
Ernst & Young LLP. Previously, Mr. Hajducky was the Chief Financial Officer of
Mountain International Company/AccuTel, Inc., a telecommunications and
software company.
Board Composition
The board of directors is currently fixed at six members. Effective with
this offering, Engage will divide the board of directors into three classes.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes, so that,
as nearly as possible, each class will consist of one-third of the total
number of directors. This classification of the board of directors may have
the effect of delaying or preventing changes in control or management of
Engage.
Each executive officer is elected by, and serves at the discretion of, the
board of directors. Each of Engage's executive officers and directors, other
than nonemployee directors, devotes his full time to the affairs of Engage.
There are no family relationships among any of the directors or executive
officers of Engage.
Board Committees
Engage has an audit committee and compensation committee of the board of
directors. The audit committee reviews the results and scope of audits and
other services provided by Engage's independent accountants. The audit
committee also reviews Engage's
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system of internal accounting and financial controls. The audit committee
consists of Messrs. Bennett, Goldman and Hajducky.
The compensation committee of the board of directors reviews and recommends
to the Board the compensation and benefits of all executive officers of Engage,
administers Engage's stock option plans and establishes and reviews general
policies relating to compensation and benefits of employees of Engage. The
compensation committee consists of Messrs. Bennett, Goldman and Wetherell.
Except as set forth in "Transactions and Relationship Between Engage and CMGI",
no interlocking relationships exist between Engage's board of directors or
compensation committee and the board of directors or compensation committee of
any other company.
Director Compensation
Non-employee directors are reimbursed for their reasonable out-of-pocket
expenses incurred in attending meetings of the board of directors or of any
committee thereof. Engage intends to grant Mr. Evans an option to purchase
25,000 shares of its common stock, to vest over a five-year period, at an
exercise price of $ per share. Mr. Goldman has been granted an option to
purchase 50,000 shares of Engage common stock, vesting over a four-year period,
at an exercise price of $0.48 per share. Mr. Bennett has been granted an option
to purchase 25,000 shares of Engage common stock, vesting over a four-year
period, at an exercise price of $8.38 per share.
In May 1999, Engage and Mr. Evans entered into a consulting, invention and
non-disclosure agreement under which Mr. Evans provides programming and other
technical services to Engage. This agreement may be terminated at any time upon
90 days notice by Mr. Evans or Engage.
No director who is an employee of Engage receives separate compensation for
services rendered as a director.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
the fiscal year ended July 31, 1998 for Messrs. Schaut and Jaye, who were the
only Engage executive officers whose salary and bonus for such fiscal year were
in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------- --------------------- All other
Name and Principal Position Salary Bonus Awards compensation
- --------------------------- ------------------- --------------------- ------------
Securities Underlying
Options(1)
<S> <C> <C> <C> <C>
Paul L. Schaut
Chief Executive Offi-
cer................... $ 109,375 $ 25,000 300,000(ENGA) $ --
40,000(CMGI)(2)
Daniel J. Jaye
Chief Technology Offi-
cer................... 118,295 115,500(3) -- 3,529(4)
</TABLE>
- ---------------------
(1) Mr. Schaut received options to purchase Engage common stock (designated in
the table as ENGA) and CMGI common stock (designated in the table as CMGI).
(2) Reflects a two-for-one CMGI stock split effective January 11, 1999.
(3) Includes $100,000 bonus paid to Mr. Jaye for his contribution in the sale
of some of Engage's technology to Red Brick Systems, Inc.
(4) Represents the amount of matching contributions made by Engage under the
CMGI 401(k) plan.
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Option Grants In Last Fiscal Year
The following table sets forth grants of stock options to Mr. Schaut for the
fiscal year ended July 31, 1998. The exercise price per share of each option
was equal to the fair market value of the common stock on the date of grant as
determined by the board of directors. The potential realizable value is
calculated based on the term of the option at its time of grant (five years).
It is calculated assuming that the fair market value of common stock on the
date of grant appreciates at the indicated annual rate compounded annually for
the entire term of the option, and that the option is exercised and sold on the
last day of its term for the appreciated stock price. These numbers are
calculated based on the requirements of the Securities and Exchange Commission
and do not reflect Engage's estimate of future stock price growth. Mr. Jaye
received no options to purchase either Engage common stock or CMGI common stock
in fiscal 1998.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Total Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration ------------------------
Name Granted in Fiscal Year Per Share Date 5% 10%
- ------------------------ ---------- ---------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Schaut.......... 300,000(1) 18.2% $0.37 11/09/02 $ 30,669 $ 67,766
40,000(2) 2.9 4.63 10/26/02 51,116 112,943
</TABLE>
- ---------------------
(1) Represents grants of options to purchase Engage common stock, exercisable
as to 25% of the shares after the first year and the remaining 75% vesting
monthly for the next 36 months thereafter.
(2) Represents grants of options to purchase CMGI common stock, exercisable as
to 25% of the shares after the first year and the remaining 75% vesting
monthly for the next 36 months thereafter. Reflects a two-for-one CMGI
stock split effective January 11, 1999.
In fiscal 1998, Engage granted to Mr. Fish an option to purchase 100,000
shares of common stock at an exercise price of $0.48 per share and to Mr. Royal
an option to purchase 50,000 shares of common stock at an exercise price of
$0.48 per share and an option to purchase 25,000 shares of common stock at an
exercise price of $4.75 per share.
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<PAGE>
Aggregate Option Exercises and Fiscal Year End Option Values
The following table sets forth information regarding exercisable and
unexercisable stock options held as of July 31, 1998 by Messrs. Schaut and
Jaye. There was no public trading market for our common stock as of July 31,
1998. Accordingly, the value of Engage options has been calculated by
determining the difference between the exercise price per share and an assumed
initial public offering price of $ per share.
Aggregate Option Exercises and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired Fiscal Year-End Fiscal Year-End
on Value ------------------------- --------------------------
Name Company Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Schaut.......... Engage -- $ -- 0 300,000 $ -- $
CMGI -- -- 0 40,000(1) -- 1,777,500(2)
Daniel J. Jaye.......... Engage -- -- 191,665 108,335
CMGI 4,000 43,625(3) 6,999 5,001(1) 215,875(2) 154,249(2)
</TABLE>
- ---------------------
(1) Reflects a two-for-one CMGI stock split effective January 11, 1999.
(2) Based on the difference between the option exercise price and $34.0625,
which was the closing price of the CMGI common stock on July 31, 1998.
(3) Based on the closing price of the CMGI common stock on the date of exercise
less the option exercise price.
52
<PAGE>
Stock Plans
1995 Equity Incentive Plan
The 1995 Equity Incentive Plan provides for the issuance of a maximum of
3,544,737 shares of common stock. Under the 1995 Equity Incentive Plan, Engage
is authorized to grant incentive stock options, non-qualified stock options,
stock appreciation rights and restricted stock awards to employees, consultants
and directors. In general, options granted pursuant to the 1995 Equity
Incentive Plan are exercisable within five years of the original grant date.
The board of directors or an appropriate committee of the Board has the right,
at its discretion, to accelerate the vesting of unexercisable options upon a
change of control of Engage. Options are not assignable or transferable except
by will or the laws of descent or distribution. As of April 30, 1999, an
aggregate of 3,233,897 shares of common stock at a weighted average price of
$4.31 per share were outstanding under the 1995 Equity Incentive Plan.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan is expected to be adopted by our board
of directors and approved by the stockholders in May 1999, to be effective upon
the closing of this offering. The 1999 Employee Stock Purchase Plan provides
for the issuance of a maximum of shares of common stock.
The 1999 Employee Stock Purchase Plan will be administered by the
compensation committee. All employees of Engage whose customary employment is
for more than hours per week and for more than months in any calendar year
are eligible to participate in the 1999 Employee Stock Purchase Plan. Employees
who would own 5% or more of the total combined voting power or value of
Engage's stock immediately after the grant of the option may not participate in
the 1999 Employee Stock Purchase Plan. To participate in the 1999 Employee
Stock Purchase Plan, an employee must authorize us to deduct an amount (not
less than one percent nor more than 10 percent of a participant's total cash
compensation) from his or her pay during quarterly payment periods. The
exercise price for the option granted in each payment period is 85% of the
lesser of the last reported sale price of the common stock on the first or last
business day of the payment period.
1999 Director Stock Option Plan
The 1999 Director Stock Option Plan is expected to be adopted by the board
of directors and approved by the stockholders in May 1999. Under the terms of
the 1999 Director Stock Option Plan, directors who are not employees of Engage
or any subsidiary of Engage receive nonstatutory options to purchase shares of
Engage's common stock. A total of shares of common stock may be issued upon
exercise of options granted under the plan.
53
<PAGE>
TRANSACTIONS AND RELATIONSHIP BETWEEN
ENGAGE AND CMGI
Engage was incorporated in July 1995 as a wholly owned subsidiary of CMGI.
CMGI currently owns approximately 96% of Engage's common stock (assuming the
conversion of the convertible note and shares of convertible preferred stock
held by CMGI as of January 31, 1999) and will own % upon the closing of this
offering.
CMGI has the power to elect the entire board of directors of Engage and to
approve or disapprove any corporate transactions or other matters submitted to
Engage stockholders for approval, including the approval of mergers or other
significant corporate transactions. CMGI also holds a majority ownership
position in many of Engage's customers and in NaviSite, which provides data
center operations to Engage.
Upon the completion of this offering, Engage and CMGI will enter into a
number of agreements for the purpose of defining various present and
prospective arrangements and transactions between them. These agreements were
negotiated between a parent and its subsidiary and therefore are not the result
of negotiations between independent parties. Engage and CMGI intend that these
agreements and the transactions provided for in such agreements, taken as a
whole, accommodate their respective interests in a manner that is fair to both
Engage and CMGI. However, because of the complex nature of the various
relationships between Engage, CMGI and various CMGI subsidiaries and
affiliates, there can be no assurance that each of the agreements described
below, or the transactions provided for in the agreements, were effected on
terms at least as favorable to Engage as Engage could have obtained from
unaffiliated third parties.
Engage, CMGI and their respective subsidiaries may enter into additional or
modified arrangements and transactions in the future. Engage, CMGI or their
respective subsidiaries, as the case may be, will negotiate the terms of such
arrangements and transactions. Engage expects to adopt a policy that all future
arrangements between Engage and CMGI and their respective subsidiaries will be
on terms that Engage believes are no less favorable to Engage than the terms
Engage believes would be available from unaffiliated parties and must be
approved by a majority of Engage's directors who are not employees of CMGI
(even though such directors may be less than a quorum).
The following is a summary of the material arrangements and transactions
between Engage and CMGI.
Debt Conversion
In July 1998, Engage issued 800,000 shares of its Series A convertible
preferred stock to CMGI in exchange for (i) cancellation of $8 million of
intercompany debt and (ii) shares of common stock of Engage previously held by
CMGI. In July 1998, Engage issued 700,000 shares of its Series A convertible
preferred stock to CMGI pursuant to the merger agreement between Engage and
Accipiter. CMGI currently owns 1,500,000 shares of Engage's Series A
convertible preferred stock at an average purchase price of $5.34 per share.
Each share of Series A convertible preferred stock will convert into 10 shares
of common stock upon the consummation of this offering.
Engage has issued a secured convertible demand note to CMGI in exchange for
the cancellation of all intercompany debt incurred by Engage to CMGI prior to
February 1, 1999. This note provides that CMGI may elect to convert amounts
payable under the note into Series C convertible preferred stock at any time.
The amount of each borrowing represented by the note is convertible into shares
of Series C convertible preferred stock at the fair market value of such shares
as of the end of the fiscal quarter in which the borrowing was made. In April
1999, Engage borrowed $22,086,307 from CMGI in connection with the acquisition
of I/PRO. Such borrowings are convertible into Series C convertible preferred
stock at a common equivalent price of $10.11 per share. Additional intercompany
debt incurred after February 1, 1999 accrues interest at a rate of 7% per year
compounded monthly until the day CMGI elects to convert the debt into shares of
Series C convertible preferred stock.
54
<PAGE>
It is expected that all notes held by CMGI prior to the closing of this
offering will be converted into Series C convertible preferred stock no later
than the closing of this offering. Each share of Series C convertible preferred
stock will convert into ten shares of common stock upon the completion of this
offering.
The following table illustrates the amount of indebtedness of Engage to CMGI
as of April 30, 1999 and the terms on which it is convertible into Series C
convertible preferred stock:
<TABLE>
<CAPTION>
Number of Shares of Series C Per Share Common
Preferred Stock Issuable Equivalent
Date of Incurrence Amount of Indebtedness Upon Conversion Conversion Price
- ------------------------ ---------------------- ---------------------------- ----------------
<S> <C> <C> <C>
April 30, 1998.......... $ 5,334,605 112,307 $ 4.75
July 31, 1998........... 2,418,456 34,798 6.95
October 31, 1998........ 598,117 7,037 8.50
January 31, 1999........ 996,273 10,229 9.74
April 7, 1999........... 22,086,307 218,460 10.11
</TABLE>
Engage expects to borrow additional amounts from CMGI to fund its operations
prior to the closing of this offering, and such borrowings and accrued
interest, net of any repayments, will be converted into additional shares of
common stock at the initial public offering price upon the closing of this
offering.
Administrative Support Agreement
Upon the closing of this offering, Engage and CMGI will enter into an
administrative support agreement under which CMGI will continue to provide
various services to Engage, including tax administration, computer and
information systems, telecommunications, utilities and employee benefits
administration.
Each service under the administrative support agreement will be provided by
CMGI indefinitely. Either party may terminate the administrative support
agreement upon prior written notice. The administrative support agreement
automatically terminates upon the date CMGI owns less than 50% of Engage's
outstanding common stock.
Engage will pay CMGI a monthly fee reflecting the cost of the services
provided by CMGI based on the total number of Engage's employees and
consultants on the last day of that month.
In fiscal 1998 and the six months ended January 31, 1999, Engage paid CMGI
$339,000 and $217,000 for services similar to those provided under the
administrative support agreement.
Sublease Agreement
Upon the closing of this offering, Engage and CMGI will enter into a
sublease agreement for the sublease by Engage of headquarter office space from
CMGI at CMGI's Andover facility. The sublease will have a term of years,
subject to renewal, and will provide for rental payments of $ per year.
Registration Rights Agreement
Upon the closing of the offering, Engage and CMGI will enter into a
registration rights agreement under which Engage will grant CMGI registration
rights. Under this agreement, CMGI and its assignees will have the right to
demand, on up to occasions, that Engage register under the Securities Act the
sale of all or part of their shares of Engage common stock. CMGI and its
assignees are also entitled to include shares of Engage common stock in a
registered offering of securities by Engage for its own account, subject to
certain limitations and restrictions. Engage will pay all costs associated with
such registration of shares pursuant to this agreement, other than underwriting
discount and commission and various other expenses.
Other Transactions with CMGI Affiliates
Engage outsources its data center operations for Engage Knowledge and its
55
<PAGE>
AdBureau advertising management service to NaviSite, a CMGI affiliate. For
Engage Knowledge, Engage leases computer equipment and space for equipment from
NaviSite. Engage pays NaviSite fees based on the amount of space and amount of
telecommunications services used by NaviSite to support Engage Knowledge. For
AdBureau, NaviSite provides comprehensive operational and facilities support.
Engage pays NaviSite a percentage of AdBureau revenue. Engage also leases
office computer equipment from NaviSite. Engage expects to continue to
outsource its data center operations to NaviSite and to lease computer
equipment and space for such equipment from NaviSite. In fiscal 1998 and the
six months ended January 31, 1999, Engage paid a total of $886,000 and $912,000
to NaviSite for these services.
Engage sells its products and services to customers affiliated with CMGI. In
fiscal 1998 and the six months ended January 31, 1999, revenue of Engage from
sales to these affiliated companies totalled $235,000 and $1.0 million.
56
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDER AND MANAGEMENT
Principal Stockholder
The following table sets forth information with respect to beneficial
ownership of Engage common stock by CMGI as of April 30, 1999, and as adjusted
to reflect the sale of the shares of common stock offered by Engage in this
offering. CMGI is the only person or entity that owns beneficially more than 5%
of the outstanding shares of common stock. The shares of common stock shown as
held by CMGI include shares issuable upon conversion of convertible preferred
stock and convertible notes held by CMGI as of April 30, 1999. See
"Transactions and Relationship Between Engage and CMGI --Debt Conversion".
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Beneficially Owned
Name and Address of Shares of Common Stock ------------------------------
Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------ ---------------------- --------------- --------------
<S> <C> <C> <C>
CMGI, Inc. ............. 18,828,310 95.7% %
100 Brickstone Square
Andover, MA 01810
</TABLE>
Management
The following table sets forth information with respect to beneficial
ownership of the common stock of Engage and CMGI, as of April 30, 1999, for (i)
each director of Engage; (ii) each executive officer named in the Summary
Compensation Table; and (iii) all directors and executive officers of Engage as
a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares
of common stock underlying options held by such person that are exercisable
within 60 days of April 30, 1999, but excludes shares of common stock
underlying options held by any other person. Percentage of beneficial ownership
is based on 19,679,569 shares of common stock outstanding as of April 30, 1999,
after giving effect to the conversion of outstanding convertible notes and
convertible preferred stock.
<TABLE>
<CAPTION>
Percentage Percentage
Shares of Engage Ownership Shares of CMGI Ownership
Name Common Stock of Engage Common Stock of CMGI
- ------------------------ ---------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Paul L. Schaut.......... 118,750(1) * 2,500(1) *
Daniel J. Jaye.......... 258,333(1) 1.3% 2,666(1) *
David S. Wetherell...... 18,828,310(2) 95.7 5,386,112(3) 11.2%
Edward A. Bennett....... 0 * 0 *
Christopher A. Evans.... 35,000(1) * 0 *
Craig D. Goldman........ 15,625(1) * 37,600(1) *
Andrew J. Hajducky,
III.................... 18,828,310(2) 95.7 34,371(4) *
All directors and
executive officers as a
group (9 persons)...... 19,307,060(5) 95.8% 5,463,249(6) 11.3%
</TABLE>
- ---------------------
* Denotes less than 1% beneficial ownership.
(1) Consists of shares issuable upon the exercise of options exercisable within
60 days of April 30, 1999.
57
<PAGE>
(2) Consists of shares owned by CMGI on an as converted basis. Messrs.
Wetherell and Hajducky disclaim beneficial ownership of all 18,828,310
shares.
(3) Includes 1,152,944 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999. Includes 850,866
shares held in trust for the benefit of Mr. Wetherell's minor children and
11,686 shares held by Mr. Wetherell and his wife as trustees for the David
S. Wetherell Charitable Trusts, for which 862,552 shares Mr. Wetherell
disclaims beneficial ownership.
(4) Includes 23,995 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
(5) Includes 478,750 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
(6) Includes 1,219,705 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and the filing of Engage's
amended and restated certificate of incorporation, the authorized capital stock
of Engage will consist of shares of common stock, par value $.01 per share,
and shares of preferred stock, par value $.01 per share.
The following summary description of Engage's capital stock, as of the
closing of this offering, is not intended to be complete and is qualified by
reference to the provisions of applicable law and to Engage's amended and
restated certificate of incorporation and amended and restated by-laws filed as
exhibits to the registration statement of which this prospectus is a part.
Common Stock
As of April 30, 1999, there were 19,679,569 shares of common stock
outstanding and held of record by 82 stockholders, after giving effect to the
conversion of all convertible demand notes held by CMGI into convertible
preferred stock and outstanding shares of convertible preferred stock into
common stock upon the closing of this offering. Based upon the number of shares
outstanding as of April 30, 1999 and giving effect to the issuance of the
shares of common stock offered by Engage hereby, there will be shares of
common stock outstanding upon the closing of this offering. In addition, as of
April 30, 1999, there were outstanding stock options for the purchase of a
total of 3,233,897 shares of common stock.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Directors are elected by a plurality of the
votes of the shares present in person or by proxy at the meeting. The holders
of common stock are entitled to receive ratably such lawful dividends as may be
declared by the board of directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of
the affairs of Engage, whether voluntarily or involuntarily, the holders of
common stock will be entitled to receive pro rata all of the remaining assets
of Engage available for distribution to its stockholders. Any such pro rata
distribution would be subject to the rights of the holders of any outstanding
shares of preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. All outstanding shares of common stock are
fully paid and non-assessable. The shares of common stock to be issued by
Engage in this offering will be fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that Engage may designate and issue in the future.
Upon the closing of this offering, there will be no shares of preferred stock
outstanding.
Preferred Stock
The board of directors will be authorized, subject to any limitations
prescribed by Delaware law, without further stockholder approval, to issue from
time to time up to an aggregate of shares of preferred stock, in one or
more series. The board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. The
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
Engage has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attemping to acquire, a majority of the
outstanding common stock of Engage.
Registration Rights
The Series B Convertible Preferred Stock Purchase Agreement dated as of July
31, 1998
59
<PAGE>
provides that the holders of 238,597 shares are entitled to rights with
respect to the registration of such shares under the Securities Act. If Engage
proposes to register any of its securities under the Securities Act, either
for its own account or for the account of another securityholder, the holders
are entitled to notice of such registration and to include their registrable
shares in such registration. However, in the event of a registration pursuant
to an underwritten public offering of common stock, the underwriters shall
have the right, subject to certain conditions, to limit the number of shares
included in such registration. These rights terminate for a holder at such
time as such holder could sell all of its shares under Rule 144(k) under the
Securities Act. See "Transactions and Relationship Between Engage and CMGI --
Registration Rights Agreement" for information concerning registration rights
granted to CMGI.
Anti-Takeover Effects of Provisions of Engage's Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws and Delaware Law
Engage's amended and restated certificate of incorporation and amended and
restated by-laws contain certain provisions that could discourage, delay or
prevent a change in control of Engage or an acquisition of Engage at a price
which many stockholders may find attractive. The existence of these provisions
could limit the price that investors might be willing to pay in the future for
shares of common stock.
The certificate of incorporation provides for the division of the board of
directors into three classes as nearly as equal in size as possible with
staggered three-year terms. In addition, it provides that, from and after such
time as CMGI (or a transferee acquiring majority ownership of Engage from
CMGI) holds less than a majority of the outstanding shares of Engage common
stock, directors may be removed only for cause. Newly created directorships
resulting from an increase in the authorized number of directors or vacancies
on the Board may be filled only by a majority of the directors then in office,
even though less than a quorum may then be in office. These provisions may
have the effect of discouraging a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of Engage, or
attempting to change the composition or policies of the Board.
The certificate of incorporation and by-laws provide that special meetings
of stockholders may be called only by a majority of the Board, the President
and, as long as CMGI (or a transferee acquiring majority ownership of Engage
from CMGI) holds at least a majority of the outstanding shares of Engage
common stock, by CMGI or such transferee. The certificate of incorporation and
the by-laws also provide that, after such time as CMGI (or a transferee
acquiring majority ownership of Engage from CMGI) holds less than a majority
of the outstanding shares of common stock, stockholder action may be taken
only at a duly called and convened annual or special meeting of stockholders
and may not be taken by written consent. These provisions, taken together, may
in the future prevent stockholders from forcing consideration by the
stockholders of stockholder proposals over the opposition of the Board, except
at an annual meeting.
The by-laws also provide that any action required or permitted to be taken
by the stockholders of Engage at any annual meeting or special meeting of
stockholders may only be taken if it is properly brought before the meeting.
In order for any matter to be considered properly brought before the meeting,
a stockholder must comply with certain requirements regarding advance notice
and provide certain information to Engage.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares issued and outstanding is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case
may be, requires a greater percentage. The certificate of incorporation
requires, after such time as CMGI (or a transferee acquiring majority
ownership of Engage from CMGI) holds less than a majority of the outstanding
shares of common stock, the affirmative vote of the holders of at least 75% of
the issued and
60
<PAGE>
outstanding shares of capital stock of Engage entitled to vote to amend or
repeal any of the foregoing provisions. The 75% stockholder vote would be in
addition to any separate class vote that might be required pursuant to the
terms of any series of preferred stock that might be outstanding at the time
any such amendments are submitted to stockholders.
The certificate of incorporation contains a provision expressly electing not
to be governed by Section 203 of the Delaware General Corporation Law. In
general, Section 203 restricts certain business combinations involving
interested stockholders (defined as any person or entity that is the beneficial
owner of at least 15% of a corporation's voting stock or is an affiliate or
associate of the corporation or the owner of 15% or more of the outstanding
voting stock of the corporation at any time in the past three years) or their
affiliates. Because of such election, Section 203 will not apply to Engage.
Limitation of Liability and Indemnification
The certificate of incorporation provides that no director of Engage shall
be personally liable to Engage or to its stockholders for monetary damages for
breach of fiduciary duty as a director, except that the limitation shall not
eliminate or limit liability to the extent that the elimination or limitation
of such liability is not permitted by the Delaware General Corporation Law as
it exists or may later be amended.
The certificate of incorporation further provides for the indemnification of
Engage's directors and officers to the fullest extent permitted by Section 145
of the Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. In addition, Engage plans to enter
into indemnification agreements with its directors containing provisions which
may require Engage, among other things, to indemnify its directors against
certain liabilities that may arise by virtue of their status or service as
directors, and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
Stock Transfer Agent
The transfer agent and registrar for the common stock is EquiServe L.P.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since some shares of common stock will not be available for sale shortly after
this offering because of the contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our common stock assuming no exercise of outstanding options. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. Of the remaining shares, are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act, which rules are summarized below.
Lock-Up Agreements
Stockholders holding an aggregate of shares of common stock, including
all of our officers and directors, have signed lock-up agreements with the
underwriters under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner:
. with the prior written consent of Goldman, Sachs & Co.;
. in the case of transfers to affiliates;
. as a bona fide gift; or
. to any trust.
Upon expiration of the lock-up period, 180 days after the date of this
prospectus, shares will be available for resale to the public in accordance
with Rule 144.
In addition, stockholders holding an aggregate of 505,092 shares have signed
lock-up agreements with CMGI under which they agreed not to transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock
until April 7, 2000. CMGI has agreed not to waive these restrictions for a
period of 180 days after the date of this prospectus, without the consent of
Goldman Sachs & Co.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of
62
<PAGE>
Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with various
restrictions, including the holding period, contained in Rule 144.
Registration Rights
Upon completion of this offering, the holders of shares of our common
stock or their transferees, including CMGI, will be entitled to various rights
with respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock --Registration Rights" and "Transactions and
Relationship Between Engage and CMGI --Registration Rights Agreement".
Stock Options
Ninety days after this offering, Engage intends to file a registration
statement under the Securities Act covering shares of common stock reserved
for issuance under our 1995 Equity Incentive Plan, 1999 Employee Stock Purchase
Plan and 1999 Director Stock Option Plan. Such registration statement is
expected to be filed and become effective 90 days after the effective date of
this offering. Accordingly, shares registered under such registration statement
will, subject to vesting provisions, Rule 144 volume limitations applicable to
our affiliates and any applicable lock-up agreements, be available for sale in
the open market 90 days after the effective date of this offering.
As of April 30, 1999, options to purchase 3,233,897 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up agreements
described above, at least shares of common stock will be subject to vested
options, based on options outstanding as of April 30, 1999.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for
Engage by Hale and Dorr LLP, Boston, Massachusetts and for the underwriters by
Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated balance sheets of Engage Technologies, Inc. and
subsidiaries as of July 31, 1997 and 1998 and the statements of operations,
changes in stockholders' equity and cash flows for the three years in the
period ended July 31, 1998 have been included in reliance on the reports of
KPMG Peat Marwick LLP, Engage's independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The balance sheets of Accipiter Inc. as of December 31, 1997 and 1998 and
the statements of operations, changes in stockholders' equity and cash flows
for the two years in the period ended July 31, 1998 and the period from April
4, 1996 (inception) to December 31, 1996 have been included in reliance on the
reports of KPMG Peat Marwick LLP, Accipiter's independent accountants, given on
the authority of that firm as experts in accounting and auditing.
The balance sheets of Internet Profiles Corporation as of December 31, 1997
and 1998 and the statements of operations, changes in stockholders' equity and
cash flows for the two years ended December 31, 1998 have been included in
reliance on the reports of PricewaterhouseCoopers LLP, Internet Profiles
Corporation's independent accountants, given on the authority of that firm as
experts in accounting and auditing.
63
<PAGE>
AVAILABLE INFORMATION
Engage has filed with the Securities and Exchange Commission, a registration
statement on Form S-1 (including the exhibits and schedules to the registration
statement) under the Securities Act with respect to the shares to be sold in
this offering. This prospectus does not contain all the information set forth
in the registration statement. For further information with respect to Engage
and the shares to be sold in this offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance reference is made to the copy of
each contract, agreement or other document filed as an exhibit to the
registration statement.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information Engage files at the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the
Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Engage's Commission
filings, including the registration statement will also be available to you on
the Commission's Internet site (http://www.sec.gov).
64
<PAGE>
Index to Financial Statements
<TABLE>
<S> <C>
Engage Technologies, Inc. Page
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets as of July 31, 1997 and 1998,
and January 31, 1999 (unaudited) ........................................ F-3
Consolidated Statements of Operations for the three years ended July 31,
1998
and for the six months ended January 31, 1998 and 1999 (unaudited) ...... F-4
Consolidated Statements of Changes in Stockholders' Equity for the three
years ended
July 31, 1998 and for the six months ended January 31, 1998 and 1999 (un-
audited) ................................................................ F-5
Consolidated Statements of Cash Flows for the three years ended July 31,
1998
and for the six months ended January 31, 1998 and 1999 (unaudited) ...... F-6
Notes to Consolidated Financial Statements ............................... F-7
Accipiter, Inc.
Independent Auditors' Report ............................................. F-22
Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998 (unau-
dited) .................................................................. F-23
Statements of Operations for the period from April 14, 1996 to December
31, 1996, for the year ended December 31, 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited) ............................... F-24
Statements of Stockholders' Deficit for the two years ended December 31,
1997 and for the three months ended March 31, 1998 (unaudited) .......... F-25
Statements of Cash Flows for the period from April 14, 1996 to December
31, 1996, for the year ended December 31, 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited) ............................... F-26
Notes to Financial Statements ............................................ F-27
Internet Profiles Corporation
Report of Independent Accountants ........................................ F-32
Balance Sheets as of December 31, 1997 and 1998 .......................... F-33
Statements of Operations for the two years ended December 31, 1998 ....... F-34
Statements of Stockholders' Equity (Deficit) for the two years ended
December 31, 1998 ....................................................... F-35
Statements of Cash Flows for the two years ended December 31, 1998 ....... F-36
Notes to Financial Statements ............................................ F-37
Unaudited Pro Forma Combined Condensed Financial Data for Engage
Technologies, Inc., Accipiter, Inc. and Internet Profiles Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of January 31,
1999 .................................................................... F-49
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended July 31, 1998 and for the six months ended January 31,
1999 .................................................................... F-51
</TABLE>
F-1
<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, 1997 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
July 31, 1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
April 9, 1999, except as to note 16
which is as of May 5, 1999
Boston, Massachusetts
F-2
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, Pro forma
------------------ January 31, January 31,
1997 1998 1999 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
(In thousands, except par value)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash.............................. $ -- $ 96 $ --
Available-for-sale securities..... -- 567 1,563
Accounts receivable, less
allowance for doubtful accounts
of $0, $360 and $352 at July 31,
1997 and 1998 and January 31,
1999, respectively............... 30 1,824 1,903
Prepaid expenses.................. 82 230 217
-------- -------- --------
Total current assets.............. 112 2,717 3,683
-------- -------- --------
Property and equipment, net........ 1,670 789 665
Investment in joint venture........ -- -- 1,609
Goodwill and other intangible
assets, net of accumulated
amortization of $1,380 and $3,449
at July 31, 1998 and January 31,
1999, respectively................ -- 18,894 16,825
-------- -------- --------
Total assets ..................... $ 1,782 $ 22,400 $ 22,782
======== ======== ========
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Debt to CMGI...................... $ 14,018 $ 7,753 $ 9,347
Accounts payable.................. -- 499 863
Accrued expenses.................. 288 1,614 3,295
Deferred revenue.................. 15 1,460 4,932
-------- -------- --------
Total current liabilities......... 14,321 11,326 18,437
-------- -------- --------
Commitments and contingencies (note
8)
Stockholders' equity
Series A Preferred Stock, $.01 par
value, 1,500 shares authorized,
1,500, 1,500 and 0 shares issued
and outstanding at July 31, 1998,
January 31, 1999 and January 31,
1999 (pro forma), respectively
(liquidating preference of
$15,000)......................... -- 15 15 --
Series B Preferred Stock, $.01 par
value, 239 shares authorized, 239
and 0 shares issued and
outstanding at January 31, 1999
and January 31, 1999 (pro forma),
respectively (liquidating
preference of $2,000)............ -- -- 2 --
Common Stock, $.01 par value,
20,000 shares authorized, 8,094,
108, 108 and 16,991 shares issued
and outstanding at July 31, 1997
and 1998, January 31, 1999, and
January 31, 1999 (pro forma),
respectively..................... 81 1 1 170
Additional paid-in capital........ 21 39,916 41,856 51,051
Deferred compensation............. -- (1,305) (914) (914)
Accumulated other comprehensive
income (loss).................... -- (1,193) 148 148
Accumulated deficit............... (12,641) (26,360) (36,763) (36,763)
-------- -------- -------- --------
Total stockholders' equity
(deficit)........................ (12,539) 11,074 4,345 $ 13,692
-------- -------- -------- ========
$ 1,782 $ 22,400 $ 22,782
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended July 31, January 31,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue............. $ -- $ 25 $ 1,742 $ 107 $ 2,640
Product revenue, related
parties.................... -- -- 203 47 948
Services and support
revenue.................... -- -- 240 -- 618
Services and support reve-
nue, related
parties.................... -- -- 32 10 59
------- -------- -------- ------- ---------
Total revenue............. -- 25 2,217 164 4,265
------- -------- -------- ------- ---------
Cost of revenue:
Cost of product revenue..... -- 31 185 7 580
Cost of services and support
revenue.................... -- -- 2,057 431 2,484
------- -------- -------- ------- ---------
Total cost of revenue..... -- 31 2,242 438 3,064
------- -------- -------- ------- ---------
Gross (loss) profit....... -- (6) (25) (274) 1,201
------- -------- -------- ------- ---------
Operating expenses:
In-process research and
development................ -- -- 9,200 -- --
Research and development.... 1,796 7,261 5,925 3,460 3,878
Selling and marketing....... 155 1,566 4,031 1,279 3,732
General and administrative.. 428 1,429 2,333 484 1,586
Amortization of goodwill and
other
intangibles................ -- -- 1,273 -- 1,909
------- -------- -------- ------- ---------
Total operating expenses.. 2,379 10,256 22,762 5,223 11,105
------- -------- -------- ------- ---------
Loss from operations.......... (2,379) (10,262) (22,787) (5,497) (9,904)
Other income (expense):
Gain on sale of product
rights..................... -- -- 9,240 9,240 --
Equity in loss of joint
venture.................... -- -- -- -- (160)
Interest expense, net....... -- -- (172) -- (339)
------- -------- -------- ------- ---------
Net (loss) income............. $(2,379) $(10,262) $(13,719) $ 3,743 $ (10,403)
======= ======== ======== ======= =========
Unaudited pro forma basic and
diluted net loss per share... $ (1.64) $ (0.62)
======== =========
Pro forma weighted average
number of basic and diluted
shares outstanding........... 8,375 16,824
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B Accumulated
Preferred Stock Preferred Stock Common Stock Additional Other
----------------- ------------------ -------------- Paid-in Deferred Accumulated Comprehensive
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit Income (Loss)
-------- ------- ------- -------- ------ ------ ---------- ------------ ----------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
31, 1995......... -- $ -- -- $ -- -- $-- $ -- $ -- $ -- $ --
Issuance of
common stock.... -- -- -- -- 8,000 80 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (2,379) --
-------- ------- ------- -------- ------ ---- ------- ------- -------- -------
Balance at July
31, 1996......... -- -- -- -- 8,000 80 -- -- (2,379) --
Exercise of
stock options... -- -- -- -- 94 1 21 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (10,262) --
-------- ------- ------- -------- ------ ---- ------- ------- -------- -------
Balance at July
31, 1997......... -- -- -- -- 8,094 81 21 -- (12,641) --
Reorganization
(see Note 10)... 800 8 -- -- (8,000) (80) 7,992 -- -- --
Acquisition of
Accipiter (see
Note 7)......... 700 7 -- -- -- -- 31,903 (1,731) -- --
Deferred
compensation
related to the
the acquisition
of Accipiter.... -- -- -- -- -- -- -- 426 -- --
Exercise of
stock options... -- -- -- -- 1 -- -- -- -- --
Unrealized loss
on available for
sale
securities...... -- -- -- -- -- -- -- -- -- (1,193)
Net loss........ -- -- -- -- -- -- -- -- (13,719) --
-------- ------- ------- -------- ------ ---- ------- ------- -------- -------
Balance at July
31, 1998......... 1,500 15 -- -- 95 1 39,916 (1,305) (26,360) (1,193)
Issuance of pre-
ferred stock,
net of
issuance costs
of $66
(unaudited)..... -- -- 239 2 -- -- 1,932 -- -- --
Foreign currency
translation
adjustment (un-
audited)........ -- -- -- -- -- -- -- -- -- 345
Deferred compen-
sation related
to the acquisi-
tion of Accipi-
ter
(unaudited)..... -- -- -- -- -- -- -- 391 -- --
Exercise of
stock options
(unaudited)..... -- -- -- -- 13 -- 8 -- -- --
Unrealized gain
on available for
sale securities
(unaudited)..... -- -- -- -- -- -- -- -- -- 996
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (10,403) --
-------- ------- ------- -------- ------ ---- ------- ------- -------- -------
Balance at Janu-
ary 31, 1999
(unaudited)...... 1,500 $ 15 239 $ 2 108 $ 1 $41,856 $ (914) $(36,763) $ 148
-------- ------- ------- -------- ------ ---- ------- ------- -------- -------
<CAPTION>
Total
---------
<S> <C>
Balance at July
31, 1995......... $ --
Issuance of
common stock.... 80
Net loss........ (2,379)
---------
Balance at July
31, 1996......... (2,299)
Exercise of
stock options... 22
Net loss........ (10,262)
---------
Balance at July
31, 1997......... (12,539)
Reorganization
(see Note 10)... 7,920
Acquisition of
Accipiter (see
Note 7)......... 30,179
Deferred
compensation
related to the
the acquisition
of Accipiter.... 426
Exercise of
stock options... --
Unrealized loss
on available for
sale
securities...... (1,193)
Net loss........ (13,719)
---------
Balance at July
31, 1998......... 11,074
Issuance of pre-
ferred stock,
net of
issuance costs
of $66
(unaudited)..... 1,934
Foreign currency
translation
adjustment (un-
audited)........ 345
Deferred compen-
sation related
to the acquisi-
tion of Accipi-
ter
(unaudited)..... 391
Exercise of
stock options
(unaudited)..... 8
Unrealized gain
on available for
sale securities
(unaudited)..... 996
Net loss
(unaudited)..... (10,403)
---------
Balance at Janu-
ary 31, 1999
(unaudited)...... $ 4,345
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENGAGE TECHNOLIGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Years ended July 31, January 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(unaudited)
(In thousands, except par value)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income............. $(2,379) $(10,262) $(13,719) $ 3,743 $(10,403)
Adjustments to reconcile net
(loss) income to net cash
used for operating
activities:
Depreciation and
amortization................ 530 947 1,745 186 2,311
Equity in loss of joint
venture..................... -- -- -- -- 160
Provision for bad debts...... -- -- 240 -- --
Deferred compensation........ -- -- 426 -- 391
Gain on sale of product
rights...................... -- -- (9,240) (9,240) --
In process research and
development................. -- -- 9,200 -- --
Changes in operating assets
and liabilities:
Accounts receivable......... -- (30) (1,439) (119) (79)
Prepaid expenses............ (276) 194 (147) (927) 13
Accounts payable............ -- -- 475 442 364
Accrued expenses............ 151 137 835 640 1,681
Deferred revenue............ -- 15 1,117 (9) 3,472
------- -------- -------- ------- --------
Net cash used for operating
activities................ (1,974) (8,999) (10,507) (5,284) (2,090)
------- -------- -------- ------- --------
Cash flows from investing
activities:
Investment in joint venture... -- -- -- -- (1,424)
Net cash acquired on
acquisition of Accipiter..... -- -- 689 -- --
Purchases of property and
equipment.................... (1,613) (490) (216) (44) (118)
------- -------- -------- ------- --------
Net cash (used for)
provided by investing
activities................ (1,613) (490) 473 (44) (1,542)
------- -------- -------- ------- --------
Cash flows from financing
activities:
Net change in debt to CMGI.... 3,587 10,511 10,129 5,328 1,594
Proceeds from option
exercises.................... -- 22 1 -- 8
Issuance of preferred stock,
net of issuance costs........ -- -- -- -- 1,934
Principal payments on notes... -- (1,044) -- -- --
------- -------- -------- ------- --------
Net cash provided by
financing activities...... 3,587 9,489 10,130 5,328 3,536
------- -------- -------- ------- --------
Net increase (decrease) in
cash.......................... -- -- 96 -- (96)
Cash, beginning of period...... -- -- -- -- 96
------- -------- -------- ------- --------
Cash, end of period............ $ -- $ -- $ 96 $ -- $ --
======= ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All information included in these footnotes for the periods subsequent to
July 31, 1998 is unaudited
(1) Description of Business
Engage is a leading provider of profile-driven Internet marketing
solutions. 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.
(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 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, Accipiter and Engage UK LTD., 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 to customers 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.
F-7
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
Under an arrangement with CMGI, the Company maintains a zero balance cash
account. Cash required by the Company for the funding of its operations is
provided as needed with a corresponding increase to 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
repayment of approximately $8,400,000 of debt due to CMGI. In addition, non-
cash investing activities also include the acquisition of Accipiter, in which
the Company acquired 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 8,000,000 shares of the Company's common stock and an $8,000,000
reduction in the debt to CMGI (see note 10).
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 other comprehensive income 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 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.
Investment in Joint Venture
The Company's investment in the common stock of a Japanese joint venture is
accounted for by the equity method.
F-8
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles
Intangibles relate to the Company's purchase of Accipiter, Inc. in April
1998 (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 based upon events or
circumstances which have occurred since acquisition.
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 other comprehensive income 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 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
F-9
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 is currently greater than 80% owned by CMGI, and as such, CMGI
realizes the full benefit of all federal and part of the state net operating
losses that have been incurred by the Company. Therefore, such net operating
losses incurred by the Company will have no future benefit to the Company.
CMGI is not obligated to reimburse the Company for the benefits utilized that
are attributable to the Company.
Advertising Costs
The Company expenses advertising costs as incurred. The Company did not
incur any advertising costs during the year ended July 31, 1996. Advertising
expense was approximately $40,000 and $175,000 for the fiscal years ended July
31, 1997 and 1998, 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 in 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.
Therefore, 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 11).
Unaudited Pro Forma Basic and Diluted Net Loss per Share
Unaudited pro forma basic earnings (loss) per share is based upon the
weighted average number of common shares outstanding during the period.
Unaudited pro forma diluted earnings (loss) per share is based upon the
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 16, conversion of all preferred stock and amounts due
to CMGI will occur upon the completion of a qualified public offering of the
Company's common stock. The unaudited pro forma basic and diluted net loss per
share information included in the accompanying statements of operations for
the year ended July 31, 1998 and the six months ended January 31, 1999
reflects the impact on unaudited 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 will
result upon conversion of the convertible preferred stock and debt to CMGI.
F-10
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the numerators and denominators of the unaudited pro
forma basic and unaudited 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 Six Months Ended
July 31, 1998 January 31, 1999
------------------ --------------------
(In thousands, except per share data)
<S> <C> <C>
Numerator:
Loss........................... $ (13,719) $ (10,403)
------------------ ------------------
Denominator:
Common shares outstanding...... 7,699 104
Assumed conversion of preferred
stock......................... 395 15,214
Assumed conversion of amounts
due to CMGI................... 281 1,506
------------------ ------------------
Weighted average number of
diluted shares outstanding.... 8,375 16,824
------------------ ------------------
Basic and diluted loss per share
................................ $ (1.64) $ (0.62)
================== ==================
</TABLE>
See note 16.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued 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 is effective for the Company beginning in fiscal
1999. The Company is in the process of determining the impact of these
standards, if any, on its consolidated financial statements and related
disclosures.
In 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and
F-11
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company
is required to adopt this standard in the first quarter of fiscal 2000, and
expects that the adoption of SFAS 133 will not have a material impact on the
its financial position or its results of operations.
Unaudited Interim Financial Information
The consolidated financial statements for the six months ended January 31,
1998 and 1999 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been
included. Results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for the full fiscal
year or any other future period.
(3) Sale of Product Rights
In August 1997, the Company sold certain rights to its data warehouse
software 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 (see note 3). These securities are carried at fair value
based on quoted market prices. A $1,193,000 unrealized holding loss was
recorded on the Red Brick shares at July 31, 1998 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 income. Subsequent to July 31,
1998, the Red Brick shares were exchanged for 142,896 common shares of
Informix Corp. due to Informix's acquisition of Red Brick.
(5) Property and Equipment
<TABLE>
<CAPTION>
July 31,
Estimated ---------------
Useful Life 1997 1998
------------------------ ------- ------
(In thousands)
<S> <C> <C> <C>
Office furniture and computer
equipment.......................... 3-5 years $ 911 $ 940
Software licenses................... 3 years 2,131 273
Leasehold improvements.............. 4 years or life-of-lease 105 105
------- ------
3,147 1,318
Less: Accumulated depreciation and
amortization....................... (1,477) (529)
------- ------
$ 1,670 $ 789
======= ======
</TABLE>
F-12
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Investment in Joint Venture
In August 1998, the Company acquired for $1.47 million in cash, 49 percent
of the shares of Engage Technologies Japan (the "Joint Venture"), a joint
venture with Sumitomo Corporation in Japan. 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.
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. Under the terms of the reseller agreement, the
Joint Venture is entitled to purchase the Company's products for resale in
Japan.
(7) Acquisition of Accipiter, Inc.
In April 1998, CMGI acquired Accipiter, Inc. ("Accipiter"), a company
specializing in Internet advertising management solutions, in exchange for
1,263,692 shares of CMGI Common Stock. 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 and the acquisition of Accipiter as if they occurred in April 1998.
The total purchase price for Accipiter was valued at $29,489,000, including
acquisition costs of $198,000. The value of the CMGI shares included in the
purchase price was recorded net of a weighted average 15% market value
discount to reflect the restrictions on transferability. Of the purchase
price, $9,200,000 was allocated to in-process research and development which
has been charged to operations during the year ended July 31, 1998.
Approximately $1,700,000 of deferred compensation was recorded during
fiscal 1998 relating to approximately 43,000 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 August 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 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 two years. Amortization of
developed technology is charged to cost of revenue while both goodwill and
other identifiable intangible assets are reflected as separate components
within operating expenses.
F-13
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital deficit, net of cash acquired of $689............ $ (249)
Property and equipment........................................... 262
Other assets..................................................... 2
In-process research and development.............................. 9,200
Goodwill......................................................... 18,394
Developed technology............................................. 1,600
Other identifiable intangible assets............................. 280
-------
Purchase price................................................... $29,489
=======
</TABLE>
The following table represents the unaudited pro forma results of
operations of the Company for the years ended July 31, 1997 and 1998, as if
the Accipiter acquisition had occurred at the beginning of the respective
periods. These pro forma results include adjustments for the amortization of
goodwill and other intangibles and deferred compensation. They have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made at the beginning of the
respective periods or of results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------
1997 1998
---------- ----------
(in thousands, except
per share data)
(unaudited)
<S> <C> <C>
Net revenues....................................... $ 428 $ 3,375
Net loss........................................... (16,472) (18,557)
Net loss per share................................. (1.10) (1.21)
</TABLE>
(8) Leases
The Company has entered into noncancelable operating leases covering
certain of its office facilities and equipment which expire through 2002. 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 $36,000, $305,000 and $483,000 for the years
ended July 31, 1996, 1997 and 1998, respectively. Rent expense for office
facilities paid to CMGI amounted to approximately $35,000, $274,000 and
$258,000 for the years ended July 31, 1996, 1997 and 1998, respectively. Rent
expense for equipment paid to a subsidiary of CMGI amounted to approximately
$1,000, $31,000 and $125,000 for the years ended July 31, 1996, 1997 and 1998,
respectively.
Minimum annual rental commitments, in thousands, are as follows at July 31,
1998:
<TABLE>
<S> <C>
1999.................................................................. $214
2000.................................................................. 95
2001.................................................................. 73
2002.................................................................. 1
----
$383
====
</TABLE>
F-14
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) 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,
1998, 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, 1998. 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,
-----------------------
1996 1997 1998
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Research credits............................... $ -- $ 212 $ 72
Deferred revenue............................... -- -- 288
Accruals and other reserves.................... 44 84 377
Loss carryforwards............................. 96 692 1,862
Depreciation and amortization.................. 43 31 345
Basis difference in available for sale
securities.................................... -- -- 821
----- ------- -------
Total deferred tax assets........................ 183 1,019 3,765
Less: Valuation allowance...................... (183) (1,019) (3,765)
----- ------- -------
Net deferred tax assets........................ $ -- $ -- $ --
===== ======= =======
Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of July 31, 1996, 1997 and 1998 will be allocated as
follows:
<CAPTION>
July 31,
-----------------------
1996 1997 1998
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Income tax benefit that would be recognized in
the consolidated statements of
operations...................................... $ 183 $ 1,019 $ 2,085
Goodwill and other non-current intangible
assets.......................................... -- -- 1,189
Accumulated other comprehensive income (loss).... -- -- 491
----- ------- -------
$ 183 $ 1,019 $ 3,765
===== ======= =======
</TABLE>
The Company has net operating loss carryforwards for Massachusetts tax
purposes of approximately $1.7 million, $1.2 million and $10.7 million as of
July 31, 1996, 1997 and 1998, respectively. The net operating loss
carryforwards will expire from 2001 through 2003. In addition, the
F-15
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company has net operating loss carryforwards for North Carolina tax purposes
of approximately $4.4 million as of July 31, 1998, which will expire from 2001
through 2003, of which $2.7 million is related to losses incurred by
Accipiter, Inc. prior to its acquisition by the Company and the related tax
benefit will be recorded, if realized, as a decrease in goodwill and other
non-current intangible assets. The Company also has $2.7 million of federal
net operating loss carryforwards, which will expire from 2011 through 2012,
related to losses incurred by Accipiter, Inc. prior to its acquisition of the
Company, the tax benefit of which, if 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.
(10) Stockholders' Equity
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") and 238,597 shares
have been designated as Series B convertible preferred stock ("Series B
Preferred Stock"). The remaining authorized shares have not been designated.
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 8,000,000 shares of common stock
and $8,000,000 in principal amount of due 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, 1998, no dividends had been declared or paid by the
Company. The Series A Convertible Preferred Stock is fully participating,
voting, and is convertible into ten 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 $10 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, and automatically converts into common stock upon the completion
of a qualifying initial public offering, as defined.
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.
At July 31, 1998, 15,000,000 shares of common stock have been reserved for
issuance upon the conversion of the Series A Preferred Stock.
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 $66,000. The Series B Convertible Preferred Stock is fully
participating, voting, and is convertible into one share 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, and automatically converts into common stock upon the
completion of a qualifying initial public offering, as defined in the stock
purchase agreement. See note 16.
Unaudited Pro Forma Balance Sheet
Upon the closing of a qualifying initial public offering, amounts due to
CMGI will convert to Series C Preferred Stock, and all of the outstanding
shares of Series A Preferred Stock, Series B
F-16
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock and Series C Preferred Stock will convert to 15,238,597 shares
of the Company's common stock. This conversion has been reflected in the
unaudited pro forma balance sheet as of January 31, 1999. See note 16.
(11) 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, non-
qualified stock options or incentive stock options may be granted to the
Company's or its affiliates' employees, as defined, up to a maximum number of
shares of common stock not to exceed 2,894,737 shares. 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. The following table reflects activity and historical prices of
stock options under the Company's 1995 Plan for the three years ended July 31,
1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... -- $ -- 1,287,750 $0.31 1,195,500 $0.48
Granted................. 1,287,750 0.31 451,750 1.19 1,645,250 2.91
Exercised............... -- -- (93,750) 0.23 (800) 0.87
Cancelled............... -- -- (450,250) 0.77 (765,923) 1.14
--------- --------- ---------
Options outstanding, end
of year................ 1,287,750 $0.31 1,195,500 $0.48 2,074,027 $2.17
========= ===== ========= ===== ========= =====
Options exercisable, end
of year................ -- $ -- 303,089 $0.24 319,722 $0.61
========= ===== ========= ===== ========= =====
Options available for
grant, end of year..... 712,250 710,750 726,160
========= ========= =========
</TABLE>
The following table summarizes information about stock options under the
Company's 1995 Plan outstanding at July 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
- ------------------------ ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 -
$0.84 1,209,500 3.6 $0.40 280,291 $0.32
$0.85 -
$1.68 40,500 3.2 1.42 18,300 1.42
$1.69 -
$3.35 20,000 3.2 2.04 7,953 2.03
$4.20 -
$5.87 779,027 4.4 4.75 13,178 4.75
$5.88 -
$8.38 25,000 4.5 8.38 -- --
--------- -------
2,074,027 3.9 $2.17 319,722 $0.61
========= =======
</TABLE>
F-17
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 52,680 $0.16 80,160 $1.82 90,620 $2.51
Granted................. 38,000 3.67 24,400 3.89 40,000 4.63
Exercised............... (10,520) 0.16 (10,940) 0.30 (53,146) 1.68
Cancelled............... -- -- (3,000) 3.44 (7,084) 3.69
------- ------- -------
Options outstanding, end
of year................ 80,160 $1.82 90,620 $2.51 70,390 $4.22
======= ===== ======= ===== ======= =====
Options exercisable, end
of year................ 21,173 $0.44 41,799 $1.62 9,301 $3.52
======= ===== ======= ===== ======= =====
</TABLE>
The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at July 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
- ------------------------ ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.92 564 1.17 $0.92 2 $0.92
$3.22 -
$3.89 28,040 2.69 3.51 8,846 3.31
$4.63 40,000 4.24 4.63 -- --
$7.53 1,786 2.32 7.53 453 7.53
------ -----
70,390 3.55 $4.22 9,301 $3.52
====== =====
</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 1996, 1997 and 1998 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, 1996 July 31, 1997 July 31, 1998
--------------------- --------------------- ---------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net loss..... $(2,379) $(2,402) $(10,262) $(10,385) $(13,719) $(14,077)
</TABLE>
F-18
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1996, 1997 and 1998, respectively: volatility
of 80.30%, 66.69% and 90.07%; risk-free interest rate of 5.81%, 6.19% and
5.48%; expected life of options of 4.0, 4.0 and 3.4 years; and 0% dividend
yield for all years. The weighted average fair value per share of options
granted during fiscal 1996, 1997 and 1998 was $0.19, $0.68 and $1.72,
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 1996, 1997
and 1998, respectively: volatility of 80.30%, 66.69% and 90.07%; risk-free
interest rate of 5.81%, 6.19% and 5.50%; expected life of options of 4.0, 6.2
years and 4.2 years; and 0% dividend yield for all years. The weighted average
fair value per share of options granted during fiscal 1996, 1997 and 1998 was
$2.02, $2.60 and $3.16, respectively.
(12) 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, Six Months Ended
------------------------------ January 31,
1996 1997 1998 1999
-------- --------- --------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Net loss.................. $ (2,379) $ (10,262) $ (13,719) $ (10,403)
Foreign currency adjust-
ments.................... -- -- -- 345
Net unrealized holding
gain (loss) arising dur-
ing the period........... -- -- (1,193) 996
-------- --------- --------- ---------
Comprehensive loss........ $ (2,379) $ (10,262) $ (14,912) $ (9,062)
======== ========= ========= =========
</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
----------- -------------- -------------
(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, six months ended January
31, 1999......................... 345 996 1,341
---- ------- -------
Balance, January 31, 1999......... $345 $ (197) $ 148
==== ======= =======
</TABLE>
F-19
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(13) Concentration of Credit Risk
Amounts included in the consolidated balance sheets for accounts
receivable, due 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. 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. 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 four
customers accounted for 33%, 29%, 15% and 15% for the six months ended January
31, 1998 and sales to two customers accounted for 11% and 10% of revenues for
the six months ended January 31, 1999. Accounts receivable at July 31, 1997
was due from one customer. Accounts receivable due from three customers
approximated 23%, 12% and 12% of total accounts receivable at July 31, 1998.
No customer receivable was in excess of 10% of total receivables at January
31, 1999. The Company's customer base consists of geographically diverse
customers across many industries.
(14) 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 and CMGI has guaranteed the Company's
obligations under a lease for office space used for research and development,
sales and service operations. Amounts due CMGI are included in "Debt to CMGI"
on the consolidated balance sheets. See note 16. 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,
-------------------
1996 1997 1998
------------ ------
(In thousands)
<S> <C> <C> <C>
Enterprise services...................................... $ -- $ 129 $ 201
Rent and facilities...................................... $ 35 $ 312 $ 366
Human resources.......................................... $ -- $ 11 $ 30
</TABLE>
In addition, beginning in fiscal 1998, the Company outsources data center
operations to one of CMGI's affiliates, for which fees were charged at
estimated fair value of $889,000 and $912,000 during the year ended July 31,
1998 and the six months ended January 31, 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 8).
F-20
<PAGE>
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 1996 and 1997. Total revenue realized
from sales to related parties were $235,000 and $1,097,000 for the fiscal year
ended July 31, 1998 and the six months ended January 31, 1999. The related
cost of revenue is consistent with the costs incurred on similar transactions
with unrelated parties.
(15) 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,
---------------------
1996 1997 1998
------ --------------
(In thousands)
<S> <C> <C> <C>
United States.......................................... $ -- $ 25 $ 1,584
Europe................................................. -- -- 71
Rest of world.......................................... -- -- 562
------ ----- --------
$ -- $ 25 $ 2,217
====== ===== ========
</TABLE>
(16) Subsequent Events
Acquisition of I/PRO
In April 1999, Engage acquired I/PRO, a provider of Web-site traffic
measurement and audit services, for approximately $30.0 million, consisting of
$1.7 million in cash, $20.4 million in CMGI shares and $7.9 million in Engage
shares and options. The acquisition will be accounted for using the purchase
method, and, accordingly, the purchase price will be allocated to the assets
purchased and liabilities assumed based upon their fair values at the date of
acquisition. Engage anticipates that a portion of the purchase price may be
charged to expense as in-process research and development upon completion of a
valuation of I/PRO. Goodwill and other intangible assets, expected to be
approximately $22.2 million, will be amortized on a straight-line basis over
their estimated useful lives. In addition, CMGI must pay up to $3.0 million to
I/PRO stockholders if stated performance goals are met by I/PRO one year after
the closing. Engage must reimburse CMGI for any such payments 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 payment will be
treated as additional purchase price.
Authorized Share Increase under 1995 Stock Option Plan
In March 1999, the Board of Directors approved an increase in the number of
authorized shares issuable under the 1995 Plan from 2,894,737 to 3,544,737.
Designation of 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 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. The Series C Preferred Stock is fully
participating, voting, and is convertible at the option of the holder into ten
shares of common stock at fair market value, subject to certain adjustments.
Upon the closing of a qualifying initial public offering, all outstanding
shares of Series C Preferred Stock will convert into common stock.
F-21
<PAGE>
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. The number of Series C Preferred
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 quarter
in which such borrowing was made.
In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding at January 31, 1999 in the amount of $9,347,000
into 164,371 shares of Series C Preferred Stock.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Accipiter, Inc.:
We have audited the accompanying balance sheets of Accipiter, Inc. as of
December 31, 1997 and 1996 and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1997 and
the period from April 4, 1996 (inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Accipiter, Inc. as of
December 31, 1997 and 1996 and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period from April 4, 1996
(inception) to December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
March 26, 1998
F-23
<PAGE>
ACCIPITER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
March 31,
1998 1997 1996
----------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................. $ 689,332 $1,225,245 $ 95,392
Accounts receivable, net of allowance for
doubtful accounts of $19,120 at March 31,
1998 and December 31, 1997................ 711,944 436,744 4,290
Other current assets....................... 2,383 19,935 --
---------- ---------- --------
Total current assets..................... 1,403,659 1,681,924 99,682
Property and equipment, at cost.............. 327,255 282,216 83,262
Less accumulated depreciation................ 65,441 50,440 8,625
---------- ---------- --------
Net property and equipment............... 261,814 231,776 74,637
---------- ---------- --------
Other assets, net............................ 1,648 1,648 1,067
---------- ---------- --------
Total assets............................. $1,667,121 $1,915,348 $175,386
========== ========== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses...... $ 228,291 $ 79,222 $ 36,383
Payroll and sales taxes payable............ 137 605 24,500
Deferred revenues.......................... 247,766 -- --
---------- ---------- --------
Total current liabilities................ 476,194 79,827 60,883
---------- ---------- --------
Notes payable................................ -- -- 250,000
---------- ---------- --------
Total liabilities........................ 476,194 79,827 310,883
---------- ---------- --------
Preferred stock, $.001 par value, 4,250,000
shares authorized:
Series A convertible redeemable preferred
stock 1,735,299 shares designated,
1,424,940, 1,424,940 and 999,999 shares
issued and outstanding at March 31, 1998
and December 31, 1997 and 1996,
respectively.............................. 1,000,000 1,000,000 500,000
Series B convertible preferred stock
2,514,701 shares designated, 2,189,383
and 2,173,883 shares issued and
outstanding at March 31, 1998 and
December 31, 1997, respectively........... 3,000,414 2,979,132 --
Stockholders' deficit:
Common stock $.01 par value, 8,000,000
shares authorized, 1,950,380, 1,950,000
and 1,950,000 shares issued and
outstanding at March 31, 1998, December
31, 1997 and 1996, respectively........... 19,504 19,500 19,500
Additional paid in capital................. 47 -- --
Accumulated deficit........................ (2,829,038) (2,163,111) (654,997)
---------- ---------- --------
Total stockholders' deficit.............. (2,809,487) (2,143,611) (635,497)
---------- ---------- --------
Commitments, contingencies and subsequent
event
Total liabilities and stockholders' defi-
cit..................................... $1,667,121 $1,915,348 $175,386
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
ACCIPITER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Period from
March 31, Year ended April 14, 1996
--------------------- December 31, to December 31,
1998 1997 1997 1996
---------- --------- ------------ ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License fees............. $ 491,068 $ 85,050 $ 771,710 $ --
Support fees............. 54,181 3,642 122,356 --
Consulting fees.......... 24,770 -- 93,639 4,290
---------- --------- ----------- ---------
Total revenues......... 570,019 88,692 987,705 4,290
---------- --------- ----------- ---------
Operating expenses:
Development.............. 235,421 130,805 649,209 203,092
Support.................. 125,110 17,000 138,300 --
Marketing................ 150,522 89,282 506,709 170,403
General and
administrative expenses
........................ 392,701 90,591 672,761 168,221
Executive................ 108,708 26,985 179,152 66,224
Selling.................. 220,358 58,081 348,773 45,979
Royalties................ 12,620 -- 23,600 --
Other.................... -- -- 280 268
---------- --------- ----------- ---------
Total operating ex-
penses................ 1,245,440 412,744 2,518,784 654,187
---------- --------- ----------- ---------
Operating loss......... (675,421) (324,052) (1,531,079) (649,897)
---------- --------- ----------- ---------
Other income, net:
Interest income, net..... 11,094 9 19,220 --
Other income (expense),
net..................... (1,600) 3,242 3,745 --
---------- --------- ----------- ---------
Other income, net.......... 9,494 3,251 22,965 --
Income tax benefit......... -- -- -- --
---------- --------- ----------- ---------
Net loss............... $ (665,927) $(320,801) $(1,508,114) $(649,897)
========== ========= =========== =========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
ACCIPITER, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional
----------------- paid in Accumulated
Shares Amount capital Deficit Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ 650,000 $ 6,500 $7,900 $ -- $ 14,400
Issuance of shares
pursuant to 2 for 1
stock dividend......... 1,300,000 13,000 (7,900) (5,100) --
Net loss................ -- -- -- (649,897) (649,897)
--------- ------- ------ ----------- -----------
December 31, 1996....... 1,950,000 19,500 -- (654,997) (635,497)
Net loss................ -- -- -- (1,508,114) (1,508,114)
--------- ------- ------ ----------- -----------
December 31, 1997....... 1,950,000 19,500 -- (2,163,111) (2,143,611)
Exercise of stock
options (unaudited).... 380 4 47 -- 51
Net loss (unaudited).... -- -- -- (665,927) (665,927)
--------- ------- ------ ----------- -----------
March 31, 1998
(unaudited)............ 1,950,380 $19,504 $ 47 $(2,829,038) $(2,809,487)
========= ======= ====== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
ACCIPITER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Period from
March 31, Year ended April 14, 1996
--------------------- December 31, to December 31,
1998 1997 1997 1996
---------- --------- ------------ ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................ $ (665,927) $(320,801) $(1,508,114) $(649,897)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization
expense.............. 15,001 -- 41,815 8,735
Bad debt expense...... -- -- 19,120 --
Increase in accounts
receivable........... (275,200) (30,745) (451,574) (4,290)
Increase (decrease) in
other current
assets............... 17,552 (1,000) (19,935) --
Increase in other
assets............... -- -- (581) (1,177)
Increase in accounts
payable and accrued
expenses............. 149,069 59,943 42,839 36,383
Increase (decrease) in
payroll and sales
taxes payable........ (468) (17,467) (23,895) 24,500
Increase in deferred
revenues............. 247,766 -- -- --
---------- --------- ----------- ---------
Net cash used in
operating
activities......... (512,207) (310,070) (1,900,325) (585,746)
---------- --------- ----------- ---------
Cash flows from investing
activities -- purchase of
equipment................ (45,039) (11,467) (198,954) (83,262)
---------- --------- ----------- ---------
Cash flows from financing
activities:
Proceeds from notes
payable................ -- 250,000 550,000 250,000
Proceeds from issuance
of preferred stock..... 21,282 -- 2,679,132 500,000
Proceeds from issuance
of common stock........ 51 -- -- 14,400
---------- --------- ----------- ---------
Net cash provided by
financing
activities......... 21,333 250,000 3,229,132 764,400
---------- --------- ----------- ---------
Net increase
(decrease) in cash
and cash
equivalents........ (535,913) (71,537) 1,129,853 95,392
Cash and cash equivalents
at beginning of period... 1,225,245 95,392 95,392 --
---------- --------- ----------- ---------
Cash and cash equivalents
at end of period......... $ 689,332 $ 23,855 $ 1,225,245 $ 95,392
========== ========= =========== =========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) Company Operations and Summary of Significant Accounting Policies
(a) Nature of Business and Presentation
Accipiter, Inc. (the "Company") develops and markets Internet application
software that enables web sites to deliver targeted advertising based on
specific demographic profiles and to track individual visitors on a web site.
Most of the Company's efforts since incorporation have been devoted to
obtaining capital and developing and testing products. Accipiter's clients are
both domestic and international organizations with web sites on the Internet.
The Company was accounted for as a development stage enterprise in
accordance with Statement of Financial Accounting Standards No. 7, "Accounting
and Reporting by Development Stage Enterprises" in 1996. Operations commenced
in 1997.
Interim Financial Statements
The financial statements of Accipiter, Inc. as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 are unaudited. All adjustments
and accruals (consisting only of normal recurring adjustments) have been
recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not
necessarily indicative of the results for the full year.
(b) Revenue Recognition
The Company's revenue, which consists of license fees, software support and
consulting fees, is recognized in accordance with AICPA Statement of Position
91-1, "Software Revenue Recognition" (AICPA SOP 91-1). Revenue from license
fees is recognized upon shipment of the product and fulfillment of acceptance
terms, if any. Revenue from software support and consulting services is
recognized as services are provided.
(c) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(d) Property and Equipment
Property and equipment, consist of computer and office equipment which is
being depreciated using the straight-line method over its estimated useful
life of five years for furniture and three years for office equipment.
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
F-28
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) Income Taxes
There was no income tax benefit for the year ended December 31, 1997 and
the period from April 4, 1996 (inception) to December 31, 1996. The difference
between the actual tax and the expected benefit is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed "expected" tax benefit........................ $(512,800) $(220,900)
Increase benefit in income taxes resulting from:
Increase in valuation reserve........................ 511,700 220,900
Nondeductible meals and entertainment................ 1,100 --
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards
(NOL's) for federal income tax purposes of approximately $1,895,000 which
expire in varying amounts between 2011 and 2012. The Company has NOL's for
state tax purposes of approximately $1,895,000 which expire in varying amounts
between 2001 and 2002. Additionally, the Company has research and development
credits of approximately $23,000 which expire in varying amounts between 2009
and 2010. Due to the uncertainty regarding the ultimate realizability of the
Company's NOL's, a full valuation allowance has been provided such that
deferred tax assets are not recognized.
The components of deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards................................ $ 644,300 $114,000
Miscellaneous reserves and credits.................... 6,700 200
Start-up costs........................................ 85,700 108,000
--------- --------
Total............................................... 736,700 222,200
Valuation allowance................................... (732,600) (220,900)
--------- --------
Net deferred asset.................................. $ 4,100 $ 1,300
========= ========
Deferred tax liabilities:
Fixed assets.......................................... $ 4,100 $ 1,300
Deferred tax liability................................ 4,100 1,300
--------- --------
Net deferred tax assets and (liability)............. $ -- $ --
========= ========
</TABLE>
The Tax Reform Act of 1986 contains provisions which limit the ability to
utilize net operating loss carryforwards in the case of certain events
including significant changes in ownership interests. If the Company's NOL's
are limited, and the Company has taxable income which exceeds the permissible
yearly NOL, the Company would incur federal income tax liability even though
NOL's would be available in future years.
F-29
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Note payable
During December 1996, the holder of the preferred stock ("Investor")
advanced $250,000 in the form of a convertible note that accrued interest at
10%. The Investor advanced an additional $250,000 in 1997. The advances
totaling $500,000 were converted to 422,000 shares of Series A preferred stock
in 1997. Accrued interest of $3,485 was converted to 2,941 shares of Series A
preferred stock in 1997.
During May 1997, the Investor advanced the Company $300,000 in the form of
a convertible note that accrued interest at 10% and which was subsequently
converted to 218,500 shares of Series B preferred stock. Accrued interest of
$5,610 was converted to 4,086 shares of Series B preferred stock in 1997.
(4) Capital Structure
The Company is authorized to issue up 8,000,000 shares of $.01 par value
common stock and 4,250,000 shares of $.001 par value preferred stock, of which
1,735,299 shares have been designated as Series A convertible preferred stock
and 2,514,701 shares have been designated as Series B convertible preferred
stock.
Series A and B preferred stock ("preferred stock")
The significant terms of the preferred stock are as follows:
Dividends--The holders of the preferred stock are eligible to receive
dividends if and when declared by the Board of Directors of the Company. The
preferred stockholders' right to receive dividends is senior to that of common
stockholders.
Liquidation Preference--The holders of preferred stock are senior to the
common shareholders in the event of liquidation. The Series A preferred
stockholders are entitled to receive a liquidation preference of $0.50 per
preferred share. The Series B preferred stockholders are entitled to receive a
liquidation preference of $1.373 per preferred share.
Redemption and Conversion--Each share of preferred stock is convertible
into common stock at the rate of one common share to one preferred share. The
preferred stock is convertible upon the occurrence of an initial public
offering or at the option of the preferred stockholders. In the event the
preferred stock has not been redeemed or converted prior to July 1, 2002, the
shares are redeemable at the option of the stockholders, with one-third
payable on July 1, 2002, one-third payable on July 1, 2003, and one-third
payable on July 1, 2004, from legally available funds on a pro rata basis at
the liquidation preference.
Voting Rights--The holders of the preferred stock are generally entitled to
vote based on the number of common shares they would receive upon conversion.
Stock Options
On May 30, 1996, the Board of Directors adopted a stock option plan to
create an additional incentive for key employees, directors and consultants or
advisors. At December 31, 1997, 1,050,000 common shares were authorized for
issuance to be granted within 10 years of plan adoption. The Company issued
incentive stock options to acquire 796,250 shares of common stock to employees
and nonqualified options to acquire 71,864 common shares to a director during
the period from adoption of the plan to December 31, 1997. The exercise price
for options issued through February
F-30
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 was set at $0.0667. The exercise price for options issued after February
1997 was set at $0.1373. Exercise prices were estimated to approximate the
market value of the common stock on the date of issuance. Generally, the
options provide that after a six month waiting period, vesting occurs ratably
each month over forty-two months. At December 31, 1997, options for 143,481
shares were vested. No options have been exercised as of December 31, 1997.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, permits entities to
recognize compensation expense over the vesting period using the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and earnings per share disclosures for employee
stock option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants in 1997 and 1996; dividend yield of 0%; expected volatility
of 0%; risk-free interest rate of 5.0% to 6.0%; and expected lives of 10 years
for each option. The pro forma disclosures have not been included as the fair
value of options granted for the year ended December 31, 1997 are immaterial.
A summary of the status of the Company's stock plan as of December 1997 and
1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1997 EXERCISE 1996 EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
At the beginning of the year......... 362,750 $ 0.0667 -- $ --
Granted.............................. 505,000 0.1273 362,750 0.0667
Exercised............................ -- -- -- --
Terminated........................... (12,000) 0.0667 -- --
------- -------- ------- --------
At the end of year................... 856,114 0.1024 362,750 0.0667
======= =======
Options exercisable at year-end...... 143,481 47
Weighted-average fair value of
options granted during the year..... $ 0.1273 $ 0.0667
</TABLE>
The following table summarizes the information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------- NUMBER OF
NUMBER REMAINING OPTIONS
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.0667............................ 423,250 8.5--9.2 years 120,966
$0.1373............................ 432,864 9.2--10 years 22,515
------- -------
Total.............................. 856,114 143,481
======= =======
</TABLE>
F-31
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Warrants
In May 1996, the Company issued warrants to Investor for 63,300 shares of
Series A preferred stock at an initial exercise price of $1.184834 per share.
The warrants vested on May 31, 1997 and expire five years after the vesting
date, on May 31, 2002.
In December 1996, the Company issued warrants to Investor for 250,000
shares of Series A preferred stock at an initial exercise price of $.50 per
share. The warrants vested immediately and expire on December 6, 2006.
In February 1997, the Company entered into a license agreement with CNET, a
customer. In connection with this agreement, the Company issued warrants to
purchase 181,862 shares of common stock at an initial exercise price of $2.50
per share. Such warrants vest during the two years after the date of the
agreement pursuant to certain conditions. The warrants are exercisable for two
years after the vesting period. If the license agreement between the Company
and CNET is terminated, the right to exercise these warrants will terminate
after 60 days.
In June 1997, the Company entered into a consulting agreement with a
director of the Company. Pursuant to this agreement, the Company issued
warrants to purchase 60,000 shares of common stock at an initial exercise
price of $0.1373 per share. This warrant expires on June 12, 2002.
(5) Leases
The Company has operating leases for office facilities, equipment, and
furniture. Rent expense under these leases and other month-to-month
arrangements totaled $163,407 and $14,311 in 1997 and 1996, respectively.
The future minimum lease payments under the noncancellable lease agreements
are as follows:
<TABLE>
<S> <C>
1998.......................................................... $217,043
1999.......................................................... 125,693
2000.......................................................... 76,836
2001.......................................................... 16,429
--------
Total minimum lease payments.................................... $436,001
========
</TABLE>
(6) Subsequent Event
On March 11, the Company and CMG Information Services, Inc. ("CMG") entered
into a letter agreement, providing for the acquisition of the Company by CMG.
It is anticipated that the transaction will close on April 2, 1998. The letter
agreement provides that the Company will be merged with a newly created
wholly-owned subsidiary of CMG. It also provides that each common share of the
Company and stock equivalents determined on a fully-diluted as-converted basis
will be converted into the right to receive $35,000,000 worth of CMG common
stock, price determined on March 2, 1998 as $55.50 per share. If the price of
common stock of CMG fluctuates according to the agreement at the acquisition
date, the number of shares may vary accordingly. The letter agreement provides
that the acquisition is subject to the execution of a definitive agreement and
to the occurrence or waiver of certain conditions.
(7) Related Party Transactions
As noted in note 4, the Company entered into a consulting agreement with a
director in June 1997. Payments under this agreement in 1997 totaled $42,000.
The agreement ended in early 1998.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Internet Profiles Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Internet Profiles
Corporation at December 31, 1998 and 1997 and the results of its operations
and cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from
operations and has an accumulated deficit of $27,768,378 at December 31, 1998
that raise substantial doubt as to its ability to continue as a going concern.
Management's plans in regard to those matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
March 1, 1999
F-33
<PAGE>
INTERNET PROFILES CORPORATION
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 1,191,604 $ 5,641,857
Accounts receivable, net of allowance of $308,586
in 1998 and $232,655 in 1997.................... 778,693 680,785
Accounts receivable from corporate partner and
investor, net of allowance of $50,000 in 1998
and $47,074 in 1997 (Note 6).................... 268,090 222,209
Prepaid expenses and other current assets........ 376,999 210,840
------------ ------------
Total current assets........................... 2,615,386 6,755,691
Property and equipment, net........................ 1,875,951 2,365,613
Other assets, net.................................. 254,403 230,606
------------ ------------
Total assets................................... $ 4,745,740 $ 9,351,910
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease and loan
obligation...................................... $ 3,065,221 $ 913,071
Accounts payable................................. 60,913 492,083
Accrued expenses................................. 821,799 513,589
Commission payable to corporate partner and
investor (Note 6)............................... 236,454 259,688
Deferred revenue................................. 15,525 37,973
Current portion of license accrual............... 175,000 58,334
------------ ------------
Total current liabilities...................... 4,374,912 2,274,738
------------ ------------
Capital lease and loan obligation, less current
portion........................................... 533,762 884,973
License accrual, less current portion.............. -- 116,666
------------ ------------
Total liabilities.............................. 4,908,674 3,276,377
------------ ------------
Commitments (Note 6)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value:
Authorized: 27,628,134 shares
Series A (liquidation value: $68,737):
Issued and outstanding: 1,140,350 shares in 1998
and 1997....................................... 1,140 1,140
Series B (liquidation value: $679,542):
Issued and outstanding: 2,788,289 shares in 1998
and 1997....................................... 2,788 2,788
Series C (liquidation value: $4,113,184):
Issued and outstanding: 2,168,586 shares in 1998
and 1997....................................... 2,169 2,169
Series D (liquidation value: $7,178,167):
Issued and outstanding: 21,174,535 shares in
1998 and 18,303,009 shares in 1997............. 21,175 18,303
Common stock, $0.001 par value:
Authorized: 75,000,000 shares
Issued and outstanding: 4,553,463 shares in 1998
and 2,383,475 shares in 1997................... 4,554 2,384
Notes receivable from stockholders (Note 7)...... (69,468) --
Additional paid-in capital....................... 27,643,086 25,899,443
Accumulated deficit.............................. (27,768,378) (19,850,694)
------------ ------------
Total stockholders' equity (deficit)........... (162,934) 6,075,533
------------ ------------
Total liabilities and stockholders' equity
(deficit)..................................... $ 4,745,740 $ 9,351,910
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF OPERATIONS
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues............................................. $ 4,557,754 $ 3,050,244
Cost of revenues..................................... 3,889,330 3,502,485
----------- -----------
Gross margin (loss)................................ 668,424 (452,241)
Operating expenses:
Research and development............................ 2,890,819 2,631,864
General and administrative.......................... 2,766,812 1,751,975
Sales and marketing................................. 3,112,174 1,882,742
----------- -----------
Loss from operations............................... (8,101,381) (6,718,822)
Interest income...................................... 125,935 78,043
Interest expense..................................... (127,238) (186,930)
Other income (Note 9)................................ 185,000 --
----------- -----------
Net loss........................................... $(7,917,684) $(6,827,709)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Preferred Stock
---------------------------------------------------------------------
Series A Series B Series C Series D Common Stock Additional
---------------- ---------------- ---------------- ------------------ ---------------- Notes Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Receivable Capital
--------- ------ --------- ------ --------- ------ ---------- ------- --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1996............ 1,140,350 $1,140 2,788,289 $2,788 2,168,586 $2,169 -- -- 1,634,417 $1,635 -- $19,464,091
Issuance of
Series D
preferred stock
for cash at
$0.339 per
share, net of
issuance costs
of $59,921...... -- -- -- -- -- -- 18,303,009 $18,303 -- -- -- 6,126,496
Exercise of
options in
exchange for
cash............ -- -- -- -- -- -- -- -- 421,844 422 -- 63,772
Issuance of
common stock in
exchange for
technologies.... -- -- -- -- -- -- -- -- 327,214 327 -- 245,084
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ---------- ------- --------- ------ -------- -----------
Balances,
December 31,
1997............ 1,140,350 1,140 2,788,289 2,788 2,168,586 2,169 18,303,009 18,303 2,383,475 2,384 -- 25,899,443
Issuance of
Series D
preferred stock
for cash at
$0.339 per
share, net of
issuance costs
of $14,473...... -- -- -- -- -- -- 2,871,526 2,872 -- -- -- 956,103
Exercise of
options in
exchange for
cash............ -- -- -- -- -- -- -- -- 111,295 111 -- 8,148
Issuance of non-
statutory
options to
employees....... -- -- -- -- -- -- -- -- -- -- -- 690,000
Issuance of
common stock in
connection with
exercise of
warrants........ -- -- -- -- -- -- -- -- 322,000 322 -- 2,898
Exercise of
options in
exchange for
promissory
notes........... -- -- -- -- -- -- -- -- 1,736,693 1,737 $(69,468) 67,731
Issuance of
common stock
warrants........ -- -- -- -- -- -- -- -- -- -- -- 18,763
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ---------- ------- --------- ------ -------- -----------
Balances,
December 31,
1998............ 1,140,350 $1,140 2,788,289 $2,788 2,168,586 $2,169 21,174,535 $21,175 4,553,463 $4,554 $(69,468) $27,643,086
========= ====== ========= ====== ========= ====== ========== ======= ========= ====== ======== ===========
<CAPTION>
Accumulated
Deficit Total
------------- -----------
<S> <C> <C>
Balances,
December 31,
1996............ $(13,022,985) $6,448,838
Issuance of
Series D
preferred stock
for cash at
$0.339 per
share, net of
issuance costs
of $59,921...... -- 6,144,799
Exercise of
options in
exchange for
cash............ -- 64,194
Issuance of
common stock in
exchange for
technologies.... -- 245,411
Net loss........ (6,827,709) (6,827,709)
------------- -----------
Balances,
December 31,
1997............ (19,850,694) 6,075,533
Issuance of
Series D
preferred stock
for cash at
$0.339 per
share, net of
issuance costs
of $14,473...... -- 958,975
Exercise of
options in
exchange for
cash............ -- 8,259
Issuance of non-
statutory
options to
employees....... 690,000
Issuance of
common stock in
connection with
exercise of
warrants........ -- 3,220
Exercise of
options in
exchange for
promissory
notes........... -- --
Issuance of
common stock
warrants........ -- 18,763
Net loss........ (7,917,684) (7,917,684)
------------- -----------
Balances,
December 31,
1998............ $(27,768,378) $ (162,934)
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(7,917,684) $(6,827,709)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,608,217 1,356,235
Fair value of common stock warrants issued....... 18,763 --
Common stock issued in exchange for technology or
services........................................ -- 245,411
Non-statutory stock options issued to employees.. 690,000 --
Provision for doubtful accounts.................. 78,857 (2,271)
Changes in assets and liabilities:
Accounts receivable............................. (176,765) (88,617)
Accounts receivable from corporate partner and
investor....................................... (45,881) (106,430)
Prepaid expenses and other current assets....... (166,159) (68,399)
Other assets.................................... (23,797) (222,606)
Accounts payable................................ (431,170) 141,104
Accrued expenses................................ 308,210 (24,511)
Commission payable to corporate partner and in-
vestor......................................... (23,234) 204,188
Deferred revenue................................ (22,448) 9,635
Contingency accrual............................. -- 175,000
----------- -----------
Net cash used in operating activities.......... (6,103,091) (5,208,970)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (987,737) (532,073)
----------- -----------
Net cash used in investing activities.......... (987,737) (532,073)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible debt......... 1,999,721 --
Proceeds from issuance of Series D preferred
stock............................................. 958,975 6,144,799
Proceeds from exercise of options.................. 8,259 64,194
Proceeds from issuance of common stock in
connection with the exercise of warrants.......... 3,220 --
Principal borrowings on capital lease.............. 748,495 --
Payments on capital lease and loan obligations..... (1,078,095) (715,986)
----------- -----------
Net cash provided by financing activities...... 2,640,575 5,493,007
----------- -----------
Net decrease in cash and cash equivalents............ (4,450,253) (248,036)
Cash and cash equivalents, beginning of year......... 5,641,857 5,889,893
----------- -----------
Cash and cash equivalents, end of year............... $ 1,191,604 $ 5,641,857
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest......................... $ 127,238 $ 189,430
Taxes paid......................................... $ 2,138 $ 2,500
Supplemental schedule of noncash financing activi-
ties:
Acquisition of property and equipment under capital
lease and loan.................................... $ 130,818 $ 309,472
Notes receivable from stockholders................. $ 69,468 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business of the Company and Basis of Presentation of the
Financial Statements
Internet Profiles Corporation (the "Company") was incorporated in
California on August 4, 1994 as a provider of software and services that help
customers analyze and obtain independent verification of Web site activity.
The Nielsen I/PRO Netline service provides an outsourced solution for
comprehensive site analysis and reporting directly to the customer's desktop.
Nielsen I/PRO I/Audit provides third party verification of web site traffic,
validating a web site as an advertising vehicle for media buyers. Customized
measurement services are also available, which provide a comprehensive and
customized array of measurement and analysis for E-Commerce, ad-supported and
corporate web sites.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and at December 31, 1998, the Company had an
accumulated deficit of $27,768,378. The Company expects to incur further
losses related to its operations. The Company's operations are currently
funded by proceeds from the sale of convertible debt. In order to fund
continuing operations, the Company entered into a definitive purchase
agreement as of March 1, 1999, whereby the Company will be acquired by CMGI,
Inc. (see Note 11).
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of
purchase to be cash equivalents. Substantially all of its cash and cash
equivalents are custodied with one major financial institution.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and other liabilities approximate fair value due to their
short maturities. Based upon borrowing rates currently available to the
Company for loans with similar terms, the carrying value of capital lease
obligations approximate fair value.
Revenue recognition
The Company generally recognizes revenue on its Netline product ratably
over the subscription period as the services are provided. The Company
recognizes revenue on its I/Audit product upon delivery of its Web site audit
reports. The Company provides an allowance for sales returns and doubtful
accounts receivable, where appropriate.
F-38
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives, which are generally three
years. Software and marketing database licenses are carried at cost, which is
amortized on a straight-line basis over their estimated useful lives,
generally four years. Upon disposal, the assets and related accumulated
depreciation or amortization are removed from the Company's accounts and the
resulting gains or losses are reflected in the current operations.
Research and development costs
Research and development costs are charged to operations as incurred.
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. To date, the establishment of
technological feasibility of the Company's products and general release have
substantially coincided, and as a result, the Company has not capitalized any
software development costs.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred taxes to the amounts expected to
be realized.
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and accounts receivable. Substantially all of its cash and cash equivalents
are custodied with one major financial institution. Deposits held with banks
may exceed the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company performs Web site audit services to customers throughout the
United States. One customer, a corporate partner and investor, accounted for
23% of accounts receivable as of December 31, 1998 and 1997.
Certain risks and uncertainties
The Company's products and services are concentrated in a single segment in
the internet industry which is characterized by rapid technological advances,
changes in customer requirements and evolving regulatory requirements and
industry standards. The success of the Company depends on the management's
ability to anticipate or to respond quickly and adequately to technological
developments in its industry, changes in customer requirements or changes in
regulatory requirements or industry standards. Any significant delays in the
development or introduction of products or services could have a material
adverse effect on the Company's business and operating results.
F-39
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computer and office equipment..................... $ 4,381,655 $ 4,496,479
Furniture and fixtures............................ 268,205 201,360
Leasehold improvements............................ 299,020 13,507
----------- -----------
4,948,880 4,711,346
Less accumulated depreciation and amortization.... (3,072,929) (2,345,733)
----------- -----------
$ 1,875,951 $ 2,365,613
=========== ===========
</TABLE>
At December 31, 1998 and 1997, equipment on capital leases accounted for
$3,088,206 and $2,339,710, respectively, of the computer and office equipment,
and $2,090,899 and $1,258,313, respectively, of the accumulated depreciation
and amortization.
4. Accrued Expenses
Accrued expenses at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Accrued payroll and related expenses...................... $ 50,635 $ 50,974
Accrued vacation.......................................... 110,213 100,000
Professional fees payable................................. 89,490 96,102
Accrued bonuses........................................... 269,558 103,000
Other accrued liabilities................................. 301,903 163,513
-------- --------
$821,799 $513,589
======== ========
</TABLE>
5. Capital Lease and Loan Obligations
The Company leases certain property and equipment under capital leases
which expire at various dates through November 2002. Future minimum lease
payments under these capital lease agreements are as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
1999............................................................. $ 584,481
2000............................................................. 312,917
2001............................................................. 239,112
2002............................................................. 21,362
----------
Total minimum lease payments..................................... 1,157,872
Less amount representing interest................................ 100,763
----------
Present value of minimum lease payments.......................... 1,057,109
Less current portion............................................. 523,347
----------
$ 533,762
==========
</TABLE>
F-40
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also entered into a loan and security agreement for equipment
purchases with a financial institution under which the Company borrowed an
aggregate amount of $768,050. The equipment line consists of advances for the
acquisition of equipment through October 1997. The equipment loan bears
interest at the bank's prime rate plus 0.5% (8.25% and 9% at December 31, 1998
and 1997, respectively) and is payable in monthly installments ending December
2000. The loan is secured by substantially all assets of the Company.
Future minimum payments under this loan agreement are as follows:
Year ended December 31,
<TABLE>
<S> <C>
1999............................................................... $306,013
2000............................................................... 283,341
--------
Minimum payments................................................... 589,354
Less amount representing interest.................................. 47,201
--------
Present value of minimum payments.................................. $542,153
========
</TABLE>
The agreement in respect of the loan contains certain covenants related to
the Company's quick ratio, liquidity and profitability. Default on any
covenant may affect the commitment by the bank to continue to lend under the
agreement and, if not corrected, could accelerate the maturity of any
borrowings outstanding under the agreement. At December 31, 1998, and at
various dates throughout the year, the Company was not in compliance with
certain covenants. The Company has obtained waivers in respect of non-
compliance as of December 31, 1998. The Company was in default of certain
covenants subsequent to December 31, 1998, which if not corrected, could
accelerate the maturity of borrowings still outstanding. Therefore, all
balances outstanding at December 31, 1998 have been classified as current.
In November and December 1998, the Company obtained a series of bridge
loans totaling approximately $1,999,721 from a group of existing preferred
shareholders. The notes bear interest at an annual rate of 6% which accrues
daily and is added to the principal balance, with principal and interest to be
repaid, in total, six months after the commencement of the note term. On the
sale or merger of the Company, the loans would have certain repayment
preferences involving either conversion of the notes to a new series of
preferred stock, or repayment of the loans prior to distribution of any funds
to holders of any class of Company preferred or common stock.
6. Commitments
The Company leases three facilities under noncancelable operating leases
expiring in September 1999 and July 2002. The Company is responsible for
certain taxes, maintenance costs and insurance under these leases. Future
minimum lease payments under the noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 547,603
2000.............................................................. 435,612
2001.............................................................. 435,612
2002.............................................................. 254,107
----------
$1,672,934
==========
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 was $578,839
and $702,434, respectively.
F-41
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1995 the Company entered into an agreement with a corporate partner and
investor for the sale and marketing of existing internet usage measurement and
analysis products and services developed by the Company. Under this agreement,
the Company is required to pay commissions on net revenues from products sold
in the US primarily through the efforts of this corporate partner, as well as
on products sold through the efforts of the Company. Revenues related to this
agreement from products sold primarily through the efforts of this corporate
partner for the years ended December 31, 1998 and 1997 totaled $363,508 and
$390,995, respectively. Commissions incurred relative to this agreement on
products sold through the efforts of the Company for the years ended December
31, 1998 and 1997 totaled $236,454 and $146,188, respectively. The agreement
expired in September 1998 and was extended for an additional year, and may
continue to be extended by the mutual agreement of the parties. As of December
31, 1998 and 1997 under this agreement, amounts payable under this agreement
totaled $236,454 and $259,688, respectively, and amounts receivable from the
corporate partner totaled $268,090 and $222,209, respectively.
In October 1997, the Company agreed to pay $175,000 to a software vendor
for a software license, payable in six monthly installments of $29,167 per
month, with the first such payment being due and payable upon the earlier of
ten days following the date upon which the vendor files a petition in
bankruptcy, or 390 days from October 31, 1997. No payments related to this
agreement were made during the year ended December 31, 1998. During January
1999, the balance outstanding on this agreement was paid in full to the
software vendor.
7. Stockholders' Equity
Convertible Preferred Stock
Dividends
The holders of Series A, B, C and D preferred stock are entitled to
preferential noncumulative dividends at the rate of $0.0285, $0.111, $0.739
and $0.0339 per share, respectively, if and when declared by the Board of
Directors. No dividends have been declared as of December 31, 1998 or 1997.
Liquidation
Series D preferred stock will be entitled to receive in preference to the
holders of the Series A, B and C preferred stock and the common stock an
amount per share equal to $0.339. The maximum aggregate amount the holders of
the Series A, B and C preferred stock will be entitled to receive is
$4,861,463. The respective liquidation preferences of the Series A, B and C
preferred stock adjust annually on May of each year to provide the Series C
preferred with an annual increase in its liquidation preference amount of five
percent. Any assets remaining after the distribution to the Series A, B, C and
D preferred stock will be distributed pro-rata to the holders of the common
stock.
Mergers
A merger, reorganization or sale of all or substantially all of the assets
of the Company in which more than 50% of the outstanding stock of the Company
is exchanged, shall be deemed to be a liquidation, dissolution or winding up.
F-42
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Voting
The holders of each share of Series A, B, C and D preferred stock shall
have the right to one vote for each share of common stock into which such
preferred stock could then be converted, and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights and
powers of the holders of common stock.
Conversion
Each share of Series A, B, C and D preferred stock, at the option of the
holder, may be converted into the number of fully paid and nonassessable
shares of common stock as is determined by dividing the conversion price per
share in effect for the preferred stock at the time of conversion into the per
share conversion value of such shares. The initial conversion price per share
and the per share conversion value of Series A, B, C and D preferred stock are
$0.285, $0.57, $2.47 and $0.339 per share, respectively. The initial
conversion price of preferred stock is subject to adjustment from time to
time. The number of shares into which a share of preferred stock is
convertible is referred to as the conversion rate of such series.
Conversion is automatic at its then effective conversion rate immediately
upon a closing of a firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of equity securities.
Common stock
The Company issued 1,000,000 shares of its common stock to the founders
under a stock purchase agreement. Each share of common stock is entitled to
one vote. The holders of common stock are also entitled to receive dividends
whenever funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holders of all classes of stock
outstanding. As of December 31, 1998 and 1997, no dividends have been
declared.
Stock issued in exchange for in-process technologies
In November 1997, the Company acquired the rights to certain technologies
which were previously held by two unrelated companies. In connection with the
purchase of these in-process technologies, the Company issued 216,000 and
111,214 shares of common stock at fair value of $162,000 and $83,411,
respectively. These amounts were immediately expensed to the statement of
operations as part of the expenses for research and development.
Notes Receivable from Stockholders
Notes receivable from stockholders consist of the exercise of stock options
for notes. For a portion of the shares, exercise of the underlying option was
permitted before vesting under the related option plan had occurred. The notes
are full recourse promissory notes bearing interest at 6%, and are
collateralized by the stock issued upon exercise of the stock options.
Interest is payable in arrears, with both interest and principle being due and
payable on the fourth anniversary of the date of the making of the note.
Should certain circumstances occur, the Company has the right to repurchase
any of the shares related to the early exercise of unvested options described
above.
F-43
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Warrants
In November 1994, in connection with a sales and marketing agreement, the
Company issued a warrant valued at $97,229, to purchase 120,000 shares of
common stock with an exercise price of $1.67 per share. The warrant expired
during 1997.
In December 1995, in connection with a sales and marketing agreement, the
Company issued a warrant valued at $3,764, to purchase 644,000 shares of
common stock. Of the 644,000 shares, 322,000 of the shares have an exercise
price of $0.01 per share and 322,000 have an exercise price of $2.22 per
share. The warrants were exercisable immediately upon grant. During the year
ended December 31, 1998, 322,000 of the warrants were exercised at the
exercise price of $0.01 per share, and the remaining 322,000 expired.
In August 1995 and January 1996, in connection with a financing
arrangement, the Company issued warrants valued at $32,491 and $22,962, to
purchase 60,810 and 40,540 shares of Series B preferred stock at an exercise
price of $1.11 per share. The warrants were exercisable immediately upon grant
and will expire on the earlier August 2005 and January 2006, respectively, or
the fifth anniversary of the closing date of the Company's initial public
offering.
In March 1996, in connection with a financing arrangement, the Company
issued a warrant valued at $15,560, to purchase 4,330 shares of Series C
preferred stock at an exercise price of $7.39 per share. The warrant was
exercisable immediately upon grant and the warrant will expire in March 2001.
In April 1996, in connection with a financing arrangement, the Company
issued a warrant valued at $33,599, to purchase 9,472 shares of Series C
preferred stock at an exercise price of $7.39 per share. The warrant was
exercisable immediately upon grant and will expire at the earlier of April
2006 or the fifth anniversary of the closing date of the Company's initial
public offering.
In October 1996, in connection with a sales agreement, the Company issued a
warrant valued at $72,776, to purchase 75,000 shares of common stock at an
exercise price of $2.00 per share. The warrant was exercisable immediately
upon grant and will expire at the earlier of October 1999 or the closing date
of the Company's initial public offering.
In February, 1998, in connection with a financing arrangement, the company
issued a warrant valued at $41,000, to purchase 240,000 shares of Series D
preferred stock at an exercise price of $0.339 per share. The warrant was
exercisable immediately upon grant and will expire in February 2004.
In August 1998, in connection with a financing arrangement, the Company
issued a warrant valued at $28,033, to purchase 162,242 shares of Series D
preferred stock at an exercise price of $0.339 per share. The warrant was
exercisable immediately upon grant and will expire in August 2004.
In connection with consulting agreements in September 1998, the Company
issued warrants valued at $2,648, to purchase 125,000 shares of common stock
with an exercise price of $0.04 per share. The warrant was exercisable
immediately upon grant and will expire in September 2004.
F-44
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company has adopted the 1995 Stock Option Plan (the "Plan") under which
incentive stock options may be granted to employees and nonstatutory stock
options may be granted to employees and consultants. In December 1997, the
Company's Board of Directors increased the number of common stock shares
reserved for issuance under the 1995 Stock Option Plan to 10,030,095.
The Board of Directors may issue incentive stock options to employees and
nonstatutory stock options to consultants or employees. The Board of Directors
has the authority to determine to whom options will be granted, the number of
shares, the term and exercise price (which cannot be less than fair market
value at date of grant for incentive stock options or 85% of fair market value
for nonstatutory stock options). If an employee or person owns stock
representing more than 10% of the outstanding voting shares, the price of each
share shall be at least 110% of fair market value, as determined by the Board
of Directors. Stock options generally expire ten years from the date of grant.
Options granted under the Plan generally become exercisable starting one year
after the date of grant, with 25% of the shares subject to the option becoming
exercisable at that time and an additional 1/16 of such shares becoming
exercisable each quarter thereafter.
During the year ended December 31, 1998, compensation expense totaling
$690,000 was immediately expensed to the statement of operations as part of
the general and administrative expenses in respect of certain options granted
to employees.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------------
Weighted
Average
Number of Exercise Aggregate Exercise
Shares Price Price Price
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1997.......... 2,056,210 $0.01-$1.50 $1,161,874 $0.57
Additional shares reserved.......
Options granted.................. 1,286,311 $0.04-$1.50 992,518 $0.77
Options exercised................ (421,844) $0.01-$1.50 (65,329) $0.15
Options canceled................. (1,203,503) $0.01-$1.50 (815,664) $0.68
---------- ----------
Balances, December 31, 1997........ 1,717,174 $0.01-$1.50 1,273,399 $0.74
Options granted.................. 10,134,031 $0.04 405,361 $0.04
Options exercised................ (1,847,988) $0.04-$0.75 (77,727) $0.04
Options canceled................. (2,047,672) $0.04-$1.50 (811,712) $0.40
---------- ----------
Balances, December 31, 1998........ 7,955,545 $0.01-$1.50 $ 729,321 $0.11
========== ==========
</TABLE>
F-45
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------
Weighted
Average Options
Remaining Exercisable
Exercise Number Contractual Number
Prices Outstanding Life (years) Exercisable
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.01 60,000 6.3 55,624
$0.04 7,322,575 9.7 5,073,020
$0.11 81,500 7.0 60,717
$0.75 314,470 8.4 128,868
$1.00 29,000 7.4 18,125
$1.50 148,000 8.0 128,873
--------- ---------
7,955,545 9.4 5,465,227
========= =========
</TABLE>
Pro forma stock-based compensation
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company has chosen to continue to account for employee
stock options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" with disclosure of pro forma information concerning its stock
option plan in accordance with SFAS No. 123. The following disclosures are
provided pursuant to SFAS No. 123:
Fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Shares Weighted Shares Weighted
outstanding average years outstanding average years
<S> <C> <C> <C> <C>
Options granted at $0.01
per share 60,000 6.27 60,000 7.27
Options granted at $0.04
per share 7,322,575 9.70 66,500 9.93
Options granted at $0.11
per share 81,500 7.03 100,000 8.02
Options granted at $0.75
per share 314,470 8.38 1,283,011 9.29
Options granted at $1.00
per share 29,000 7.35 44,000 8.35
Options granted at $1.50
per share 148,000 8.03 169,000 8.95
</TABLE>
The risk free interest rate for 1998 and 1997 were 5.42% and 6.36%,
respectively. The weighted average fair value of those options granted in 1998
and 1997 was $0.04 and $0.77, respectively.
The following pro forma loss information has been prepared following the
provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net loss--pro forma................................. $7,948,894 $6,880,503
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
F-46
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The primary components of the net deferred tax asset as of December 31,
1998 and 1997 are:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net operating loss carryforwards--federal
and State.................................. $ 10,105,689 $ 7,658,836
Depreciable assets.......................... 229,659 194,836
Reserves and allowances..................... 390,858 476,021
Other temporary differences, net............ (565,662) (569,511)
------------ -----------
10,160,544 7,760,182
Valuation allowance......................... (10,160,544) (7,760,182)
------------ -----------
Net deferred tax asset...................... $ -- $ --
============ ===========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax asset. The valuation
allowance increased by $2,400,362 in 1998 and $2,616,592 in 1997.
As of December 31, 1998, the Company has net operating loss carryforwards
of approximately $25,071,000 and $17,891,000 for federal and California state
tax purposes, respectively. Such carryforwards expire in varying amounts
through the year 2018 if not used before such time to offset future taxable
income or tax liabilities.
Due to changes in the Company's ownership, the amount of net operating loss
carryforwards available to offset future federal and state taxable income or
tax may be limited by Internal Revenue Code (IRC) Section 382. The amount of
such limitation, if any, has not been determined.
9. Sale of Technology
In October 1998, the Company sold the rights to one of its internet
properties in exchange for cash proceeds of $160,000 and certain limited
future advertising rights valued at $25,000, resulting in a gain of $185,000.
10. Employee Benefit Plan
Essentially all Company employees are covered by a Company-sponsored 401(k)
plan, which qualifies under Section 401(k) of the Internal Revenue Code of
1986, as amended. Each eligible employee may elect to contribute to the plan,
through payroll deductions, up to 15% of compensation, subject to certain
limitations. The Company, at its discretion, may make additional
contributions. No such additional contributions were made during the years
ended December 31, 1998 or 1997.
11. Subsequent Events
In February 1999, the Company transferred its rights to certain
technologies used in measuring and reporting the results of advertising
campaigns in exchange for cash proceeds of $300,000. This amount is subject to
increase if certain performance goals are met during 1999. The entire purchase
F-47
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Concluded)
price was recorded as a gain, as, in compliance with its normal accounting
policies, the Company had previously expensed all costs associated with the
development of this technology.
On March 1, 1999, the Company signed a binding letter of intent to be
acquired by CMGI, Inc. Upon signing of a definitive purchase agreement, the
Company will become a wholly owned subsidiary of Engage Technologies, Inc.,
which is in turn a wholly owned subsidiary of CMGI, Inc. A portion of the
purchase price will be used to retire certain liabilities, including the
outstanding balance on a loan and security agreement with a financial
institution, attorney and broker fees related to the transaction, and certain
other commitments. Approximately 10% of the remaining purchase price will be
used to retire a portion of the outstanding common stock of the Company. The
remainder, in the form of various forms of equity vehicles available to CMGI,
Inc., will be used to retire the balance of the Company's common and preferred
stock.
F-48
<PAGE>
ENGAGE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet at January 31,
1999 gives pro forma effect to the acquisition of Internet Profiles
Corporation, ("I/PRO"), completed by Engage Technologies, Inc., (the
"Company"), in April 1999 as if it had occurred as of January 31, 1999.
The unaudited pro forma combined condensed statements of operations of the
Company for the year ended July 31, 1998 and the six months ended January 31,
1999 give pro forma effect to:
. the Accipiter acquisition;
. the I/PRO acquisition; and
. the related financing of the acquisitions above as if each had occurred
as of August 1, 1997.
The results of operations of the Company for the fiscal year ended July 31,
1998 have been combined with the results of operations of Accipiter, Inc. for
the period August 1, 1997 through March 31, 1998 (the results of operations of
Accipiter for the period April 1, 1998 through July 31, 1998 are included in
the consolidated statement of operations of the Company), and the results of
operations of I/PRO for the twelve months ended September 30, 1998. In
addition, the results of operations for the Company for the six months ended
January 31, 1999 have been combined with the results of operations of I/PRO
for the six months ended December 31, 1998. The results of operations of I/PRO
for July 1998 through September 1998 have been included in both unaudited pro
forma combined condensed statements of operations presented.
The Company has accounted for their acquisitions under the purchase method
of accounting. The total cost of businesses acquired including related fees
and expenses is allocated to the underlying tangible and intangible assets
acquired and liabilities assumed based on their respective fair values. The
purchase price allocations for the I/PRO acquisition included in the unaudited
pro forma data are preliminary. However, the Company does not expect that the
final allocation of the purchase price will be materially different from its
preliminary allocation.
The unaudited pro forma financial data are not necessarily indicative of
the results of operations or financial position of the Company had the
transactions assumed therein occurred, nor are they necessarily indicative of
the results of operations which may be expected to occur in the future.
Furthermore, the unaudited pro forma financial data are based upon assumptions
that the Company believes are reasonable and should be read in conjunction
with the financial statements and the accompanying notes included elsewhere in
this prospectus.
F-49
<PAGE>
ENGAGE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JANUARY 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Adjustments
Pro forma Pro for the Pro forma,
Engage I/PRO (a) Adjustments forma Offering as Adjusted
------- --------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equiva-
lents................ $ -- $ 1,192 $ -- $ 1,192
Available-for-sale se-
curities............. 1,563 -- -- 1,563
Accounts receivable
net of allowance for
doubtful accounts.... 1,903 1,047 -- 2,950
Prepaid expenses...... 217 377 -- 594
------- ------- ------- -------
Total current as-
sets............... 3,683 2,616 -- 6,299
------- ------- ------- -------
Property and equipment,
net.................... 665 1,876 -- 2,541
Investment in joint ven-
ture................... 1,609 -- -- 1,609
Other assets............ -- 254 -- 254
Goodwill and other in-
tangible assets, net... 16,825 -- 22,203 (a) 39,028
------- ------- ------- -------
$22,782 $ 4,746 $22,203 $49,731
======= ======= ======= =======
Liabilities and Stock-
holders' Equity (Defi-
cit)
Current liabilities:
Current portion of
capital lease and
loan obligation...... $ -- $ 3,065 $ (542)(c) $ 523
(2,000)(b)
Debt to CMGI.......... 9,347 -- -- 9,347
Accounts payable...... 863 61 -- 924
Accrued expenses...... 3,295 1,232 (229)(c) 4,298
Deferred revenue...... 4,932 16 -- 4,948
------- ------- ------- -------
Total current lia-
bilities........... 18,437 4,374 (2,771) 20,040
------- ------- ------- -------
Capital lease and loan
obligation, long term
portion................ -- 534 -- 534
------- ------- ------- -------
Total liabilities... 18,437 4,908 (2,771) 20,574
------- ------- ------- -------
Stockholders' equity
Preferred stock....... 17 27 (27)(a) 39
22 (d)
Common stock.......... 1 5 (5)(a) 6
5 (d)
Notes receivable from
stockholders......... -- (69) 69 (a) --
Additional paid-in
capital.............. 41,856 27,643 (27,643)(a) 71,641
29,785 (d)
Deferred compensa-
tion................. (914) -- -- (914)
Accumulated other
comprehensive income
..................... 148 -- -- 148
Accumulated deficit... (36,763) (27,768) 27,768 (a) (41,763)
(5,000)(a)
------- ------- ------- -------
Total stockholders'
equity............. 4,345 (162) 24,974 29,157
------- ------- ------- -------
$22,782 $ 4,746 $22,203 $49,731
======= ======= ======= =======
</TABLE>
F-50
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET AS OF JANUARY 31, 1999
(a) The following table represents the estimated allocation of the purchase
price over the historical net book values of the acquired assets and
liabilities of I/PRO at December 31, 1998, and is for illustrative
purposes only. Actual allocations will be based on fair values as of the
acquisition date (April 9, 1999). Assuming the transaction occurred on
January 31, 1999, the allocation would have been as follows (in
thousands):
<TABLE>
<S> <C>
Working capital deficit, net of cash acquired of $1,192............ $ (179)
Property plant and equipment....................................... 1,876
Other assets....................................................... 254
Long term liabilities.............................................. (534)
In process research and development................................ 5,000
Intangible assets.................................................. 22,203
-------
Purchase price, net of cash acquired............................... $28,620
=======
</TABLE>
The estimated purchase price excludes contingent payments of up to $3
million that will be due the stockholders of I/PRO in the event that
certain revenue, employee retention, and clickstream data collection goals
are met one year subsequent to the closing. The Company anticipates
recording contingent payments, if any, as additional purchase price.
(b) Reflects the conversion of I/PRO's short term bridge loans to shares of
I/PRO preferred stock upon the closing of the purchase.
(c) Reflects I/PRO's satisfaction of certain I/PRO liabilities simultaneous to
the closing of the purchase as set forth in the stock purchase agreement.
(d) Reflects the issuance of Engage common shares and options to acquire
Engage common shares to the stockholders of I/PRO and the expected
issuance of Series C preferred shares to CMGI for its contribution to the
total purchase price of I/PRO.
F-51
<PAGE>
ENGAGE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended July 31, 1998 and the six months ended January 31, 1999
<TABLE>
<CAPTION>
Year Ended July 31, 1998 Six Months Ended January 31, 1999
--------------------------------------------------- ----------------------------------------
Pro Forma Pro Forma
---------------------- ---------------------
Engage I/PRO Accipiter Adjustments Total Engage I/PRO Adjustments Total
-------- ------- --------- ----------- -------- -------- ------- ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue........ $ 1,945 $ -- $ 965 $ -- $ 2,910 $ 3,588 $ -- $ -- $ 3,588
Services and support
revenue............... 272 3,973 193 -- 4,438 677 2,591 -- 3,268
-------- ------- ------- ------ -------- -------- ------- ------- --------
Total revenue........... 2,217 3,973 1,158 -- 7,348 4,265 2,591 -- 6,856
-------- ------- ------- ------ -------- -------- ------- ------- --------
Cost of revenue:
Cost of product
revenue............... 185 36 1,213(c) 1,434 580 500(c) 1,080
Cost of services and
support revenue....... 2,057 3,849 215 8(e) 6,129 2,484 1,821 -- 4,305
-------- ------- ------- ------ -------- -------- ------- ------- --------
Total cost of revenue... 2,242 3,849 251 1,221 7,563 3,064 1,821 500 5,385
-------- ------- ------- ------ -------- -------- ------- ------- --------
Gross (loss) margin..... (25) 124 907 (1,221) (215) 1,201 770 (500) 1,471
-------- ------- ------- ------ -------- -------- ------- ------- --------
Operating expenses:
In-process research and
development........... 9,200 -- -- (9,200)(a) -- -- -- -- --
Research and
development........... 5,925 3,565 534 120(e) 10,144 3,878 1,524 -- 5,402
Selling and marketing.. 4,031 2,694 796 32(e) 7,553 3,732 1,825 -- 5,557
General and
administrative........ 2,333 1,959 1,164 360(e) 5,816 1,586 1,904 -- 3,490
Amortization of
goodwill and other
intangibles........... 1,273 -- -- 6,136(b) 7,409 1,909 -- 1,796(b) 3,705
-------- ------- ------- ------ -------- -------- ------- ------- --------
Total operating
expenses............... 22,762 8,218 2,494 (2,552) 30,922 11,105 5,253 1,796 18,154
-------- ------- ------- ------ -------- -------- ------- ------- --------
Loss from operations.... (22,787) (8,094) (1,587) 1,331 (31,137) (9,904) (4,483) (2,296) (16,683)
Gain on sale of product
rights................. 9,240 185 9,425 -- 185 -- 185
Equity in loss of joint
venture................ -- -- -- -- -- (160) -- -- (160)
Other income (expense),
net.................... (172) (32) 30 67(d) (107) (339) (37) 35(d) (341)
-------- ------- ------- ------ -------- -------- ------- ------- --------
Net (loss) income....... $(13,719) $(7,941) $(1,557) $1,398 $(21,819) $(10,403) $(4,335) $(2,261) $(16,999)
======== ======= ======= ====== ======== ======== ======= ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (1.64) $ (1.21) $ (.62) $ (.87)
======== ======== ======== ========
Pro forma weighted
average number of basic
and diluted shares
outstanding............ 8,375 18,064 16,824 19,514
======== ======== ======== ========
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended July 31, 1998 and the six months ended January 31, 1999
(a) Adjustment to in-process research and development reflects the elimination
of $9,200 expensed to in-process research and development related to the
acquisition of Accipiter in April, 1998. The Company expects to expense
approximately $5,000 to in-process research and development related to the
April, 1999 acquisition of I/PRO.The Company will adjust its allocation of
the I/PRO purchase price upon completion of a valuation of I/PRO.
(b) Reflects additional goodwill and other intangible asset amortization
expense related to the acquisition of Accipiter and I/PRO. Goodwill and
other intangible assets are being amortized over five and two years,
respectively, using the straight-line method.
(c) Reflects additional amortization expense of developed technology acquired
in the purchase of Accipiter and I/PRO. Developed technology is being
amortized over five years using the straight-line method.
(d) Reflects a reduction in interest expense related to I/PRO borrowings that
would have been settled by I/PRO had the acquisition been consummated at
the beginning of the periods presented. This calculation was made based on
actual amounts expensed by I/PRO in the related periods.
(e) Reflects additional amortization expense of deferred compensation acquired
in the purchase of Accipiter for the period August 1, 1997 through April
8, 1998, the acquisition date.
F-52
<PAGE>
UNDERWRITING
Engage and the underwriters named below (the "Underwriters") have entered
into an underwriting agreement with respect to the shares being offered.
Subject to the conditions in the underwriting agreement, each Underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Hambrecht & Quist LLC and Bear, Stearns & Co. Inc.
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co......................................
Hambrecht & Quist LLC....................................
Bear, Stearns & Co. Inc..................................
---------
Total..................................................
=========
</TABLE>
---------------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
shares from Engage to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the Underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Engage. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.
Paid by Engage
----------------
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the Underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Engage, its directors, officers and stockholders have agreed with the
Underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to gifts or transfers to
affiliates or transactions under any existing employee benefit plans. Please
see "Shares Available for Future Sale" for a discussion of various transfer
restrictions.
In addition, at the request of Engage, the Underwriters have reserved for
sale, at the initial public offering price, shares of common stock for
directors, employees and associates of Engage. There can be no assurance that
any of the reserved shares will be so purchased. The number of shares available
for sale to the general public in the offering will be reduced by the number of
reserved shares sold. Any reserved shares not so purchased will be offered to
the general public on the same basis as the other shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Engage and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Engage's
U-1
<PAGE>
historical performance, estimates of the business potential and earnings
prospects of Engage, an assessment of Engage's management and the consideration
of the above factors in relation to market valuation of companies in related
businesses.
Engage has applied to list the common stock on the Nasdaq National Market
under the symbol "ENGA".
In connection with this offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Engage estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately .
Engage has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization .......................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 30
Management............................................................... 48
Transactions and Relationship Between Engage and CMGI.................... 54
Security Ownership of Principal Stockholder and Management............... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 62
Validity of Common Stock................................................. 63
Experts.................................................................. 63
Available Information.................................................... 64
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
Engage Technologies, Inc.
Common Stock
-------------------
[ENGAGE LOGO APPEARS HERE]
-------------------
Goldman, Sachs & Co.
Hambrecht & Quist
Bear, Stearns & Co. Inc.
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee................................................ $20,850
NASD filing fee..................................................... 8,000
Nasdaq National Market listing fee.................................. *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue Sky fees and expenses (including legal fees)................... *
Transfer agent and registrar fees and expenses...................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
--------
* To be filed by Amendment
Engage will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and Engage's charter and by-laws
provide for indemnification of Engage's directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
Engage and, with respect to any criminal action or proceeding, actions that
the indemnitee had no reasonable cause to believe were unlawful. Reference is
made to Engage's charter and by-laws filed as Exhibits 3.1 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under some circumstances, to indemnify directors, officers and controlling
persons of Engage against some liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities.
In the three fiscal years preceding the filing of this registration
statement, Engage has issued the following securities that were not registered
under the Securities Act:
(a) Issuance of Capital Stock.
In July 1998, Engage issued 700,000 shares of its Series A convertible
preferred stock to CMGI pursuant to the Merger Agreement between Engage and
Accipiter. In April 1998, Engage issued 800,000 shares of its Series A
convertible preferred stock to CMGI in exchange for (i) cancellation of
$8,000,000 of intercompany debt and (ii) shares of common stock of Engage
previously held by CMGI. CMGI currently owns 1,500,000 shares of Engage's
Series A convertible preferred stock at an average purchase price of $5.34 per
share. Every one share of Series A Preferred Stock will convert into 10 shares
of common stock upon the consummation of this offering.
II-1
<PAGE>
In August 1998, Engage issued 238,597 shares of its Series B convertible
preferred stock to Sumitomo Corporation and Sumitomo Corporation of America at
a purchase price of $8.38 per share, for an aggregate consideration of
$2,000,000. Upon closing of the offering, the 238,597 outstanding shares of
Series B preferred stock will convert into 238,597 shares of common stock.
Engage issued a secured demand note to CMGI, dated February 1, 1999, in the
aggregate amount of $9,347,451, which is convertible into 164,371 shares of
Engage's Series C convertible preferred stock. Every one share of Series C
convertible preferred stock will convert into 10 shares of common stock upon
the consummation of this offering.
In April 1999, Engage acquired I/PRO. As part of the acquisition, Engage
issued to I/PRO stockholders 505,092 shares of Engage common stock in exchange
for I/PRO common stock.
In April 1999, Engage agreed to issue to CMGI, in cancellation of
$22,086,307 of indebtedness incurred by Engage to acquire I/PRO, 218,460
shares of Series C convertible preferred stock.
(b) Grants and Exercises of Stock Options.
As of April 30, 1999, Engage had granted options to purchase an aggregate
of 3,233,897 shares of common stock under the 1995 Equity Incentive Plan
exercisable at a weighted average exercise price of $4.31 per share. From
August 1, 1995 to April 30, 1998, Engage issued 107,570 shares of common stock
for an aggregate purchase price of $31,682 pursuant to exercise of employee
options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by
an issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase Common Stock, Rule 701
under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation.
3.4 By-laws.
3.5* Form of Amended and Restated By-laws.
4.1* Specimen Certificate for shares of Common Stock.
4.2 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.1).
5.1* Opinion of Hale and Dorr LLP.
10.1 1995 Equity Incentive Plan.
10.2* 1999 Employee Stock Purchase Plan.
10.3* 1999 Director Stock Option Plan.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.7* License Agreement between Engage and Engage Technologies Japan,
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.
10.12* Services and License Agreement between Lycos, Inc. and Engage,
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.
10.14* Lease Agreement between Engage Technologies Limited and Capital
and Countries PLC, dated April 4, 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* Form of Investor Rights Agreement between Engage and CMGI.
10.19* Form of Administrative Support Agreement between Engage and CMGI.
10.20* Separation Agreement between CMGI and Chris Evans, dated May 3,
1999.
10.21* Consulting, Inventions and Non-Disclosure Agreement between Engage
and Chris Evans, dated May 3, 1999 (filed as an exhibit to Exhibit
10.20).
10.22* Inter-Company Agreement between Engage and CMGI, dated April 7,
1999.
10.23* Secured Convertible Demand Note issued by Engage to CMGI, dated as
of
February 1, 1999.
10.24* Security Agreement between Engage and CMGI, dated as of May 3,
1999.
10.25* Intellectual Property Security Agreement between Engage and CMGI,
dated as of May 3, 1999.
21.1 Subsidiaries.
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP (Accipiter).
23.4 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (contained on page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act
II-3
<PAGE>
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and (3) that for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Andover,
Massachusetts on May 7, 1999.
Engage Technologies, Inc.
/s/ Paul L. Schaut
By: _________________________________
Paul L. Schaut
Chief Executive Officer,
President and Director
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Engage Technologies, Inc.,
hereby severally constitute and appoint Paul L. Schaut and Stephen A. Royal,
and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, any registration statement related to the offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 (a "462(b) Registration Statement"), any and all amendments and exhibits
to this registration statement or any 462(b) Registration Statement, and any
and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to the registration of the securities covered
hereby or thereby, and generally to do all things in our names and on our
behalf in such capacities to enable Engage Technologies, Inc. to comply with
the provisions of the Securities Act of 1933 and all requirements of the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Paul L. Schaut Chief Executive Officer, May 7, 1999
______________________________________ President and Director
Paul L. Schaut (Principal Executive
Officer)
/s/ Stephen A. Royal Chief Financial Officer May 7, 1999
______________________________________ and Treasurer (Principal
Stephen A. Royal Financial and Accounting
Officer)
/s/ David S. Wetherell Chairman of the Board of May 7, 1999
______________________________________ Directors
David S. Wetherell
/s/ Edward A. Bennett Director May 7, 1999
______________________________________
Edward A. Bennett
/s/ Christopher A. Evans Director May 7, 1999
______________________________________
Christopher A. Evans
/s/ Andrew J. Hajducky, III Director May 7, 1999
______________________________________
Andrew J. Hajducky, III
/s/ Craig D. Goldman Director May 7, 1999
______________________________________
Craig D. Goldman
</TABLE>
II-5
<PAGE>
Schedule II
ENGAGE TECHNOLOGIES
VALUATION AND QUALIFYING ACCOUNTS
for the years ended July 31, 1996, 1997 and 1998 and
the six months ended January 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
--------------------
Balance at Charged to Deductions Balance
Beginning Costs and From at End
Description of Year Expenses Other (1) Reserves of Year
- ----------- ---------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1996:
Allowance for doubtful ac-
counts................... $ -- -- -- -- $ --
Year ended July 31, 1997:
Allowance for doubtful ac-
counts................... $ -- -- -- -- $ --
Year ended July 31, 1998:
Allowance for doubtful ac-
counts................... $ -- 240 120 -- $360
Six months ended January 31,
1999:
Allowance for doubtful ac-
counts................... $360 41 -- (49) $352
</TABLE>
- --------
(1) Represents allowance for doubtful accounts of Accipiter, Inc. as of
April 1, 1998.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation.
3.4 By-laws.
3.5* Form of Amended and Restated By-laws.
4.1* Specimen Certificate for shares of Common Stock.
4.2 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.1).
5.1* Opinion of Hale and Dorr LLP.
10.1 1995 Equity Incentive Plan.
10.2* 1999 Employee Stock Purchase Plan.
10.3* 1999 Director Stock Option Plan.
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.
10.7* License Agreement between Engage and Engage Technologies Japan,
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.
10.12* Services and License Agreement between Lycos, Inc. and Engage,
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.
10.14* Lease Agreement between Engage Technologies Limited and Capital
and Countries PLC, dated April 4, 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* Form of Investor Rights Agreement between Engage and CMGI.
10.19* Form of Administrative Support Agreement between Engage and CMGI.
10.20* Separation Agreement between CMGI and Chris Evans, dated May 3,
1999.
10.21* Consulting, Inventions and Non-Disclosure Agreement between Engage
and Chris Evans, dated May 3, 1999 (filed as an exhibit to Exhibit
10.20).
10.22* Inter-Company Agreement between Engage and CMGI, dated April 7,
1999.
10.23* Secured Convertible Demand Note issued by Engage to CMGI, dated as
of
February 1, 1999.
10.24* Security Agreement between Engage and CMGI, dated as of May 3,
1999.
10.25* Intellectual Property Security Agreement between Engage and CMGI,
dated as of May 3, 1999.
21.1 Subsidiaries.
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP (Accipiter).
23.4 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (contained on page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENGAGE TECHNOLOGIES, INC.
ENGAGE TECHNOLOGIES, INC. (the "Corporation" or the "Company") a
corporation organized and existing under and by virtue of the Delaware General
Corporation Law, does hereby certify that the board of Directors of the
Corporation, by unanimous written consent of all of the Directors of the
Corporation dated April 3, 1998, approved and adopted, pursuant to Section 242
of the Delaware General Corporation Law, this Amended and Restated Certificate
of Incorporation, which restates, integrates and amends the Certificate of
Incorporation of the Corporation in its entirety pursuant to Section 245 of the
Delaware General Corporation Law. The Corporation further certifies that the
stockholders of the Corporation, by written consent dated April 3, 1998,
approved and adopted this Amended and Restated Certificate of Incorporation,
pursuant to Sections 242 and 245 of the Delaware General Corporation Law.
Written notice of the adoption of this Amended and Restated Certificate of
Incorporation has been given as provided by Section 228 of the General
Corporation Law of the State of Delaware to every stockholder entitled to such
notice. The Certificate of Incorporation of the Corporation, as amended to
date, was originally file with the Secretary of State of Delaware on July 18,
1995 under the name CMG Direct Interactive, Inc. The full text of the Amended
and Restate Certificate of Incorporation is set forth below.
FIRST: the name of the Corporation is Engage Technologies, Inc.
------
SECOND: The address of the Corporation's registered office in the State of
-------
Delaware is 1013 Center Road, Wilmington, Delaware 19805, Country of New Castle,
State of Delaware. The name of its registered agent at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
------
activity for which corporations may be organized under the General Corporation
Law of the Sate of Delaware.
FOURTH: The aggregate number of shares of all classes of stock which the
-------
Corporation is authorized to issue is twenty five million (25,000,000) shares,
of which five million (5,000,000) shall be shares of Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), and twenty million (20,000,000) shall
be shares of Common Stock, par value $0.01 per share (the "Common Stock").
<PAGE>
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid stock and the holder of such shares
shall not be liable for any further call or assessment or any other payment
thereon.
No holder of any of the shares of any class of stock of the Corporation,
whether now or hereafter authorized or issued, shall be entitled as of right to
purchase or subscribe for (i) any unissued stock of any class whatsoever of
stock of the Corporation, or (ii) any new or additional shares of any class
whatsoever of stock of the Corporation to be issued by reason of any increase of
the authorized stock of the Corporation, or of any class of such stock, or (iii)
bonds, certificates of indebtedness, debentures or other securities convertible
into stock of any class of the Corporation or carrying any right to purchase
stock of any class of the Corporation, but any such unissued stock, or
additionally authorized issue of any stock, or other securities convertible into
stock of the Corporation may be issued and disposed of pursuant to a resolution
or resolutions of the Board of Directors to such persons, firms, corporations,
associations or other entities and upon such terms as may be deemed advisable by
the Board of Directors in the exercise of its sole discretion.
Section 1. Common Stock.
-------------
The powers, preferences, rights, qualifications, limitations and
restrictions relating to the Common Stock are as follows:
(a) The Common Stock is junior to the Preferred Stock and is subject to all
the powers, rights, privileges, preferences and priorities of the Preferred
Stock designated herein or in any resolution or resolutions adopted by the Board
of Directors pursuant to authority expressly vested in it by the provisions of
Section 2 of this Article FOURTH.
(b) The Common Stock shall have voting rights for the election of directors
and for all other purposes (subject to the powers, rights, privileges,
preferences and priorities of the Preferred Stock as provided above), each
holder of Common Stock being entitled to one vote for each share thereof held by
such holder, except as otherwise required by law.
Section 2. Preferred Stock
---------------
The Board of Directors is expressly authorized to provide for the issuance
of all or any part of the shares of the Preferred Stock in one or more classes
or series, and to fix for each such class or series such voting powers, full or
limited or fractional, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors in
its sole discretion providing for the
- 2 -
<PAGE>
issuance of such class or series and as may be permitted by the Delaware General
Corporation Law, including, without limitation, the authority to determine with
respect to the shares of any such class or series (i) whether such shares shall
be redeemable, and, if so, the terms and conditions of such redemption, whether
for cash, property or rights, including securities of any other corporation, and
whether at the option of either the Corporation or the holder or both, including
the date or dates or the event or events upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; (ii)
whether such shares shall be entitled to receive dividends (which maybe
cumulative or noncumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) the rights of
such shares in the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights of priority, if any, of
payment of such shares; (iv) whether such shares shall be convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, whether at the option
either of the Corporation or the holder or both, and, if so, the terms and
conditions of such conversion, including provision for adjustment of the
conversion rate in such events as the Board of Directors shall determine; (v)
whether the class or series shall have a sinking fund for the redemption or
purchase of such shares, and, if so, the terms and amount of each sinking fund;
(vi) provisions as to any other voting, optional, and/or special or relative
rights, powers, priorities, preferences, limitations, or restrictions; and (vii)
the number of shares and designation of such class or series.
FIFTH: The Corporation is to have perpetual existence.
------
SIXTH: Election of Directors need not be by written ballot unless the by-
------
laws of the Corporation so provide.
SEVENTH: The Board of Directors of the corporation is expressly authorized
--------
to adopt, amend or repeal the by-laws of the Corporation.
EIGHTH: A director shall not be personally liable to the Corporation or
-------
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that the elimination or limitation of liability
is not permitted under the Delaware General Corporation Law as in effect when
such liability is determined. No amendment or repeal of this provision shall
deprive a director of the benefits hereof with respect to any act or omission
occurring prior to such amendment or repeal.
NINTH: The Corporation reserved the right to amend, alter, change or
------
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in
- 3 -
<PAGE>
the manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
This Amended and Restated Certificate of Incorporation was duly adopted in
accordance with the applicable provisions of Sections 242, 245 and 228 of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, Engage Technologies, Inc. has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 3rd day of April, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
--------------------------
Paul L. Schaut
President
ATTEST
By: /s/ William Williams
--------------------
William Williams II
Assistant Secretary
[Corporate Seal]
- 4 -
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK
Engage Technologies, Inc., a Delaware corporation (the "Corporation" or the
"Company"), pursuant to authority conferred on the Board of Directors of the
Corporation by the Amended and Restated Certificate of Incorporation of the
corporation and in accordance with the provisions of Section 151 of the General
Corporation Law of the Sate of Delaware, certifies that the Board of Directors
of the corporation, by unanimous consent dated April 3, 1998, has duly adopted
the following resolution providing for the establishment and issuance of a
series of Preferred Stock to be designated "Series A Convertible Preferred
Stock" and to consist of eight hundred thousand (800,000) shares as follows:
RESOLVED: That, pursuant to the authority expressly granted and vested in
the Board of Directors of this Corporation in accordance with
the provisions of its Amended and Restated Certificate of
Incorporation, a series of Preferred Stock of the Corporation
hereby is established, consisting of eight hundred thousand
(8000,000) shares, to be designated "Series A Convertible
Preferred Stock" (hereafter "Series A Preferred Stock"), the
Board of Directors be and hereby is authorized to issue such
shares of Series A Preferred Stock from time to time and for
such consideration and on such terms as the Board of Directors
shall determine; and subject to the limitations provided by law
and by the Corporation's Amended and Restate Certificate of
Incorporation, the powers, designations, preferences and
relative, participating, optional or other special rights,
powers or priorities of, and the qualifications, limitations or
restrictions upon, the Series A Preferred Stock shall be as
follows:
1. Designation. This series of Preferred Stock par value $0.01 per
-----------
share, shall be designated the "Series A Convertible Preferred Stock"
(hereinafter "Series A Preferred Stock").
2. Dividends.
---------
(a) The holders of shares of Series A Preferred Stock shall be
entitled to receive, out of funds legally available therefor, dividends computer
at a rate of 7% or $0.70 per share per annum (or a proportional part thereof for
a portion of a year and all subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar recapitalization
affecting such shares) commencing as of February 1, 1998, payable when, as and
if declared by the Board of Directors of the Corporation. The right to receive
dividends on Series A Preferred Stock shall be
<PAGE>
noncumulative, and no right to receive dividends shall accrue by reason for the
fact that no dividends have been declared on the Series A Preferred Stock in any
or every prior year.
(b) The Corporation shall not declare or pay any distributions on
shares of Common Stock until the holders of shares of Series A Preferred Stock
then outstanding shall have first received a distribution at the rate specified
in paragraph (a) of this Section 2 calculated on a cumulative basis from the
date of issuance of said stock compounded annually as of any anniversary of the
date of issuance of such shares.
(c) For purposes of this Section 2, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
help by employees or directors of, or consultants to, the Corporation pursuant
to agreements providing for such repurchase and other than redemptions in
liquidation or dissolution of the Corporation) for cash or property, including
any such transfer, purchase or redemption by a subsidiary of the Corporation.
3. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, and provided that the amount available for distribution to holders of
the Series A Preferred Stock pursuant to this Section 3 is less than $10.00 per
share plus a dividend computed at a rate of 7% or $0.70 per share per annum,
compounded annually as of February 1, 1998 (such amount to be equitably adjusted
whenever there shall occur a stock split, combination, reclassification or other
similar event as provided in Section 5(e)(ii) hereof), whether voluntary or
involuntary, the entire assets of the Company available for such distribution
shall be distributed ratably among the holders of the Series A Preferred Stock.
(b) In the event of any liquidation, dissolution or winding up of the
Company, and provided that the amount available for distribution to holders of
the Series A Preferred Stock pursuant to this Section 3 is at least $10.00 per
share plus a dividend computed at a rate of 7% or $0.70 per share per annum,
compounded annually as of February 1, 1998 (such amount to be equitably adjusted
whenever there shall occur a stock split, combination, reclassification or other
similar event as provided in Section 5(e)(ii) hereof), whether voluntary or
involuntary, holders of each share of Series A Preferred Stock shall be entitled
to be paid first out of the assets of the Company available for distribution to
holders of the Company's capital stock of all classes, whether such assets are
capital, surplus, or earnings, before any sums shall be paid or any assets
distributed among the holders of any other class of capital
- 2 -
<PAGE>
stock, an amount equal to $10.00 per share of Series A Preferred Stock plus a
dividend computed at a rate of 7% or $0.70 per share per annum, compounded
annually as of February 1, 1998. After the payment of the preferential amount
required to be paid to the holders of the Series A Preferred Stock, upon the
liquidation, dissolution or winding up of the Corporation, the holders of shares
of the Corporation's Common Stock shall be entitled to receive the remaining
assets and funds of the Corporation available for distribution to its
stockholders.
(c) A consolidation or merger of the Company or a sale of all or
substantially all of the assets of the Company shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Company within the
meaning of this Section 3; provided, however, that each holder of Series A
Preferred Stock shall have the right to elect the benefits of the provisions of
Section 5(h) hereof in lieu of receiving payment in liquidation, dissolution or
winding up of the Company pursuant to this Section 3. Each holder of Series A
Preferred Stock shall notify the Company in advance of its election to obtain
the benefits of this Section 3(c) or of Section 5(b), which notification shall
be given not later than a date specified in writing to each holder by the
Company to be at least five (5) days prior to the effective date of such
consolidation, merger or sale. If a holder fails to make any election, he shall
be deemed to have elected the benefits of this Section 3(c).
(d) Whenever the distribution provided for herein shall be paid in
property other than cash, the value of such distribution shall be the fair
market value of such property as determined in good faith by the Board of
Directors of the Company.
4. Voting Power. Except as otherwise expressly provided in Section 8
------------
hereof, or as required by law, each holder of Series A Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of whole shares of Common Stock into which such
holder's shares of Series A Preferred Stock could be converted, pursuant to the
provisions of Section 5 hereof (taking into account all accrued and unpaid
dividends, if any, with respect to such Series A Preferred Stock), at the record
date for the determination of shareholders entitled to vote on such matter or,
if no such record date is established, at the date such vote is taken or any
written consent of shareholders is solicited. Except as otherwise expressly
provided herein or as required by law, the holders of shares of Series A
Preferred Stock and of Common Stock shall be entitled to vote together as a
class on all matters.
5. Conversion Rights. The holders of the Series A Preferred Stock shall
-----------------
have the following conversion rights:
(a) General. Subject to and in compliance with the provisions of this
-------
Section 5, any shares of the Series A Preferred Stock, may, at the option of the
holder,
- 3 -
<PAGE>
be converted at any time or from time to time into fully-paid and non-
assessable shares (calculated as to each conversion to the largest whole share)
of Common Stock. The number of shares of Common Stock to which a holder of
Series A Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the Applicable Conversion Rate (determined as provided
in Section 5(c) by the number of shares of Series A Preferred Stock being
converted. Upon conversion of their shares of Series A Preferred Stock into
shares of Common Stock, holders of shares of Series A Preferred Stock shall also
have the option to have all declared but unpaid dividends on such shares of
Series A Preferred Stock converted into shares of Common Stock. the number of
shares of Common Stock to be received upon the conversion of such declared but
unpaid dividends shall be computed by multiplying the number of shares of Series
A Preferred Stock which could have been purchased with such declared but unpaid
dividends, assuming a Series A Preferred Stock purchase price of $10.00 per
share, by the Applicable Conversion Rate in effect at the time of such
conversion.
(b) Conversion Following Underwritten Public Offering.
-------------------------------------------------
(i) All outstanding shares of Series A Preferred Stock shall, upon the
closing of an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offering
and sale of Common Stock for the account of the Company in which the Common
Stock is sold at a price to the public of not less than the amount per share
which would be equal to $10.00 per share plus a dividend computed at a rate of
7% or $0.70 per share per annum, compounded annually as of February 1, 1998
(such amount to be equitably adjusted whenever there shall occur a stock split,
combination, reclassification or other similar event affecting the Common Stock)
and in which the aggregate gross proceeds (before deduction of any underwriting
discounts, commissions or expenses) received by the Company from such public
offering, shall equal or exceed Fifteen Million Dollars ($15,0000,000), be
converted automatically into the number of shares of Common Stock to which a
holder of Series A Preferred Stock shall be entitled upon conversion pursuant to
Section 5(a) hereof without any further action by such holders and whether or
not the certificates representing such shares are surrendered to the Company or
its transfer agent for the Common Stock.
(ii) Upon the occurrence of the conversion specified in Section
5(b)(i), the holders of such Series A Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or of its
transfer agent for the Common Stock. Thereupon, there shall be issued and
delivered to each such holder a certificate or certificates for the number of
shares of Common Stock into which the shares of the Series A Preferred Stock
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such
- 4 -
<PAGE>
conversion unless certificates evidencing such shares of the Series A Preferred
Stock being converted are either delivered to the Company or any such transfer
agent or the holder notifies the Company or any such transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. In addition, the Company may, if the Board of
Directors deems it reasonably necessary, require the holder to post a bond in
connection with such indemnity agreement.
(c) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing (i) $10.00 by (ii) the Applicable Conversion Value, calculated as
provided in Section 5(d).
(d) Applicable Conversion Value. The Applicable Conversion Value in
---------------------------
effect from time to time, except as adjusted in accordance with Section 5(e)
hereof, shall be $1.00 as of the date of this Certificate of Series A
Convertible Preferred Stock.
(e) Adjustments to Applicable Conversion Value.
------------------------------------------
(i) Upon Sales of Common Stock. If the Company shall, while
--------------------------
there are any shares of Series A Preferred Stock outstanding, issue or sell
shares of its Common Stock without consideration or at a price per share less
than the Applicable Conversion Value in effect immediately prior to such
issuance or sale, then in each such case such Applicable Conversion Value upon
each such issuance or sale, except as hereinafter provided, shall be adjusted to
an amount determined by multiplying such Applicable Conversion Value by a
fraction:
(A) the numerator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock, calculated on a fully diluted basis
assuming exercise or conversion of all securities exercisable for or
convertible into Common Stock, whether or not such exercise or conversion
is unvested or otherwise conditional, plus (b) the number of shares of
Common Stock which the net aggregate consideration received by the
Corporation for the total number of such additional shares of Common Stock
so issued would purchase at the Applicable conversion Value, and
(B) the denominator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock, calculated on a fully diluted basis
assuming exercise or
- 5 -
<PAGE>
conversion of all securities exercisable for or convertible into Common
Stock, whether or not such exercise or conversion is unvested or otherwise
conditional, plus (b) the number of such additional shares of Common Stock
so issued or deemed issued.
The Corporation's issuance of up to an aggregate of two million (2,000,000)
shares of Common Stock (such amount to be equitably adjusted whenever there
shall occur a stock split, combination, reclassification or other similar event
affecting the Common Stock), or options exercisable therefor, pursuant to any
stock purchase or stock option plan or other individual or group incentive
program of any kind approved by the Board of Directors to the Corporation's
officers, directors, employees or consultants shall not be deemed an issuance of
additional shares of Common Stock and shall have no effect on the calculations
contemplated by this Section 5(e).
For the purposes of this Section 5(e), the issuance of any warrants,
options, subscriptions or purchase rights with respect to shares of Common Stock
and the issuance of any securities convertible into or exchangeable for shares
of Common Stock (or the issuance of any warrants, options or any rights with
respect to such convertible or exchangeable securities) whether or not such
conversion or exchange is conditional, shall be deemed an issuance at such time
of such Common Stock if the Net Consideration Per Share (as hereinafter
determined) which may be received by the Company for such Common Stock shall be
less than the Applicable Conversion Value at the time of such issuance. Any
obligation, agreement or undertaking to issue warrants, options, subscriptions
or purchase rights at any time in the future shall be deemed to be an issuance
at any time such obligation, agreement or undertaking is made or arises. No
adjustment of the Applicable Conversion Value shall be made under this Section
5(e) upon the issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange rights in any convertible
securities if any adjustment shall previously have been made upon the issuance
of any such warrants, options or subscriptions or purchase rights or upon the
issuance of any convertible securities (or upon the issuance of any warrants,
options or any rights therefor) as above provided. Any adjustment of the
Applicable Conversion Value with respect to this paragraph which relates to
warrants, potions, subscriptions or purchase rights with respect to shares of
Common Stock shall be disregarded if, as, and when all of such warrants,
options, subscriptions or purchase rights expire or are cancelled without being
exercised, so that the Applicable Conversion Value effective immediately upon
such cancellation or expiration shall be equal to the Applicable Conversion
Value in effect at the time of the issuance of the expired or cancelled
warrants, options, subscriptions or purchase rights, with such additional
adjustments as would have been made to that Applicable Conversion Value had the
expired or cancelled warrants, options, subscriptions or purchase rights not
been issued. For purposes of this paragraph, the "Net
- 6 -
<PAGE>
Consideration Per Share" which may be received by the Company shall be
determined as follows:
(A) The "Net Consideration Per Share" shall mean the
amount equal to the total amount of consideration, if any, received by the
Company for the issuance of such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities, plus the minimum
amount of consideration, if any, payable to the Company upon exercise,
conversion or exchange thereof, divided by the aggregate number of shares
of Common Stock that would be issued if all such warrants, options,
subscriptions or other purchase rights or convertible or exchangeable
securities were exercised, exchanged or converted.
(B) The "Net Consideration Per Share" which may be
received by the Company shall be determined in each instance as of the date
of issuance of warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities without giving effect to any
possible future price adjustments or rate adjustments which may be
applicable with respect to such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities.
For purposes of this Section 5(e), if a part or all of the consideration
received by the Company in connection with the issuance of shares of the Common
Stock or the issuance of any of the securities described in this Section 5(e)
consists of property other than cash, the Company at its expense will promptly
cause independent public accountants of recognized standing selected by the
Company to value such property, whereupon such value shall be given to such
consideration and shall be recorded on the books of the Company with respect to
receipt of such property.
This Section 5(e)(i) shall not apply under any of the circumstances which
would constitute an Extraordinary Common Stock Event (as hereinafter defined in
Section 5(e)(ii)).
(ii) Upon an Extraordinary Common Stock Event. Upon the
----------------------------------------
happening of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by multiplying the then effective
Applicable Conversion Value by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be the
- 7 -
<PAGE>
number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock event, and the product so obtained shall thereafter
be the Applicable Conversion Value. The Applicable Conversion value, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of Common Stock as a dividend or other distribution on outstanding shares
of Common Stock, (ii) the subdivision of outstanding shares of Common Stock into
a greater number of shares of Common Stock, or (iii) the combination of
outstanding shares of the Common Stock into a smaller number of shares of Common
Stock.
(f) Dividends. In the event the Company shall make or issue, or fix a
---------
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in assets (excluding cash dividends or
distributions), then and in each such event provisions shall be made so that the
holders of Series A Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon, the
number of securities or such other assets of the Company which they would have
received had their Series A Preferred Stock been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to and including the Conversion Date (as that term is hereafter
defined in Section 5(j)), retained such securities or such other assets
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred Stock.
(g) Recapitalization or Reclassification. If the Common Stock
------------------------------------
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or a different number of shares of any class or classes of stock
of the Corporation, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for elsewhere in this Section 5, or a reorganization, merger, consolidation or
sale of assets provided for elsewhere in this Section 5), then and in each such
event the holder of each share of Series A Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such share of Series A Preferred Stock might have been
converted (taking into account all accrued and unpaid dividends and interest
with respect to such Series A Preferred Stock) immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
- 8 -
<PAGE>
(h) Capitalization Reorganization, Merger or Sale of Assets. If at
-------------------------------------------------------
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 5) or a merger or
consolidation of the Company with or into another corporation or entity, or the
sale of all or substantially all of the Company's properties and assets to any
other person or persons, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the holders of the Series
A Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, the number of shares of stock or other securities or
property of the Company, or of the successor corporation or entity resulting
from such merger, consolidation or sale, to which a holder of Common Stock
issuable upon conversion would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 5
with respect to the rights of the holders of the Series A Preferred Stock after
the reorganization, merger, consolidation or sale to the end that the provisions
of this Section 5 (including adjustment of the Applicable Conversion Value then
in effect and the number of shares purchasable upon conversion of the Series A
Preferred Stock) shall be applicable after that event in as nearly equivalent a
manner as may be practicable.
Each holder of Series A Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Company, or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 5(h), shall have the option of
electing treatment of his shares of Series A Preferred Stock under either this
Section 5(h) or Section 3(b) hereof, notice of which election shall be submitted
in writing to the Company at its principal offices no later than five (5) days
before the effective date of such event.
(i) Accountant's Certificate as to Adjustments. In each case of an
------------------------------------------
adjustment or readjustment of the Applicable Conversion Rate, the Company will
furnish each holder of Series A Preferred Stock with a certificate, prepared by
its chief financial officer showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based. Upon
the request of any holder, the Company will cause its independent public
accountants to confirm the accuracy of such adjustment or readjustment.
(j) Exercise of Conversion Privilege. To exercise his conversion
--------------------------------
privilege, a holder of Series A Preferred Stock shall surrender the certificate
or certificates representing the shares being converted to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for
- 9 -
<PAGE>
shares of Series A Preferred Stock surrendered for conversion shall be
accompanied by proper assignment thereof to the Company or in blank. The date
when such written notice is received by the Company, together with the
certificate or certificates representing the shares of Series A Preferred Stock
being converted, shall be the "Conversion Date." As promptly as practicable
after the conversion Date, the Company shall issue and shall deliver to the
holder of the shares of Series A Preferred Stock being converted, or on its
written order, such certificate or certificates as it may request for the number
of whole shares of Common Stock issuable upon the conversion of such shares of
Series A Preferred Stock in accordance with the provisions of this Section 5,
cash in the amount of all unpaid dividends on such shares of Series A Preferred
Stock, up to and including the Conversion Date, unless conversion of such unpaid
dividends into Common Stock has been elected, and cash, as provided in Section
5(k), in respect of any fraction of a share of Common Stock issuable upon such
conversion. Such conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date, and at such time the
rights of the holder as holder of the converted shares of Series A Preferred
Stock shall cease and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Common Stock represented thereby.
(k) Cash in Lieu of Fractional Shares. No fractional shares of Common
---------------------------------
Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series A Preferred Stock, the Company shall pay to the holder of the shares of
Series A Preferred Stock which were converted a cash adjustment in respect of
such fractional shares in an amount equal to the same fraction of the market
price per share of the Common Stock (as determined in a reasonable manner
prescribed by the Board of Directors) at the close of business on the Conversion
Date. The determination as to whether or not any fractional shares are issuable
shall be based upon the total number of shares of Series A Preferred Stock being
converted at any one time by any holder thereof, not upon each share of Series A
Preferred Stock being converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Series A Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or on the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series A Preferred Stock which were not
converted.
(m) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to
- 10 -
<PAGE>
time be sufficient to effect the conversion of all outstanding shares of the
Series A Preferred Stock and all unpaid dividends thereon, and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the Series
A Preferred Stock and all unpaid dividends thereon, the Company shall take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
6. Redemption.
----------
(a) At the written election of a majority in interest of the holders
of Series A Preferred Stock on or before March 1, 2005, beginning on August 1,
2005 and on the first day of July in each year thereafter (the "Redemption
Date"), the Company shall redeem twenty-five percent (25%) of all of the
outstanding shares of Series A Preferred Stock; provided, however, that the
Company's redemption option shall be reduced by the number of shares of Series A
Preferred Stock that have been converted prior to any such Redemption Date, and
such reduction shall apply first to the Redemption Date immediately following
such conversion and thereafter any balance shall apply to any Subsequent
Redemption Dates. The redemption price for each share of Series A Preferred
Stock redeemed pursuant to this Section 6 shall be $10.00 per share plus a
dividend computed at a rate of 7% or $0.70 per share per annum, compounded
annually as of February 1, 1998 (the "Redemption Price"). Each redemption of
Series A Preferred Stock shall be made so that the number of shares of Series A
Preferred Stock held by each holder whose shares are being redeemed shall be
reduced in an amount which shall bear the same ratio to the total number of
shares of Series A Preferred Stock being redeemed as all such shares then held
by such registered owner bears to the aggregate number of shares of Series A
Preferred Stock then outstanding and held by all registered owners whose shares
are being redeemed.
(b) The Redemption Price set forth in this Section 6 shall be subject
to equitable adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Series A Preferred Stock.
(c) At least thirty (30) days before any Redemption Date pursuant to
Section 6(a), written notice (hereinafter referred to as the "Redemption
Notice") shall be mailed, postage prepaid, to each holder of record of the
Series A Preferred Stock which is to be redeemed, at its address shown on the
records of the Company; provided, however, that the giving of such Redemption
Notice shall not affect the conversion rights of such holder pursuant to Section
5 hereof; provided, further, that the Company's failure to give such Redemption
Notice shall in no way affect its obligation to redeem the shares of Series A
Preferred Stock as provided in Section 6(a) hereof. The Redemption Notice shall
contain the following information:
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<PAGE>
(i) The number of shares of Series A Preferred Stock held by
the holder which shall be redeemed by the Company and the total number of shares
of Series A Preferred Stock held by all holders to be so redeemed,
(ii) The Redemption Date and the applicable Redemption Price,
and
(iii) That the holder is to surrender to the Company, at the
place designated therein, its certificate or certificates representing the
shares of Series A Preferred Stock to be redeemed.
(d) Each holder of shares of Series A Preferred Stock to be redeemed
shall surrender the certificate or certificates representing such shares to the
Company at the place designated in the Redemption Notice, and thereupon the
applicable Redemption Price for such shares as set forth in this Section 6 shall
be paid to the order of the person whose name appears on such certificate or
certificates and each surrendered certificate shall be cancelled and retired.
(e) If any shares of Series A Preferred Stock are not redeemed solely
because a holder fails to surrender the certificate or certificates representing
such shares pursuant to Section 6(d) hereof, then, from and after the Redemption
Date, such shares of Series A Preferred Stock thereupon subject to redemption
shall not be entitled to any further accrual of any dividends pursuant to
Section 2 hereof or to the conversion provisions set forth in Section 5 hereof,
unless the company otherwise specifically agrees in writing.
7. No Reissuance of Series A Preferred Stock. No share or shares of
-----------------------------------------
Series A Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be cancelled, retired and eliminated from the shares which the Company shall be
authorized to issue. The Company may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of the Series A Preferred Stock accordingly.
8. Restrictions and Limitations.
----------------------------
(a) Except as expressly provided herein or as required by law, neither
the Company nor any subsidiary of the Company (which shall mean any corporation
or trust of which the Company directly or indirectly owns at the time all of the
outstanding shares of every class of such corporation or trust other than
directors' qualifying shares) shall, without the vote or written consent by the
holders of at least a majority of the then outstanding shares of the Series A
Preferred Stock voting together, each share of Series A Preferred Stock to be
entitled to one vote in each instance for each share of Common Stock into which
such Preferred Stock is then convertible:
- 12 -
<PAGE>
(i) Redeem, purchase or otherwise acquire for value or (pay
in, to or set aside for a sinking fund for such purpose), any share or shares of
Series A Preferred Sock other than pursuant to the redemption provisions
contained elsewhere herein;
(ii) Authorize or issue, or obligate itself to authorize or
issue, any other equity security senior to or on a parity with the Series A
Preferred Stock as to liquidation preferences, conversion rights, redemption
rights, dividend rights, voting rights or otherwise;
(iii) Effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the Company or any
subsidiary thereof, or any consolidation or merger involving the company or any
subsidiary thereof, or any reclassification or other change of stock, or any
recapitalization or any dissolution, liquidation or winding up of the Company;
(iv) Effect any bank borrowings in excess of an aggregate
amount of Two Hundred Fifty Thousand Dollars ($250,000) U.S.;
(v) Effect any merger by the Company with or into any business
entity or any acquisition by the Company of any assets or business having a fair
market value in excess of One Million Dollars ($1,000,000) U.S.; or
(vi) Amend its Amended and Restated Certificate of
Incorporation, if such amendment would change any of the rights, preferences,
privileges of or limitations provided for herein for the benefit of any shares
of Series A Preferred Stock.
9. No Dilution or Impairment. Except as provided in Section 8 above, the
-------------------------
Company will not, by amendment of its Amended and Restated Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Series A Preferred Stock set forth herein, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
holders of the Series A Preferred Stock against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock receivable on the conversion of
the Series A Preferred Stock above the amount payable therefor on such
conversion, (b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid
- 13 -
<PAGE>
and non-assessable shares of stock on the conversion of all Series A Preferred
Stock from time to time outstanding and all accrued and unpaid dividends
thereon, and (c) will not transfer all or substantially all of its properties
and assets to any other person (corporate or otherwise), or consolidate with or
merge into any other person or permit any such person to consolidate with or
merge into the Company (if the Company is not the surviving person), unless such
other person shall expressly assume in writing and will be bound by all the
terms of the Series A Preferred Stock set forth herein.
10. Notices of Record Date. In the event of
----------------------
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation, or any other entity or person,
or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company.
then and in each such event the Company shall mail or cause to be mailed to each
holder of Series A Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective, (iii) the time, if any, that is to be fixed, as to when the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which such action is to be taken.
This Certificate of Designation was duly adopted in accordance with the
applicable provisions of Section 151 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Engage Technologies, Inc., has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its
- 14 -
<PAGE>
President, and attested by William Williams II, its Assistant Secretary,
this 3rd day of April, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
-------------------------
Paul L. Schaut, President
ATTEST
By: /s/ William Williams
--------------------
William Williams II, Assistant Secretary
[Corporate Seal]
- 15 -
<PAGE>
CERTIFICATE OF INCREASE IN SHARES
DESIGNATED AS SERIES A PREFERRED STOCK
Pursuant to Section 151(g) of the General Corporation Law
of the State of Delaware
Engage Technologies, inc., a Delaware corporation (the "Corporation" or the
"Company"), pursuant to authority conferred on the Board of Directors of the
Corporation by the Amended and Restated Certificate of Incorporation of the
Corporation and in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, certifies that the Board of Directors
of the Corporation, by unanimous consent dated July 31, 1998, has duly adopted
the following resolution providing for the increase in the number of shares of
Preferred Stock to be designated "Series A Preferred Stock" from eight Hundred
Thousand (800,000) shares to One Million Five Hundred Thousand (1,500,000)
shares as follows:
RESOLVED: That pursuant to, and to the extent of, the authority expressly
vested in the Board of Directors of the Corporation by the Restated
Certificate of Incorporation of the Corporation, as amended, the
Board of Directors does hereby adopt a resolution increasing the
number of shares of the Corporation's Preferred Stock designated
"Series A Preferred Stock" (the "Series A Preferred Stock") by Seven
Hundred Thousand (700,000) shares to a total of One Million Five
Hundred Thousand (1,500,000) shares, which number of shares may be
decreased (but not below the number of shares then outstanding) from
time to time by the Board of Directors of the Corporation.
This Certificate of Designation was duly adopted in accordance with the
applicable provisions of Section 151 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Engage Technologies, Inc., has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 1st day of August, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
-------------------------
Paul L. Schaut, President
ATTEST
By: /s/ William Williams
----------------------------------------
William Williams II, Assistant Secretary
[Corporate Seal]
<PAGE>
CERTIFICATE OF MERGER
of
ACCIPITER, INC.
into
ENGAGE TECHNOLOGIES, INC.
(the surviving corporation)
Pursuant to Section 251 of the General
Corporation Law of the State of Delaware
Engage Technologies, Inc. (hereinafter called the "Corporation"), organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the Merger is as follows:
Name State of Incorporation
- ---- ----------------------
Engage Technologies, Inc. Delaware
Accipiter, Inc. Delaware
SECOND: That an Agreement and Plan of Merger between the parties to the
Merger has been approved, adopted, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of Section
251 of the General Corporation Law of the State of Delaware.
THIRD: that the surviving corporation of the Merger is Engage
Technologies, Inc.
FOURTH: The Certificate of Incorporation of Engage Technologies, Inc.
shall become the Certificate of Incorporation of the surviving corporation.
FIFTH: That the executed Agreement and Plan of Merger is on file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is 100 Brickstone
Square, 1st Floor, Andover, Massachusetts 01810.
SIXTH: That a copy of the Agreement and Plan of Merger will be furnished
by the surviving corporation, on request and without costs, to any stockholder
of any constituent corporation.
<PAGE>
IN WITNESS WHEREOF, Engage Technologies, Inc. has caused this Certificate
to be signed by its authorized officer, with effect as of the 6th day of August,
1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
-------------------------
Paul L. Schaut, President
ATTEST
By: /s/ William Williams
----------------------------------------
William Williams II, Assistant Secretary
[Corporate Seal]
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES B CONVERTIBLE PREFERRED STOCK
Engage Technologies, Inc., a Delaware corporation (the "Corporation" or the
"Company"), pursuant to authority conferred on the Board of Directors of the
Corporation by the Amended and Restated Certificate of Incorporation of the
Corporation and in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, certifies that the Board of Directors
of the Corporation, by unanimous consent dated July 31, 1998, has duly adopted
the following resolution providing for the establishment and issuance of a
series of Preferred Stock to be designated "Series B Convertible Preferred
Stock" and to consist of two hundred thirty-eight thousand five hundred ninety-
seven (238,597) shares as follows:
RESOLVED: That, pursuant to the authority expressly granted and vested in the
Board of Directors of this Corporation in accordance with the
provisions of its Amended and Restated Certificate of Incorporation,
a series of Preferred Stock of the Corporation hereby is established,
consisting of two hundred thirty-eight thousand five hundred ninety-
seven (238,597) shares, to be designated "Series B Convertible
Preferred Stock" (hereafter "Series B Preferred Stock"), the Board of
Directors be and hereby is authorized to issue such shares of Series
B Preferred Stock from time to time and for such consideration and on
such terms as the Board of Directors shall determine; and subject to
the limitations provided by law and by the Corporation's Amended and
Restated Certificate of Incorporation, the powers, designations,
preferences and relative, participating, optional or other special
rights, powers or priorities of, and the qualifications, limitations
or restrictions upon, the Series B Preferred Stock shall be as
follows:
1. Designation. This series of Preferred Stock, par value $0.01 per
-----------
share, shall be designated the "Series B Convertible Preferred Stock"
(hereinafter "Series B Preferred Stock").
2. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other class or series of stock of the Corporation ranking on
liquidation prior and in preference to the Series A Preferred Stock, but before
any payment shall be made to the holders of Series B Preferred Stock, Common
Stock or any other class or series of stock ranking on liquidation junior to the
Series A Preferred Stock, by reason of their
<PAGE>
ownership thereof, an amount equal to $10.00 per share (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares), plus any accrued but unpaid
dividends with respect thereto. If upon any such liquidation, dissolution or
winding up of the Corporation, the remaining assets of the Corporation available
for distribution to its stockholders shall be insufficient to pay the holders of
shares of Series A Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Series A Preferred Stock and any class or
series of stock ranking on liquidation on a parity with the Series A Preferred
Stock shall share ratably in any distribution of the remaining assets and funds
of the Corporation in proportion to the respective amounts which would otherwise
be payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock and any other class or series of
stock of the Corporation ranking on liquidation senior to the Series B Preferred
Stock, but before any payment shall be made to the holders of Common Stock or
any other class or series of stock ranking on liquidation junior to the Series B
Preferred Stock upon the liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series B Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, by reason of their ownership thereof, an
amount equal to $8.3823 per share (subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares). If upon any such liquidation,
dissolution or winding up of the Corporation, the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series B Preferred Stock the full amount to
which they shall be entitled, the holders of shares of Series B Preferred Stock
and any class or series of stock ranking on liquidation on a parity with the
Series B Preferred Stock shall share ratably in any distribution of the
remaining assets and funds of the Corporation in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock, Series B Preferred Stock and any
other class or series of stock ranking on liquidation senior to the Common
Stock, upon the dissolution, liquidation or winding up of the Corporation, the
holders of shares of Common Stock then outstanding shall be entitled to receive,
on a pro-rata basis the remaining funds and assets of the Corporation available
for distribution to its stockholders.
(d) With respect to the Series B Preferred Stock, a merger or
consolidation of the Corporation into or with another corporation in which the
holders of the outstanding capital stock of the Corporation immediately prior to
such
<PAGE>
merger or consolidation do not hold a majority of the outstanding capital
stock of the surviving corporation, or the sale of all or substantially all the
assets of the Corporation, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 2 unless the holder
of at least 51% of the then outstanding shares of Series B Preferred Stock elect
to have such events not deemed to be a liquidation, dissolution or winding up of
the Corporation by giving written notice thereof to the Corporation at least ten
(10) days before the effective date of such event. If such notice is given, the
provisions of Subsection 4(h) below shall apply. Whenever the distribution
provided for herein shall be paid in property other than cash, the value of such
distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the Corporation.
3. Voting Power. Except as otherwise expressly provided herein or as
------------
required by law, each holder of Series B Preferred Stock shall be entitled to
vote on all matters and shall be entitled to that number of votes equal to the
largest number of whole shares of Common Stock into which such holders shares of
Series B Preferred Stock could be converted, pursuant to the provisions of
Section 4 hereof (taking into account all declared but unpaid dividends, if any,
with respect to such Series B Preferred Stock), at the record date for the
determination of stockholders entitled to vote on such matter or, if no such
record date is established, at the date such vote is taken or any written
consent of stockholders is solicited. Except as otherwise expressly provided
herein or as required by law, the holders of shares of Series A Preferred Stock,
Series B Preferred Stock and of Common Stock shall be entitled to vote together
as a class on all matters.
4. Conversion Rights. The holders of the Series B Preferred Stock shall
-----------------
have the following conversion rights:
(a) General. Subject to and in compliance with the provisions of this
-------
Section 4, any shares of the Series B Preferred Stock, may, at the option of the
holder, be converted at any time or from time to time into fully-paid and non-
assessable shares (calculated as to each conversion to the largest whole share)
of Common Stock. The number of shares of Common Stock to which a holder of
Series B Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the Applicable Conversion Rate (determined as provided
in Section 4(c)) by the number of shares of Series B Preferred Stock being
converted. Upon conversion of their shares of Series B Preferred Stock into
shares of Common Stock, holders of shares of Series B Preferred Stock shall also
have the option to have all declared but unpaid dividends on such shares of
Series B Preferred Stock converted into shares of Common Stock. The number of
shares of Common Stock to be received upon the conversion of such declared but
unpaid dividends shall be computed by multiplying the number of shares of Series
B Preferred Stock which could have been purchased with such declared but unpaid
dividends, assuming a Series B Preferred Stock purchase price of $8.3823 per
share, by the Applicable Conversion Rate in effect at the time of such
conversion.
<PAGE>
(b) Conversion Following Underwritten Public Offering.
-------------------------------------------------
(i) All outstanding shares of Series B Preferred Stock shall, upon the
closing of an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933 as amended, covering the offering and
sale of Common Stock for the account of the Company in which the Common Stock is
sold at a price to the public of not less than the amount per share which would
be equal to $10.70 per share (such amount to be equitably adjusted whenever
there shall occur a stock split combination, reclassification or other similar
event affecting the Common Stock) and in which the aggregate gross proceeds
(before deduction of any underwriting discounts, commissions or expenses)
received by the Company from such public offering, shall equal or exceed Fifteen
Million Dollars ($15,000,000), be converted automatically into the number of
shares of Common Stock to which a holder of Series B Preferred Stock shall be
entitled upon conversion pursuant to Section 4(a) hereof without any further
action by such holders and whether or not the certificates representing such
shares are surrendered to the Company or its transfer agent for the Common
Stock.
(ii) Upon the occurrence of the conversion specified in Section
4(b)(i), the holders of such Series B Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or of its
transfer agent for the Common Stock. Thereupon, there shall be issued and
delivered to each such holder a certificate or certificates for the number of
shares of Common Stock into which the shares of the Series B Preferred Stock
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless certificates evidencing such
shares of the Series B Preferred Stock being converted are either delivered to
the Company or any such transfer agent or the holder notifies the Company or any
such transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith. In addition, the Company
may, if the Board of Directors deems it reasonably necessary, require the holder
to post a bond in connection with such indemnity agreement.
(c) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing (i) $8.3823 by (ii) the Applicable Conversion Value, calculated as
provided in Section 4(d).
(d) Applicable Conversion Value. The Applicable Conversion Value in
---------------------------
effect from time to time, except as adjusted in accordance with Section 4(e)
hereof, shall be $8.3823 as of the date of this Certificate of Series B
Convertible Preferred Stock.
<PAGE>
(e) Adjustments to Applicable Conversion Value.
------------------------------------------
(i) Upon Sales of Common Stock. If the Company shall, while
--------------------------
there are any shares of Series B Preferred Stock outstanding, issue or sell
shares of its Common Stock without consideration or at a price per share less
than the Applicable Conversion Value in effect immediately prior to such
issuance or sale, then in each such case such Applicable Conversion Value upon
each such issuance or sale, except as hereinafter provided, shall be adjusted to
an amount equal to a fraction:
(A) the numerator of which shall be (a) the Applicable
Conversion Value prior to the issuance multiplied by the number of shares
of Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, calculated on a fully diluted basis
assuming exercise or conversion of all securities exercisable for or
convertible into Common Stock, whether or not such exercise or conversion
is unvested or otherwise conditional, plus (b) the price per share of such
additional shares of Common Stock multiplied by number of such additional
shares of Common Stock so issued or deemed issued, and
(B) the denominator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock, calculated on a fully diluted basis
assuming exercise or conversion of all securities exercisable for or
convertible into Common Stock, whether or not such exercise or conversion
is unvested or otherwise conditional, plus (b) the number of such
additional shares of Common stock so issued or deemed issued.
The Corporation's issuance of shares of Common Stock, or options exercisable
therefor, pursuant to any stock purchase or stock option plan or other
individual or group incentive program of any kind approved by the Board of
Directors to the Corporation's officers, directors, employees or consultants
shall not be deemed an issuance of additional shares of Common Stock and shall
have no effect on the calculations contemplated by this Section 4(e).
For the purposes of this Section 4(e), the issuance of any warrants,
options, subscriptions or purchase rights with respect to shares of Common Stock
and the issuance of any securities convertible into or exchangeable for shares
of Common Stock (or the issuance of any warrants, options or any rights with
respect to such convertible or exchangeable securities) whether or not such
conversion or exchange is conditional, shall be deemed an issuance at such time
of such Common Stock if the Net Consideration Per Share (as hereinafter
determined) which may be received by the Company for such Common Stock shall be
less than the Applicable Conversion
<PAGE>
Value at the time of such issuance. Any obligation, agreement or undertaking to
issue warrants, options, subscriptions or purchase rights at any time in the
future shall be deemed to be an issuance at any time such obligation, agreement
or undertaking is made or arises. No adjustment of the Applicable Conversion
Value shall be made under this Section 4(e) upon the issuance of any shares of
Common Stock which are issued pursuant to the exercise of any warrants, options
subscriptions or purchase rights or pursuant to the exercise of any conversion
or exchange rights in any convertible securities if any adjustment shall
previously have been made upon the issuance of any such warrants, options or
subscriptions or purchase rights or upon the issuance of any convertible
securities (or upon the issuance of any warrants, options or any rights
therefor) as above provided. Any adjustment of the Applicable Conversion Value
with respect to this paragraph which relates to warrants, options, subscriptions
or purchase rights with respect to shares of Common Stock shall be disregarded
if, as, and when all of such warrants, options, subscriptions or purchase rights
expire or are canceled without being exercised, so that the Applicable
Conversion Value effective immediately upon such cancellation or expiration
shall be equal to the Applicable Conversion Value in effect at the time of the
issuance of the expired or canceled warrants, options, subscriptions or purchase
rights, with such additional adjustments as would have been made to that
Applicable Conversion Value had the expired or canceled warrants, options,
subscriptions or purchase rights not been issued. For purposes of this
paragraph, the "Net Consideration Per Share" which may be received by the
Company shall be determined as follows:
(A) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by
the Company for the issuance of such warrants, options,
subscriptions or other purchase rights or convertible or
exchangeable securities, plus the minimum amount of
consideration, if any, payable to the Company upon exercise,
conversion or exchange thereof, divided by the aggregate number
of shares of Common Stock that would be issued if all such
warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities were exercised, exchanged
or converted.
(B) The "Net Consideration Per Share" which may be received
by the Company shall be determined in each instance as of the
date of issuance of warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities without
giving effect to any possible future price adjustments or rate
adjustments which may be applicable with respect to such
warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities.
<PAGE>
For purposes of this Section 4(e), if a part or all of the consideration
received by the Company in connection with the issuance of shares of the Common
Stock or the issuance of any of the securities described in this Section 4(e)
consists of property other than cash, the Company at its expense will promptly
cause independent public accountants of recognized standing selected by the
Company to value such property, whereupon such value shall be given to such
consideration and shall be recorded on the books of the Company with respect to
receipt of such property.
This Section 4(e)(i) shall not apply under any of the circumstances which
would constitute an Extraordinary Common Stock Event (as hereinafter defined in
Section 4(e)(ii)).
(ii) Upon an Extraordinary Common Stock Event. Upon the
----------------------------------------
happening of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by multiplying the then effective
Applicable Conversion Value by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock event, and the product so obtained shall thereafter
be the Applicable Conversion Value. The Applicable Conversion Value, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of Common Stock as a dividend or other distribution on outstanding shares
of Common Stock, (ii) the subdivision of outstanding shares of Common Stock into
a greater number of shares of Common Stock, or (iii) the combination of
outstanding shares of the Common Stock into a smaller number of shares of Common
Stock.
(f) Dividends. In the event the Company shall make or issue, or fix a
---------
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in assets (excluding cash dividends or
distributions), then and in each such event provisions shall be made so that the
holders of Series B Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon the number
of securities or such other assets of the Company which they would have received
had their Series B Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the Conversion Date (as that term is hereafter defined in
Section 4(j)), retained such securities or such other assets receivable by them
as aforesaid during such period, giving application to all adjustments called
for during such period under this Section 4 with respect to the rights of the
holders of the Series B Preferred Stock.
<PAGE>
(g) Recapitalization or Reclassification. If the Common Stock
------------------------------------
issuable upon the conversion of the Series B Preferred Stock shall be changed
into the same or a different number of shares of any class or classes of stock
of the Corporation, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for elsewhere in this Section 4, or a reorganization, merger, consolidation or
sale of assets provided for elsewhere in this Section 4), then and in each such
event the holder of each share of Series B Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such share of Series B Preferred Stock might have been
converted (taking into account all declared and unpaid dividends and interest
with respect to such Series B Preferred Stock) immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(h) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 4) or a merger or consolidation of the
Company with or into another corporation or entity, or the sale of all or
substantially all of the Company's properties and assets to any other person or
persons, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Series B Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series B
Preferred Stock the number of shares of stock or other securities or property of
the Company, or of the successor corporation or entity resulting from such
merger, consolidation or sale, to which such holders would be entitled if they
were holders of the number of shares of Common Stock they were entitled to
receive on conversion of the Series B Preferred Stock held by them immediately
prior to such capital reorganization, merger consolidation, or sale. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Series B Preferred Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this Section 4 (including adjustment of the
Applicable Conversion Value then in effect and the number of shares purchasable
upon conversion of the Series B Preferred Stock) shall be applicable after that
event in as nearly equivalent a manner as may be practicable.
Each holder of Series B Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Company, or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 4(h), shall have the option of
electing treatment of his shares of Series B Preferred Stock under either this
Section 4(h) or Section 2(d) hereof, notice of which election shall be submitted
in writing to the Company at its principal offices no later than five (5) days
before the effective date of such event.
<PAGE>
(i) Accountant's Certificate as to Adjustments. In each case of an
------------------------------------------
adjustment or readjustment of the Applicable Conversion Rate, the Company will
furnish each holder of Series B Preferred Stock with a certificate, prepared by
its chief financial officer showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based. Upon
the request of any holder, the Company will cause its independent public
accountants to confirm the accuracy of such adjustment or readjustment.
(j) Exercise of Conversion Privilege. To exercise his conversion
--------------------------------
privilege, a holder of Series B Preferred Stock shall surrender the certificate
or certificates representing the shares being converted to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Series B Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Company or in blank. The date when such written notice is received by the
Company, together with the certificate or certificates representing the shares
of Series B Preferred Stock being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date, the Company shall issue and
shall deliver to the holder of the shares of Series B Preferred Stock being
converted, or on its written order, such certificate or certificates as it may
request for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series B Preferred Stock in accordance with the
provisions of this Section 4, cash in the amount of all unpaid dividends on such
shares of Series B Preferred Stock, up to and including the Conversion Date,
unless conversion of such unpaid dividends into Common Stock has been elected
and cash, as provided in Section 4(k), in respect of any fraction of a share of
Common Stock issuable upon such conversion. Such conversion shall be deemed to
have been effected immediately prior to the close of business on the Conversion
Date, and at such time the rights of the holder as holder of the converted
shares of Series B Preferred Stock shall cease and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares of Common Stock represented thereby.
(k) Cash in Lieu of Fractional Shares. No fractional shares of Common
---------------------------------
Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series B Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series B Preferred Stock, the Company shall pay to the holder of the shares of
Series B Preferred Stock which were converted a cash adjustment in respect of
such fractional shares in an amount equal to the same fraction of the market
price per share of the Common Stock (as determined in a reasonable manner
prescribed by the Board of Directors) at the close of business on the Conversion
Date. The determination as to whether or not any fractional shares are issuable
shall be based upon the total
<PAGE>
number of shares of Series B preferred Stock being converted at any one time by
any holder thereof, not upon each share of Series B Preferred Stock being
converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Series B Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or on the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series B Preferred Stock which were not
converted.
(m) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series B Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series B Preferred Stock and all unpaid dividends thereon, and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock and all unpaid dividends thereon, the Company shall
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
5. No Reissuance of Series B Preferred Stock. No share or shares of
-----------------------------------------
Series B Preferred Stock acquired by the Company by reason of purchase or
conversion shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series B Preferred
Stock accordingly; provided, that this provision shall not be construed to
permit the amendment of this Certificate of Designation with respect to any
matter other than the number of shares of Series B Stock authorized for
issuance, except with the consent of the holders of a majority in interest of
the issued and outstanding Series B Preferred Stock.
6. No Dilution or Impairment. The Company will not, by amendment of its
-------------------------
Amended and Restated Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Series B Preferred Stock set forth
herein, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the holders of the Series B
Preferred Stock against dilution or other impairment. Without limiting the
generality of the foregoing, the Company (a) will not increase the par value of
any shares of stock receivable on the conversion of the Series B Preferred Stock
above the amount payable therefor on such conversion, (b) will take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and non-assessable shares of stock on the
conversion of all Series B Preferred Stock from time to time outstanding and all
accrued and unpaid
<PAGE>
dividends thereon, and (c) will not transfer all or substantially all of its
properties and assets to any other person (corporate or otherwise), or
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and will be
bound by all the terms of the Series B Preferred Stock set forth herein.
7. Notices of Record Date. In the event of
----------------------
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company,
then and in each such event the Company shall mail or cause to be mailed to each
holder of Series B Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective, (iii) the time, if any, that is to be fixed, as to when the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which such action is to be taken.
This Certificate of Designation was duly adopted in accordance with the
applicable provisions of Section 151 of the Delaware General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, Engage Technologies, Inc., has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 1st day of August, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
-------------------------
Paul L. Schaut, President
ATTEST
By: /s/ William Williams
----------------------------------------
William Williams II, Assistant Secretary
[Corporate Seal]
<PAGE>
AUTHENTICATION:
DATE:
CERTIFICATE OF MERGER
of
ACCIPITER, INC.
into
ENGAGE TECHNOLOGIES, INC.
(the surviving corporation)
Pursuant to Section 251 of the General
Corporation Law of the State of Delaware
Engage Technologies, Inc. (hereinafter called the "Corporation"), organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the Merger is as follows:
Name State of Incorporation
- ---- ----------------------
Engage Technologies, Inc. Delaware
Accipiter, Inc. Delaware
SECOND: That an Agreement and Plan of Merger between the parties to the
Merger has been approved, adopted, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of Section
251 of the General Corporation Law of the State of Delaware.
THIRD: That the surviving corporation of the Merger is Engage
Technologies, Inc.
FOURTH: The Certificate of Incorporation of Engage Technologies, Inc.
shall become the Certificate of Incorporation of the surviving corporation.
<PAGE>
FIFTH: That the executed Agreement and Plan of Merger is on file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is 100 Brickstone
Square, 1st Floor, Andover, Massachusetts 01810.
SIXTH: That a copy of the Agreement and Plan of Merger will be furnished
by the surviving corporation, on request and without costs, to any stockholder
of any constituent corporation.
IN WITNESS WHEREOF, Engage Technologies, Inc. has caused this Certificate
to be signed by its authorized officer, with effect as of the 6th day of August,
1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
------------------------
Paul L. Schaut, President
ATTEST
By: /s/ William Williams
----------------------------------------
William Williams II, Assistant Secretary
[Corporate Seal]
<PAGE>
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION OF
ENGAGE TECHNOLOGIES, INC.
It is hereby certified that:
1. The name of the corporation is Engage Technologies, Inc. (the
"Corporation").
2. The Corporation's Restated Certificate of Incorporation is hereby amended
by striking out the first paragraph of Article 4 thereof and by
substituting the following replacement paragraph:
"The aggregate number of shares of all classes of stock which the
Corporation is authorized to issue is thirty five million (35,000,000)
shares, of which five million (5,000,000) shall be shares of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), and thirty
million (30,000,000) shall be shares of Common Stock, par value $0.01 per
share (the "Common Stock")."
3. This Certificate of Amendment was duly adopted in accordance with the
applicable provisions of Sections 242 and 228 of the Delaware General
Corporation Law.
Signed and attested to on March 24, 1999.
/s/ Paul L. Schaut
---------------------
Paul L. Schaut
President
ATTEST:
/s/ Michael K. Baker
- -----------------------
Michael K. Baker
Secretary
<PAGE>
Exhibit 3.4
-----------
BY-LAWS
OF
CMG DIRECT INTERACTIVE, INC.
(A Delaware Corporation)
Adopted: July 18, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1. OFFICES................................................. 1
Section 1.1 Registered Office................................... 1
Section 1.2 Other Offices....................................... 1
ARTICLE 2. SEAL.................................................... 1
ARTICLE 3. MEETINGS OF STOCKHOLDERS................................ 1
Section 3.1 Place of Meeting.................................... 1
Section 3.2 Annual Meetings..................................... 1
Section 3.3 Special Meetings.................................... 1
Section 3.4 Notice.............................................. 2
Section 3.5 Quorum and Adjournments............................. 2
Section 3.6 Votes; Proxies...................................... 3
Section 3.7 Organization........................................ 4
Section 3.8 Consent of Stockholders in Lieu of Meeting.......... 4
ARTICLE 4. DIRECTORS............................................... 5
Section 4.1 Number.............................................. 5
Section 4.2 Term of Office...................................... 5
Section 4.3 Vacancies........................................... 5
Section 4.4 Removal by Stockholders............................. 6
Section 4.5 Meetings............................................ 6
Section 4.6 Votes............................................... 6
Section 4.7 Quorum and Adjournment.............................. 6
Section 4.8 Compensation........................................ 7
Section 4.9 Action by Consent of Directors...................... 7
ARTICLE 5. COMMITTEES OF DIRECTORS................................. 7
Section 5.1 Executive Committee................................. 7
Section 5.2 Audit Committee..................................... 8
Section 5.3 Other Committees.................................... 9
Section 5.4 Term of Office...................................... 10
ARTICLE 6. OFFICERS................................................ 10
Section 6.1 Officers............................................ 10
Section 6.2 Vacancies........................................... 11
Section 6.3 Chairman of the Board............................... 11
Section 6.4 President........................................... 11
Section 6.5 Executive Vice Presidents and Vice Presidents....... 11
Section 6.6 Secretary........................................... 11
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> z
Section 6.7 Assistant Secretaries............................... 12
Section 6.8 Treasurer........................................... 12
Section 6.9 Assistant Treasurers................................ 12
Section 6.10 Controller.......................................... 12
Section 6.11 Assistant Controllers............................... 12
Section 6.12 Subordinate Officers................................ 13
Section 6.13 Compensation........................................ 13
Section 6.14 Removal............................................. 13
Section 6.15 Bonds............................................... 13
ARTICLE 7. CERTIFICATES OF STOCK................................... 13
Section 7.1 Form and Execution of Certificates.................. 13
Section 7.2 Transfer of Shares.................................. 14
Section 7.3 Closing of Transfer Books........................... 15
Section 7.4 Fixing Date for Determination of
Stockholders of Record........................... 15
Section 7.5 Lost or Destroyed Certificates...................... 16
Section 7.6 Uncertificated Shares............................... 16
ARTICLE 8. EXECUTION OF DOCUMENTS.................................. 17
Section 8.1 Execution of Checks, Notes, Etc..................... 17
Section 8.2 Execution of Contracts, Assignments, Etc............ 17
Section 8.3 Execution of Proxies................................ 17
ARTICLE 9. INSPECTION OF BOOKS..................................... 17
ARTICLE 10. FISCAL YEAR............................................. 18
ARTICLE 11. AMENDMENTS.............................................. 18
ARTICLE 12. INDEMNIFICATION......................................... 18
Section 12.1 Indemnification..................................... 18
Section 12.2 Authorization....................................... 20
Section 12.3 Expense Advance..................................... 20
Section 12.4 Nonexclusivity...................................... 20
Section 12.5 Insurance........................................... 21
Section 12.6 "The Corporation"................................... 21
Section 12.7 Other Indemnification............................... 21
Section 12.8 Other Definitions................................... 22
Section 12.9 Continuation of Indemnification..................... 22
Section 12.10 Amendment or Repeal................................. 22
ARTICLE 13. TRANSACTIONS WITH INTERESTED PARTIES.................... 22
</TABLE>
-ii-
<PAGE>
CMG DIRECT INTERACTIVE, INC.
(a Delaware Corporation)
BY-LAWS
ARTICLE 1. OFFICES
Section 1.1 Registered Office
-----------------
The registered office of the Corporation shall be located at 1209 Orange
Street in the City of Wilmington, County of New Castle, State of Delaware. The
name of the Corporation's registered agent at such address is The Corporation
Trust Company.
Section 1.2 Other Offices
-------------
The Corporation may also have offices at such other places, within or
without the State of Delaware, as the Board of Directors may from time to time
appoint or the business of the Corporation may require.
ARTICLE 2. SEAL
The seal of the Corporation shall, subject to alteration by the Board of
Directors, consist of a flat-faced circular die with the word "Delaware,"
together with the name of the Corporation and the year of incorporation, cut or
engraved thereon.
ARTICLE 3. MEETINGS OF STOCKHOLDERS
Section 3.1 Place of Meeting
----------------
Meetings of the Stockholders shall be held either within or without the
State of Delaware at such place as the Board of Directors may fix.
Section 3.2 Annual Meetings
---------------
The annual meeting of Stockholders shall be held for the election of
Directors on such date and at such time as the Board of Directors may fix. Any
other proper business may be transacted at the annual meeting.
Section 3.3 Special Meetings
----------------
Special meetings of the Stockholders for any purpose or purposes may be
called by the Chairman of the Board of Directors, if there be one, the
President, or by the Directors (either by written instrument signed by a
majority of the Directors or by resolution adopted by a vote of the majority of
the Directors), and special meetings shall
1
<PAGE>
be called by the President or the Secretary whenever Stockholders owning a
majority of the capital stock issued, outstanding and entitled to vote so
request in writing. Such request of Stockholders shall state the purpose or
purposes of the proposed meeting.
Section 3.4 Notice
------
Written or printed notice of every meeting of Stockholders, annual or
special, stating the hour, date and place thereof, and the purpose or purposes
in general terms for which the meeting is called, shall, not less than ten (10),
or such longer period as shall be provided by law, the Certificate of
Incorporation or these By-Laws, and not more than sixty (60) days before such
meeting, be served upon or mailed to each Stockholder entitled to vote at the
meeting, at his address as it appears upon the stock records of the Corporation
or, if such Stockholder shall have filed with the Secretary of the Corporation a
written request that notices intended for him be mailed to some other address,
then to the address designated in such request.
Notice of the hour, date, place and purpose of any meeting of Stockholders
may be dispensed with if every Stockholder entitled to vote at the meeting shall
attend either in person or by proxy and shall not, at the beginning of the
meeting, object to the holding of such meeting because the meeting has not been
lawfully called or convened, or if every absent Stockholder entitled to such
notice shall in writing, filed with the records of the meeting, either before or
after the holding thereof, waive such notice.
Section 3.5 Quorum and Adjournments
-----------------------
Except as otherwise provided by law or by the Certificate of Incorporation,
the presence in person or by proxy at any meeting of Stockholders of the holders
of a majority of the shares of the capital stock of the Corporation issued and
outstanding and entitled to vote at the meeting, shall be requisite and shall
constitute a quorum. If two or more classes of stock are entitled to vote as
separate classes upon any question, then, in the case of each such class, a
quorum for the consideration of such question shall, except as otherwise
provided by law or by the Certificate of Incorporation, consist of a majority in
interest of all stock of that class issued, outstanding and entitled to vote.
if a majority of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote at the meeting or, where a larger quorum is
required, such quorum, shall not be represented at any meeting of the
Stockholders regularly called, the holders of a majority of the shares present
or represented by proxy and entitled to vote at the meeting shall have the power
to adjourn the meeting to another time, or to another time and place, without
notice other than announcement of adjournment at the meeting, and there may be
successive adjournments for like cause and in like manner until the requisite
amount of shares entitled to vote at such meeting shall be represented;
provided, however, that if the adjournment is for more than thirty (30) days,
notice of the hour, date and place of the adjourned meeting shall be given to
each Stockholder entitled to vote at the meeting. Subject to the requirements
of law and the Certificate
2
<PAGE>
of Incorporation, on any issue on which two or more classes of stock are
entitled to vote separately, no adjournment shall be taken with respect to any
class for which a quorum is present unless the Chairman of the meeting otherwise
directs. At any meeting held to consider matters which were subject to
adjournment for want of a quorum at which the required number of shares entitled
to vote at the meeting shall be represented, any business may be transacted
which might have been transacted at the meeting as originally noticed.
Section 3.6 Votes; Proxies
--------------
Except as otherwise provided in the Certificate of Incorporation, at each
meeting of Stockholders, every Stockholder of record at the closing of the
transfer books, if closed, or on the date set by the Board of Directors for the
determination of Stockholders entitled to vote at such meeting, shall have one
vote for each share of stock entitled to vote which is registered in his name on
the books of the Corporation.
At each such meeting, every Stockholder entitled to vote shall be entitled
to do so in person, or by proxy appointed by an instrument in writing or as
otherwise permitted by law subscribed by such Stockholder and bearing a date not
more than three (3) years prior to the meeting in question, unless said
instrument provides for a longer period during which it is to remain in force.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable proxy. A proxy may be made irrevocable regardless of
whether the interest with which it is coupled is an interest in the stock itself
or any interest in the Corporation generally. A Stockholder may revoke any
proxy which is not irrevocable by attending the meeting and voting in person or
by filing an instrument in writing or as otherwise permitted by law revoking the
proxy or by filing another duly executed proxy bearing a later date with the
Secretary of the Corporation.
Voting at meetings of Stockholders need not be by written ballot and,
except as otherwise provided by law, need not be conducted by inspectors of
election unless so determined by the Chairman of the meeting or by the holders
of shares of stock having a majority of the votes which could be cast by the
holders of all outstanding shares of stock entitled to vote thereon which are
present in person or represented by proxy at such meeting. If it is required or
determined that inspectors of election be appointed, the Chairman shall appoint
two inspectors of election, who shall first take and subscribe an oath or
affirmation faithfully to execute the duties of inspectors at such meeting with
strict impartiality and according to the best of their ability. The inspectors
so appointed shall take charge of the polls and, after the balloting, shall make
a certificate of the result of the vote taken. No Director or candidate for the
office of Director shall be appointed as such inspector.
Unless the Certificate of Incorporation otherwise provides, at any meeting
at which a quorum is present, a plurality of the votes properly cast for the
election of any
3
<PAGE>
Director shall be sufficient to elect a candidate to the Board of Directors. A
majority of the votes properly cast upon any other question shall decide the
question, except in any case where a larger vote is required by law, the
Certificate of Incorporation, these By-Laws, or otherwise.
Section 3.7 Organization
------------
The Chairman of the Board, if there be one, or in his or her absence, the
Vice Chairman, or in the absence of a Vice Chairman, the President, or in the
absence of the President, a Vice President, shall call meetings of the
Stockholders to order and shall act as chairman thereof. The Secretary of the
Corporation, if present, shall act as secretary of all meetings of Stockholders,
and, in his or her absence, the presiding officer may appoint a secretary.
Section 3.8 Consent of Stockholders in Lieu of Meeting
------------------------------------------
Unless otherwise restricted by the Certificate of Incorporation, any action
required or permitted by the Delaware General Corporation Law to be taken at any
annual or special meeting of the Stockholders of the Corporation, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of Stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each Stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this section to the
Corporation, written consents signed by a sufficient number of Stockholders to
take action are delivered to the Corporation by delivery to its registered
office in Delaware, its principal place of business, or an officer or agent of
the Corporation having custody of the book in which proceedings of meetings of
Stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those Stockholders who
have not consented in writing. In the event that the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law other than Section 228 thereof, if such
action had been voted on by Stockholders at
4
<PAGE>
a meeting thereof, the certificate filed under such other section shall state,
in lieu of any statement required by such section concerning any vote of
Stockholders, that written consent has been given in accordance with Section 228
of the Delaware General Corporation Law, and that written notice has been given
as provided in such Section 228.
ARTICLE 4. DIRECTORS
Section 4.1 Number
------
The business and affairs of the Corporation shall be conducted and managed
by a Board of Directors consisting of not less than one Director. No Director
needs to be a Stockholder. The number of Directors for each year shall be fixed
at each annual meeting of Stockholders, but if the number is not so fixed, the
number shall remain as it stood immediately prior to such meeting.
At each annual meeting of Stockholders, the Stockholders shall elect
Directors. Each Director so elected shall hold office, subject to the provisions
of law, the Certificate of Incorporation, these By-Laws, or otherwise, until the
next annual meeting of Stockholders and until his successor is elected and
qualified.
At any time during any year, except as otherwise provided by law, the
Certificate of Incorporation, these By-Laws, or otherwise, the number of
Directors may be increased or reduced, in each case by vote of the holders of a
majority of the stock issued and outstanding and present in person or
represented by proxy and entitled to vote for the election of Directors or a
majority of the Directors in office at the time of such increase or decrease,
regardless of whether such majority constitutes a quorum.
Section 4.2 Term of Office
--------------
Each Director shall hold office until the next annual meeting of
Stockholders and until his successor is duly elected and qualified or until his
earlier death or resignation, subject to the right of the Stockholders at any
time to remove any Director or Directors as provided in Section 4.4 of this
Article.
Section 4.3 Vacancies
---------
If any vacancy shall occur among the Directors, or if the number of
Directors shall at any time be increased, the Directors then in office, although
less than a quorum, by a majority vote may fill the vacancies or newly-created
Directorships, or any such vacancies or newly-created Directorships may be
filled by the Stockholders at any meeting.
5
<PAGE>
Section 4.4 Removal by Stockholders
-----------------------
Except as otherwise provided by law, the Certificate of Incorporation or
otherwise, the holders of record of the capital stock of the Corporation
entitled to vote for the election of Directors may, by a majority vote, remove
any Director or Directors, with or without cause, and, in their discretion,
elect a new Director or Directors in place thereof.
Section 4.5 Meetings
--------
Meetings of the Board of Directors shall be held at such place, within our
without the State of Delaware, as may from time to time be fixed by resolution
of the Board of Directors or by the Chairman of the Board, if there be one, or
the President and as may be specified in the notice or waiver of notice of any
meeting. Meetings may be held at any time upon the call of the Chairman of the
Board, if there be one, or the President or any two (2) of the Directors in
office by oral, telegraphic, telex, telecopy or other form of electronic
transmission, or by written notice, duly served or sent or mailed to each
Director not less than twenty-four (24) hours before such meeting, except that,
if mailed, such notice shall be mailed not less than seventy-two (72) hours
before such meeting.
Meetings may be held at any time and place without notice if all the
Directors are present and do not object to the holding of such meeting for lack
of proper notice or if those not present shall, in writing or by telegram,
telex, telecopy or other form of electronic transmission, waive notice thereof.
A regular meeting of the Board may be held without notice immediately following
the annual meeting of Stockholders at the place where the annual meeting of
Stockholders is held. Regular meetings of the Board may also be held without
notice at such time and place as shall from time to time be determined by
resolution of the Board.
Members of the Board of Directors or any committee thereof may participate
in a meeting of such Board or committee by means of conference telephone or
similar communication equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting pursuant to the
foregoing provisions shall constitute presence in person at the meeting.
Section 4.6 Votes
-----
Except as otherwise provided by law, the Certificate of Incorporation or
otherwise, the vote of the majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 4.7 Quorum and Adjournment
----------------------
Except as otherwise provided by law, the Certificate of Incorporation or
otherwise, a majority of the Directors shall constitute a quorum for the
transaction of business. If
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at any meeting of the Board there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time without
notice other than announcement of the adjournment at the meeting, and at such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed.
Section 4.8 Compensation
------------
Directors shall receive compensation for their services, as such, and for
service on any Committee of the Board of Directors, as fixed by resolution of
the Board of Directors and for expenses of attendance at each regular or special
meeting of the Board or any Committee thereof. Nothing in this Section shall be
construed to preclude a Director from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 4.9 Action by Consent of Directors
------------------------------
Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee. Such consent shall be treated as a vote adopted at a
meeting for all purposes. Such consents may be executed in one or more
counterparts and not every Director or committee member need sign the same
counterpart.
ARTICLE 5. COMMITTEES OF DIRECTORS
Section 5.1 Executive Committee
-------------------
The Board of Directors may, by resolution passed by a majority of the whole
Board, appoint an Executive Committee of one (1) or more members, to serve at
the pleasure of the Board, and to consist of such Directors as the Board may
from time to time designate. The Board of Directors shall designate the
Chairman of the Executive Committee.
(a) Procedure. The Executive Committee shall, by a vote of a
---------
majority of its members, fix its own times and places of meeting, determine the
number of its members constituting a quorum for the transaction of business, and
prescribe its own rules of procedure, no change in which shall be made save by a
majority vote of its members.
(b) Responsibilities. During the intervals between the meetings of
----------------
the Board of Directors, except as otherwise provided by the Board of Directors
in establishing such Committee or otherwise, the Executive Committee shall
possess and
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may exercise all the powers of the Board in the management and direction of the
business and affairs of the Corporation; provided, however, that the Executive
Committee shall not, except to the extent provided in the Certificate of
Incorporation or in the resolution providing for the issuance of shares of stock
adopted by the Board of Directors as provided in Section 151(a) of the Delaware
General Business Corporation Law, have the power:
(i) to amend or authorize the amendment of the Certificate of
Incorporation or these By-Laws;
(ii) to authorize the issuance of stock;
(iii) to authorize the payment of any dividend;
(iv) to adopt an agreement of merger or consolidation of the
Corporation or to recommend to the Stockholders the sale, lease or exchange of
all or substantially all the property and business of the Corporation;
(v) to recommend to the Stockholders a dissolution, or a
revocation of a dissolution, of the Corporation; or
(vi) to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware Business Corporation Law.
(c) Reports. The Executive Committee shall keep regular minutes of
-------
its proceedings, and all actions by the Executive Committee shall be reported
promptly to the Board of Directors. Such actions shall be subject to review,
amendment and repeal by the Board, provided that no rights of third parties
shall be adversely affected by such review, amendment or repeal.
(d) Appointment of Additional Members. In the absence or
---------------------------------
disqualification of any member of the Executive Committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member.
Section 5.2 Audit Committee
---------------
The Board of Directors may, by resolution passed by a majority of the whole
Board, appoint an Audit Committee of two (2) or more members of the Board, to
serve at the pleasure of the Board, and to consist of such Directors as the
Board may from time to time designate. The Board of Directors shall designate
the Chairman of the Audit Committee.
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(a) Procedure. The Audit Committee, by a vote of a majority of its
---------
members, shall fix its own times and places of meeting, shall determine the
number of its members constituting a quorum for the transaction of business, and
shall prescribe its own rules of procedure, no change in which shall be made
save by a majority vote of its members.
(b) Responsibilities. The Audit Committee shall review the annual
----------------
financial statements of the Corporation prior to their submission to the Board
of Directors, shall consult with the Corporation's independent auditors, and may
examine and consider such other matters in relation to the internal and external
audit of the Corporation's accounts and in relation to the financial affairs of
the Corporation and its accounts, including the selection and retention of
independent auditors, as the Audit Committee may, in its discretion, determine
to be desirable.
(c) Reports. The Audit Committee shall keep regular minutes of its
-------
proceedings, and all actions by the Audit Committee shall, from time to time, be
reported to the Board of Directors as it shall direct. Such actions shall be
subject to review, amendment and repeal by the Board, provided that no rights of
third parties shall be adversely affected by such review, amendment or repeal.
(d) Appointment of Additional Members. In the absence or
---------------------------------
disqualification of any member of the Audit Committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member.
Section 5.3 Other Committees
----------------
The Board of Directors may, by resolution passed by a majority of the whole
Board, at any time appoint one or more other committees from and outside of its
own number. Every such committee must include at least one member of the Board
of Directors. The Board may from time to time designate or alter, within the
limits permitted by law, the Certificate of Incorporation and this Article, if
applicable, the duties, powers and number of members of such other committees or
change their membership, and remove or add members, and may at any time abolish
such other committees or any of them. The Board of Directors shall designate
the Chairman of any such committee.
(a) Procedure. Each committee, appointed pursuant to this Section,
---------
shall, by a vote of a majority of its members, fix its own times and places of
meeting, determine the number of its members constituting a quorum for the
transaction of business, and prescribe its own rules of procedure, no change in
which shall be made save by a majority vote of its members.
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(b) Responsibilities. Each committee, appointed pursuant to this
----------------
Section, shall exercise the powers assigned to it by the Board of Directors in
its discretion.
(c) Reports. Each committee appointed pursuant to this Section shall
-------
keep regular minutes of proceedings, and all action by each such committee
shall, from time to time, be reported to the Board of Directors as it shall
direct. Such actions shall be subject to review, amendment and repeal by the
Board, provided that no rights of third parties shall be adversely affected by
such review, amendment or repeal.
(d) Appointment of Additional Members. In the absence or
---------------------------------
disqualification of any member of each committee appointed pursuant to this
Section, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors (or, to the extent permitted,
another person) to act at the meeting in place of any such absent or
disqualified member.
Section 5.4 Term of Office
--------------
Each member of a committee shall hold office until the first meeting of the
Board of Directors following the annual meeting of Stockholders (or until such
other time as the Board of Directors may determine, either in the vote
establishing the committee or at the election of such member or otherwise) and
until his successor is elected and qualified, or until he sooner dies, resigns,
is removed, is replaced by change of membership or becomes disqualified by
ceasing to be a Director (where membership on the Board is required), or until
the committee is sooner abolished by the Board of Directors.
ARTICLE 6. OFFICERS
Section 6.1 Officers
--------
The Board of Directors shall elect a President, a Secretary and a
Treasurer, and, in their discretion, may elect a Chairman of the Board, a Vice
Chairman of the Board, a Chief Executive Officer, a Chief Financial Officer, a
Chief Accounting Officer, a Controller, and one or more Executive Vice
Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and
Assistant Controllers or other officers as deemed necessary or appropriate.
Such officers shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of Stockholders (or at such other meeting
as the Board of Directors determines), and each shall hold office for the term
provided by the vote of the Board, except that each will be subject to removal
from office in the discretion of the Board as provided herein. The powers and
duties of more than one office may be exercised and performed by the same
person.
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Section 6.2 Vacancies
---------
Any vacancy in any office may be filled for the unexpired portion of the
term by the Board of Directors, at any regular or special meeting.
Section 6.3 Chairman of the Board
---------------------
The Chairman of the Board of Directors, if elected, shall be a member of
the Board of Directors and shall preside at its meetings. He shall advise and
counsel with the President, and shall perform such duties as from time to time
may be assigned to him by the Board of Directors.
Section 6.4 President
---------
The President shall be the chief executive officer of the Corporation,
unless the Board of Directors has designated the Chairman of the Board as the
chief executive officer. Subject to the directions of the Board of Directors,
he shall have and exercise direct charge of and general supervision over the
business and affairs of the Corporation and shall perform all duties incident to
the office of the chief executive officer of a corporation and such other duties
as from time to time may be assigned to him by the Board of Directors. Subject
to the directions of the Board of Directors, he may vote any shares and exercise
any rights that the Corporation may own or hold or be entitled to in any
corporation, business entity or other investment. The President may but need
not be a member of the Board of Directors.
Section 6.5 Executive Vice Presidents and Vice Presidents
---------------------------------------------
Each Executive Vice President and Vice President shall have and exercise
such powers and shall perform such duties as from time to time may be assigned
to him by the Board of Directors or the President.
Section 6.6 Secretary
---------
The Secretary shall keep the minutes of all meetings of the Stockholders
and of the Board of Directors in books provided for that purpose; he shall see
that all notices are duly given in accordance with the provisions of law and
these By-Laws; he shall be custodian of the records and of the corporate seal or
seals of the Corporation, he shall see that the corporate seal is affixed to all
documents the execution of which, on behalf of the Corporation under its seal,
is duly authorized, and, when the seal is so affixed, he may attest the same, he
may sign, with the President, an Executive Vice President or a Vice President,
certificates of stock of the Corporation, and, in general, he shall perform all
duties incident to the office of secretary of a corporation, and such other
duties as from time to time may be assigned to him by the Board of Directors or
the President.
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Section 6.7 Assistant Secretaries
---------------------
The Assistant Secretaries may perform the duties and exercise the powers of
the Secretary and shall perform such other duties as the Board of Directors
shall prescribe or as from time to time may be assigned by the Secretary or the
President.
Section 6.8 Treasurer
---------
The Treasurer shall have charge of and be responsible for all funds,
securities, receipts and disbursements of the Corporation, and shall deposit, or
cause to be deposited, in the name of the Corporation, all monies or other
valuable effects in such banks, trust companies or other depositories as shall,
from time to time, be selected by the Board of Directors; he may endorse for
collection on behalf of the Corporation checks, notes and other obligations; he
may sign receipts and vouchers for payments made to the Corporation, he may sign
checks of the Corporation, singly or jointly with another person as the Board of
Directors may authorize, and pay out and dispose of the proceeds under the
direction of the Board; he shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation; he may sign, with the President, or an Executive Vice President or
a Vice President, certificates of stock of the Corporation; and in general,
shall perform all the duties incident to the office of treasurer of a
corporation, and such other duties as from time to time may be assigned to him
by the Board of Directors or the President.
Section 6.9 Assistant Treasurers
--------------------
The Assistant Treasurers may perform the duties and exercise the powers of
the Treasurer and shall perform such other duties as the Board of Directors
shall prescribe or as from time to time may be assigned by the Treasurer or the
President.
Section 6.10 Controller
----------
The Controller, if elected as such, shall be the chief accounting officer
of the Corporation, and, in general, shall perform all duties incident to the
office of a controller of a corporation, and, in the absence of or disability of
the Treasurer or any Assistant Treasurer, shall perform the duties and exercise
the powers of the Treasurer and shall perform such other duties as the Board of
Directors shall prescribe or as from time to time may be assigned by the
President or the Treasurer.
Section 6.11 Assistant Controllers
---------------------
The Assistant Controllers in order of their seniority shall, in the absence
or disability of the Controller, perform the duties and exercise the powers of
the Controller and shall perform such other duties as the Board of Directors
shall prescribe or as from time to time may be assigned by the Controller or by
the President or the Treasurer.
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Section 6.12 Subordinate Officers
--------------------
The Board of Directors may appoint such subordinate officers as it may deem
desirable. Each such officer shall hold office for such period, have such
authority and perform such duties as the Board of Directors may prescribe. The
Board of Directors may, from time to time, authorize any officer to appoint and
remove subordinate officers and to prescribe the powers and duties thereof.
Section 6.13 Compensation
------------
The Board of Directors shall fix the compensation of all officers of the
Corporation. It may authorize any officer, upon whom the power of appointing
subordinate officers may have been conferred, to fix the compensation of such
subordinate officers.
Section 6.14 Removal
-------
Any officer of the Corporation may be removed, with or without cause, by
action of the Board of Directors.
Section 6.15 Bonds
-----
The Board of Directors may require any officer of the Corporation to give a
bond to the Corporation, conditional upon the faithful performance of such
officer's duties, with one or more sureties and in such amount as may be
satisfactory to the Board of Directors.
ARTICLE 7. CERTIFICATES OF STOCK
Section 7.1 Form and Execution of Certificates
----------------------------------
The interest of each Stockholder of the Corporation shall be evidenced by a
certificate or certificates for shares of stock in such form as the Board of
Directors may from time to time prescribe. The certificates of stock of each
class shall be consecutively numbered and signed by the Chairman or Vice
Chairman of the Board, if any, the President, an Executive Vice President or a
Vice President and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer of the Corporation, and may be countersigned and registered
in such manner as the Board of Directors may by resolution prescribe, and shall
bear the corporate seal or a printed or engraved facsimile thereof. Where any
such certificate is signed by a transfer agent or transfer clerk acting on
behalf of the Corporation, the signatures of any such Chairman, Vice Chairman,
President, Executive Vice President, Vice President, Treasurer, Assistant
Treasurer, Secretary or Assistant Secretary may be facsimiles, engraved or
printed. In case any officer or officers, who shall have signed, or whose
facsimile signature or signatures shall
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<PAGE>
have been used on, any such certificate or certificates, shall cease to be such
officer or officers, whether because of death, resignation or otherwise, before
such certificate or certificates shall have been delivered by the Corporation,
such certificate or certificates may nevertheless be issued and delivered by the
Corporation as though the person or persons who signed such certificate or
certificates or whose facsimile signature or signatures shall have been used
thereon had not ceased to be such officer or officers.
In case the corporate seal which has been affixed to, impressed on, or
reproduced in any such certificate or certificates shall cease to be the seal of
the Corporation before such certificate or certificates have been delivered by
the Corporation, such certificate or certificates may nevertheless be issued and
delivered by the Corporation as though the seal affixed thereto, impressed
thereon or reproduced therein had not ceased to be the seal of the Corporation.
Every certificate for shares of stock which are subject to any restriction
on transfer pursuant to law, the Certificate of Incorporation, these By-Laws, or
any agreement to which the Corporation is a party, shall have the restriction
noted conspicuously on the certificate, and shall also set forth, on the face or
back, either the full text of the restriction or a statement of the existence of
such restriction and (except if such restriction is imposed by law) a statement
that the Corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge.
Every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall set forth on its face or back either the
full text of the preferences, voting powers, qualifications, and special and
relative rights of the shares of each class and series authorized to be issued,
or a statement of the existence of such preferences, powers, qualifications and
rights, and a statement that the Corporation will furnish a copy thereof to the
holder of such certificate upon written request and without charge.
Section 7.2 Transfer of Shares
------------------
The shares of the stock of the Corporation shall be transferred on the
books of the Corporation by the holder thereof in person or by his attorney
lawfully constituted, upon surrender for cancellation of certificates for the
same number of shares, with an assignment and power of transfer endorsed thereon
or attached thereto, duly executed, with such proof or guaranty of the
authenticity of the signature as the Corporation or its agents may reasonably
require. The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and accordingly shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, save as expressly provided by law or by the Certificate
of Incorporation. It shall be the duty of each Stockholder to notify the
Corporation of his post office address.
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<PAGE>
Section 7.3 Closing of Transfer Books
-------------------------
The stock transfer books of the Corporation may, if deemed appropriate by
the Board of Directors, be closed for such length of time not exceeding fifty
(50) days as the Board may determine, preceding the date of any meeting of
Stockholders or the date for the payment of any dividend or the date for the
allotment of rights or the date when any issuance, change, conversion or
exchange of capital stock shall go into effect, during which time no transfer of
stock on the books of the Corporation may be made.
Section 7.4 Fixing Date for Determination of Stockholders of Record
-------------------------------------------------------
In order that the Corporation may determine the Stockholders entitled to
notice of or to vote at any meeting of Stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to received payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and which record date (a) in the case of determination of
Stockholders entitled to vote at any meeting of Stockholders or adjournment
thereof, shall, unless otherwise required by law, the Certificate of
Incorporation or otherwise, not be more than sixty (60) nor less than ten (10)
days before the date of such meeting; (b) in the case of determination of
Stockholders entitled to express consent to corporate action in writing without
a meeting, shall, unless otherwise required by law, the Certificate of
Incorporation or otherwise, not be more than ten (10) days from the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; and (c) in the case of any other action, shall not be more than sixty
(60) days prior to such other action. If no record date is fixed: (a) the record
date for determining Stockholders entitled to notice of or to vote at a meeting
of Stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; (b)the record
date for determining Stockholders entitled to express consent to corporate
action in writing without a meeting when no prior action of the Board of
Directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation in accordance with applicable law, or, if prior action by the
Board of Directors is required by law, shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action; and (c) the record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
Stockholders of record entitled to notice of or to vote at a meeting of
Stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
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Section 7.5 Lost or Destroyed Certificates
------------------------------
In case of the loss or destruction of any certificate of stock, a new
certificate may be issued under the following conditions:
(a) The owner of said certificate shall file with the Secretary or any
Assistant Secretary of the Corporation an affidavit giving the facts in relation
to the ownership, and in relation to the loss or destruction of said
certificate, stating its number and the number of shares represented thereby,
such affidavit shall be in such form and contain such statements as shall
satisfy the President, any Executive Vice President, Vice President, the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer,
that said certificate has been accidentally destroyed or lost, and that a new
certificate ought to be issued in lieu thereof. Upon being so satisfied, any
such officer may require such owner to indemnify and save harmless the
Corporation from any claim, loss, damage or liability which may be occasioned by
the issuance of a new certificate in lieu thereof and may also require such
owner to furnish the Corporation a bond in such amount and in such form as he
may deem advisable, and with a surety or sureties approved by him, to indemnify
and save harmless the Corporation from any claim, loss, damage or liability
which may be occasioned by the issuance of a new certificate in lieu thereof.
Upon such indemnity being given, if required, or upon such bond being so filed,
if so required, a new certificate for the same number of shares shall be issued
to the owner of the certificate so lost or destroyed; and the transfer agent and
registrar, if any, of stock shall countersign and register such new certificate
upon receipt of a written order signed by any such officer, and thereupon the
Corporation will save harmless said transfer agent and registrar in the
premises. In case of the surrender of the original certificate, in lieu of
which a new certificate has been issued, or the surrender of such new
certificate, for cancellation, the bond of indemnity given as a condition of the
issue of such new certificate may be surrendered; or
(b) The Board of Directors of the Corporation may by resolution
authorize and direct any transfer agent or registrar of stock of the Corporation
to issue and register respectively from time to time without further action or
approval by or on behalf of the Corporation new certificates of stock to replace
certificates reported lost, stolen or destroyed upon receipt of an affidavit of
loss and bond of indemnity in form and amount and with surety satisfactory to
such transfer agent or registrar in each instance or upon such terms and
conditions as the Board of Directors may determine.
Section 7.6 Uncertificated Shares
---------------------
The Board of Directors of the Corporation may by resolution provide that
one or more of any or all classes or series of the stock of the Corporation
shall be uncertificated shares, subject to the provisions of Section 158 of the
Delaware General Corporation Law.
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ARTICLE 8. EXECUTION OF DOCUMENTS
Section 8.1 Execution of Checks, Notes, Etc.
--------------------------------
All checks and drafts on the Corporation's bank accounts and all bills of
exchange and promissory notes, and all acceptances, obligations and other
instruments for the payment of money, shall be signed by such officer or
officers, or agent or agents, as shall be thereunto authorized from time to time
by the Board of Directors, which may in its discretion authorize any such
signatures to be facsimile.
Section 8.2 Execution of Contracts, Assignments, Etc.
-----------------------------------------
Unless the Board of Directors shall have otherwise provided generally or in
a specific instance, all contracts, agreements, endorsements, assignments,
transfers, stock powers, or other instruments shall be signed by the Chairman of
the Board, the Chief Executive Officer, the Chief Financial Officer, the
President, any Executive Vice President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer. The Board of
Directors may, however, in its discretion, require any or all such instruments
to be signed by any two or more of such officers, or may permit any or all of
such instruments to be signed by such other officer or officers, agent or
agents, as it shall thereunto authorize from time to time.
Section 8.3 Execution of Proxies
--------------------
The President, any Executive Vice President or any Vice President, and the
Secretary, the Treasurer, any Assistant Secretary or any Assistant Treasurer, or
any other officer designated by the Board of Directors, may sign on behalf of
the Corporation proxies to vote upon shares of stock of other companies standing
in the name of the Corporation.
ARTICLE 9. INSPECTION OF BOOKS
The Board of Directors shall determine from time to time whether, and if
allowed, to what extent and at what time and places and under what conditions
and regulations, the accounts and books of the Corporation (except such as may
by law be specifically open to inspection) or any of them shall be open to the
inspection of the Stockholders, and no Stockholder shall have any right to
inspect any account or book or document of the Corporation, except as conferred
by the laws of the State of Delaware, unless and until authorized so to do by
resolution of the Board of Directors or of the Stockholders of the Corporation.
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ARTICLE 10. FISCAL YEAR
The fiscal year of the Corporation shall be determined from time to time by
vote of the Board of Directors.
ARTICLE 11. AMENDMENTS
These By-Laws may be altered, amended, changed or repealed and new By-Laws
adopted by the Stockholders or, to the extent provided in the Certificate of
Incorporation, by the Board of Directors, in either case at any meeting called
for that purpose at which a quorum shall be present. Any By-Law, whether made,
altered, amended, changed or repealed by the Stockholders or the Board of
Directors may be repealed, amended, changed, further amended, changed, repealed
or reinstated, as the case may be either by the Stockholders or by the Board of
Directors, as herein provided; except that this Article may be altered, amended,
changed or repealed only by vote of the Stockholders and except that any
provision hereof requiring approval or other action by greater than a majority
of the Stockholders may only be amended by a similar greater than a majority
vote of the Stockholders.
ARTICLE 12. INDEMNIFICATION
Section 12.1 Indemnification
---------------
(a) The Corporation (as defined below in Section 12.6 of this Article
12) shall indemnify and hold harmless, to the fullest extent permitted by
applicable law as it presently exists or may hereafter be amended, any person
who was or is a party or is threatened to be made a party or is otherwise
involved in any threatened, pending or contemplated 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, or a
person for whom he is the legal representative:
(i) is or was a Director or officer of the Corporation;
(ii) is or was a Director or officer of the Corporation and is
or was serving at the request of the Corporation as a Director, officer,
trustee, partner, employee or agent of another corporation, partnership, joint
venture, trust or "other enterprise", (as defined below in Section 12.8 of this
Article 12) or non-profit entity; or
(iii) is or was he request of the Corporation as a Director,
officer, trustee or partner of another corporation, partnership, joint venture,
trust or other enterprise or non-profit entity,
against all liability, losses, expenses (including attorneys' fees), judgments,
"fines" (as defined below in Section 12.8 of this Article 12), and amounts paid
in settlement actually
18
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and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to a 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. In addition, the Corporation shall have the power to indemnify any
of its employees or agents who are not Directors, trustees, partners or officers
of the Corporation or such other corporation, partnership, joint venture, trust,
or other enterprise or non-profit entity on any terms that the Corporation deems
appropriate and are not prohibited by law.
(b) The Corporation shall indemnify and hold harmless any person who
was or is a party or is threatened to be made a party to any threatened, pending
or contemplated 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
(i) is or was a Director or officer of the Corporation;
(ii) is or was a Director or officer of the Corporation and is or
was serving at the request of the Corporation as a Director, officer, trustee,
partner, employee or agent of another corporation, partnership, joint venture,
trust or "other enterprise" (as defined below in Section 12.8 of this Article
12) or non-profit entity; or
(iii) is or was serving at the request of the Corporation as a
Director, officer, trustee or partner of another corporation, partnership, joint
venture, trust or other enterprise or non-profit entity,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit 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 for negligence or misconduct in the
performance of his duty to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon application that despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery of the State of Delaware or such other court shall deem
proper. In addition, the Corporation shall have the power to indemnify any of
its employees or agents who are not Directors, trustees, partners or officers of
the Corporation or such other
19
<PAGE>
corporation, partnership, joint venture, trust, or other enterprise or non-
profit entity on any terms that the Corporation deems appropriate and are not
prohibited by law.
(c) To the extent that any person who is entitled to indemnification
as provided in paragraphs (a) or (b) has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to therein, or
in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith. To the extent that any person who may be
indemnified as provided in paragraphs (a) or (b) has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
therein, or in defense of any claim, issue or matter therein, he may be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 12.2 Authorization
-------------
Any indemnification under Section 12.1 of this Article (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the Director, trustee, partner,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 12.1 of this Article. Such
determination shall be made in the discretion of the Board of Directors: (a) by
the Board of Directors by a majority vote of a quorum consisting of Directors
who were not parties to such action, suit or proceeding, (b) if such a quorum is
not obtainable, or, even if obtainable, if a quorum of disinterested Directors
so directs, by independent legal counsel in written opinion, or (c) by the
Stockholders.
Section 12.3 Expense Advance
---------------
Expenses (including attorneys fees) incurred by an officer or Director of
the Corporation in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors in the manner provided in Section 12.2 of
this Article upon receipt of an undertaking by or on behalf of such officer or
Director to repay such amount, unless it shall ultimately be determined that he
is entitled to, or may, be indemnified by the Corporation as authorized in this
Article. Such expenses (including attorneys' fees) incurred by other employees
or agents of the Corporation may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
Section 12.4 Nonexclusivity
--------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other Sections of this Article shall not be deemed exclusive of
any other
20
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rights to which those seeking indemnification or advancement of expenses may be
entitled under any statute, By-Law, agreement, vote of Stockholders or
disinterested Directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a Director, officer, partner,
trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 12.5 Insurance
---------
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, trustee, partner, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or non-profit entity
against any liability asserted against him and 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 him against such liability under the
provisions of this Article or Section 145 of Title 8 of the Delaware General
Corporation Law.
Section 12.6 "The Corporation"
---------------
For the purposes of this Article, references to "the Corporation" shall
include any resulting or successor corporation and, to the extent that the Board
of Directors of the resulting or successor corporation so decides, all
constituent corporations (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its Directors, officers and
employees or agents so that any person who is or was a Director, officer,
employee or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as Director, trustee, partner, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or non-profit entity shall stand in the same position under the
provisions of this Article with respect to the resulting or successor
corporation as if its separate existence had continued.
Section 12.7 Other Indemnification
---------------------
The Corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a Director, trustee, partner, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise or non-profit entity shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture, trust or other enterprise or non-profit entity or from insurance.
21
<PAGE>
Section 12.8 Other Definitions
-----------------
For purposes of this Article, references to "other enterprises" shall
include employee benefit plans (and a person acting in a fiduciary capacity
thereunder shall be deemed to be serving as an officer of another enterprise);
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a Director, trustee, partner,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such Director, trustee, partner, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries, and a person who acted in good faith and in a manner he
reasonably believed to be in the interests of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
Section 12.9 Continuation of Indemnification
-------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a Director, trustee,
partner, officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 12.10 Amendment or Repeal
-------------------
No amendment or repeal of the provisions of this Article shall adversely
affect any right or protection hereunder of any person in respect of any act or
omission occurring prior to the time of such amendment or repeal.
ARTICLE 13. TRANSACTIONS WITH INTERESTED PARTIES
No contract or transaction between the Corporation and one or more of its
Directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization in which the Corporation has a
financial interest or one or more of its Directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
that reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because the vote of any such Director is counted for such purpose, if:
(a) The material facts as to the relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board or committee in good faith authorizes the
contract or
22
<PAGE>
transaction by the affirmative votes of a majority of the disinterested
Directors, even though the disinterested Directors be less than a quorum; or
(b) The material facts as to the relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified by the Board of Directors, a
committee of the Baord of Directors or the stockholders.
Common or interested Directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
23
<PAGE>
Exhibit 10.1
------------
ENGAGE TECHNOLOGIES, INC.
(formerly CMG Direct Interactive, Inc.)
1995 EQUITY INCENTIVE PLAN
Adopted August 1, 1995
The number of shares of Common Stock available for Awards under this Plan
was changed from 200 shares to 2,000,000 shares pursuant to a 10,000-for-1 stock
split on November 8, 1996.
1. Purpose
The purpose of the Engage Technologies, Inc. 1995 Equity Incentive Plan
(the "Plan") is to attract and retain key employees and consultants of the
Company and its Affiliates, to provide an incentive for them to achieve long-
range performance goals, and to enable them to participate in the long-term
growth of the Company.
2. Definitions
"Affiliate" means any business entity in which the Company owns directly or
indirectly 50% or more of the total voting power or has a significant financial
interest as determined by the Committee.
"Award" means any Option, Stock Appreciation Right or Restricted Stock
granted under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor law.
"Committee" means one or more committees each comprised of not less than
two members of the Board appointed by the Board to administer the Plan or a
specified portion thereof. If a Committee is authorized to grant Awards to a
Reporting Person or a "covered employee" within the meaning of Section 162(m) of
the Code, each member shall be a "disinterested person" or the equivalent within
the meaning of applicable Rule 16b-3 under the Exchange Act or an "outside
director" or the equivalent within the meaning of Section 162(m) of the Code,
respectively.
"Common Stock" or "Stock" means the Common Stock, $0.01 par value, of the
Company.
1
<PAGE>
"Company" means Engage Technologies, Inc.
"Designated Beneficiary" means the beneficiary designated by a Participant,
in a manner determined by the Committee, to receive amounts due or exercise
rights of the Participant in the event of the Participant's death. In the
absence of an effective designation by a Participant, "Designated Beneficiary"
means the Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor law.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Committee
in good faith or in the manner established by the Committee from time to time.
"Incentive Stock Option" -- See Section 6(a).
"Nonstatutory Stock Option" -- See Section 6(a).
"Option" -- See Section 6(a).
"Participant" means a person selected by the Committee to receive an Award
under the Plan.
"Reporting Person" means a person subject to Section 16 of the Exchange
Act.
"Restricted Period" -- See Section 8(a).
"Restricted Stock" -- See Section 8(a).
"Stock Appreciation Right" or "SAR" -- See Section 7(a).
3. Administration
The Plan shall be administered by the Committee. The Committee shall have
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall from time to time
consider advisable, and to interpret the provisions of the Plan. The
Committee's decisions shall be final and binding. To the extent permitted by
applicable law, the Committee may delegate to one or more executive officers of
the Company the power to make Awards to Participants who are not subject to
Section 16 of the Exchange Act and all determinations under the Plan with
respect thereto, provided that the Committee shall fix the maximum amount of
such Awards for all such Participants and a maximum for any one Participant.
2
<PAGE>
4. Eligibility
All employees and, in the case of Awards other than Incentive Stock Options
under Section 6, consultants of the Company or any Affiliate, capable of
contributing significantly to the successful performance of the Company, other
than a person who has irrevocably elected not to be eligible, are eligible to be
Participants in the Plan. Incentive Stock Options may be granted only to
persons eligible to receive such Options under the Code.
5. Stock Available for Awards
(a) Amount. Subject to adjustment under subsection (b), Awards may be made
under the Plan for up to 2,000,000 shares of Common Stock. If any Award expires
or is terminated unexercised or is forfeited or settled in a manner that results
in fewer shares outstanding than were awarded, the shares subject to such Award,
to the extent of such expiration, termination, forfeiture or decrease, shall
again be available for award under the Plan. Common Stock issued through the
assumption or substitution of outstanding grants from an acquired company shall
not reduce the shares available for Awards under the Plan. Shares issued under
the Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.
(b) Adjustment. In the event that the Committee determines that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, or other
transaction affects the Common Stock such that an adjustment is required in
order to preserve the benefits intended to be provided by the Plan, then the
Committee (subject in the case of Incentive Stock Options to any limitation
required under the Code) shall equitably adjust any or all of (i) the number and
kind of shares in respect of which Awards may be made under the Plan, (ii) the
number and kind of shares subject to outstanding Awards and (iii) the exercise
price with respect to any of the foregoing, and if considered appropriate, the
Committee may make provision for a cash payment with respect to an outstanding
Award, provided that the number of shares subject to any Award shall always be a
whole number.
(c) Limit on Individual Grants. The maximum number of shares of Common
Stock subject to Options and Stock Appreciation Rights that may be granted to
any Participant in the aggregate in any calendar year shall not exceed 2,000,000
shares, subject to adjustment under subsection (b).
6. Stock Options
Grant of Options. Subject to the provisions of the Plan, the Committee may
grant options ("Options") to purchase shares of Common Stock (i) complying with
the requirements of Section 422 of the Code or any successor provision and any
regulations thereunder ("Incentive Stock Options") and (ii) not intended to
comply with such requirements ("Nonstatutory Stock Options"). The Committee
shall determine the number of shares subject to each Option and the exercise
price therefor, which, in the case of incentive stock options only, shall not be
less than 100% of the Fair Market Value
3
<PAGE>
of the Common Stock on the date of grant. No Incentive Stock Option may be
granted hereunder more than ten years after the effective date of the Plan.
Terms and Conditions. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may specify in the
applicable grant or thereafter. The Committee may impose such conditions with
respect to the exercise of Options, including conditions relating to applicable
federal or state securities laws, as it considers necessary or advisable.
Payment. No shares shall be delivered pursuant to any exercise of an
Option until payment in full of the exercise price therefor is received by the
Company. Such payment may be made in whole or in part in cash or, to the extent
permitted by the Committee at or after the grant of the Option, by delivery of a
note or shares of Common Stock owned by the optionee, including Restricted
Stock, or by retaining shares otherwise issuable pursuant to the Option, in each
case valued at their Fair Market Value on the date of delivery or retention, or
such other lawful consideration as the Committee may determine.
7. Stock Appreciation Rights
Grant of SARs. Subject to the provisions of the Plan, the Committee may
grant rights to receive any excess in value of shares of Common Stock over the
exercise price ("Stock Appreciation Rights" or "SARs") in tandem with an Option
(at or after the award of the Option), or alone and unrelated to an Option.
SARs in tandem with an Option shall terminate to the extent that the related
Option is exercised, and the related Option shall terminate to the extent that
the tandem SARs are exercised. The Committee shall determine at the time of
grant or thereafter whether SARs are settled in cash, Common Stock or other
securities of the Company, Awards or other property.
Exercise Price. The Committee shall fix the exercise price of each SAR or
specify the manner in which the price shall be determined. An SAR granted in
tandem with an Option shall have an exercise price not less than the exercise
price of the related Option. An SAR granted alone and unrelated to an Option may
not have an exercise price less than 100% of the Fair Market Value of the Common
Stock on the date of the grant.
Limited SARs. An SAR related to an Option, which SAR can only be exercised
upon or during limited periods following a change in control of the Company, may
entitle the Participant to receive an amount based upon the highest price paid
or offered for Common Stock in any transaction relating to the change in control
or paid during a specified period immediately preceding the occurrence of the
change in control in any transaction reported in the stock market in which the
Common Stock is normally traded.
8. Restricted Stock
Grant of Restricted Stock. Subject to the provisions of the Plan, the
Committee may grant shares of Common Stock subject to forfeiture ("Restricted
Stock") and
4
<PAGE>
determine the duration of the period (the "Restricted Period") during which, and
the conditions under which, the shares may be forfeited to the Company and the
other terms and conditions of such Awards. Shares of Restricted Stock may be
issued for no cash consideration or such minimum consideration as may be
required by applicable law.
Restrictions. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted Period. Shares of Restricted Stock shall be
evidenced in such manner as the Committee may determine. Any certificates
issued in respect of shares of Restricted Stock shall be registered in the name
of the Participant and unless otherwise determined by the Committee, deposited
by the Participant, together with a stock power endorsed in blank, with the
Company. At the expiration of the Restricted Period, the Company shall deliver
such certificates to the Participant or if the Participant has died, to the
Participant's Designated Beneficiary.
9. General Provisions Applicable to Awards
Reporting Person Limitations. Notwithstanding any other provision of the
Plan, to the extent required to qualify for the exemption provided by Rule 16b-3
under the Exchange Act, Awards made to a Reporting Person shall not be
transferable by such person other than by will or the laws of descent and
distribution and are exercisable during such person's lifetime only by such
person or by such person's guardian or legal representative. If then permitted
by Rule 16b-3, such Awards shall also be transferable pursuant to a qualified
domestic relations order as defined in the Code or Title I of the Employee
Retirement Income Security Act or the rules thereunder.
Documentation. Each Award under the Plan shall be evidenced by a writing
delivered to the Participant specifying the terms and conditions thereof and
containing such other terms and conditions not inconsistent with the provisions
of the Plan as the Committee considers necessary or advisable to achieve the
purposes of the Plan or to comply with applicable tax and regulatory laws and
accounting principles.
Committee Discretion. Each type of Award may be made alone, in addition to
or in relation to any other Award. The terms of each type of Award need not be
identical, and the Committee need not treat Participants uniformly. Except as
otherwise provided by the Plan or a particular Award, any determination with
respect to an Award may be made by the Committee at the time of grant or at any
time thereafter.
Dividends and Cash Awards. In the discretion of the Committee, any Award
under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest, and (ii)
cash payments in lieu of or in addition to an Award.
Termination of Employment. The Committee shall determine the effect on an
Award of the disability, death, retirement or other termination of employment of
a Participant and the extent to which, and the period during which, the
Participant's legal
5
<PAGE>
representative, guardian or Designated Beneficiary may receive payment of an
Award or exercise rights thereunder.
Change in Control. In order to preserve a Participant's rights under an
Award in the event of a change in control of the Company, the Committee in its
discretion may, at the time an Award is made or at any time thereafter, take one
or more of the following actions: (i) provide for the acceleration of any time
period relating to the exercise or payment of the Award, (ii) provide for
payment to the Participant of cash or other property with a Fair Market Value
equal to the amount that would have been received upon the exercise or payment
of the Award had the Award been exercised or paid upon the change in control,
(iii) adjust the terms of the Award in a manner determined by the Committee to
reflect the change in control, (iv) cause the Award to be assumed, or new rights
substituted therefor, by another entity or (v) make such other provision as the
Committee may consider equitable to Participants and in the best interests of
the Company.
Loans. The Committee may authorize the making of loans or cash payments to
Participants in connection with the grant or exercise of any Award under the
Plan, which loans may be secured by any security, including Common Stock,
underlying or related to such Award (provided that the loan shall not exceed the
Fair Market Value of the security subject to such Award), and which may be
forgiven upon such terms and conditions as the Committee may establish at the
time of such loan or at any time thereafter.
Withholding Taxes. The Participant shall pay to the Company, or make
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the date of
the event creating the tax liability. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value on the date of delivery. The Company and its Affiliates may, to
the extent permitted by law, deduct any such tax obligations from any payment of
any kind otherwise due to the Participant.
Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the Plan as the Committee considers necessary
or advisable to achieve the purposes of the Plan or to comply with applicable
laws.
Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Committee
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
6
<PAGE>
10. Miscellaneous
No Right To Employment. No person shall have any claim or right to be
granted an Award. Neither the Plan nor any Award hereunder shall be deemed to
give any employee the right to continued employment or to limit the right of the
Company to discharge any employee at any time.
No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed under
the Plan until he or she becomes the holder thereof. A Participant to whom
Common Stock is awarded shall be considered the holder of the Stock at the time
of the Award except as otherwise provided in the applicable Award.
Effective Date. The Plan shall be effective on August 1, 1995.
Amendment of Plan. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time, subject to such stockholder approval as the
Board determines to be necessary or advisable to comply with any tax or
regulatory requirement.
Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of Delaware.
----------------------------------------
This Plan was approved by the Board of Directors on August 1, 1995.
This Plan was approved by the Stockholders on August 1, 1995.
7
<PAGE>
EXHIBIT A
Standard Form
-------------
ENGAGE TECHNOLOGIES, INC.
NON-COMPETITION AGREEMENT
IN CONSIDERATION OF the grant to the undersigned Employee or Consultant of
a stock option for the purchase of ______________ shares of Common Stock, $0.01
par value per share, of Engage Technologies, Inc. (the "Company"), which term as
used herein shall in all instances be deemed to include all Affiliates (as
defined in the Company's Equity incentive Plan) of the Company), the undersigned
Employee or Consultant hereby agrees as follows:
1. Non-Competition Agreement. I agree that during my employment with the
-------------------------
Company and for twelve (12) months thereafter, I will not (i) as an individual,
proprietor, partner, stockholder, officer, employee, director, consultant, joint
venturer, investor, lender, or in any other capacity whatsoever (except as the
passive holder of not more than one percent of the total outstanding stock of a
publicly held company), engage anywhere in the world in the business of
developing, producing, marketing or selling products or services competitive
with any kind or type of products or services which were developed or were being
(or were planned to be) developed, produced, marketed or sold by the Company
while I was employed by, or under a consulting relationship to, the Company; or
(ii) recruit, solicit or induce, or attempt to induce, any employee of or
consultant to the Company to terminate his/her employment with, or otherwise
cease any relationship with, the Company; or (iii) solicit, divert or take away,
or attempt to divert or take away, any business of any of the clients, customers
or accounts of the Company which were contacted, solicited or served by the
Company at any time during the twelve (12) month period preceding the
termination of my employment or consulting relationship. If any restriction set
forth in this Paragraph 1 is found by any court to be unenforceable because it
extends for too long a period of time, or over too great a range of activities,
or over too broad a geographic area, the restriction shall be interpreted to
extend only over the maximum period of time, range of activities or geographic
area which the court finds to be enforceable. I acknowledge that the
restrictions contained in this Paragraph 1 are appropriate for the protection of
the business and goodwill of the Company and are considered by me to be
reasonable for such purpose.
2. Additional Agreements. I agree to notify any prospective employer of
---------------------
the existence of this Agreement and to furnish a copy hereof (and the Company
may furnish a copy hereof) to such employer. This Agreement is assignable by
the Company. No amendment or modification of this Agreement shall be valid or
bidding unless in writing and signed by both of the parties hereto. I have read
and executed the Company's Patent and Confidential Information Policy and
Agreement. This Agreement shall be
8
<PAGE>
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts, without regard to its conflict of laws provisions.
IN WITNESS WHEREOF, the undersigned Employee or Consultant has executed
this Non-Competition Agreement this _____________ day of ____________, 19__.
ENGAGE TECHNOLOGIES, INC. EMPLOYEE/CONSULTANT
By:
---------------------------- -------------------------------------
Authorized Representative Employee/Consultant Signature
Print Name:
--------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
9
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ENGAGE TECHNOLOGIES, INC.
Non-Statutory Stock Option Terms and Conditions
-----------------------------------------------
1. Plan Incorporated by Reference. This Option is issued pursuant to the terms
------------------------------
of the Plan and may be amended as provided in the Plan. Capitalized terms
used and not otherwise defined in this certificate have the meanings given
to them in the Plan. This certificate does not set forth all of the terms
and conditions of the Plan, which are incorporated herein by reference. The
Committee administers the Plan and its determinations regarding the
operation of the Plan are final and binding. Copies of the Plan may be
obtained upon written request without charge from the Secretary of the
Company.
2. Option Price. The price to be paid for each share of Common Stock issued
------------
upon exercise of the whole or any part of this Option is the Option Price
set forth on the face of this certificate.
3. Exercisability Schedule. This Option may be exercised at any time and from
-----------------------
time to time for the number of shares and in accordance with the
exercisability schedule set forth on the face of this certificate, but only
for the purchase of whole shares. This Option may not be exercised as to
any shares after the Expiration Date.
4. Method of Exercise. To exercise this Option, the Optionholder shall deliver
------------------
written notice of exercise to the Company specifying the number of shares
with respect to which the Option is being exercised accompanied by payment
of the Option Price for such shares in cash, by certified check or insuch
other form, including shares of Common Stock of the Company valued at their
Fair Market Value on the date of delivery or a payment commitment of a
financial or brokerage institution, as the Committee may approve. Promptly
following such notice, the Company will deliver to the Optionholder a
certificate representing the number of shares with respect to which the
Option is being exercised.
5. Rights as a Stockholder, Employee or Consultant. The Optionholder shall not
-----------------------------------------------
have any rights in respect of shares as to which the Option shall not have
been exercised and payment made as provided above. The Optionholder shall
not have any rights to continued employment or consulting with the Company
or its Affiliates by virtue of the grant of this Option.
6. Recapitalization, Mergers, Etc. As provided in the Plan, in the event of
------------------------------
corporate transactions affecting the Company's outstanding Common Stock,
the Committee shall equitably adjust the number and kind of shares subject
to this Option and the exercise price hereunder or make provision for a
cash payment. If such transaction involves a consolidation or merger of the
Company with another entity, the sale or exchange of all or substantially
all of the assets of the Company or a reorganization or liquidation of the
Company, then in lieu of the foregoing, the Committee may upon written
notice to the Optionholder provide that this Option shall terminate on a
date not less than 20 days after the date of such notice
10
<PAGE>
unless theretofore exercised. In connection with such notice, the Committee
may in its discretion accelerate or waive any deferred exercise period.
7. Option Not Transferable. This Option is not transferable by the
-----------------------
Optionholder otherwise than by will or the laws of descent and
distribution, and is exercisable, during the Optionholder's lifetime, only
by the Optionholder. The naming of a Designated Beneficiary does not
constitute a transfer.
8. Exercise of Option Alter Termination of Employment. If the Optionholder's
--------------------------------------------------
status as an employee or consultant of (a) the Company, (b) an Affiliate,
or (c) a corporation (or parent or subsidiary corporation of such
corporation) issuing or assuming a stock option in a transaction to which
Section 424(a) of the Code applies, is terminated for any reason other than
by disability (within the meaning of Section 22(e)(3) of the Code) or
death, the Optionholder may exercise the rights which were available to the
Optionholder at the time of such termination only within one month
following the date of termination. If such status is terminated as a result
of disability, such rights may be exercised within six months from the date
of termination. Upon the death of the Optionholder, his or her Designated
Beneficiary shall have the right, at any time within twelve months after
the date of death, to exercise in whole or in part any rights that were
available to the Optionholder at the time of death. Notwithstanding the
foregoing, no rights under this Option may be exercised after the
Expiration Date. The aforesaid one month, six month and twelve month
periods may be extended by the Committee in its sole discretion up to the
Expiration Date of the option. If an Optionholder's employment or
consulting relationship with the Company or any Affiliate is terminated for
cause (as defined by the Committee in its sole discretion), all such
Optionholder's options shall terminate immediately and be of no further
force or effect. Whether authorized leaves of absence or absence on
military or governmental service may constitute termination for purposes of
the Plan shall be conclusively determined by the Committee. Nothing in the
Plan or in any option granted thereunder shall be deemed to give the
Optionholder the right to continue his or her employment or consulting with
the Company or any of its Affiliates or shall be deemed to interfere in any
way with the right of the Company to terminate any Optionholder's
employment or consulting relationship at any time and for any reason.
Options granted under the Plan shall not be affected by any change of
employment or consulting among the Company and its Affiliates so long as
the Optionholder continues to have an employment or consulting relationship
with the Company or one of its Affiliates.
9. Compliance with Securities Laws. It shall be a condition to the
-------------------------------
Optionholder's right to purchase shares of Common Stock hereunder that the
Company may, in its discretion, require (a) that the shares of Common Stock
reserved for issue upon the exercise of this Option shall have been duly
listed, upon official notice of issuance, upon any national securities
exchange or automated quotation system on which the Company's Common Stock
may then be listed or quoted, (b) that
11
<PAGE>
either (i) a registration statement under the Securities Act of 1933 with
respect to the shares shall be in effect, or (ii) in the opinion of counsel
for the Company, the proposed purchase shall be exempt from registration
under that Act and the Optionholder shall have made such undertakings and
agreements with the Company as the Company may reasonably require, and (c)
that such other steps, if any, as counsel for the Company shall consider
necessary to comply with any law applicable to the issue of such shares by
the Company shall have been taken by the Company or the Optionholder, or
both. The certificates representing the shares purchased under this Option
may contain such legends as counsel for the Company shall consider
necessary to comply with any applicable law.
10. Payment of Taxes. The Optionholder shall pay to the Company, or make
----------------
provision payment of, any taxes required by law to be withheld with respect
to the exercise of this Option. The Committee may, in its discretion,
require or permit any other Federal or state taxes imposed on the exercise
of this option or the sale of the shares to be paid by the Optionholder. In
the Committee's discretion, such tax obligations may be paid in whole or in
part in shares of Common Stock, including shares retained from the exercise
of this Option, valued at their Fair Market Value on the date of delivery.
The Company and its Affiliates may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to the
Optionholder.
12
<PAGE>
Exercise #_________
ENGAGE TECHNOLOGIES, INC.
(formerly CMG Direct Interactive, Inc.)
1995 EQUITY INCENTIVE PLAN
Form of Exercise
The undersigned employee of Engage Technologies, Inc. (the "Company"), pursuant
to its 1995 Equity Incentive Plan (the "Plan") and pursuant to the Grant of
Option dated _______________ hereby agrees to purchase from the Company ________
shares of Common Stock, $0.01 par value per share, at an exercise price of
$_______ per share and for a total purchase price of $______________.
Name of Optionholder: ______________________________________________________
Address: ______________________________________________________
______________________________________________________
______________________________________________________
Social Security No. ______________________________________________________
Name of Joint Tenant with Right of Survivorship (if any):
Name: ______________________________________________________
Social Security No. ______________________________________________________
The above Optionholder has delivered the following consideration to the Company
in exchange for the shares of Common Stock listed above:
1) $________________ in cash or by check.
The above Optionholder has executed and delivered to the Company a Stock
Purchase, Restriction, Buy-Back and Right of First Refusal Agreement with
respect to the shares of Common Stock listed above.
IN WITNESS WHEREOF, the undersigned Optionholder has executed this Form of
Exercise this _______ day of __________________, 199__.
- ---------------------------------- ----------------------------------
Signature of Optionholder Date of Exercise
13
<PAGE>
EXHIBIT B
ENGAGE TECHNOLOGIES, INC.
STOCK PURCHASE, RESTRICTION, BUY-BACK,
AND RIGHT OF FIRST REFUSAL AGREEMENT
THIS AGREEMENT (the "Agreement") is made this ____, day of ___________,
199_, by and between ENGAGE TECHNOLOGIES, INC., a Delaware corporation (the
"Company", which term as used herein shall in all instances be deemed to include
all Affiliates (as defined in the Company's Equity Incentive Plan) of the
Company, and _______________________________________, (the "Purchaser").
WHEREAS, the Purchaser desires to acquire the number of shares (the
"Shares") of common stock, $0.01 par value, of the Company ("Common Stock") set
forth under his signature below at the purchase price also set forth under his
signature below pursuant to his/her exercise of a non-qualified stock option
issued by the Company to the Purchaser pursuant to the Company's 1995 Equity
Incentive Plan and the Company desires to issue said Shares to the Purchaser,
subject to the restrictions on transfer, Buy-Back Option and Right of First
Refusal hereinafter set forth; and,
WHEREAS, the parties desire to enter into this Agreement in order to (i)
assure the continuity of ownership of the Company, (ii) assure that the Company
will remain closely held, (iii) prevent the transfer of the Shares to third
parties who might not contribute to the development and management of the
Company's business, and (iv) provide for the future management and ownership of
the Company; and,
WHEREAS, to achieve these objectives, the parties wish to impose certain
restrictions on the transfer or encumbrance of the Shares issued to the
Purchaser and to give the Company the right to purchase the Shares in certain
events;
NOW, THEREFORE, for and in consideration of the premises and the covenants
of the parties contained in this Agreement, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto,
for themselves, their successors and assigns, hereby agree as follows:
1. Purchase of Shares.
------------------
The Purchaser hereby subscribes for and, upon acceptance hereof, shall
purchase, the Shares. The aggregate purchase price for the Shares set forth
under the Purchaser's signature below shall be paid by the Purchaser by check
payable to the order of the Company or such other method as may be acceptable to
the Company. Upon receipt of payment by the Company for the Shares, the Company
shall issue to the Purchaser one or more certificates in the name of the
Purchaser for the Shares. The Purchaser agrees that the Shares shall be subject
to all terms and conditions of this Agreement including,
14
<PAGE>
without limitation, the Buy-Back Option set forth in Section 2 of this
Agreement, and the Right of First Refusal set forth in Section 3 of this
Agreement.
2. Buy-Back Option.
---------------
(a) If the employment or director or consulting relationship of the
Purchaser with the Company is terminated for any reason or for no reason, with
or without cause, voluntarily or involuntarily, the Company shall have the right
and option (the "Buy-Back Option"), but not the obligation, to purchase from the
Purchaser, at one hundred percent (100%) of fair market value (except as
provided in the next sentence) as determined in good faith by the Board of
Directors of the Company in its sole discretion (the "Buy-Back Price") part or
all of the Shares. If the employment or director or consulting relationship of
the Purchaser with the Company is terminated by the Company for Cause (as
hereinafter defined), the purchase price as set forth in the preceding sentence
shall be one-half (50%) of fair market value as determined in good faith by the
Board of Directors of the Company in its sole discretion. For purposes of this
Section 2(a), Cause shall mean (i) arrest, indictment or conviction of a crime
which may injure the business or reputation of the Company or an affiliate of
the Company or arrest, indictment or conviction of a crime of moral turpitude;
(ii) theft or embezzlement of assets of the Company or an affiliate of the
Company; (iii) a material breach of any agreement between the Purchaser and the
Company or an affiliate of the Company; (iv) the willful and continued failure
by the Purchaser to perform his or her duties and responsibilities at the
Company (other than as a result of incapacity due to physical or mental
illness); and (v) willful misconduct which seriously and adversely affects the
business of the Company or an affiliate of the Company; but only with respect to
Clauses (iii), (iv) and (v) if there has been a good faith determination by the
Board of Directors of the Company that such breach, failure to perform or
willful misconduct has occurred.
(b) Without limiting the generality of Section 2(a) above, the Purchaser's
relationship with the Company shall be deemed to have terminated for purposes of
Section 2(a) at such time as the Company gives notice to the Purchaser that (a)
the Company is assigning the Purchaser to any position or office which involves
less responsibility than the position in which he or she was initially hired or
retained, and (b) that, as a result of such action, the Buy-Back Option is being
exercised by the Company, in its sole discretion, in whole or in part.
(c) The Company may exercise the Buy-Back Option by delivering or mailing
to the Purchaser (or to his estate), in accordance with Section 14 of this
Agreement, written notice of exercise within ninety (90) days after the
termination of the relationship of the Purchaser with the Company. Such notice
shall specify the date of the notice, the number of Shares to be purchased and
the Buy-Back Price. If and to the extent the Buy-Back Option is not so exercised
within such ninety (90) day period, the Buy- Back Option shall automatically
expire and terminate effective upon the expiration of such ninety (90) day
period. Any Shares to which the Company's Buy-Back Option is not so exercised
will henceforth remain subject to all other terms and conditions of this
Agreement.
15
<PAGE>
(d) Within ten (10) days after his receipt of the Company's notice of
exercise of the Buy-Back Option pursuant to Section 2(a) above, the Purchaser
(or his estate) shall tender to the Company at its principal office the
certificate or certificates representing the Shares which the Company has
elected to purchase, duly endorsed in blank by the Purchaser or with duly
endorsed stock powers attached thereto, all in form suitable for the transfer of
such Shares to the Company. Upon its receipt of such shares, the Company shall
deliver or mail to the Purchaser a check in the amount of the aggregate Buy-Back
Price therefor.
(e) The aggregate Buy-Back Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding indebtedness of
the Purchaser to the Company or in cash (by check) or both.
(f) The Company shall not purchase any fraction of a share upon exercise of
the Buy-Back Option, and any fraction of a Share resulting from a computation
made pursuant to Section 2 of this Agreement shall be rounded up to the next
whole Share.
(g) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to Section 2(d) above, the Company
shall not pay any dividend to the Purchaser on account of such Shares or permit
the Purchaser to exercise any of the privileges or rights of a stockholder with
respect to such Shares, but shall, in so far as permitted by law, treat the
Company as the owner of such Shares.
3. Right of First Refusal.
----------------------
(a) If at any time, either during the Purchaser's relationship with the
Company or afterwards, the Purchaser wishes to transfer (as hereinafter defined)
any of his or her Shares, other than as provided for in Section 5(b) of this
Agreement, the Purchaser shall first give written notice to the Company, stating
the nature of the proposed transfer, the name and address of the proposed
transferee or transferees, the number of shares to be transferred (the "Offered
Shares"), the price to be paid therefor and all the terms and conditions of the
proposed transfer, and shall forthwith offer in writing to transfer such shares
to the Company for the same consideration and on the same terms and conditions
and the Company shall have the irrevocable and exclusive first option (the
"Right of First Refusal"), but not the obligation, to acquire from the Purchaser
all or any portion of the Offered Shares on the same terms and conditions.
(b) The Purchaser agrees that the Company has the right to assign its
rights under Subsections 3(c) and 3(d) below, with respect to the purchase of
part or all of the Offered Shares, to one or more other persons or entities (the
"Purchasing Stockholder(s)") in its sole discretion and in whatever proportions
it decides and the Purchaser agrees that any such assignment shall constitute a
novation as among the Company, the Purchaser and the Purchasing Stockholder(s)
with respect to the rights and obligations of the Company and the Purchaser set
forth in Subsections 3(c) and 3(d) below so that such rights and obligations
with respect to the purchase of that part or all of the Offered
16
<PAGE>
Shares (if any) assigned to the Purchasing Stockholder(s) in whatever
proportions have been decided by the Company, shall thereafter exist between the
Purchaser and the Purchasing Stockholder(s).
(c) Within ninety (90) days following delivery of the Purchaser's notice,
as specified in Section 3(a) above, the Company and/or the Purchasing
Stockholder(s) shall give written notice to the Purchaser, stating whether or
not the Company and/or the Purchasing Stockholder(s) elect to exercise their
Rights of First Refusal as to all or any part of the Offered Shares. Failure by
the Company and/or the Purchasing Stockholder(s) to give this notice within the
ninety (90) day period shall be deemed to be an election of the Company and/or
the Purchasing Stockholder(s) not to exercise their Rights of First Refusal for
the Offered Shares.
(d) Within ten (10) days after the date of the Company's and/or the
Purchasing Stockholder(s) notice of exercise of their Rights of First Refusal
pursuant to Section 3(c) above, the Purchaser, or his estate, shall tender to
the Company and/or the Purchasing Stockholder(s) at the Company's principal
offices the certificate or certificates representing that portion of the Offered
Shares which the Company and/or the Purchasing Stockholder(s) have elected to
acquire, duly endorsed in blank by the Purchaser or with duly endorsed stock
powers attached thereto, all in form suitable for the transfer of such Shares to
the Company and/or the Purchasing Stockholder(s) and the Company and/or the
Purchasing Stockholder(s) shall pay to the Purchaser the purchase price at the
times and upon the terms and conditions proposed to be paid by the proposed
third-party transferee, as set forth in the Purchaser's notice. If the Board of
Directors of the Company, in its sole judgement, shall determine that the
proposed purchase price set forth in the Purchaser's notice is less than fair
market value or if there is no purchase price, then the Company and/or the
Purchasing Stockholder(s) shall pay to the Purchaser fair market value of part
or all of the Shares to be purchased as determined in good faith by the Board of
Directors of the Company in its sole discretion.
(e) If the Purchaser's notice shall be duly given, and the Company and/or
the Purchasing Stockholder(s) shall fail to purchase all of the Offered Shares
by the exercise of their Right of First Refusal, then, but only then, the
Purchaser shall be free to transfer the Offered Shares, but only for the price
and upon the terms and conditions set forth in the Purchaser's notice, and only
to the transferee or transferees named therein, and only if the Board of
Directors of the Company, in its sole judgment, shall determine that the
proposed transfer is a bona fide transfer and said transfer shall be consummated
within one hundred twenty (120) days after the date of the Purchaser's notice to
the Company, and only if the transferee or transferees shall execute a copy of
this Agreement satisfactory to the Company in all respects. If the Offered
Shares shall not be so transferred by the Purchaser within the period specified
above, then the transfer may not be made and the Offered Shares shall remain
subject to the terms of this Agreement in the same manner as if the Purchaser's
notice had not been given.
17
<PAGE>
4. Compliance With This Agreement.
------------------------------
The Company shall not be required to transfer any Shares upon its books or
to recognize any purported new transferee thereof in any manner, unless every
applicable provision hereof has first been complied with to the satisfaction of
the Company or has been waived in writing by the Company. The provisions hereof
shall not be discharged with respect to any Shares by any transfer or
encumbrance made in compliance with this Agreement but shall apply anew to such
shares in the hands of the new transferee thereof. If the Purchaser or any legal
representative or any transferee attempts to transfer any of the Shares without
compliance with the requirements and restrictions of this Agreement, he shall
not, until full compliance therewith, be entitled to any of the rights and
privileges of a shareholder of the Company, and no person purporting to claim or
hold by, through or under him shall in any way be recognized; but this provision
shall in no way relieve the Purchaser or any legal representative or any
transferee from the obligation to offer, transfer or sell the Shares to the
Company as herein provided.
5. Restrictions on Transfer.
------------------------
(a) The Purchaser shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"), any Shares (or any interest therein) except in accordance with the
provisions of Section 3 of this Agreement.
(b) Notwithstanding the foregoing, the Purchaser may transfer Shares, to
the Purchaser's spouse, children or grandchildren (collectively "Purchaser's
immediate family") or to an instrument of trust for the benefit of the members
of the Purchaser's immediate family (excluding, however, transfer made pursuant
to any divorce or separation proceedings or settlement) and, further provided,
that such Shares shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in this Agreement) and any
permitted transferee shall, as a condition of such transfer, execute and deliver
to the Company a copy of this Agreement satisfactory to the Company in all
respects and confirming that such transferee shall be bound by all of the terms
and conditions of this Agreement.
6. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a legend in
substantially the following form, in addition to any other legends that may be
required under federal or state securities laws:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND AN OPTION TO PURCHASE SET FORTH IN A CERTAIN
STOCK PURCHASE, RESTRICTION, BUY-BACK AND RIGHT OF FIRST REFUSAL AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED OWNER OF THIS CERTIFICATE (OR
HIS PREDECESSOR IN INTEREST), WHICH AGREEMENT IS BINDING UPON ANY
18
<PAGE>
AND ALL OWNERS OF ANY INTEREST IN SAID SHARES. SAID AGREEMENT IS AVAILABLE
FOR INSPECTION WITHOUT CHARGE AT THE PRINCIPAL OFFICE OF THE CORPORATION
AND A COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE TO ANY OWNER OF SAID
SHARES UPON REQUEST.
7. Investment Representations.
--------------------------
The Purchaser represents, warrants and covenants as follows:
(a) He is purchasing the Shares for his own account and not with a view to,
or for sale in connection with, any distribution of the Shares in violation of
the Securities Act of 1933, as amended, (the "Securities Act") or any rule or
regulation under the Securities Act or in violation of any applicable state
securities law.
(b) He has had such opportunity as he has deemed adequate to obtain from
representatives of the Company such information as is necessary to permit him to
evaluate the merits and risks of his investment in the Company.
(c) He has sufficient experience in business, financial and investment
matters to be able to evaluate the risks involved in the purchase of the Shares
and to make an informed investment decision with respect to such purchase.
(d) He can afford the complete loss of the value of the Shares and is able
to bear the economic risk of holding such Shares for an indefinite period.
(e) He understands that (i) the Shares have not been registered under the
Securities Act and are "restricted securities" within the meaning of Rule 144
under the Securities Act; (ii) the Shares cannot be sold, transferred or
otherwise disposed of unless they are subsequently registered under the
Securities Act or an exemption from registration is then available; (iii) in any
event, the exemption from registration under Rule 144 will not be available for
at least one (1) year and even then will not be available unless a public market
then exists for the Common Stock, adequate information concerning the Company is
then available to the public, and other terms and conditions of Rule 144 are
complied with; and (iv) there is now no registration statement on file with the
Securities and Exchange Commission with respect to any stock of the Company and
the Company has no obligation or current intention to register the Shares under
the Securities Act.
(f) A legend substantially in the following form will be placed on the
certificate or certificates representing the Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO DISTRIBUTION
19
<PAGE>
OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH
SECURITIES UNDER THE SECURITIES ACT OF 1933, AND ANY APPLICABLE STATE
SECURITIES LAWS, UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL,
WHICH OPINION IS SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT SUCH
REGISTRATIONS ARE NOT REQUIRED.
8. Adjustments for Stock Splits, Stock Dividends etc.
--------------------------------------------------
(a) If from time to time during the term of this Agreement there is any
stock split-up, stock dividend, stock distribution or other reclassification of
the Common Stock of the Company, any and all new, substituted or additional
securities to which the Purchaser is entitled by reason of his ownership of the
Shares shall be immediately subject to the terms of this Agreement.
(b) If the Shares are converted into or exchanged for, or stockholders of
the Company receive by reason of any distribution in total or partial
liquidation, securities of another corporation, or other property (including
cash), pursuant to any merger of the Company or acquisition of its assets, then
the rights of the Company under this Agreement shall inure to the benefit of the
Company's successor and this Agreement shall apply to the securities or other
property received upon such conversion, exchange or distribution in the same
manner and to the same extent as the Shares.
9. Taxes.
-----
The Purchaser acknowledges and agrees that the Company has the right to
deduct from payments of any kind otherwise due to the Purchaser any federal,
state or local taxes of any kind required by law to be withheld with respect to
the purchase of the Shares by the Purchaser.
10. 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, and each other provision of the Agreement shall be severable and
enforceable to the extent permitted by law.
11. Waiver.
------
Any provision contained in the Agreement may be waived in writing by the
Board of Directors of the Company. No waiver of any right hereunder by any party
shall operate as a waiver of any other right, or as a waiver of the same right
with respect to any subsequent occasion for its exercise, or as a waiver of any
right to damages. No waiver by any party of any breach of this Agreement shall
be held to constitute a waiver of any other breach or a waiver of the
continuation of the same breach.
20
<PAGE>
12. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company and the Purchaser and their respective heirs, executors, administrators,
legal representatives, successors and assigns.
13. No Rights to Employment.
-----------------------
Nothing contained in this Agreement shall be construed as giving the
Purchaser any right to be retained, in any position, as an employee, consultant
or director of the Company.
14. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or upon deposit in the United States
Post Office, by registered or certified mail, postage prepaid, addressed to the
other party hereto at the address shown beneath his or its respective signature
to this Agreement, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 14.
15. 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.
16. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties, and
supersedes all prior agreements and understandings, relating to the subject
matter of this Agreement.
17. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Purchaser.
18. Construction.
------------
This Agreement and all matters connected therewith shall be construed and
all questions shall be determined by the Board of Directors of the Company
acting in its sole discretion and the decisions of such Board shall be binding
upon all interested parties.
21
<PAGE>
19. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the Commonwealth of Massachusetts.
20. Termination.
-----------
This Agreement shall become null and void and shall be of no further force
or effect immediately upon (i) the closing of the Company's Qualified Initial
Public Offering, or (ii) written agreement between the Company and the Purchaser
or his successor or assign. The term "Qualified Initial Public Offering" shall
mean: (i) an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of shares of Common Stock of the Company but only if the aggregate proceeds
(before deduction of any underwriting discounts, commissions or expenses)
received by the Company from such public offering, at the offering price, shall
equal or exceed $5,000,000; and (ii) each of the underwriters participating in
such public offering shall be obligated to buy on a "firm commitment" basis all
shares of capital stock of the Company which such underwriters shall have agreed
to distribute.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and the year first written above.
ENGAGE TECHNOLOGIES, INC. PURCHASER
By: ______________________ ________________________
Purchaser Signature
Title: ___________________ ________________________
Printed Name of Purchaser
Address: 100 Brickston Square _____________________________
1st Floor _____________________________
Andover, MA 01810 _____________________________
Number of Shares Purchased: __________________________________
Purchase Price Per Share: __________________________________
Aggregate Purchase Price: __________________________________
Effective Date: __________________________
22
<PAGE>
Exhibit 10.6
------------
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
This Series B Convertible Preferred Stock Purchase Agreement (this
"Agreement") is made and entered into as of July 31, 1998, by and among:
ENGAGE TECHNOLOGIES, INC., a corporation duly organized and existing under
the laws of the State of Delaware, United States of America and having its
principal place of business at 100 Brickstone Square, First Floor, Andover,
Massachusetts 01810, United States of America ("Engage");
SUMITOMO CORPORATION, a corporation duly organized and existing under the
laws of Japan and having its principal place of business at 2-2,
Hitotsubashi 1-chome, Chiyoda-ku, Tokyo, Japan ("SC"); and
SUMITOMO CORPORATION OF AMERICA, a corporation duly organized and existing
under the laws of the State of New York, United States of America and
having a place of business at 345 Park Avenue, New York, New York 10154-
0042, United States of America ("SCOA", and together with SC, the
"Purchasers").
RECITALS
WHEREAS, Engage desires to sell to the Purchasers, and the Purchasers
desire to purchase from Engage, the Engage Shares (as defined below), all on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. AGREEMENT TO PURCHASE AND SELL STOCK.
1.1 Authorization. Prior to the Closing (as defined below), Engage's
-------------
Board of Directors will have authorized the issuance of the Engage Shares (as
defined below) pursuant to the terms and conditions of this Agreement. The
Engage Shares, when issued, will have the rights and preferences set forth in
the Certificate of Designation attached hereto as Exhibit A (the "Certificate of
---------
Designation").
1.2 Agreement to Purchase and Sell Common Stock. At the Closing (as
-------------------------------------------
defined below), Engage hereby agrees to sell to the Purchasers and the
Purchasers hereby agree to purchase from Engage an aggregate of 238,597 shares
of Series B Convertible Preferred Stock of Engage, $0.01 par value per share
(the "Engage
1
<PAGE>
Shares"), at a price per share of $8.3823 for an aggregate purchase price of US
$1,999,991.60, as follows: (a) Engage hereby agrees to sell to SC and SC hereby
agrees to purchase from Engage 178,947 Engage Shares for an aggregate purchase
price of US $1,499,987.40, and (b) Engage hereby agrees to sell to SCOA and SCOA
hereby agrees to purchase from Engage 59,650 Engage Shares for an aggregate
purchase price of US $500,004.20.
2. CLOSING.
2.1 The Closing. The purchase and sale of the Engage Shares shall take
-----------
place at the offices of Palmer & Dodge LLP, One Beacon Street, Boston,
Massachusetts 02108, at 10:00 a.m. Massachusetts time, within three (3) business
days after the conditions set forth in Articles 5 and 6 have been satisfied, or
at such other time and place as Engage and the Purchasers mutually agree upon
(which time and place are referred to in this Agreement as the "Closing"). At
the Closing, Engage will deliver to the Purchasers certificates representing the
Engage Shares, against delivery to Engage by the Purchasers of the consideration
set forth in Section 1.2 by wire transfer of funds to an account designated by
Engage at least two business days prior to the Closing. It is expected that
Closing documents will be delivered by facsimile with original signature pages
sent by overnight courier.
3. REPRESENTATIONS AND WARRANTIES OF ENGAGE. Engage hereby represents
and warrants to the Purchasers, at the date of execution of this Agreement and
at the Closing, that the statements in this Section 3 are true and correct,
except as set forth in the Disclosure Letter from Engage to the Purchasers of
even date herewith (the "Disclosure Letter"):
3.1 Organization, Good Standing and Qualification. Engage is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, United States of America and has all corporate power
and authority required to (a) carry on its business as presently conducted, and
(b) enter into this Agreement and consummate the transactions contemplated
hereby. Engage is qualified to do business and is in good standing in each
jurisdiction in which the failure to so qualify would have a Material Adverse
Effect. As used in this Agreement, "Material Adverse Effect" means a material
adverse effect on, or a material adverse change in, or a group of such effects
on or changes in, the business, operations, financial condition, results of
operations, prospects, assets or liabilities of Engage and its Subsidiaries (as
defined below), taken as a whole.
3.2 Capitalization. As of the date hereof, the authorized stock of Engage
--------------
consists of 20,000,000 shares of Common Stock, par value $0.01 per share
("Common Stock") of which 93,750 shares are issued and outstanding, and
5,000,000 shares of Preferred Stock, $0.01 par value ("Preferred Stock")
consisting of: 800,000 shares of Preferred Stock designated "Series A Preferred"
of which 800,000 are issued and
2
<PAGE>
outstanding and 4,200,000 undesignated shares of Preferred Stock. As of the
Closing, the authorized stock of Engage will consist of 20,000,000 shares of
Common Stock of which 93,750 shares will be issued and outstanding, 5,000,000
shares of Preferred Stock consisting of: 1,500,000 shares of Preferred Stock
designated "Series A Preferred" of which 1,500,000 will be issued and
outstanding, 238,597 shares of Preferred Stock designated "Series B Preferred"
(the "Series B Preferred Stock") of which none shall be issued and outstanding,
and 3,261,403 undesignated shares of Preferred Stock. Immediately prior to the
Closing, all issued and outstanding shares will have been duly authorized,
validly issued, and will be fully paid and nonassessable and free of any liens
or encumbrances other than any liens or encumbrances created by or imposed upon
the holders thereof. As of the date hereof, CMG Information Services, Inc. is
the record holder of all of the outstanding shares of Series A Preferred Stock
of Engage. As of the date hereof and as of the Closing, Engage shall have
reserved 2,800,987 shares of Common Stock for issuance to officers, directors,
employees or independent contractors or affiliates of Engage under Engage's
employee benefit plans. As of the Closing, options shall have been issued under
such employee benefit plans representing approximately 2,000,000 of such shares.
All shares of Common Stock subject to issuance as aforesaid, upon issuance on
the terms and conditions specified in the instruments pursuant to which they are
issuable, shall be duly authorized, validly issued, fully paid and
nonassessable. There are no other equity securities, convertible securities,
options, warrants, calls, rights, commitments or agreements of any character to
which Engage is a party or by which it is bound obligating Engage to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of Engage or obligating
Engage to grant, extend or enter into any such equity security, convertible
security, option, warrant, call, right, commitment or agreement.
3.3 Authorization. All corporate action on the part of Engage, its
-------------
officers, directors and stockholders necessary for the authorization, execution,
delivery of, and the performance of all obligations of Engage under this
Agreement and the authorization, issuance, reservation for issuance and delivery
of all of the Engage Shares being sold under this Agreement has been taken or
will be taken prior to the Closing, and this Agreement constitutes a valid and
binding obligation of Engage, enforceable against Engage in accordance with its
terms, except as enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies.
3.4 Valid Issuance of Stock.
-----------------------
(a) Valid Issuance. The Engage Shares, and the shares of Common
--------------
Stock issuable upon conversion thereof, when issued, sold and delivered in
3
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accordance with the terms of this Agreement for the consideration provided for
herein, or the terms of the Certificate of Designation, as applicable, will be
duly and validly issued, fully paid and nonassessable and will be free of any
liens or encumbrances. The sale of the Engage Shares is not and will not be
subject to any preemptive rights or rights of first refusal that have not been
waived.
(b) Compliance with Securities Laws. Assuming the correctness of the
-------------------------------
representations made by each of the Purchasers in Section 4 hereof, the Engage
Shares will be issued in full compliance with the registration requirements of
the Securities Act of 1933, as amended, and the rules and regulations of the
Securities and Exchange Commission (the "Commission") issued under such act
(collectively, the "Securities Act"), or in compliance with applicable
exemptions therefrom, and the registration and qualification requirements of all
applicable securities laws of the states of the United States.
3.5 Subsidiaries and Affiliates.
---------------------------
(a) The Disclosure Letter sets forth a list of all entities in which
Engage beneficially owns, directly or indirectly, 50% or more of the outstanding
stock or other equity interests (collectively, the "Subsidiaries"). The
Disclosure Letter also includes (i) a complete list of each partnership or joint
venture agreement or arrangement to which Engage is a party and the nature and
amount of the interest of Engage in such entities and (ii) a complete list of
the corporations, partnerships, limited liability companies or other entities
with respect to which Engage beneficially owns, directly or indirectly, the
outstanding stock or other equity interests and the percentage ownership of such
entity by Engage. Except as set forth in the Disclosure Letter, there is no
other entity with respect to which: (i) Engage beneficially owns, directly or
indirectly, any outstanding stock or other ownership interests of such entity;
(ii) Engage may be deemed to be in control because of factors or relationships
(contractual or otherwise) other than the quantity of stock or other interests
owned; (iii) Engage may be liable under any circumstances for the payment of
additional amounts with respect to its interest, whether in the form of
assessments, capital calls, installment payments, general partner liability or
otherwise; or (iv) the investment by Engage is accounted for by the equity
method.
(b) All capital stock or other equity interests owned by Engage as
described pursuant to Section 3.5(a) are owned by Engage or its Subsidiaries, as
the case may be, as record and beneficial owner thereof free and clear of all
liens, charges, encumbrances, equities and claims whatsoever. There is no
outstanding or authorized option, subscription, warrant, call, right, commitment
or other agreement of any character obligating Engage to issue, sell, transfer,
pledge or otherwise encumber any share of capital stock or other equity interest
described pursuant to Section 3.5(a) or any security or other instrument
convertible into or exercisable for or
4
<PAGE>
evidencing the right to subscribe for any such share of capital stock or other
equity interest.
(c) Each Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of its state of organization. Each
Subsidiary is duly qualified to do business as a foreign corporation and is in
good standing in every jurisdiction in which the nature of the business
conducted by it or the character or location of the properties owned or leased
by it makes such qualification necessary, except where the failure to be so
qualified would not have a Material Adverse Effect. Each Subsidiary has all
requisite corporate power and authority to own or lease and operate its
properties and assets and to carry on its business as now conducted.
3.6 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of Engage is required
in connection with the consummation of the transactions contemplated by this
Agreement, except the filing of such qualifications or filings under the
Securities Act and the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission issued under such act (collectively, the
"Exchange Act") and all applicable state securities laws as may be required in
connection with the transactions contemplated by this Agreement. All such
qualifications and filings will, in the case of qualifications, be effective on
the Closing and will, in the case of filings, be made within the time prescribed
by law.
3.7 Non-Contravention. The execution, delivery and performance of this
-----------------
Agreement by Engage and the consummation by Engage of the transactions
contemplated hereby do not and will not (i) contravene or conflict with the
Certificate of Incorporation, Certificate of Designation of Series A Preferred
Stock or Bylaws of Engage; (ii) constitute a violation of any provision of any
federal, state, local or foreign law binding upon or applicable to Engage; or
(iii) constitute a default or require any consent under, give rise to any right
of termination, cancellation or acceleration of, or to a loss of any benefit to
which Engage is entitled under, or result in the creation or imposition of any
lien, claim or encumbrance on any assets of Engage under, any contract to which
Engage is a party or any permit, license or similar right relating to Engage or
by which Engage may be bound or affected in such a manner as, individually or
together with all other such matters, would have Material Adverse Effect.
3.8 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation ("Action") pending or, to the best of Engage's knowledge,
threatened: (a) against Engage or its Subsidiaries, their respective activities,
properties or assets or against any officer, director or employee of Engage in
connection with such officer's, director's or employee's relationship with, or
actions taken on behalf of, Engage, in
5
<PAGE>
each case which is reasonably likely to have a Material Adverse Effect, or (b)
that seeks to prevent, enjoin, alter or delay the transactions contemplated by
this Agreement. Engage is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. No Action by Engage is currently pending nor does Engage intend
to initiate any Action which is reasonably likely to have a Material Adverse
Effect.
3.9 Compliance with Law and Charter Documents. Engage is not in violation
-----------------------------------------
or default of any provisions of its Certificate of Incorporation or Bylaws, each
as amended. Engage and its Subsidiaries have complied and are in compliance
with all applicable statutes, laws, and regulations and executive orders of the
United States of America and all states, foreign countries and other
governmental bodies and agencies having jurisdiction over Engage's and its
Subsidiaries' businesses or properties, except for any violations that would
not, either individually or in the aggregate, have a Material Adverse Effect.
3.10 Financial Statements. Engage has provided the Purchasers with copies
--------------------
of the unaudited financial statements of Engage for the fiscal year ended July
31, 1997 and the audited financial statements of Accipiter, Inc. ("Accipiter")
for the fiscal year ended December 31, 1997 (collectively, the "Annual Financial
Statements"), and unaudited financial statements of Engage for the nine-month
period ended April 30, 1998, which statements include the operations of
Accipiter for the relevant period (the "Balance Sheet Date"). Such unaudited
financial statements of Engage and Accipiter, Inc. fairly present, in conformity
with generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated in the notes thereto), the financial position
of Engage and Accipiter as at the dates thereof and the consolidated results of
their operations and cash flows for the periods then ended (subject to normal
year-end audit adjustments in the case of unaudited interim financial
statements).
3.1 Absence of Certain Changes Since Balance Sheet Date. Except as set
---------------------------------------------------
forth in the Disclosure Letter, since the Balance Sheet Date, the business and
operations of Engage and its Subsidiaries have been conducted in the ordinary
course consistent with past practice, and there has not been:
(a) any declaration, setting aside or payment of any dividend or
other distribution of the assets of Engage with respect to any shares of capital
stock of Engage or any repurchase, redemption or other acquisition by Engage or
any Subsidiary of Engage of any outstanding shares of Engage's or any
Subsidiary's capital stock;
(b) any damage, destruction or loss, whether or not covered by
insurance, except for such occurrences that have not resulted, and are not
expected to result, in a Material Adverse Effect;
6
<PAGE>
(c) any waiver by Engage or a Subsidiary of a valuable right or of a
material debt owed to it, except for such waivers that have not resulted and are
not expected to result, in a Material Adverse Effect;
(d) any material change or amendment to, or any waiver of any
material rights under a material contract or arrangement by which Engage or a
Subsidiary or any of its respective assets or properties is bound or subject,
except for changes, amendments, or waivers that are expressly provided for or
disclosed in this Agreement or the Disclosure Letter or that have not resulted,
and are not expected to result, in a Material Adverse Effect;
(e) any change by Engage in its accounting principles, methods or
practices or in the manner it keeps its accounting books and records, except any
such change required by a change in GAAP; and
(f) any other event or condition of any character, except for such
events and conditions that have not resulted, and are not expected to result,
either individually or collectively, in a Material Adverse Effect.
3.12 Rights in Proprietary Information. Except as set forth in the
---------------------------------
Disclosure Letter, Engage has not received any communications alleging that
Engage has violated or, by conducting its business, would violate any of the
patents, trademarks, service marks, or other proprietary rights of any other
person or entity, nor does Engage have reason to believe that it has violated
or, by conducting its business, would violate any of the patents, trademarks,
service marks, or other proprietary rights of any person or entity. Engage has
sufficient right to proprietary information to conduct its business as currently
conducted.
3.13 Conduct of Business; Liabilities. Engage is not in default under, and
--------------------------------
to the best of Engage's knowledge no condition exists that would by notice or
lapse or time would constitute a default of Engage under (i) any mortgage, loan
agreement, evidence of indebtedness, or other instrument evidencing borrowed
money to which Engage is a party or by which Engage or the properties of Engage
are bound or (ii) any judgment, order, or injunction of any court, arbitrator,
or governmental agency that would reasonably be expected to have a Material
Adverse Effect.
3.14 Permits. Engage has all franchises, permits, licenses and any similar
-------
authority necessary for the conduct of its business as it is now being
conducted, the lack of which could have a Material Adverse Effect, and believes
it can obtain, without undue burden or expense, any similar authority for the
conduct of its business as planned to be conducted. Engage is not in default in
any material respect under any of such franchises, permits, licenses or other
similar authority.
7
<PAGE>
3.15 Full Disclosure. The information contained in this Agreement and the
---------------
Disclosure Letter with respect to the business, operations, assets, results of
operations and financial condition of Engage and its Subsidiaries, and the
transactions contemplated by this Agreement are true and complete in all
material respects and do not omit to state any material fact necessary in order
to make the statements herein and therein, in light of the circumstances under
which they were made, not misleading.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS. Each of
the Purchasers hereby jointly and severally represents and warrants to Engage,
at the date of execution of this Agreement and at the Closing, and agrees that:
4.1 Organization and Good Standing. SC is a corporation duly organized,
------------------------------
validly existing and in good standing under the laws of Japan and has all
corporate power and authority required to carry on its business as presently
conducted, and to enter into this Agreement and to consummate the transactions
contemplated hereby. SCOA is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York and has all corporate
power and authority required to carry on its business as presently conducted,
and enter into this Agreement and to consummate the transactions contemplated
hereby.
4.2 Authorization. This Agreement has been duly authorized by all
-------------
necessary corporate action on the part of each Purchaser. This Agreement
constitutes a valid and binding obligation of each Purchaser, enforceable
against each Purchaser in accordance with its terms, except as enforceability
may be limited by (a) applicable bankruptcy, insolvency, reorganization or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally and (b) the effect of rules of law governing the
availability of equitable remedies. Each Purchaser has full corporate power and
authority to enter into this Agreement.
4.3 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or foreign governmental authority on the part of either
Purchaser is required in connection with the consummation of the transactions
contemplated by this Agreement, except for such authorizations of the relevant
authorities under all applicable laws of Japan as may be required in connection
with the transactions contemplated by this Agreement. All such authorizations,
qualifications and filings will, in the case of authorizations and
qualifications, be effective on the Closing and will, in the case of filings, be
made within the time prescribed by law.
4.4 Purchase for Own Account. The Engage Shares are being acquired for
------------------------
investment for each Purchaser's own account, not as a nominee or agent, and not
with a view to the public resale or distribution thereof within the meaning of
the
8
<PAGE>
Securities Act, and neither Purchaser has the present intention of selling,
granting any participation in, or otherwise distributing the same.
4.5 Investment Experience. Each Purchaser understands that the purchase
---------------------
of the Engage Shares involves substantial risk. Each Purchaser has experience
as an investor in corporate securities and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment in the Engage Shares
and has such knowledge and experience in financial or business matters that it
is capable of evaluating the merits and risks of this investment in the Engage
Shares and protecting its own interests in connection with this investment.
4.6 Accredited Investor Status. Each Purchaser is an "accredited
--------------------------
investor" within the meaning of Regulation D promulgated under the Securities
Act.
4.7 Restricted Securities. Each Purchaser understands that the Engage
---------------------
Shares are characterized as "restricted securities" under the Securities Act,
inasmuch as they are being acquired from Engage in a transaction not involving a
public offering and that under the Securities Act such securities may be resold
without registration under the Securities Act only in certain limited
circumstances. Each Purchaser is familiar with Rule 144 promulgated under the
Securities Act, as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
4.8 Legends. Each Purchaser agrees that the certificates for the Engage
-------
Shares shall bear the following legend in addition to any legend required to
provide notice of Engage's rights under Section 7.
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or with any state securities
commission, and may not be transferred or disposed of by the holder in the
absence of a registration statement which is effective under the Securities
Act of 1933, as amended, and applicable state laws and rules, or, unless,
immediately prior to the time set for transfer, such transfer may be
effected without violation of the Securities Act of 1933, as amended, and
other applicable state laws and rules."
In addition, each Purchaser agrees that Engage may place stop transfer orders
with its transfer agents with respect to such certificates to the extent
necessary to enforce compliance with the requirements of the Securities Act.
The appropriate portion of the legend and the stop transfer orders will be
removed promptly upon delivery to Engage of such satisfactory evidence as
reasonably may be required by Engage, that such legend or stop orders are not
required to ensure compliance with the Securities Act.
9
<PAGE>
5. CONDITIONS TO THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations
of the Purchasers under Sections 1 and 2 of this Agreement are subject to the
fulfillment or waiver, on or before the Closing, of each of the following
conditions:
5.1 Representations and Warranties True. Each of the representations and
-----------------------------------
warranties of Engage contained in Section 3 will be true and correct in all
material respects on and as of the date hereof and on and as of the date of the
Closing, except as set forth in the Disclosure Letter, with the same effect as
though such representations and warranties had been made as of the Closing.
5.2 Performance. Engage will have performed and complied with all
-----------
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing and
will have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
5.3 Compliance Certificate. Engage will have delivered to the Purchasers
----------------------
at the Closing a certificate signed on its behalf by its Chief Executive Officer
or Chief Financial Officer certifying that the conditions specified in Sections
5.1, 5.2 and 5.7 hereof have been fulfilled.
5.4 Securities Exemptions. The offer and sale of the Engage Shares to the
---------------------
Purchasers pursuant to this Agreement will be exempt from the registration
requirements of the Securities Act and the registration and/or qualification
requirements of all applicable state securities laws.
5.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto will be reasonably satisfactory in form and substance to the
Purchasers and to the Purchasers' legal counsel, and the Purchasers will have
received all such counterpart originals and certified or other copies of such
documents as they may reasonably request. Such documents shall include, but not
be limited to, the following:
(a) Certified Charter Documents. A copy of (i) the Certificate of
---------------------------
Incorporation and Certificate of Designation of Series A Preferred Stock, each
certified as of a recent date by the Secretary of State of the State of Delaware
as a complete and correct copy thereof; and (ii) the By-laws of Engage (as
amended through the date of the Closing) certified by the Assistant Secretary of
Engage as true and correct copies thereof as of the Closing.
(b) Board Resolutions. A copy, certified by the Assistant Secretary
-----------------
of Engage, of the resolutions of the Board of Directors of Engage providing for
the
10
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approval of this Agreement and the issuance of the Engage Shares and the other
matters contemplated hereby.
(c) Stock Certificates. Stock certificates representing the Engage
------------------
Shares.
5.6 Opinion of Engage Counsel. The Purchasers will have received an
-------------------------
opinion on behalf of Engage, dated as of the date of the Closing, from Palmer &
Dodge LLP, in substantially the form attached as Exhibit B hereto.
---------
5.7 No Material Adverse Effect. Between the date hereof and the Closing,
--------------------------
there shall not have occurred any Material Adverse Effect.
5.8 Satisfaction of Due Diligence. The Purchasers shall have completed to
-----------------------------
their satisfaction a legal and financial review of Engage.
5.9 Merger of Accipiter. Engage shall have consummated the stock-for-
-------------------
stock merger of Accipiter with and into Engage and Engage shall be the survivor
of such merger. Evidence of consummation of the merger satisfactory to the
Purchasers shall have been delivered by Engage.
6. CONDITIONS TO ENGAGE'S OBLIGATIONS AT CLOSING. The obligations of
Engage to the Purchasers under Sections 1 and 2 of this Agreement are subject to
the fulfillment or waiver on or before the Closing, of each of the following
conditions:
6.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Purchasers contained in Section 4 will be true and correct in
all material respects on and as of the date hereof and on and as of the date of
the Closing with the same effect as though such representations and warranties
had been made as of the Closing.
6.2 Performance. The Purchasers will have performed and complied with all
-----------
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing and
will have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
6.3 Payment of Purchase Price. The Purchasers will have delivered to
-------------------------
Engage the full purchase price of the Engage Shares as specified in Section 1.2.
6.4 Securities Exemptions. The offer and sale of the Engage Shares to the
---------------------
Purchasers pursuant to this Agreement will be exempt from the registration
requirements of the Securities Act and the registration
11
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requirements of the Securities and/or qualification requirements of all
applicable state securities laws.
6.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto will be reasonably satisfactory in form and substance to Engage
and to Engage's legal counsel, and Engage will have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request.
7. COVENANTS OF THE PURCHASERS AND ENGAGE.
7.1 Covenants of the Purchasers. As long as a Purchaser holds any of the
---------------------------
Engage Shares, such Purchaser hereby covenants and agrees as follows:
7.1.1 Right of First Offer Upon Transfer of Engage Shares. If either
---------------------------------------------------
Purchaser intends to sell any of the Engage Shares to any person (other than an
Affiliate of such Purchaser pursuant to Section 7.1.2 below), such Purchaser
shall provide written notice thereof to Engage (the "Purchaser Notice"). The
Purchaser Notice shall specify the number of Engage Shares involved and the
proposed price per share. For a period of 48 hours after the receipt of the
Purchaser Notice by Engage, Engage shall be entitled to elect to purchase all,
but not less than all, of the Engage Shares described in the Purchaser Notice,
at the price per share described in such notice, by delivery of a written notice
(a "Company Purchase Election") to such Purchaser irrevocably electing to
purchase such Shares and shall have twenty (20) business days to consummate said
purchase from such Purchaser. In the event that Engage has not delivered a
Company Purchase Election prior to the expiration of such 48-hour period or has
failed to purchase such Engage Shares within said twenty (20) business day
period, Engage's right to purchase such Engage Shares shall expire, and such
Purchaser shall be entitled to sell the Engage Shares described in the Purchaser
Notice for a period of ninety (90) days following the expiration of such twenty
(20) day period, but only to the proposed purchaser set forth in the Purchaser
Notice and only for a purchase price not less than the purchase price set forth
in the Purchaser Notice. In the event such Purchaser has not sold such Engage
Shares by the end of such ninety (90) day period, the rights of Engage set forth
above in this Section 7.1.1 shall apply to any subsequent sales by such
Purchaser. Each Purchaser further agrees that it will not sell the Engage
Shares privately to an entity engaged in the same business as Engage at the time
of such sale without the prior written consent of Engage, which consent shall
not be unreasonably withheld.
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7.1.2 Transfers to Affiliates.
-----------------------
(a) Subject to the last sentence of Section 7.1.1, Engage Shares and
the rights granted to a Purchaser under this Agreement relating thereto may be
transferred by such Purchaser to any corporation or other entity which directly
or indirectly controls, is controlled by or is under common control with such
Purchaser, either individually or together with the another Purchaser (an
"Affiliate"), and such Affiliate shall be treated as a Purchaser hereunder,
subject to such Affiliate's compliance with the provisions of this Section
7.1.2. For purposes of this Section 7.1.2, "control" shall mean direct or
indirect control of more than fifty percent (50%), individually or in the
aggregate, of the outstanding voting stock or other ownership interest of a
corporation or entity, or possession, directly or indirectly, of the power to
manage, direct or cause the direction of the management and policies of a
corporation or other entity or possession of the power to elect or appoint fifty
percent (50%) or more of the members of the governing body of the corporation or
other entity.
(b) Any Affiliate (other than any of the Purchasers) to whom Engage
Shares and rights under this Agreement are transferred pursuant to this Section
7.1.2 shall, as a condition to such transfer, deliver to Engage a written
instrument by which the Affiliate identifies itself gives Engage notice of the
transfer of such rights, indicates the Engage Shares owned by it and agrees to
be bound by the obligations imposed upon Purchasers under this Agreement.
Unless and until Engage shall have received such written notice, it shall have
no obligations hereunder to the transferee.
(c) An Affiliate to whom rights are transferred pursuant to this
Section 7.1.2 may not again transfer such rights to any other person or entity,
other than as provided in paragraphs (a) and (b) of this Section 7.1.2.
7.2 Covenants of Engage. As long as the Purchasers hold any of the Engage
-------------------
Shares, Engage hereby covenants and agrees as follows:
7.2.1 Reserve for Conversion Shares. Engage shall at all times reserve
-----------------------------
and keep available out of its authorized but unissued shares of Common Stock,
for the purpose of effecting the conversion of the Engage Shares, such number of
its duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of all the Engage Shares (and any securities convertible into Shares
of Common Stock that may have been issued pursuant to the terms of the Series B
Preferred Stock) from time to time outstanding. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all the then outstanding Engage Shares, Engage will forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose. Engage shall take all steps
13
<PAGE>
reasonably necessary to obtain any authorization, consent, approval, or other
action by or make any filing with any court or administrative body that may be
required in connection with the issuance of shares of Common Stock upon
conversion of the Engage Shares (and any securities convertible into Shares of
Common Stock that may have been issued pursuant to the terms of the Series B
Preferred Stock).
7.2.2 Financial Statements. Engage will maintain books of account in
--------------------
accordance with generally accepted accounting principles applied on a consistent
basis, keep full and complete financial records and furnish to the Purchasers
the following reports:
(a) within 90 days after the end of each fiscal year, a copy of the
balance sheet of Engage as at the end of such year, together with statements of
operations, stockholders' equity and cash flows of Engage for such year prepared
in accordance with generally accepted accounting principles and practices
consistently applied. Such financial statements shall be audited if and to the
extent that Engage has such audited financial statements available. To the
extent audited financial statements become available, at any time, Engage shall
promptly furnish copies thereof to the Purchasers.
(b) within 45 days after the end of each fiscal quarter, a copy of
the balance sheet of Engage as at the end of such quarter, together with
statements of operations, stockholders' equity and cash flows of Engage for such
quarter.
7.2.3 Approval of Series B. Without the prior approval of the holders
--------------------
of at least 51 % of the then outstanding Engage Shares, Engage will not alter,
change or amend the rights, preferences or privileges of the Series B Preferred
Stock (including the Engage Shares) or increase the authorized number of shares
of Series B Preferred Stock or take any action to authorize or effect such
alteration, change, amendment or increase.
7.2.4 Advisory Board Member. If at any time Engage or its Board of
---------------------
Directors forms a business advisory board, the Purchasers shall be entitled to
designate an individual reasonably acceptable to Engage as a member of such
business advisory board.
7.2.5 Preemptive Right.
----------------
(a) Each Purchaser shall be entitled to a right of first refusal to
purchase, on a pro rata basis, all or any part of any Series B Convertible
Preferred Stock issued by Engage after the date hereof (the "New Securities"),
subject to the terms and conditions set forth below. Such Purchaser's pro rata
share shall equal a fraction, the numerator of which is the number of shares of
Series B Preferred Stock then issued and outstanding and held by such Purchaser,
and the denominator of
14
<PAGE>
which is the total number of shares of Series B Preferred Stock then issued and
outstanding.
(b) In the event Engage intends to issue New Securities, it shall
give each Purchaser who is then a record holder of Engage Shares (a "Holder")
written notice of such intention, describing the type of New Securities to be
issued, the price thereof and the general terms upon which Engage proposes to
effect such issuance. Each such Holder shall have twenty (20) days from the date
of any such notice to agree to purchase all of its pro rata share of such New
Securities for the price and upon the general terms and conditions specified in
Engage's notice by giving written notice to Engage stating the quantity of New
Securities to be so purchased.
(c) In the event the Holders fail to exercise the foregoing right of
first refusal with respect to any New Securities within such 20-day period,
Engage may within 120 days thereafter sell any or all of such New Securities not
agreed to be purchased by the Holders, at a price and upon general terms no more
favorable to the purchasers thereof than specified in the notice given to each
Holder pursuant to paragraph (b) above. In the event Engage has not so sold
such New Securities within such 120-day period, Engage shall not thereafter
issue or sell any New Securities without first offering such New Securities to
the Holders in the manner provided above.
7.26 Merger. Engage agrees that, notwithstanding the rights, powers,
------
designations and other terms of the Series A Convertible Preferred Stock of
Engage as specified in the Certificate of Designation of such Series A
Convertible Preferred Stock, the merger of Accipiter, with and into Engage as
contemplated in Section 5.9, shall not be deemed a liquidation, dissolution or
winding-up within the meaning of such Certificate of Designation.
8. Registration Rights. Notwithstanding anything to the contrary in this
-------------------
Section 8, Engage shall not be obligated to include in any Registration
Statement (as defined below) any Registrable Shares (as defined below) of a
Purchaser, who could at the time of such request for registration then sell all
of the Registrable Shares which such Purchaser then holds pursuant to Rule
144(k) under the Securities Act.
8.1 Whenever Engage proposes to file a Registration Statement, prior to
such filing it shall give 30 days prior written notice to each Purchaser who is
a record holder of Registrable Shares of its intention to do so (which shall
include, to the extent known, the proposed offering price, the number of shares
proposed to be registered, the distribution arrangements and other appropriate
information), and upon the written request of a Purchaser or Purchasers given
within 30 days after Engage provides such notice (which request shall state the
Registrable Shares intended to be disposed of), Engage shall, subject to Section
8.2, use its best efforts to
15
<PAGE>
cause all Registrable Shares which Engage has been requested to register by the
Purchasers to be registered under the Securities Act; provided that Engage shall
have the right to postpone or withdraw any such Registration Statement without
obligation to either Purchaser.
8.2 In connection with any offering under Section 8.1 involving an
underwriting, Engage shall not be required to include any Registrable Shares in
such underwriting unless the holders thereof accept the terms of the
underwriting as agreed upon between Engage and the underwriters selected by it.
If in the opinion of the managing underwriter the registration of all, or part
of, the Registrable Shares which the Purchasers have requested to be included
would materially and adversely affect such public offering, then Engage shall be
required to include in the underwriting only that number of Registrable Shares,
if any, which the managing underwriter believes may be sold without causing such
adverse effect. In the event of such a reduction in the number of shares to be
included in the underwriting, all Purchasers of Registrable Shares who have
requested registration shall participate in the underwriting pro rata based upon
their total ownership of Registrable Shares (or in any other proportion as
agreed upon by such Purchasers) and if any such Purchaser would thus be entitled
to include more shares than such Purchaser requested to be registered, the
excess shall be allocated among such other requesting Purchasers pro rata based
on their ownership of Registrable Shares. Notwithstanding the foregoing, with
respect to any registration other than an Initial Public Offering in which
Registrable Shares may be included pursuant to this Section 8, if the number of
Registrable Shares to be included in the offering in accordance with the
foregoing is less than the total number of shares which the holders of
Registrable Shares have requested to be included, then the holders of
Registrable Shares who have requested registration and other holders of
securities entitled to include them in such registration shall participate in
the registration, pro rata based upon their total ownership of shares of Common
Stock (giving effect to the conversion into Common Stock of all securities
convertible thereunto). If any Purchaser would thus be entitled to include more
securities than such Purchaser requested to be registered, the excess shall be
allocated among other requesting holders pro rata in the manner described in the
preceding sentence.
8.3 Registration Procedures.
-----------------------
8.3.1 If and whenever Engage is required by the provisions of this
Agreement to effect the registration of any of the Registrable Shares under the
Securities Act, Engage shall:
(a) 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 and remain effective;
16
<PAGE>
(b) 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 keep the
Registration Statement effective for a period of not less than 180 days from the
effective date;
(c) as expeditiously as possible furnish to each selling Purchaser
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the selling Purchaser may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the selling Purchaser;
(d) 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 Purchaser shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the selling Purchaser to consummate the public
sale or other disposition in such jurisdictions of the Registrable Shares owned
by the selling Purchaser; provided, however, that Engage shall not be required
-------- -------
in connection with this paragraph (d) to qualify as a foreign corporation in any
jurisdiction; and
(e) cause all of the Registrable Shares to be listed on or included in
each securities exchange or quotation system on which similar securities issued
by Engage are then listed.
8.3.2 If Engage has delivered preliminary or final prospectuses to the
selling Purchaser and after having done so the prospectus is amended to comply
with the requirements of the Securities Act, Engage shall promptly notify the
selling Purchaser and, if requested, the selling Purchaser shall immediately
cease making offers of Registrable Shares and shall return all prospectuses to
Engage. Engage shall promptly provide the selling Purchaser with revised
prospectuses and, following receipt of the revised prospectuses, the selling
Purchaser shall be free to resume, if and to the extent consistent with the
transaction or transactions registered pursuant to the applicable Registration
Statement, making offers of the Registrable Shares.
8.4 Allocation of Expenses. Engage shall pay all Registration Expenses of
----------------------
such any registration effected pursuant to this Section 8. For purposes of this
Section 8, the term "Registration Expenses" shall mean all expenses incurred by
---------------------
Engage in complying with Section 8 of this Agreement, including, without
limitation, all registration and filing fees, exchange listing fees, printing
expenses, fees and disbursements of counsel for Engage, out-of-pocket expenses
of Engage and the underwriters, state Blue Sky fees and expenses, and the
expense of any special audits incident to or required by any such registration,
but excluding underwriting discount
17
<PAGE>
and selling commissions relating to the Registrable Shares. Such underwriting
discounts and selling commissions shall be borne pro rata by the selling
Purchasers in accordance with the number of Registrable Shares included by each
in such registration.
8.5 Indemnification.
---------------
8.5.1 In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, then to the extent
permitted by law Engage shall indemnify and hold harmless the seller of such
Registrable Shares (including its respective directors, officers, employees and
agents), (and to the extent set forth in any underwriting agreement with respect
to such offering, each underwriter) and each other person, if any, who controls
such seller or underwriter within the meaning of the Securities Act or the
Exchange Act from and against any losses, claims, damages, expenses or
liabilities, joint or several, to which such seller (including its respective
directors, officers, employees and agents), underwriter or controlling person
may become subject under the Securities Act, the Exchange Act, state securities
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 or any violation by Engage of the Securities
Act, any state securities or Blue Sky laws or any rule or regulation thereunder
in connection with such registration; and Engage shall 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 or the payment of any settlement thereof; provided, however,
-------- -------
that Engage shall 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 Engage, in writing, by or on
behalf of such seller, (and to the extent set forth in any underwriting
agreement with respect to such offering, each underwriter) or controlling person
specifically for use in the preparation thereof.
8.5.2 In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, then to the extent
permitted by law, each seller of Registrable Shares jointly and severally shall
indemnify and hold harmless Engage, each of its directors and officers (and to
the extent set forth in any underwriting agreement with respect to such
offering, each underwriter) and each
18
<PAGE>
person, if any, who controls Engage or any such underwriter within the meaning
of the Securities Act or the Exchange Act, from and against any losses, claims,
damages, expenses or liabilities joint or several, to which Engage, such
directors and officers, underwriter or controlling person may become subject
under the Securities Act, Exchange Act, state securities laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise solely out of or are based solely upon any untrue statement or
alleged untrue statement of a 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 the Registration
Statement, or arise solely out of or are solely 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, provided that the
statement or omission was made in reliance upon and in conformity with
information furnished in writing to Engage by or on behalf of such seller,
specifically for use in connection with the preparation of such Registration
Statement, prospectus, amendment or supplement; and provided, further, that the
-------- -------
obligations of such Purchaser hereunder shall be limited to an amount equal to
the proceeds to each Purchaser of Registrable Shares sold as contemplated
herein.
8.5.3 Indemnification of an underwriter pursuant to this Subsection 8.5
shall not be interpreted as providing relief of such underwriter from any or all
of its due diligence obligations. Further, an underwriter shall not be entitled
to indemnification pursuant to this Subsection 8.5 in the event that it fails to
deliver to any selling Purchaser any preliminary or final or revised prospectus,
as required by the rules and regulations of the Commission. Finally, no
indemnification shall be provided pursuant to this Subsection 8.5 in the event
that any error in a preliminary prospectus of Engage is subsequently corrected
in the final prospectus of Engage for a particular offering, and such final
prospectus is delivered to all purchasers in the offering prior to the date of
purchase of the securities.
8.5.4 Contribution. If the indemnification provided for in Subsections
------------
8.5.1 through 8.5.4 is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any losses, claims, damages
or liabilities referred to herein, the Indemnifying Party, in lieu of
indemnifying such Indemnified Party thereunder, shall to the extent permitted by
applicable law contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, claim, damage or liability in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
violation(s) that resulted in such loss, claim, damage or liability, as well as
any other relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by a court
of law by reference to, among other things, whether the untrue or alleged untrue
statement of material fact or the omission to state a material fact relates to
19
<PAGE>
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
8.6 Information by Holder. Each holder of Registrable Shares included in
---------------------
any registration shall furnish to Engage such information regarding such holder
and the distribution proposed by such holder as Engage may request in writing
and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement.
8.7 Rule 144 Requirements. With a view to making available to the
---------------------
Purchasers the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the Commission that may at any time permit a
Purchaser to sell securities of Engage to the public without registration,
Engage agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act (at any time after
it has become subject to the reporting requirements of the Exchange Act);
(b) file with the Commission in a timely manner all reports and other
documents required of Engage to be filed under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) furnish to any holder of Registrable Shares upon request a
written statement by Engage as to its compliance with the reporting requirements
of said Rule 144, and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of Engage, and such other reports and
documents of Engage as such holder may reasonably request to avail itself of any
similar rule or regulation of the Commission allowing it to sell any such
securities without registration.
8.8 Certain Definitions. As used in this Section 8, the following terms
-------------------
shall have the following respective meanings:
"Initial Public Offering" means the first public distribution of the Common
-----------------------
Stock pursuant to a firm commitment underwriting, following which the Common
Stock shall be listed and traded on a national securities exchange or on the
NASDAQ National Market System.
"Registrable Shares" means the shares of Common Stock issued or issuable
------------------
upon conversion of the Engage Shares and any convertible securities with respect
to the Engage Shares that may have been issued pursuant to the terms of the
Series B Preferred Stock, and any shares of Common Stock issued with respect
thereto as a dividend or other distribution or in connection with any
reorganization,
20
<PAGE>
recapitalization or other corporate transaction affecting the Series B Preferred
Stock generally. Wherever reference is made in this Agreement to a request or
consent of holders of a certain percentage of the Registrable Shares (or any
category thereof), or to a number or percentage of Registrable Shares (or any
category thereof) held by a particular Purchaser, such reference shall be
intended to refer to the shares of Common Stock issuable upon conversion of the
shares of Preferred Stock held by it in accordance with the Certificate of
Incorporation of Engage and the Certificate of Designation for such Preferred
Stock, even though such conversion has not yet been effected.
"Registration Statement" means a registration statement filed by Engage
----------------------
with the Commission for a public offering and sale of securities of Engage
(other than a registration statement on Form S-4 or S-8, or their successors, or
any registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).
9. MISCELLANEOUS.
9.1 Successors and Assigns. The terms and conditions of this Agreement
----------------------
will inure to the benefit of and be binding upon the respective successors and
assigns of the parties.
9.2 Governing Law and Dispute Resolution. This Agreement shall be
------------------------------------
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts (excluding choice of law principles) except with respect to
matters properly governed by the General Corporation Law of the State of
Delaware, which shall be governed thereby, and both parties agree that all
disputes arising between them related to this Agreement in any respect and the
enforcement of this Agreement shall be resolved only and exclusively in the
United States Federal Court in Boston, Massachusetts. Each party hereto hereby
consents to the non-exclusive jurisdiction of the United States Federal Court in
Boston, Massachusetts and the appropriate State and Federal Courts located in
the State of Delaware, with respect to any action, suit or proceeding commenced
in any such court by the other party hereto or its successors or assigns, and
each party hereto waives any defense it may have with respect to such
jurisdiction or with respect to the proper venue of any such action, suit or
proceeding in any such court.
9.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
9.4 Headings. The headings and captions used in this Agreement are used
--------
for convenience only and are not to be considered in construing or interpreting
this Agreement. All references in this Agreement to sections, paragraphs,
exhibits and
21
<PAGE>
schedules will, unless otherwise provided, refer to sections and paragraphs
hereof and exhibits and schedules attached hereto, all of which exhibits and
schedules are incorporated herein by this reference.
9.5 Notices. Any notice required or permitted under this Agreement will
-------
be given in writing, shall be effective when received, and shall in any event be
deemed received and effectively given upon personal delivery to the party to be
notified or three (3) business days after mailing, by registered air mail,
postage prepaid, or one (1) business day after deposit with a nationally
recognized courier service such as Federal Express for next business day
delivery under circumstances in which such service guarantees next business day
delivery, or one (1) business day after facsimile with copy delivered by
registered air mail, postage prepaid and addressed to the party to be notified
at the address as specified at the beginning of this Agreement or at such other
address as the Purchaser or Engage may designate by giving at least ten (10)
days advance written notice pursuant to this Section 9.5.
9.6 No Finder's Fees. Each Purchaser represents that it neither is nor
----------------
will be obligated for any finder's or broker's fee or commission in connection
with the transactions contemplated hereunder (except as a result of the
transactions contemplated under Section 8). The Purchasers will jointly and
severally indemnify and hold harmless Engage from any liability for any
commission or compensation in the nature of a finders' or broker's fee for which
the Purchasers or any of their officers, employees or consultants, or
representatives is responsible. Engage represents that it neither is nor will
be obligated for any finder's or broker's fee or commission in connection with
the transactions contemplated hereunder, except with respect to those owed to
Japan Entry (and except as a result of the transactions contemplated under
Section 8). Engage will indemnify and hold harmless the Purchasers from any
liability for any commission or compensation in the nature of a finder's or
broker's fee for which Engage or any of its officers, employees or consultants
or representatives is responsible.
9.7 Amendments and Waivers. This Agreement may be amended and the
----------------------
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of Engage and the Purchasers. Any amendment or waiver effected
in accordance with this Section 9.7 will be binding upon the Purchasers, Engage
and their respective successors and assigns.
9.8 Severability. If any provision of this Agreement is held to be
------------
unenforceable under applicable law, such provision will be excluded from this
Agreement and the balance of the Agreement will be interpreted as if such
provision were so excluded and will be enforceable in accordance with its terms.
22
<PAGE>
9.9 Entire Agreement. This Agreement, the Disclosure Letter and all
----------------
exhibits and schedules hereto and thereto constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior negotiations, correspondence, agreements,
understandings duties or obligations between the parties with respect to the
subject matter hereof.
9.10 Further Assurances. From and after the date of this Agreement, upon
------------------
the request of Engage or the Purchasers, Engage and the Purchasers will execute
and deliver such instruments, documents or other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
9.11 Meaning of Include and Including. Whenever in this Agreement the
--------------------------------
word "include" or "including" is used, it shall be deemed to mean "include,
without limitation" or "including, without limitation," as the case may be, and
the language following "include" or "including" shall not be deemed to set forth
an exhaustive list.
9.12 Fees Costs and Expenses. All fees, costs and expenses (including
-----------------------
attorneys' fees and expenses) incurred by either party hereto in connection with
the preparation, negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby (including the costs
associated with any filings with, or compliance with any of the requirements of,
any governmental authorities), shall be the sole and exclusive responsibility of
such party.
9.13 Competition. Nothing set forth herein shall be deemed to preclude,
-----------
limit or restrict Engage's or the Purchaser's ability to compete with the other.
9.14 Survival. The representations and warranties made by Engage are not
--------
limited in any manner by the representations and warranties made by the
Purchasers hereunder. The representations and warranties contained herein made
by Engage and the Purchasers shall survive the execution and delivery of this
Agreement.
9.15 Indemnity. Engage and each Purchaser each agrees to indemnify and
---------
hold each other party hereto harmless against any and all losses, costs and
expenses (including, without limitation, reasonable legal and other expenses)
resulting from, relating to or arising out of (i) any misrepresentation or
breach of any warranty of such party contained in this Agreement, the Disclosure
Letter or any certificate delivered by such party at the Closing, (ii) any
breach of any covenant of such party contained in this Agreement and (iii) any
and all actions, suits, demands, assessments or judgments with respect to any
claim arising out of or relating to the subject matter of this indemnification.
9.16 Indemnification Procedure. Each party entitled to indemnification
-------------------------
under this Agreement (the "Indemnified Party") shall give notice to the party
-----------------
23
<PAGE>
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 Agreement. 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. 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 that 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.
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul Schaut
---------------------------------
Name: Paul Schaut
-------------------------------
Title: CEO
------------------------------
SUMITOMO CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
SUMITOMO CORPORATION OF AMERICA
By: /s/ Yukihiro Yoshida
---------------------------------
Name: Yukihiro Yoshida
-------------------------------
Title: Executive Vice President
------------------------------
25
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION
26
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES B CONVERTIBLE PREFERRED STOCK
Engage Technologies, Inc., a Delaware corporation (the "Corporation" or the
"Company"), pursuant to authority conferred on the Board of Directors of the
Corporation by the Amended and Restated Certificate of Incorporation of the
Corporation and in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, certifies that the Board of Directors
of the Corporation, by unanimous consent dated July 31, 1998, has duly adopted
the following resolution providing for the establishment and issuance of a
series of Preferred Stock to be designated "Series B Convertible Preferred
Stock" and to consist of two hundred thirty-eight thousand five hundred ninety-
seven (238,597) shares as follows:
RESOLVED: That, pursuant to the authority expressly granted and vested in
the Board of Directors of this Corporation in accordance with the
provisions of its Amended and Restated Certificate of Incorporation, a
series of Preferred Stock of the Corporation hereby is established,
consisting of two hundred thirty-eight thousand five hundred ninety-seven
(238,597) shares, to be designated "Series B Convertible Preferred Stock"
(hereafter "Series B Preferred Stock"), the Board of Directors be and
hereby is authorized to issue such shares of Series B Preferred Stock from
time to time and for such consideration and on such terms as the Board of
Directors shall determine; and subject to the limitations provided by law
and by the Corporation's Amended and Restated Certificate of Incorporation,
the powers, designations, preferences and relative, participating, optional
or other special rights, powers or priorities of, and the qualifications,
limitations or restrictions upon, the Series B Preferred Stock shall be as
follows:
1. Designation. This series of Preferred Stock, par value $0.01 per
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share, shall be designated the "Series B Convertible Preferred Stock"
(hereinafter "Series B Preferred Stock").
2. Liquidation, Dissolution or Winding Up.
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(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other class or series of stock of the Corporation ranking on
liquidation prior and in preference to the Series A Preferred Stock, but before
any payment shall be made to
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the holders of Series B Preferred Stock, Common Stock or any other class or
series of stock ranking on liquidation junior to the Series A Preferred Stock,
by reason of their ownership thereof, an amount equal to $10.00 per share
(subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares),
plus any accrued but unpaid dividends with respect thereto. If upon any such
liquidation, dissolution or winding up of the Corporation, the remaining assets
of the Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of shares of Series A Preferred Stock the full
amount to which they shall be entitled, the holders of shares of Series A
Preferred Stock and any class or series of stock ranking on liquidation on a
parity with the Series A Preferred Stock shall share ratably in any distribution
of the remaining assets and funds of the Corporation in proportion to the
respective amounts which would otherwise be payable in respect of the shares
held by them upon such distribution if all amounts payable on or with respect to
such shares were paid in full.
(b) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock and any other class or series of
stock of the Corporation ranking on liquidation senior to the Series B Preferred
Stock, but before any payment shall be made to the holders of Common Stock or
any other class or series of stock ranking on liquidation junior to the Series B
Preferred Stock upon the liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series B Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, by reason of their ownership thereof; an
amount equal to $8.3823 per share (subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares). If upon any such liquidation,
dissolution or winding up of the Corporation, the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series B Preferred Stock the full amount to
which they shall be entitled, the holders of shares of Series B Preferred Stock
and any class or series of stock ranking on liquidation on a parity with the
Series B Preferred Stock shall share ratably in any distribution of the
remaining assets and funds of the Corporation in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock, Series B Preferred Stock and any
other class or series of stock ranking on liquidation senior to the Common
Stock, upon the dissolution, liquidation or winding up of the Corporation, the
holders of shares of Common Stock then outstanding shall be entitled to receive,
on a pro-rata basis, the remaining funds and assets of the Corporation available
for distribution to its stockholders.
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(d) With respect to the Series B Preferred Stock, a merger or
consolidation of the Corporation into or with another corporation in which the
holders of the outstanding capital stock of the Corporation immediately prior to
such merger or consolidation do not hold a majority of the outstanding capital
stock of the surviving corporation, or the sale of all or substantially all the
assets of the Corporation, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 2 unless the holders
of at least 51 % of the then outstanding shares of Series B Preferred Stock
elect to have such events not deemed to be a liquidation, dissolution or winding
up of the Corporation by giving written notice thereof to the Corporation at
least ten (10) days before the effective date of such event. If such notice is
given, the provisions of Subsection 4(h) below shall apply. Whenever the
distribution provided for herein shall be paid in property other than cash, the
value of such distribution shall be the fair market value of such property as
determined in good faith by the Board of Directors of the Corporation.
3. Voting Power. Except as otherwise expressly provided herein or as
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required by law, each holder of Series B Preferred Stock shall be entitled to
vote on all matters and shall be entitled to that number of votes equal to the
largest number of whole shares of Common Stock into which such holder's shares
of Series B Preferred Stock could be converted, pursuant to the provisions of
Section 4 hereof (taking into account all declared but unpaid dividends, if any,
with respect to such Series B Preferred Stock), at the record date for the
determination of stockholders entitled to vote on such matter or, if no such
record date is established, at the date such vote is taken or any written
consent of stockholders is solicited. Except as otherwise expressly provided
herein or as required by law, the holders of shares of Series A Preferred Stock,
Series B Preferred Stock and of Common Stock shall be entitled to vote together
as a class on all matters.
4. Conversion Rights. The holders of the Series B Preferred Stock shall
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have the following conversion rights:
(a) General. Subject to and in compliance with the provisions of
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this Section 4, any shares of the Series B Preferred Stock, may, at the option
of the holder, be converted at any time or from time to time into fully-paid and
non-assessable shares (calculated as to each conversion to the largest whole
share) of Common Stock. The number of shares of Common Stock to which a holder
of Series B Preferred Stock shall be entitled upon conversion shall be the
product obtained by multiplying the Applicable Conversion Rate (determined as
provided in Section 4(c)) by the number of shares of Series B Preferred Stock
being converted. Upon conversion of their shares of Series B Preferred Stock
into shares of Common Stock, holders of shares of Series B Preferred Stock shall
also have the option to have all declared but unpaid dividends on such shares of
Series B Preferred Stock converted into shares of Common Stock. The number of
shares of Common Stock to be received upon the conversion of such declared but
unpaid dividends shall be computed by multiplying
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the number of shares of Series B Preferred Stock which could have been purchased
with such declared but unpaid dividends, assuming a Series B Preferred Stock
purchase price of $8.3823 per share, by the Applicable Conversion Rate in effect
at the time of such conversion.
(b) Conversion Following Underwritten Public Offering.
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(i) All outstanding shares of Series B Preferred Stock shall,
upon the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offering and sale of Common Stock for the account of the Company in which
the Common Stock is sold at a price to the public of not less than the amount
per share which would be equal to $10.70 per share (such amount to be equitably
adjusted whenever there shall occur a stock split, combination, reclassification
or other similar event affecting the Common Stock) and in which the aggregate
gross proceeds (before deduction of any underwriting discounts, commissions or
expenses) received by the Company from such public offering, shall equal or
exceed Fifteen Million Dollars ($15,000,000), be converted automatically into
the number of shares of Common Stock to which a holder of Series B Preferred
Stock shall be entitled upon conversion pursuant to Section 4(a) hereof without
any further action by such holders and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent
for the Common Stock.
(ii) Upon the occurrence of the conversion specified in Section
4(b)(i), the holders of such Series B Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or of its
transfer agent for the Common Stock. Thereupon, there shall be issued and
delivered to each such holder a certificate or certificates for the number of
shares of Common Stock into which the shares of the Series B Preferred Stock
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless certificates evidencing such
shares of the Series B Preferred Stock being converted are either delivered to
the Company or any such transfer agent or the holder notifies the Company or any
such transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith. In addition, the Company
may, if the Board of Directors deems it reasonably necessary, require the holder
to post a bond in connection with such indemnity agreement.
(c) Applicable Conversion Rate. The conversion rate in effect at any
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time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing (i) $8.3823 by (ii) the Applicable Conversion Value, calculated as
provided in Section 4(d).
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(d) Applicable Conversion Value. The Applicable Conversion Value in
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effect from time to time, except as adjusted in accordance with Section 4(e)
hereof; shall be $8.3823 as of the date of this Certificate of Series B
Convertible Preferred Stock.
(e) Adjustments to Applicable Conversion Value.
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(i) Upon Sales of Common Stock. If the Company shall, while there
--------------------------
are any shares of Series B Preferred Stock outstanding, issue or sell shares of
its Common Stock without consideration or at a price per share less than the
Applicable Conversion Value in effect immediately prior to such issuance or
sale, then in each such case such Applicable Conversion Value upon each such
issuance or sale, except as hereinafter provided, shall be adjusted to an amount
equal to a fraction:
(A) the numerator of which shall be (a) the Applicable
Conversion Value prior to the issuance multiplied by the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock, calculated on a fully diluted basis assuming exercise or
conversion of all securities exercisable for or convertible into Common Stock,
whether or not such exercise or conversion is unvested or otherwise conditional,
plus (b) the price per share of such additional shares of Common Stock
multiplied by number of such additional shares of Common Stock so issued or
deemed issued, and
(B) the denominator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, calculated on a fully diluted basis assuming
exercise or conversion of all securities exercisable for or convertible into
Common Stock, whether or not such exercise or conversion is unvested or
otherwise conditional, plus (b) the number of such additional shares of Common
Stock so issued or deemed issued.
The Corporation's issuance of shares of Common Stock, or options exercisable
therefor, pursuant to any stock purchase or stock option plan or other
individual or group incentive program of any kind approved by the Board of
Directors to the Corporation's officers, directors, employees or consultants
shall not be deemed an issuance of additional shares of Common Stock and shall
have no effect on the calculations contemplated by this Section 4(e).
For the purposes of this Section 4(e), the issuance of any warrants,
options, subscriptions or purchase rights with respect to shares of Common Stock
and the
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issuance of any securities convertible into or exchangeable for shares
of Common Stock (or the issuance of any warrants, options or any rights with
respect to such convertible or exchangeable securities) whether or not such
conversion or exchange is conditional, shall be deemed an issuance at such time
of such Common Stock if the Net Consideration Per Share (as hereinafter
determined) which may be received by the Company for such Common Stock shall be
less than the Applicable Conversion Value at the time of such issuance. Any
obligation, agreement or undertaking to issue warrants, options, subscriptions
or purchase rights at any time in the future shall be deemed to be an issuance
at any time such obligation, agreement or undertaking is made or arises. No
adjustment of the Applicable Conversion Value shall be made under this Section
4(e) upon the issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange rights in any convertible
securities if any adjustment shall previously have been made upon the issuance
of any such warrants, options or subscriptions or purchase rights or upon the
issuance of any convertible securities (or upon the issuance of any warrants,
options or any rights therefor) as above provided. Any adjustment of the
Applicable Conversion Value with respect to this paragraph which relates to
warrants, options, subscriptions or purchase rights with respect to shares of
Common Stock shall be disregarded if, as, and when all of such warrants,
options, subscriptions or purchase rights expire or are canceled without being
exercised, so that the Applicable Conversion Value effective immediately upon
such cancellation or expiration shall be equal to the Applicable Conversion
Value in effect at the time of the issuance of the expired or canceled warrants,
options, subscriptions or purchase rights, with such additional adjustments as
would have been made to that Applicable Conversion Value had the expired or
canceled warrants, options, subscriptions or purchase rights not been issued.
For purposes of this paragraph, the "Net Consideration Per Share" which may be
received by the Company shall be determined as follows:
(A) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by the Company for
the issuance of such warrants, options, subscriptions or other purchase rights
or convertible or exchangeable securities, plus the minimum amount of
consideration, if any, payable to the Company upon exercise, conversion or
exchange thereof, divided by the aggregate number of shares of Common Stock that
would be issued if all such warrants, options, subscriptions or other purchase
rights or convertible or exchangeable securities were exercised, exchanged or
converted.
(B) The "Net Consideration Per Share" which may be received
by the Company shall be determined in each instance as
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of the date of issuance of warrants, options, subscriptions or other purchase
rights or convertible or exchangeable securities without giving effect to any
possible future price adjustments or rate adjustments which may be applicable
with respect to such warrants, options, subscriptions or other purchase rights
or convertible or exchangeable securities.
For purposes of this Section 4(e), if a part or all of the consideration
received by the Company in connection with the issuance of shares of the Common
Stock or the issuance of any of the securities described in this Section 4(e)
consists of property other than cash, the Company at its expense will promptly
cause independent public accountants of recognized standing selected by the
Company to value such property, whereupon such value shall be given to such
consideration and shall be recorded on the books of the Company with respect to
receipt of such property.
This Section 4(e)(i) shall not apply under any of the circumstances which
would constitute an Extraordinary Common Stock Event (as hereinafter defined in
Section 4(e)(ii)).
(ii) Upon an Extraordinary Common Stock Event. Upon the
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happening of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by multiplying the then effective
Applicable Conversion Value by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock event, and the product so obtained shall thereafter
be the Applicable Conversion Value. The Applicable Conversion Value, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of Common Stock as a dividend or other distribution on outstanding shares
of Common Stock, (ii) the subdivision of outstanding shares of Common Stock into
a greater number of shares of Common Stock, or (iii) the combination of
outstanding shares of the Common Stock into a smaller number of shares of Common
Stock.
(f) Dividends. In the event the Company shall make or issue, or
---------
fix a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in assets (excluding cash dividends or
distributions), then and in each such event provisions shall be made so that the
holders of Series B Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of
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Common Stock receivable thereupon, the number of securities or such other assets
of the Company which they would have received had their Series B Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
Conversion Date (as that term is hereafter defined in Section 4(j)), retained
such securities or such other assets receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this Section 4 with respect to the rights of the holders of the Series B
Preferred Stock.
(g) Recapitalization or Reclassification. If the Common Stock
------------------------------------
issuable upon the conversion of the Series B Preferred Stock shall be changed
into the same or a different number of shares of any class or classes of stock
of the Corporation, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for elsewhere in this Section 4, or a reorganization, merger, consolidation or
sale of assets provided for elsewhere in this Section 4), then and in each such
event the holder of each share of Series B Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such share of Series B Preferred Stock might have been
converted (taking into account all declared and unpaid dividends and interest
with respect to such Series B Preferred Stock) immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(h) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 4) or a merger or consolidation of the
Company with or into another corporation or entity, or the sale of all or
substantially all of the Company's properties and assets to any other person or
persons, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Series B Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series B
Preferred Stock, the number of shares of stock or other securities or property
of the Company, or of the successor corporation or entity resulting from such
merger, consolidation or sale, to which such holders would be entitled if they
were holders of the number of shares of Common Stock they were entitled to
receive on conversion of the Series B Preferred Stock held by them immediately
prior to such capital reorganization, merger, consolidation, or sale. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Series B Preferred Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this Section 4 (including adjustment of the
Applicable Conversion Value then in effect and the number of shares purchasable
upon conversion of the
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Series B Preferred Stock) shall be applicable after that event in as nearly
equivalent a manner as may be practicable.
Each holder of Series B Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Company, or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 4(h), shall have the option of
electing treatment of his shares of Series B Preferred Stock under either this
Section 4(h) or Section 2(d) hereof, notice of which election shall be submitted
in writing to the Company at its principal offices no later than five (5) days
before the effective date of such event.
(i) Accountant's Certificate as to Adjustments. In each case
------------------------------------------
of an adjustment or readjustment of the Applicable Conversion Rate, the Company
will furnish each holder of Series B Preferred Stock with a certificate,
prepared by its chief financial officer showing such adjustment or readjustment,
and stating in detail the facts upon which such adjustment or readjustment is
based. Upon the request of any holder, the Company will cause its independent
public accountants to confirm the accuracy of such adjustment or readjustment.
(j) Exercise of Conversion Privilege. To exercise his conversion
--------------------------------
privilege, a holder of Series B Preferred Stock shall surrender the certificate
or certificates representing the shares being converted to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Series B Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Company or in blank. The date when such written notice is received by the
Company, together with the certificate or certificates representing the shares
of Series B Preferred Stock being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date, the Company shall issue and
shall deliver to the holder of the shares of Series B Preferred Stock being
converted, or on its written order, such certificate or certificates as it may
request for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series B Preferred Stock in accordance with the
provisions of this Section 4, cash in the amount of all unpaid dividends on such
shares of Series B Preferred Stock, up to and including the Conversion Date,
unless conversion of such unpaid dividends into Common Stock has been elected,
and cash, as provided in Section 4(k), in respect of any fraction of a share of
Common Stock issuable upon such conversion. Such conversion shall be deemed to
have been effected immediately prior to the close of business on the Conversion
Date, and at such time the rights of the holder as holder of the converted
shares of Series B Preferred Stock shall cease and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such
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conversion shall be deemed to have become the holder or holders of record of the
shares of Common Stock represented thereby.
(k) Cash in Lieu of Fractional Shares. No fractional shares of
---------------------------------
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series B Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series B Preferred Stock, the Company shall pay to the holder of the shares of
Series B Preferred Stock which were converted a cash adjustment in respect of
such fractional shares in an amount equal to the same fraction of the market
price per share of the Common Stock (as determined in a reasonable manner
prescribed by the Board of Directors) at the close of business on the Conversion
Date. The determination as to whether or not any fractional shares are issuable
shall be based upon the total number of shares of Series B Preferred Stock being
converted at any one time by any holder thereof, not upon each share of Series B
Preferred Stock being converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Series B Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or on the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series B Preferred Stock which were not
converted.
(m) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series B Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series B Preferred Stock and all unpaid dividends thereon, and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock and all unpaid dividends thereon, the Company shall
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
5. No Reissuance of Series 13 Preferred Stock. No share or shares of
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Series B Preferred Stock acquired by the Company by reason of purchase or
conversion shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series B Preferred
Stock accordingly; provided, that this provision shall not be construed to
permit the amendment of this Certificate of Designation with respect to any
matter other than the number of shares of Series B Stock authorized for
issuance, except with the
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consent of the holders of a majority in interest of the issued and outstanding
Series B Preferred Stock.
6. No Dilution or Impairment. The Company will not, by amendment of its
-------------------------
Amended and Restated Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Series B Preferred Stock set forth
herein, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the holders of the Series B
Preferred Stock against dilution or other impairment. Without limiting the
generality of the foregoing, the Company (a) will not increase the par value of
any shares of stock receivable on the conversion of the Series B Preferred Stock
above the amount payable therefor on such conversion, (b) will take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and non-assessable shares of stock on the
conversion of all Series B Preferred Stock from time to time outstanding and all
accrued and unpaid dividends thereon, and (c) will not transfer all or
substantially all of its properties and assets to any other person (corporate or
otherwise), or consolidate with or merge into any other person or permit any
such person to consolidate with or merge into the Company (if the Company is not
the surviving person), unless such other person shall expressly assume in
writing and will be bound by all the terms of the Series B Preferred Stock set
forth herein.
7. Notices of Record Date. In the event of
----------------------
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation, or any other entity or person,
or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company, then and in each such event the Company shall mail or cause
to be mailed to each holder of Series B Preferred Stock a notice specifying (i)
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and a description of such dividend, distribution
or right, (ii) the date on which any such
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reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
(iii) the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up. Such notice shall
be mailed at least twenty (20) days prior to the date specified in such notice
on which such action is to be taken.
This Certificate of Designation was duly adopted in accordance with the
applicable provisions of Section 151 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Engage Technologies, Inc., has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 1st day of August, 1998.
ENGAGE TECHNOLOGIES, INC.
By:
Paul L. Schaut, President
ATTEST
By:______________________________________
William Williams II, Assistant Secretary
[Corporate Seal]
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EXHIBIT B
FORM OF OPINION
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Engage Technologies, Inc.
100 Brickstone Square, First Floor
Andover, Massachusetts 01810
July 31, 1998
Disclosure Letter to
Series B Convertible Preferred Stock Purchase Agreement dated August 31, 1998
Capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to them in the Series B Convertible Preferred Stock Purchase
Agreement dated August 31, 1998 by and among Engage Technologies, Inc. (the
"Company"), Sumitomo Corporation and Sumitomo Corporation of America.
Section 3.2
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Redemption Rights: the Restated Certificate of Incorporation of the
Company, as amended (a copy of which is attached as an exhibit hereto), provides
for certain redemption rights of the holders of Series A Convertible Preferred
Stock.
Section 3.5
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Subsidiaries: As a consequence of the merger of Accipiter, Inc. with and
into the Company prior to the Closing, the Company shall hold 100% of the
capital stock of Accipiter Ltd., a company organized under the laws of the
United Kingdom.
Joint Ventures: Pursuant to a Shareholders Agreement between the Company
and Sumitomo Corporation relating to Engage Technologies Japan, Inc. (the
"JV"), the Company has subscribed for a 49% equity interest in the JV.
Equity Interests: The Company holds 238,160 shares of the capital stock of
Red Brick Systems, Inc. (the "Red Brick Shares"). The Red Brick Shares are
subject to certain restrictions on transfer.
Section 3.11
- ------------
Absence of Certain Changes: The Red Brick Shares were valued at
$1,199,997.74 ($5.04 per share) on the Company's June 1998 balance sheet. The
Company may have to "write down" the Red Brick Shares based on a current (July
29, 1998) market value of $595,400.00 ($2.50 per share).
The Company recently underwent a reorganization in which 8,000,000 shares
of Common Stock and $8,000,000 in principal amount of intercompany debt were
changed into 800,000 shares of Series A Convertible Preferred Stock.
1
<PAGE>
On or about the date hereof, Accipiter, Inc. shall have been merged with
and into the Company in a stock-for-stock merger in which 700,000 shares of the
Company's Series A Convertible Preferred Stock was issued as consideration.
Attested to as of the date first set forth above
/s/ Paul L. Schaut
- -------------------------------
Paul L. Schaut, President
2
<PAGE>
EXHIBITS
Charter Documents
Amended and Restated Certificate of Incorporation of Engage Technologies,
Inc. Certificate of Designation of Series A Preferred Stock
3
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENGAGE TECHNOLOGIES, INC.
ENGAGE TECHNOLOGIES, INC. (the "Corporation" or the "Company"), a
corporation organized and existing under and by virtue of the Delaware General
Corporation Law, does hereby certify that the board of Directors of the
Corporation, by unanimous written consent of all of the Directors of the
Corporation dated April 3, 1998, approved and adopted, pursuant to Section 242
of the Delaware General Corporation Law, this Amended and Restated Certificate
of Incorporation, which restates, integrates and amends the Certificate of
Incorporation of the Corporation in its entirety pursuant to Section 245 of the
Delaware General Corporation Law. The Corporation further certifies that the
stockholders of the Corporation, by written consent dated April 3, 1998,
approved and adopted this Amended and Restated Certificate of Incorporation,
pursuant to Sections 242 and 245 of the Delaware General Corporation Law.
Written notice of the adoption of this Amended and Restated Certificate of
Incorporation has been given as provided by Section 228 of the General
Corporation Law of the State of Delaware to every stockholder entitled to such
notice. The Certificate of Incorporation of the Corporation, as amended to
date, was originally filed with the Secretary of State of Delaware on July 18,
1995 under the name CMG Direct Interactive, Inc. The full text of the Amended
and Restated Certificate of Incorporation is set forth below:
FIRST: The name of the Corporation is Engage Technologies, Inc.
-----
SECOND: The address of the Corporation's registered office in the State of
------
Delaware is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle,
State of Delaware. The name of its registered agent at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The aggregate number of shares of all classes of stock which the
------
Corporation is authorized to issue is twenty five million (25,000,000) shares,
of which five million ($5,000,000) shall be shares of Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), and twenty million (20,000,000) shall
be shares of Common Stock, par value $0.01 per share (the "Common Stock").
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid stock and the holder of such shares
shall not be liable for any further call or assessments or any other payment
thereon.
<PAGE>
No holder of any of the shares of any class of stock of the Corporation,
whether now or hereafter authorized or issued, shall be entitled as of right to
purchase or subscribe for (i) any unissued stock of any class whatsoever of
stock of the Corporation to be issued by reason of any increase of the
authorized stock of the Corporation, or of any class of such stock, or (iii)
bonds, certificates of indebtedness, debentures or other securities convertible
into stock of any class of the Corporation or carrying any right to purchase
stock of any class of the Corporation, but any such unissued stock, or
additionally authorized issue of any stock, or other securities convertible into
stock of the Corporation may be issued and disposed of pursuant to a resolution
or resolutions of the Board of Directors to such persons, firms, corporations,
associations or other entities and upon such terms as may be deemed advisable by
the Board of Directors in the exercise of its sole discretion.
Section 1. Common Stock.
------------
The powers, preferences, rights, qualifications, limitations and
restrictions relating to the Common Stock are as follows:
(a) The Common Stock is junior to the Preferred Stock and is subject to
all the powers, rights, privileges, preferences and priorities of the Preferred
Stock designated herein or in any resolution or resolutions adopted by the Board
of Directors pursuant to authority expressly vested in it by the provisions of
Section 2 of this Article FOURTH.
(b) The Common Stock shall have voting rights for the election of
directors and for all other purposes (subject to the powers, rights, privileges,
preferences and priorities of the Preferred Stock as provided above), each
holder of Common Stock being entitled to one vote for each share thereof held by
such holder, except as otherwise required by law.
Section 2. Preferred Stock.
---------------
The Board of Directors is expressly authorized to provide for the issuance
of all or any part of the shares of the Preferred Stock in one or more classes
or series, and to fix for each such class or series such voting powers, full or
limited or fractional, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors in
its sole discretion providing for the issuance of such class or series and as
may be permitted by the Delaware General Corporation Law, including, without
limitation, the authority to determine with respect to the shares of any such
class or series (i) whether such shares shall be redeemable, and, if so, the
terms and conditions of such redemption, whether for cash, property or rights,
including securities of any other corporation, and whether at
2
<PAGE>
the option of either the Corporation or the holder or both, including the date
or dates or the event or events upon or after which they shall be redeemable,
and the amount per share payable in cash of redemption, which amount may vary
under different conditions and at different redemption dates; (ii) whether such
shares shall be entitled to receive dividends (which may be cumulative or
noncumulative) at such rates, on such conditions, and at such times, and payable
in preference to, or in such relation to, the dividends payable on any other
class or classes or any other series; (iii) the rights of such shares in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of such
shares; (iv) whether such shares shall be convertible into, or exchangeable for,
shares of any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, whether at the option either of the
Corporation or the holder or both, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such
events as the Board of Directors shall determine; (v) whether the class or
series shall have a sinking fund for the redemption or purchase of such shares,
and, if so, the terms and amount of each sinking fund; (vi) provisions as to any
other voting, optional, and/or special or relative rights, powers, priorities,
preferences, limitations, or restrictions; and (vii) the number of shares and
designation of such class or series.
FIFTH: The Corporation is to have perpetual existence.
-----
SIXTH: Election of Directors need not be by written ballot unless the by-
-----
laws of the Corporation so provide.
SEVENTH: The Board of Directors of the Corporation is expressly authorized
-------
to adopt, amend or repeal the by-laws of the Corporation.
EIGHTH: A director shall not be personally liable to the Corporation or
------
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that the elimination or limitation of liability
is not permitted under the Delaware General Corporation Law as in effect when
such liability is determined. No amendment or repeal of this provision shall
deprive a director of the benefits hereof with respect to any act or omission
occurring prior to such amendment or repeal.
NINTH: The Corporation reserves the right to amend, alter, change or
-----
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
This Amended and Restated Certificate of Incorporation was duly adopted in
accordance with the applicable provisions of Sections 242, 245 and 228 of the
Delaware General Corporation Law.
3
<PAGE>
IN WITNESS WHEREOF, Engage Technologies, Inc. has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 3rd day of April, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
---------------------
Paul L. Schaut
President
ATTEST
By: /s/ William Williams
------------------------------
William Williams II
Assistant Secretary
[Corporate Seal]
4
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK
Engage Technologies, Inc., a Delaware corporation (the "Corporation" or the
"Company"), pursuant to authority conferred on the Board of Directors of the
Corporation by the Amended and Restated Certificate of Incorporation of the
Corporation and in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, certifies that the Board of Directors
of the Corporation, by unanimous consent dated April 3, 1998, has duly adopted
the following resolution providing for the establishment and issuance of a
series of Preferred Stock to be designated "Series A Convertible Preferred
Stock" and to consist of eight hundred thousand (800,000) shares as follows:
RESOLVED: That, pursuant to the authority expressly granted and vested
in the Board of Directors of this Corporation in accordance with the
provisions of its Amended and Restated Certificate of Incorporation, a
series of Preferred Stock of the Corporation hereby is established,
consisting of eight hundred thousand (800,000) shares, to be designated
"Series A Convertible Preferred Stock", (hereafter "Series A Preferred
Stock"), the Board of Directors, be and hereby is authorized to issue such
shares of Series A Preferred Stock from time to time and for such
consideration and on such terms as the Board of Directors shall determine;
and subject to the limitations provided by law and by the Corporation's
Amended and Restated Certificate of Incorporation, the powers,
designations, preferences and relative, participating, optional or other
special rights, powers or priorities of, and the qualifications,
limitations or restrictions upon, the Series A Preferred Stock shall be as
follows:
1. Designation. This series of Preferred Stock, par value $0.01 per
-----------
share, shall be designated the "Series A Convertible Preferred Stock"
(hereinafter "Series A Preferred Stock").
2. Dividends.
---------
(a) The holders of shares of Series A Preferred Stock shall be
entitled to receive, out of funds legally available therefor, dividends computed
at a rate of 7% or $0.70 per share per annum (or a proportional part thereof for
a portion of a year and all subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar recapitalization
affecting such shares) commencing as of February 1, 1998, payable when, as and
if declared by the Board of Directors of the Corporation. The right to receive
dividends on Series A Preferred Stock shall be noncumulative, and no right to
receive dividends shall
<PAGE>
accrue by reason of the fact that no dividends have been declared on the Series
A Preferred Stock in any or every prior year.
(b) The Corporation shall not declare or pay any distributions on
shares of Common Stock until the holders of shares of Series A Preferred Stock
then outstanding shall have first received a distribution at the rate specified
in paragraph (a) of this Section 2 calculated on a cumulative basis from the
date of issuance of said stock compounded annually as of any anniversary of the
date of issuance of such shares.
(c) For purposes of this Section 2, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
held by employees or directors of, or consultants to, the Corporation pursuant
to agreements providing for such repurchase and other than redemptions in
liquidation or dissolution of the Corporation) for cash or property, including
any such transfer, purchase or redemption by a subsidiary of the Corporation.
3. Liquidation, Dissolution or Winding-Up.
--------------------------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, and provided that the amount available for distribution to holders of
the Series A Preferred Stock pursuant to this Section 3 is less than $10.00 per
share plus a dividend computed at a rate of 7% or $0.70 per share per annum,
compounded annually as of February 1, 1998 (such amount to he equitably adjusted
whenever there shall occur a stock split, combination, reclassification or other
similar event as provided in Section 5(e)(ii) hereof), whether voluntary or
involuntary, the entire assets of the Company available for such distribution
shall be distributed ratably among the holders of the Series A Preferred Stock.
(b) In the event of any liquidation, dissolution or winding up of the
Company, and provided that the amount available for distribution to holders of
the Series A Preferred Stock pursuant to this Section 3 is at least $10.00 per
share plus a dividend computed at a rate of 7% or $0.70 per share per annum,
compounded annually as of February 1, 1998 (such amount to be equitably adjusted
whenever there shall occur a stock split, combination, reclassification or other
similar event as provided in Section 5(e)(ii) hereof), whether voluntary or
involuntary, holders of each share of Series A Preferred Stock shall be entitled
to be paid first out of the assets of the Company available for distribution to
holders of the Company's capital stock of all classes, whether such assets are
capital, surplus, or earnings, before any sums shall be paid or any assets
distributed among the holders of any other class of capital stock, an amount
equal to $10.00 per share of Series A Preferred Stock plus a
2
<PAGE>
dividend computed at a rate of 7% or $0.70 per share per annum, compounded
annually as of February 1, 1998. After the payment of the preferential amount
required to be paid to the holders of the Series A Preferred Stock, upon the
liquidation, dissolution or winding up of the Corporation, the holders of shares
of the Corporation's Common Stock shall be entitled to receive the remaining
assets and funds of the Corporation available for distribution to its
stockholders.
(c) A consolidation or merger of the Company or a sale of all or
substantially all of the assets of the Company shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Company within the
meaning of this Section 3; provided, however, that each holder of Series A
Preferred Stock shall have the right to elect the benefits of the provisions of
Section 5(h) hereof in lieu of receiving payment in liquidation, dissolution or
winding up of the Company pursuant to this Section 3. Each holder of Series A
Preferred Stock shall notify the Company in advance of its election to obtain
the benefits of this Section 3(c) or of Section 5(h), which notification shall
be given not later than a date specified in writing to each holder by the
Company to be at least five (5) days prior to the effective date of such
consolidation, merger or sale. If a holder fails to make any election, he shall
be deemed to have elected the benefits of this Section 3(c).
(d) Whenever the distribution provided for herein shall be paid in
property other than cash, the value of such distribution shall be the fair
market value of such property as determined in good faith by the Board of
Directors of the Company.
4. Voting Power. Except as otherwise expressly provided in Section 8
------------
hereof, or as required by law, each holder of Series A Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of whole shares of Common Stock into which such
holder's shares of Series A Preferred Stock could be converted, pursuant to the
provisions of Section 5 hereof (taking into account all accrued and unpaid
dividends, if any, with respect to such Series A Preferred Stock), at the record
date for the determination of shareholders entitled to vote on such matter or,
if no such record date is established, at the date such vote is taken or any
written consent of shareholders is solicited. Except as otherwise expressly
provided herein or as required by law, the holders of shares of Series A
Preferred Stock and of Common Stock shall be entitled to vote together as a
class on all matters.
5. Conversion Rights. The holders of the Series A Preferred Stock shall
-----------------
have the following conversion rights:
(a) General. Subject to and in compliance with the provisions of
-------
this Section 5, any shares of the Series A Preferred Stock, may, at the option
of the holder, be converted at any time or from time to time into fully-paid and
non-assessable
3
<PAGE>
shares (calculated as to each conversion to the largest whole share) of Common
Stock. The number of shares of Common Stock to which a holder of Series A
Preferred Stock shall be entitled upon conversion shall be the product obtained
by multiplying the Applicable Conversion Rate (determined as provided in Section
5(c)) by the number of shares of Series A Preferred Stock being converted. Upon
conversion of their shares of Series A Preferred Stock into shares of Common
Stock, holders of shares of Series A Preferred Stock shall also have the option
to have all declared but unpaid dividends on such shares of Series A Preferred
Stock converted into shares of Common Stock. The number of shares of Common
Stock to be received upon the conversion of such declared but unpaid dividends
shall be computed by multiplying the number of shares of Series A Preferred
Stock which could have been purchased with such declared but unpaid dividends,
assuming a Series A Preferred Stock purchase price of $10.00 per share, by the
Applicable Conversion Rate in effect at the time of such conversion.
(b) Conversion Following Underwritten Public Offering.
-------------------------------------------------
(i) All outstanding shares of Series A Preferred Stock shall,
upon the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offering and sale of Common Stock for the account of the Company in which
the Common Stock is sold at a price to the public of not less than the amount
per share which would be equal to $10.00 per share plus a dividend computed at a
rate of 7% or $0.70 per share per annum, compounded annually as of February 1,
1998 (such amount to be equitably adjusted whenever there shall occur a stock
split, combination, reclassification or other similar event affecting the Common
Stock) and in which the aggregate gross proceeds (before deduction of any
underwriting discounts, commissions or expenses) received by the Company from
such public offering, shall equal or exceed Fifteen Million Dollars
($15,000,000), be converted automatically into the number of shares of Common
Stock to which a holder of Series A Preferred Stock shall be entitled upon
conversion pursuant to Section 5(a) hereof without any further action by such
holders and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent for the Common Stock.
(ii) Upon the occurrence of the conversion specified in Section
5(b)(i), the holders of such Series A Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or of its
transfer agent for the Common Stock. Thereupon, there shall be issued and
delivered to each such holder a certificate or certificates for the number of
shares of Common Stock into which the shares of the Series A Preferred Stock
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless certificates evidencing such
shares of the Series A Preferred Stock
4
<PAGE>
being converted are either delivered to the Company or any such transfer agent
or the holder notifies the Company or any such transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. In addition, the Company may, if the Board of
Directors deems it reasonably necessary, require the holder to post a bond in
connection with such indemnity agreement.
(c) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing (i) $10.00 by (ii) the Applicable Conversion Value, calculated as
provided in Section 5(d).
(d) Applicable Conversion Value. The Applicable Conversion Value in
---------------------------
effect from time to time, except as adjusted in accordance with Section 5(e)
hereof, shall be $1.00 as of the date of this Certificate of Series A
Convertible Preferred Stock.
(e) Adjustments to Applicable Conversion Value.
------------------------------------------
(i) Upon Sales of Common Stock. If the Company shall, while
--------------------------
there are any shares of Series A Preferred Stock outstanding, issue or sell
shares of its Common Stock without consideration or at a price per share less
than the Applicable Conversion Value in effect immediately prior to such
issuance or sale, then in each such case such Applicable Conversion Value upon
each such issuance or sale, except as hereinafter provided, shall be adjusted to
an amount determined by multiplying such Applicable Conversion Value by a
fraction:
(A) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock, calculated on a fully diluted basis assuming exercise or
conversion of all securities exercisable for or convertible into Common Stock,
whether or not such exercise or conversion is unvested or otherwise conditional,
plus (b) the number of shares of Common Stock which the net aggregate
consideration received by the Corporation for the total number of such
additional shares of Common Stock so issued would purchase at the Applicable
Conversion Value, and
(B) the denominator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock, calculated on a fully diluted basis assuming exercise or
conversion of all securities exercisable for or convertible into Common Stock,
whether or not such exercise or conversion is unvested or otherwise conditional,
plus (b) the number of such additional shares of Common Stock so issued or
deemed issued.
5
<PAGE>
The Corporation's issuance of up to an aggregate of two million (2,000,000)
shares of Common Stock (such amount to be equitably adjusted whenever there
shall occur a stock split, combination, reclassification or other similar event
affecting the Common Stock), or options exercisable therefor, pursuant to any
stock purchase or stock option plan or other individual or group incentive
program of any kind approved by the Board of Directors to the Corporation's
officers, directors, employees or consultants shall not be deemed an issuance of
additional shares of Common Stock and shall have no effect on the calculations
contemplated by this Section 5(e).
For the purposes of this Section 5(e), the issuance of any warrants,
options, subscriptions or purchase rights with respect to shares of Common Stock
and the issuance of any securities convertible into or exchangeable for shares
of Common Stock (or the issuance of any warrants, options or any rights with
respect to such convertible or exchangeable securities) whether or not such
conversion or exchange is conditional, shall be deemed an issuance at such time
of such Common Stock if the Net Consideration Per Share (as hereinafter
determined) which may be received by the Company for such Common Stock shall be
less than the Applicable Conversion Value at the time of such issuance. Any
obligation, agreement or undertaking to issue warrants, options, subscriptions
or purchase rights at any time in the future shall be deemed to be an issuance
at any time such obligation, agreement or undertaking is made or arises. No
adjustment of the Applicable Conversion Value shall be made under this Section
5(e) upon the issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange rights in any convertible
securities if any adjustment shall previously have been made upon the issuance
of any such warrants, options or subscriptions or purchase rights or upon the
issuance of any convertible securities (or upon the issuance of any warrants,
options or any rights therefor) as above provided. Any adjustment of the
Applicable Conversion Value with respect to this paragraph which relates to
warrants, options, subscriptions or purchase rights with respect to shares of
Common Stock shall be disregarded if, as, and when all of such warrants,
options, subscriptions or purchase rights expire or are canceled without being
exercised, so that the Applicable Conversion Value effective immediately upon
such cancellation or expiration shall be equal to the Applicable Conversion
Value in effect at the time of the issuance of the expired or canceled warrants,
options, subscriptions or purchase rights, with such additional adjustments as
would have been made to that Applicable Conversion Value had the expired or
canceled warrants, options, subscriptions or purchase rights not been issued.
For purposes of this paragraph, the "Net Consideration Per Share" which may be
received by the Company shall be determined as follows:
(A) The "Net Consideration Per Share" shall mean the amount equal
to the total amount of consideration, if any, received by the Company for the
issuance of such warrants, options,
6
<PAGE>
subscriptions or other purchase rights or convertible or exchangeable
securities, plus the minimum amount of consideration, if any, payable to the
Company upon exercise, conversion or exchange thereof, divided by the aggregate
number of shares of Common Stock that would be issued if all such warrants,
options, subscriptions or other purchase rights or convertible or exchangeable
securities were exercised, exchanged or converted.
(B) The "Net Consideration Per Share" which may be received by
the Company shall be determined in each instance as of the date of issuance of
warrants, options, subscriptions or other purchase rights or convertible or
exchangeable securities without giving effect to any possible future price
adjustments or rate adjustments which may be applicable with respect to such
warrants, options, subscriptions or other purchase rights or convertible or
exchangeable securities.
For purposes of this Section 5(e), if a part or all of the consideration
received by the Company in connection with the issuance of shares of the Common
Stock or the issuance of any of the securities described in this Section 5(e)
consists of property other than cash, the Company at its expense will promptly
cause independent public accountants of recognized standing selected by the
Company to value such property, whereupon such value shall be given to such
consideration and shall be recorded on the books of the Company with respect to
receipt of such Property.
This Section 5(e)(i) shall not apply under any of the circumstances which
would constitute an Extraordinary Common Stock Event (as hereinafter defined in
Section 5(e)(ii)).
(ii) Upon an Extraordinary Common Stock Event. Upon the
----------------------------------------
happening of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by multiplying the then effective
Applicable Conversion Value by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock event, and the product so obtained shall (hereafter
be the Applicable Conversion Value. The Applicable Conversion Value, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Stock Event or Events.
7
<PAGE>
"Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of Common Stock as a dividend or other distribution on outstanding shares
of Common Stock, (ii) the subdivision of outstanding shares of Common Stock into
a greater number of shares of Common Stock, or (iii) the combination of
outstanding shares of the Common Stock into a smaller number of shares of Common
Stock.
(f) Dividends. In the even (the Company shall make or issue, or
---------
fix a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in assets (excluding cash dividends or
distributions), then and in each such event provisions shall be made so that the
holders of Series A Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon, the
number of securities or such other assets of the Company which they would have
received had their Series A Preferred Stock been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to and including the Conversion Date (as that term is hereafter
defined in Section 5(j)), retained such securities or such other assets
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred Stock.
(g) Recapitalization or Reclassification. If the Common Stock
------------------------------------
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or a different number of shares of any class or classes of stock
of the Corporation, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for elsewhere in this Section 5, or a reorganization, merger, consolidation or
sale of assets provided for elsewhere in this Section 5), then and in each such
event the holder of each share of Series A Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such share of Series A Preferred Stock might have been
converted (taking into account all accrued and unpaid dividends and interest
with respect to such Series A Preferred Stock) immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(h) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 5) or a merger or consolidation of the
Company with or into another corporation or entity, or the sale of all or
substantially all of the Company's properties and assets to any other person or
persons, then, as a pan of such reorganization, merger, consolidation or sale,
provision shall be made so
8
<PAGE>
that the holders of the Series A Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock, the number of shares of
stock or other securities or property of the Company, or of the successor
corporation or entity resulting from such merger, consolidation or sale, to
which a holder of Common Stock issuable upon conversion would have been entitled
on such capital reorganization, merger, consolidation, or sale. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of the Series A
Preferred Stock after the reorganization, merger, consolidation or sale to the
end that the provisions of this Section 5 (including adjustment of the
Applicable Conversion Value then in effect and the number of shares purchasable
upon conversion of the Series A Preferred Stock) shall be applicable after that
event in as nearly equivalent a manner as may be practicable.
Each holder of Series A Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Company, or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 5(h), shall have the option of
electing treatment of his shares of Series A Preferred Stock under either this
Section 5(h) or Section 3(b) hereof, notice of which election shall be submitted
in writing to the Company at its principal offices no later than five (5) days
before the effective date of such event.
(i) Accountant's Certificate as to Adjustments. In each case of
------------------------------------------
an adjustment or readjustment of the Applicable Conversion Rate, the Company
will furnish each holder of Series A Preferred Stock with a certificate,
prepared by its chief financial officer showing such adjustment or readjustment,
and stating in detail the facts upon which such adjustment or readjustment is
based. Upon the request of any holder, the Company will cause its independent
public accountants to confirm the accuracy of such adjustment or readjustment.
(j) Exercise of Conversion Privilege. To exercise his conversion
--------------------------------
privilege, a holder of Series A Preferred Stock shall surrender the certificate
or certificates representing the shares being converted to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Series A Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Company or in blank. The date when such written notice is received by the
Company, together with the certificate or certificates representing the shares
of Series A Preferred Stock being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date, the Company shall issue and
shall deliver to the holder of the shares of Series A Preferred Stock being
converted, or on its written order, such certificate or certificates
9
<PAGE>
as it may request for the number of whole shares of Common Stock issuable upon
the conversion of such shares of Series A Preferred Stock in accordance with the
provisions of this Section 5, cash in the amount of all unpaid dividends on such
shares of Series A Preferred Stock, up to and including the Conversion Date,
unless conversion of such unpaid dividends into Common Stock has been elected,
and cash, as provided in Section 5(k), in respect of any fraction of a share of
Common Stock issuable upon such conversion. Such conversion shall be deemed to
have been effected immediately prior to the close of business on the Conversion
Date, and at such time the rights of the holder as holder of the converted
shares of Series A Preferred Stock shall cease and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares of Common Stock represented thereby.
(k) Cash in Lieu of Fractional Shares. No fractional shares of
---------------------------------
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series A Preferred Stock, the Company shall pay to the holder of the shares of
Series A Preferred Stock which were converted a cash adjustment in respect of
such fractional shares in an amount equal to the same fraction of the market
price per share of the Common Stock (as determined in a reasonable manner
prescribed by the Board of Directors) at the close of business on the Conversion
Date. The determination as to whether or not any fractional shares are issuable
shall be based upon the total number of shares of Series A Preferred Stock being
converted at any one time by any holder thereof, not upon each share of Series A
Preferred Stock being converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Series A Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or on the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series A Preferred Stock which were not
converted.
(m) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock and all unpaid dividends thereon, and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock and all unpaid dividends thereon, the Company shall
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
10
<PAGE>
6. Redemption.
----------
(a) At the written election of a majority in interest of the holders
of Series A Preferred Stock on or before March 1, 2005, beginning on August 1,
2005 and on the first day of July in each year thereafter (the "Redemption
Date"), the Company shall redeem twenty-five percent (25 %) of all of the
outstanding shares of Series A Preferred Stock; provided, however, that the
Company's redemption option shall be reduced by the number of shares of Series A
Preferred Stock that have been converted prior to any such Redemption Date, and
such reduction shall apply first to the Redemption Date immediately following
such conversion and thereafter any balance shall apply to any Subsequent
Redemption Dates. The redemption price for each share of Series A Preferred
Stock redeemed pursuant w this Section 6 shall be $10.00 per share plus a
dividend computed at a rate of 7% or $0.70 per share per annum, compounded
annually as of February 1, 1998 (the "Redemption Price"). Each redemption of
Series A Preferred Stock shall be made so that the number of shares of Series A
Preferred Stock held by each holder whose shares are being redeemed shall be
reduced in an amount which shall bear the same ratio to the total number of
shares of Series A Preferred Stock being redeemed as all such shares then held
by such registered owner bears to the aggregate number of shares of Series A
Preferred Stock then outstanding and held by all registered owners whose shares
are being redeemed.
(b) The Redemption Price set forth in this Section 6 shall be subject
to equitable adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Series A Preferred Stock.
(c) At least thirty (30) days before any Redemption Date pursuant to
Section 6(a), written notice (hereinafter referred to as the "Redemption
Notice") shall be mailed, postage prepaid, to each holder of record of the
Series A Preferred Stock which is to be redeemed, at its address shown on the
records of the Company; provided, however, that the giving of such Redemption
Notice shall not affect the conversion rights of such holder pursuant to Section
5 hereof; provided, further, that the Company's failure to give such Redemption
Notice shall in no way affect its obligation to redeem the shares of Series A
Preferred Stock as provided in Section 6(a) hereof. The Redemption Notice shall
contain the following information:
(i) The number of shares of Series A Preferred Stock held by the
holder which shall be redeemed by the Company and the total number of shares of
Series A Preferred Stock held by all holders to be so redeemed.
(ii) The Redemption Date and the applicable Redemption Price, and
11
<PAGE>
(iii) That the holder is to surrender to the Company, at the
place designated therein, its certificate or certificates representing the
shares of Series A Preferred Stock to be redeemed.
(d) Each holder of shares of Series A Preferred Stock to be redeemed
shall surrender the certificate or certificates representing such shares to the
Company at the place designated in the Redemption Notice, and thereupon the
applicable Redemption Price for such shares as set forth in this Section 6 shall
be paid to the order of the person whose name appears on such certificate or
certificates and each surrendered certificate shalt be canceled and retired.
(e) If any shares of Series A Preferred Stock are not redeemed solely
because a holder fails to surrender the certificate or certificates representing
such shares pursuant to Section 6(d) hereof, then, from and after the Redemption
Date, such shares of Series A Preferred Stock thereupon subject to redemption
shall not be entitled to any further accrual of any dividends pursuant to
Section 2 hereof or to the conversion provisions set forth in Section 5 hereof,
unless the Company otherwise specifically agrees in writing.
7. No Reissuance of Series A Preferred Stock. No share or shares of
-----------------------------------------
Series A Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Company shall be
authorized to issue. The Company may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of the Series A Preferred Stock accordingly.
8. Restrictions and Limitations.
----------------------------
(a) Except as expressly provided herein or as required by law,
neither the Company nor any subsidiary of the Company (which shall mean any
corporation or trust of which the Company directly or indirectly owns at the
time all of the outstanding shares of every class of such corporation or trust
other than directors' qualifying shares) shall, without the vote or written
consent by the holders of at least a majority of the then outstanding shares of
the Series A Preferred Stock voting together each share of Series A Preferred
Stock to be entitled to one vote in each instance for each share of Common Stock
into which such Preferred Stock is then convertible:
(i) Redeem, purchase or otherwise acquire for value or (pay in,
to or set aside for a sinking fund for such purpose), any share or shares of
Series A Preferred Stock other than pursuant to the redemption provisions
contained elsewhere herein;
12
<PAGE>
(ii) Authorize or issue, or obligate itself to authorize or
issue, any other equity security senior to or on a parity with the Series A
Preferred Stock as to liquidation preferences, conversion rights, redemption
rights, dividend rights, voting rights or otherwise;
(iii) Effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the Company or any
subsidiary thereof, or any consolidation or merger involving the Company or any
subsidiary thereof, or any reclassification or other change of stock, or any
recapitalization or any dissolution, liquidation or winding up of the Company;
(iv) Effect any bank borrowings in excess of an aggregate
amount of Two Hundred Fifty Thousand Dollars ($250,000) U.S.;
(v) Effect any merger by the Company with or into any business
entity or any acquisition by the Company of any assets or business having a fair
market value in excess of One Million Dollars ($1,000,000) U.S.; or
(vi) Amend its Amended and Restated Certificate of
Incorporation, if such amendment would change any of the rights, preferences,
privileges of or limitations provided for herein for the benefit of any shares
of Series A Preferred Stock.
9. No Dilution or Impairment. Except as provided in Section 8 above, the
-------------------------
Company will not, by amendment of its Amended and Restated Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of the Series A Preferred Stock set forth herein, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
holders of the Series A Preferred Stock against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock receivable on the conversion of
the Series A Preferred Stock above the amount payable therefor on such
conversion, (b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and non-
assessable shares of stock on the conversion of all Series A Preferred Stock
from time to time outstanding and all accrued and unpaid dividends thereon, and
(c) will not transfer all or substantially all of its properties and assets to
any other person (corporate or otherwise), or consolidate with or merge into the
Company (if the Company is not the surviving person), unless such other person
shall expressly assume in writing and will be bound by all the terms of the
Series A Preferred Stock set forth herein.
13
<PAGE>
10. Notices of Record Date. In the event of
----------------------
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation, or any other entity or person,
or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company, then and in each such event the Company shall mail or cause
to be mailed to each holder of Series A Preferred Stock a notice specifying (i)
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and a description of such dividend, distribution
or right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, (iii) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least
twenty (20) days prior to the date specified in such notice on which such action
is to be taken.
This Certificate of Designation was duly adopted in accordance with the
applicable provisions of Section 151 of the Delaware General Corporation law.
IN WITNESS WHEREOF, Engage Technologies, Inc., has caused its corporation
seal to be affixed hereto and this Certificate to be signed by Paul L. Schaut,
its President, and attested by William Williams II, its Assistant Secretary,
this 3rd day of April, 1998.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
---------------------
Paul L. Schaut, President
14
<PAGE>
ATTEST
By: /s/ William Williams
-----------------------------------------
William Williams II, Assistant Secretary
[Corporate Seal]
15
<PAGE>
Exhibit 10.15
-------------
ANTHONY & CO.
OFFICE LEASE AGREEMENT
COVER PAGE
TENANT: ACCIPITER, INC.
DATED: APRIL 9, 1997
For the purposes of this Lease Agreement by and between MILKSON ASSOCIATES, LLC
("Landlord"), by its agent, Anthony & Co., and ACCIPITER, INC. ("Tenant"), the
terms set forth below, when preceded by a capital letter, shall have the meaning
set forth in this Cover Page and in the Lease.
I. TENANT AND LANDLORD INFORMATION
A. Landlord: Milkson Associates, LLC
a North Carolina Limited Liability Company
B. Tenant: Accipiter, Inc.
C. Tenant's Notice Address: Suite 2000
4000 Wake Forest Road
Raleigh, NC 27609
D. Tenant's Representative Chris Evans
II. DESCRIPTION OF PREMISES
A. Building: 4000 Wake Forest Road
B. Business Hours: 8:00 a.m. to 6:00 p.m.
C. Premises: Suite 210, approximately 6,014 rentable
square feet
D. Permitted Use: Office
III. TERM
A. Commencement Date: May 1, 1997
B. Expiration date: April 30, 1999
<PAGE>
IV. RENT
A. Advance Rent: ____ N/A ____ ($___) representing the final
monthly installment of Base Annual Rent for
the ______ (___th) month of the lease term
set forth in Article III.
B. Base Annual Rent: Eighty-seven Thousand, Two Hundred Three and
no/100 Dollars ($87,203.00).
C. Base Rental Rate: Fourteen and 50/100 Dollars ($14.50) per
square foot.
D. Monthly Installment of Seven Thousand, Two Hundred Sixty-six and
Basic Rental Rent: 92/100 Dollars ($7,266.92).
E. Security Deposit: One Thousand, Twenty-one and 50/100 Dollars
($1,021.50).
V. ADJUSTMENTS
A. Adjustment Period The Consumer Price Index as established for
Consumer price Index: the month of _____ N/A ____ of each year
following the Base Period Consumer Price
Index as determined from the published
figures.
B. Base Period Consumer The Consumer Price Index as established
Price Index: the month of ____ N/A ____.
C. CPI Escalator: ______ N/A ______ Percent (___%) subject to
Three percent (3%) minimum and Five percent
(5%) maximum.
D. Base Operating and Real _____ N/A _____ Dollars ($____) per
Estate Tax Expenses: square foot.
E. Tenant's Pro Rata Share: ____ N/A ____ Percent (___%) of the
Building. Total rentable square footage is
____.
VI. MISCELLANEOUS
A. Broker: Jim Anthony
B. Special Conditions None
C. Exclusive Rights None
TENANT: LANDLORD:
ACCIPITER, INC. MILKSON ASSOCIATES, LLC
by:__________________________ by:______________________
Name:________________________
Title:_______________________
Date:________________________
(Please Print or Type)
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<PAGE>
ANTHONY & Co.
OFFICE LEASE
THIS LEASE ("Lease") is made April 9, 1997, between Milkson Associates, LLC
("Landlord") and ACCIPITER ("Tenant"). Landlord is a Limited Liability Company,
organized under the laws of North Carolina.
ARTICLE 1
PREMISES
1.01 Premises. Landlord leases to Tenant Suite 200, 4000 Wake Forest Road,
Raleigh, North Carolina ("Premises") as outlined on the Floor Plan attached as
Exhibit A. The Premises consists of approximately 6,014 square feet of rentable
- ---------
space and 5,322 square feet of usable space in the building ("Building") in
which the Premises are located. The Building is shown as Exhibit B and is
---------
located on the land described in Exhibit C ("Land"). The Premises contain the
---------
fixtures, improvements, and other property now installed plus any Landlord
Improvements required by Section 4.05 and Exhibit D.
---------
1.02 Common Areas. Tenant and its agents, employees, and invitees have the
nonexclusive right with others designated by Landlord to the free use of the
common areas ("Common Areas") in the Building and on the Land for the Common
Areas' intended and normal purpose. Common Areas include elevators, sidewalks,
parking areas, driveways, hallways, stairways, public bathrooms, common
entrances, lobby, and other similar public areas and access ways. Landlord may
change the Common Areas if the changes do not materially and unreasonably
interfere with Tenant's access to or use of the Premises.
ARTICLE II
USE
Tenant shall use the Premises for general office use, unless Landlord gives its
advance written consent to another use. Landlord warrants that applicable laws,
ordinances, regulations, and restrictive covenants permit the Premises to be
used for general offices. Tenant shall not create a nuisance or use the
Premises for any immoral or illegal purposes.
ARTICLE III
TERM
The Lease begins ("Commencement Date") on the earlier of: May 1, 1997, or
(a) The date that Tenant takes possession and occupies the Premises; or
(b) After (i) the Premises are substantially completed according to
Section 4.01, (ii) Landlord gives the notice required by Section
4.02, (iii) Landlord is ready, willing and able to deliver actual
possession of the Premises, and (iv) the Target Date set in Section
4.01 has arrived.
The Lease ends ("Expiration Date") at 11:59 pm on the last day of the calendar
month June (2) years following the Commencement Date, unless terminated earlier
under this Lease. Within thirty (30) days after the Commencement Date, the
parties shall confirm in writing the Commencement and Expiration Dates.
4.01 Substantial Completion. Landlord shall use its best efforts to
substantially complete the Premises by May 1, 1997 ("Target Date").
Substantially complete means completing Landlord's Improvements (Section 4.05
and Exhibit D) so that Tenant can use the Premises for their intended purposes.
---------
4.02 Notice. Landlord shall give Tenant at least ten (10) days advance
notice of the estimated substantial completion date if different from the Target
Date. If the estimated substantial completion date changes at any time after
Landlord gives notice, then Landlord shall give ten (10) days advance notice of
the new estimated substantial completion date.
4.03 Inspection and Punchlist. Within 30 days after the Commencement Date,
the parties shall inspect the Premises, have all systems demonstrated, and
prepare a punchlist. The punchlist shall list incomplete, minor, or
insubstantial details of construction; necessary mechanical adjustments; and
needed finishing touches. Tenant's acceptance of possession of the Premises
after such inspection shall be conclusive evidence that the Premises were in
good order and satisfactory condition, except for any punchlist items. Landlord
reserves the right to inspect and reasonably approve Tenant's improvements.
4.04 Delayed Possession. Tenant may cancel this Lease if Landlord cannot
deliver actual possession of the substantially complete Premises by one hundred
and eighty (180) days after the Target Date. To cancel, Tenant must give notice
to Landlord within sixty (60) days after the expiration of such one hundred and
eighty day period and before Landlord gives notice to Tenant that the Premises
are substantially complete. The one hundred and eighty (180) day period above
shall be extended in the time equal to any period of delay caused by Tenant.
Within thirty (30) days after cancellation, Landlord shall return to Tenant
prepaid consideration including Rent and deposits, and neither party shall have
any further rights or obligations under this Lease.
-3-
<PAGE>
ARTICLE IV
COMPLETION OF PREMISES
4.05 Landlord Improvements. Landlord, at its expense, shall make improvements
to the Premises in accord with Exhibit D ("Landlord Improvements"). The
---------
Landlord Improvements shall be completed in a good and workmanlike manner and
comply with all applicable laws, ordinances, rules, and regulations of
governmental authorities.
ARTICLE V
RENT AND SECURITY
5.01 Base Rent. Tenant shall pay to Landlord Base Rent during the Term,
as follows:
Months: Annual Base Rent: Monthly Base Rent:
One through Twelve,
May 1, 1997 - April 30, 1998 $87,203.00 $7,266.92
Thirteen through Twenty-four,
May 1, 1998 - April 30, 1999 $89,819.09 $7,484.92
The above schedule includes a three percent (3%) annual escalation.
The Base Rent shall be paid:
(a) without advance notice, demand, offset, or deduction;
(b) by the first day of each month during the Term; and
(c) to Landlord at its address set forth in Section 13.03 or as Landlord
may specify in writing to Tenant.
If the Term does not begin on the first day or end on the last day of a month,
the Base Rent for that partial month shall be prorated by multiplying the
monthly Base Rent by a fraction, the numerator of which is the number of days of
the partial month included in the Term and the denominator of which is the total
number of days in the full calendar month.
If Tenant fails to pay part or all of the Base Rent or Additional Rent within
ten (10) days after written notice that it is past due, the Tenant shall also
pay:
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<PAGE>
(a) a late charge equal to four percent (4%) of the unpaid Base Rent and
Additional Rent, plus
(b) interest at eighteen percent (18%) per annum or the maximum then
allowed by applicable law, whichever is less, on the remaining unpaid
balance, retroactive to the date originally due until paid.
5.04 Personal Property Tax. Before delinquency Tenant shall pay taxes assessed
during the Term against trade fixtures or personal property placed by Tenant in
the Premises. If these taxes are assessed against the Building, Tenant shall
pay its share of the taxes to Landlord within ten (10) days after receiving
Landlord's written statement setting forth the amount of taxes applicable to
Tenant's property and the basis for the charge to Tenant. Tenant's failure to
pay within the ten-day period shall entitle Landlord to the same remedies it has
upon Tenant's failure to pay Base Rent or Additional Rent.
5.05 Security Deposit. The Tenant has deposited One Thousand, Twenty-one and
50/100 Dollars ($1,021.50) (Security Deposit) with Landlord to secure Tenant's
performance of its Lease obligations. If Tenant defaults, Landlord may, after
giving five (5) days advance notice to Tenant, without prejudice to Landlord's
other remedies, apply part or all of the Security Deposit to cure Tenant's
default. If Landlord so uses part or all of the Security Deposit, then Tenant
shall within ten (10) days after written demand, pay Landlord the amount used to
restore the Security Deposit to its original amount. Landlord may mix the
Security Deposit with its own funds, and the Security Deposit shall not earn
interest thereon. Any part of the Security Deposit not used by Landlord as
permitted by this paragraph shall be returned to Tenant within thirty (30) days
after the Lease ends.
ARTICLE VI
AFFIRMATIVE OBLIGATIONS
6.01 Compliance with Laws.
(a) Landlord's Compliance. Landlord warrants, that on the Commencement
Date, the Premises will comply with all applicable laws, ordinances,
rules, and regulations of governmental authorities ("Applicable
Laws"). During the Term, Landlord shall comply with all Applicable
Laws regarding the Premises and Building except to the extent Tenant
must comply under Section 6.01(b).
(b) Tenant's Compliance. Tenant shall comply with all Applicable Laws (i)
regarding the physical condition of the Premises, but only to the
extent the Applicable Laws pertain to the particular manner in which
Tenant uses the Premises; or (ii) that do not relate to the physical
condition of
-5-
<PAGE>
the Premises but relate to the lawful use of the Premises and with
which only the occupant can comply, such as laws governing maximum
occupancy, workplace smoking, and illegal business operations, such as
gambling. Notwithstanding the foregoing, Tenant shall comply with any
requirements imposed under the Americans with Disabilities Act of 1990
("ADA") which relate exclusively to the Premises.
6.02 Services and Utilities.
(a) Services. Landlord shall provide at its expense, subject to
reimbursement under Section 5.03:
(i) Heating, ventilation, and air conditioning ("HVAC") for the
Premises during business hours to maintain temperatures for
comfortable use and occupancy;
(ii) Automatic passenger elevators providing adequate service
leading to the floor on which the Premises are located;
(iii) Janitorial services to the Premises (all business days, Monday
through Friday);
(iv) Hot and cold water sufficient for drinking, lavatory, toilet,
and ordinary cleaning purposes;
(v) Electricity to the Premises at all times that provides electric
current in reasonable amounts necessary for normal office use,
lighting, and HVAC;
(vi) Replacement of lighting tubes, lamp ballasts, and bulbs;
(vii) Extermination and pest control when necessary; and
(viii) Maintenance of Common Areas in a manner consistent with other
comparable office Buildings in the Raleigh, North Carolina
area. The maintenance shall include cleaning, HVAC,
illumination, snow shoveling, deicing, repairs, replacements,
lawn care, and landscaping.
(b) Business Hours. "Business Hours" means:
(i) Monday through Friday, 8:00 a.m. through 6:00 p.m., and
-6-
<PAGE>
(ii) Saturday, 9:00 a.m. through 1:00 p.m., but excludes the
following holidays or the days on which the holidays are
designated for observance: New Year's Day, Easter (Good
Friday), Memorial Day, July Fourth, Labor Day, Thanksgiving
Day, and Christmas Day.
(c) 24 Hour Access. Tenant, its employees, agents, and invitees shall
have access to the Premises, twenty-four (24) hours a day, seven (7)
days a week. During non business hours Landlord may restrict access by
requiring persons to show a badge or identification card issued by
Landlord. Landlord shall not be liable for denying entry to any person
unable to show the proper identification. Landlord may temporarily
close the Building if required in an emergency. Landlord shall use its
best efforts to close the Building during non business hours only. If,
however, the Building must be closed during business hours, then the
Base Rent and Additional Rent shall abate during any closing that
lasts more than twenty-four (24) hours.
(d) Extra Services. Landlord, shall have the right to monitor the
Tenant's use of electricity consumption within the Premises. Whenever
Landlord knows that any tenant (including Tenant) is using extra
services because of either non business-hours use or high electricity
consumption installations, Landlord may directly charge that tenant
for the extra use and exclude those charges from Operating Expenses.
Extra services include:
(i) Non business-Hours Use. Electricity required by Tenant
during non business hours shall be supplied upon reasonable
advance verbal notice. If more than one tenant directly
benefits from these services then the cost shall be allocated
proportionately between or among the benefiting tenants based
upon the amount of time each tenant benefits and the square
footage each leases.
(ii) Excess Utility Use. Tenant shall not place or operate in the
Premises any electrically operated equipment or other
machinery, other than typewriters, personal computers, adding
machines, reproduction machines, and other machinery and
equipment normally used in offices, unless Tenant receives
Landlord's advance written consent. Landlord shall not
unreasonably withhold or delay its consent, but Landlord may
require payment for the extra use of electricity caused by
operating this equipment or machinery. Landlord may require
that special, high electricity consumption installations of
Tenant such as computer or reproduction facilities (except
personal computers or normal office photocopy machines) be
separately sub-metered for electrical consumption at Tenant's
cost.
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(iii) Payment. Tenant's charges for the utilities provided under (i)
and (ii) above shall be one hundred ten percent (110%) of Landlord's
actual cost of labor and utilities and shall be Additional Rent.
Tenant's failure to pay the charges in (i) and (ii) above within
thirty (30) days of receiving a proper and correct invoice shall
entitle Landlord to the same remedies it has upon Tenant's failure to
pay Base Rent.
(e) Interruption of Services. Landlord does not warrant that any services
Landlord supplies will not be interrupted. Services may be interrupted
because of accidents, repairs, alterations, improvements, or any
reason beyond the reasonable control of Landlord, and such an interruption
shall not:
(i) be considered an eviction or disturbance of Tenant's use and
possession of the Premises;
(ii) make Landlord liable to Tenant for damages;
(iii) abate Base Rent or Additional Rent; or
(iv) relieve Tenant from performing Tenant's Lease obligations.
6.03 Repairs and Maintenance.
(a) Tenant's Care of Premises. Tenant shall:
(i) keep the Premises and fixtures in good order;
(ii) make repairs or replacements to the Premises or Building needed
because of Tenant's misuse or negligence, except to the extent that
the repairs or replacements are covered by Landlord's insurance or the
insurance Landlord is required to carry under this Lease, whichever is
greater;
(iii) repair and replace special equipment or decorative treatments
installed by or at Tenant's request and that serve the Premises
only, except
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(1) to the extent the repairs or replacements are needed
because of Landlord's misuse or primary negligence, and
are not covered by Tenant's insurance or the insurance
Tenant is required to carry under this Lease, whichever is
greater; or
(2) if the Lease is terminated under Article IX (Loss of
Premises); and
(iv) not commit waste.
(b) Landlord's Repairs. Except for repairs and replacements that Tenant
must make under paragraph 6.03(a), Landlord shall pay for and make all
other repairs and replacements to the Premises, Common Areas and Building
(including Building fixtures and equipment). Landlord shall make the
repairs and replacements to maintain the Building in a condition consistent
with other comparable office buildings in the Raleigh, North Carolina area.
This maintenance shall include the roof, foundation, exterior walls,
interior structural walls, all structural components, and all systems, such
as mechanical, electrical, HVAC, and plumbing.
(c) Time for Repairs. Repairs or replacements required under Sections
6.03(a) or 6.03(b) shall be made within a reasonable time (depending
on the nature of the repair or replacement needed) after receiving
notice or having actual knowledge of the need for a repair or
replacement.
(d) Surrendering the Premises. Upon the Expiration Date or earlier
termination of this Lease, Tenant shall surrender the Premises to
Landlord in the same condition that the Premises were in on the
Commencement Date except for:
(i) ordinary wear and tear;
(ii) damage by the elements, fire, and other casualty unless Tenant
would be required to repair under paragraph 6.03(a);
(iii) condemnation;
(iv) damage arising from any cause not required to be repaired or
replaced by Tenant; and
(v) alterations as permitted by this Lease unless consent was
conditioned on their removal.
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On surrender Tenant shall remove from the Premises its personal
property, trade fixtures, and any alterations required to be removed
under Section 7.01 and repair any damage to the Premises caused by the
removal. Any items not removed by Tenant as required above shall be
considered abandoned. Landlord may dispose of abandoned items as
Landlord chooses and bill Tenant for the cost of their disposal, minus
any revenues received by Landlord for their disposal.
ARTICLE VII
NEGATIVE OBLIGATIONS
7.01 Alterations.
(a) Definitions. "Alterations" means alterations, additions,
substitutions, installations, changes, and improvements, but excludes minor
decorations and the Improvements Landlord is to make under Section 4.04 and
Exhibit D.
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(b) Consent. Tenant shall not make Alterations without the Landlord's
advance written consent. Landlord's consent shall not be unreasonably
withheld or unduly delayed for nonstructural interior Alterations to
the Premises that do not adversely affect the Building s appearance,
value, and structural strength.
(c) Conditions of Consent. Landlord may condition its consent in Section
7.01(b) on all or any part of the following:
(i) Tenant shall furnish Landlord with reasonably detailed plans
and specifications of the alterations as requested by Tenant.
(ii) The Alterations shall be performed and completed
(1) in accord with the submitted plans and specifications
approved by Tenant and Landlord,
(2) in a workmanlike manner,
(3) in compliance with all applicable laws, regulations,
rules, ordinances, and other requirements of governmental
authorities,
(4) using new materials and installations at least equally in
quality to the original Building materials and
installations,
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(5) by not disturbing the quiet possession of the other
tenants,
(6) by not interfering with the construction, operation, or
maintenance of the Building, and
(7) with due diligence;
(iii) tenant shall use workers and contractors who Landlord employs
or approves in writing, which approval shall not be
unreasonably withheld or unduly delayed;
(iv) Tenant shall modify plans and specifications because of
reasonable conditions set by Landlord after reviewing the plans
and specifications;
(v) Tenant's contractors shall carry builder's risk insurance in an
amount then customarily carried by prudent contractors and
workers' compensation insurance for its employees in statutory
limits, naming Landlord as an additional insured, to the extent
its interest may appear;
(vi) Tenant's workers or contractors shall work in harmony and not
unreasonably interfere with Landlord's workers or contractors
or other tenants and their workers or contractors;
(vii) Tenant shall, at Landlord's sole option, supply a lien and
completion bond, bank letter of credit, or other security
satisfactory to Landlord, in an amount equal to the estimated
cost to insure Landlord against materials and mechanics' liens
and against completion of the Alterations;
(viii) Tenant shall give Landlord at least fifteen (15) days advance
notice before beginning any alterations so that Landlord may
post or record notices of nonresponsibility;
(ix) Upon demand Tenant shall give Landlord evidence that it
complied with any condition set by Landlord;
(x) If Tenant completes alterations, Tenant shall give Landlord
complete as-built mylar drawings of the Alterations after they
are finished; and
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(xi) Tenant shall remove any unusual additions, alterations and
repair any damage from their removal by the Expiration Date.
(d) Payment and Ownership of the Alterations. Alterations made under this
paragraph shall be at Tenant's expense. The Alterations shall belong to
Landlord when this Lease ends except for those Alterations required by
Landlord to be removed by Tenant, if any, under Section 7.01(c)(xi).
Nevertheless, Tenant may remove its trade fixtures, furniture, equipment,
and other personal property if Tenant promptly repairs any damage caused by
their removal.
7.02 Assignment and Subleasing.
(a) Consent Required. Tenant shall not transfer, mortgage, encumber,
assign, or sublease all or part of the Premises without Landlord's advance
written consent. Landlord's consent to any assignment or sublease shall not
be unreasonably withheld or unduly delayed.
(b) Reasonableness. The Landlord's consent shall not be considered
unreasonably withheld if:
(i) the proposed subtenant's or assignee's financial responsibility
does not meet the same criteria Landlord uses to select comparable
Building tenants;
(ii) the proposed subtenant's or assignee's business is not suitable
for the Building considering the business of the other tenants and the
Building's prestige; or
(iii) the proposed use is inconsistent with the use permitted by
Article II.
(c) Procedure.
(i) Tenant must provide Landlord in writing:
(1) the name and address of the proposed subtenant or
assignee;
(2) the nature of the proposed subtenant's or assignee's
business it will operate in the Premises;
(3) the terms of the proposed sublease or assignment; and
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(4) reasonable financial information so that Landlord can
evaluate the proposed subtenant or assignee.
(ii) Landlord shall, within ten (10) business days after receiving
the information under Section 7.02(c)(i), give notice to Tenant to
permit or deny the proposed sublease or assignment. If Landlord denies
consent, it must explain the reasons for the denial. If Landlord does
not give notice within the ten (10) business-day period, then Tenant
may sublease or assign part or all of the Premises upon the terms
described in the information submitted by Tenant under Section
7.02(c)(i).
(d) Affiliates. Notwithstanding Section 7.02(a), (b), and (c), Tenant may
assign or sublease part or all of the Premises without Landlord's consent
to:
(i) any corporation or partnership that controls, is controlled
by, or is under common control with, Tenant; or
(ii) any corporation resulting from the merger or consolidation with
Tenant or to any entity that acquires all of Tenant's assets or stock
as a going concern of the business that is being conducted on the
Premises, as long as the assignee or subleases is a bona fide entity
and assumes the obligations of Tenant.
(e) Conditions. Any subleases and assignments by Tenant are also subject
to the following:
(i) The terms of this Lease;
(ii) The term of any sublease shall not extend beyond the Term;
(iii) Tenant shall remain liable for all Lease obligations;
(iv) Consent to one sublease or assignment does not waive the
consent requirements for future assignments or subleases; and
(v) Any consideration ("Excess Consideration") received by Tenant
from an assignment or sublease that exceeds the amount Tenant must pay
Landlord, which amount is to be prorated where a part of the Premises
is subleased or assigned, shall also be paid to Landlord. Tenant shall
pay this Excess Consideration to Landlord at the end of each calendar
month during which Tenant collects any Excess Consideration. Each
payment shall be sent
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with a detailed statement showing the total consideration paid by the
subtenant or assignee. Landlord shall have the right to audit Tenant's
books and records to verify the accuracy of the detailed statement.
ARTICLE VIII
INSURANCE
8.01 Insurance.
(a) Landlord's Building Insurance. Landlord shall keep the Building,
including the Landlord Improvements insured against damage and
destruction by fire, earthquake, vandalism, and other perils in the
amount of the full replacement value of the Building, as the value
may exist from time to time.
(b) Property Insurance. Each party shall keep its personal property and
trade fixtures in the Premises and Building insured with "all risks"
insurance in an amount to cover one hundred percent (100%) of the
replacement cost of the property and fixtures. Tenant shall also keep
any non-Building standard improvements made to the Premises at
Tenant's request insured to the same degree as Tenant's personal
property. Tenant's property insurance shall also provide for business
interruption/extra expense coverage in sufficient amounts.
(c) Liability Insurance. Each party shall maintain contractual and
comprehensive general liability insurance, including limits of no
less than $1,000,000 per occurrence/$2,000,000 aggregate per location
subject to no deductible contractual liability covering the
indemnities specified herein. This policy must be written on an
occurrence basis.
Policy shall be endorsed to name Landlord as additional insured.
Definition of additional insured shall include all Partners,
Officers, Directors, Employees, agents and representatives of the
named entity including its managing agent. Further, coverage for the
additional insured shall apply on a primary basis irrespective of any
other insurance, whether collectible or not.
(d) Workers Compensation and Employee Liability Insurance. Affording
coverage under the Workers Compensation laws of the State of North
Carolina and Employers Liability coverage subject to a limit of no
less than $100,000 each employee, $100,000 each accident, $500,000
policy limit.
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(e) Umbrella Liability insurance. Tenant shall maintain umbrella
liability insurance at not less than a $3,000,000 limit providing
excess coverage over all limits and coverage noted in Sections 8.01.c
and 8.01.d above. This policy shall be written on an occurrence
basis.
(f) Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant hereby waive and release each
other of and from any and all right of recovery, claim, action or
cause of action, against each other, their agents, officers and
employees, for any loss or damage that may occur to the Premises,
improvements to the Building, or personal property within the
Building, by reason of fire or the elements, regardless of cause or
origin, including negligence of Landlord or Tenant and their agents,
officers and employees. Landlord and Tenant agree immediately to give
their respective insurance companies which have issued policies of
insurance covering all risk of direct physical loss, written notice
of the terms of the mutual waivers contained in this Section, and to
have the insurance policies properly endorsed, if necessary, to
prevent the invalidation of the insurance coverage by reason of the
mutual waivers. The waiver does not apply to claims caused by a
party's willful misconduct.
If despite a party's best efforts it cannot find an insurance company
meeting the criteria in Section 8.01(f) that will give the waiver at
reasonable commercial rates, then it shall give notice to the other
party within thirty (30) days after the Commencement Date. The other
party shall then have thirty (30) days to find an insurance company
that will issue the waiver. If the other party also cannot find such
an insurance company, then both parties shall be released from their
obligations to obtain the waiver.
(g) Increase in Insurance. If due to Tenant's particular use of the
Premises, Landlord's insurance rates are increased, Tenant shall pay
the increase. In addition, the amounts of coverage required by this
Lease are subject to review by Landlord at the end of each Adjustment
Period. At each review, if necessary to maintain the same level of
coverage that existed on the Commencement Date, the amounts of
coverage shall be increased to the lesser of:
(i) the amounts of coverage carried by prudent landlords and
tenants of comparable office buildings in the Raleigh, North Carolina
area; or
(ii) twenty-five percent (25%) higher than the previous insurance
amounts.
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(h) Insurance Criteria. Insurance policies required by this Lease shall:
(i) be issued by insurance companies licensed to do business in the
state of North Carolina with general policyholder's ratings of at
least A and a financial rating of at least XI in the most current
Best's Insurance Reports available on the date of this Lease;
(ii) name the non procuring party as an additional insured as its
interest may appear (other landlords or tenants may also be added as
additional insurers in a blanket policy);
(iii) provide that the insurance not be canceled or materially
changed in the scope or amount of coverage unless thirty (30) days'
advance notice is given to the non procuring party;
(iv) be primary policies - not as contributing with, or in excess
of, the coverage that the other party may carry;
(v) be permitted to be carried through a "blanket policy" or
"umbrella" coverage;
(vi) have property deductibles not greater than $5,000; and
(vii) be maintained during the entire Term.
(i) Evidence of Insurance. By the Commencement Date and upon each renewal
of its insurance policies, Tenant shall give copies of certificates of
insurance to Landlord. The certificate shall specify amounts, types of
coverage, the waiver of subrogation, and the insurance criteria listed in
Section 8.01(f). The policies shall be renewed or replaced and maintained
by Tenant. If Tenant fails to give the required certificate within thirty
(30) days after the notice of demand for it, Landlord may obtain and pay
for that insurance, but is not obligated to do so, and receive
reimbursement from the party required to have the insurance.
8.02 Indemnification.
(a) Tenant's Indemnity. Tenant indemnifies, defends, and holds Landlord
harmless from claims, including but not limited to claims:
(i) for personal injury, death, or property damage;
(ii) for incidents occurring in or about the Premises or Building;
and
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(iii) caused by the negligence or willful misconduct of Tenant,
its agents, employees, or invitees.
When the claim is caused by the joint negligence or willful misconduct
of Tenant and Landlord or Tenant and a third party unrelated to
Tenant, except Tenant's agents, employees, or invitees, Tenant's duty
to defend, indemnify, and hold Landlord harmless shall be in
proportion to Tenant's allocable share of the joint negligence or
willful misconduct.
(b) Landlord's Indemnity. Landlord indemnifies, defends, and holds Tenant
harmless from claims:
(i) for personal injury, death, or property damage;
(ii) for incidents occurring in or about the Premises or Building;
and
(iii) caused by the negligence or willful misconduct of Landlord, its
agents, employees, or invitees.
When the claim is caused by the joint negligence or willful misconduct of
Landlord and Tenant or Landlord and a third party unrelated to Landlord,
except Landlord's agents, employees, or invitees, Landlord's duty to
defend, indemnify, and hold Tenant harmless shall be in proportion to
Landlord's allocable share of the joint negligence or willful misconduct.
(c) Release of Claims. Notwithstanding Section 8.02(a) and (b), the parties
release each other from any claims either party ("Injured Party") has
against the other to the extent the claim is covered by the Injured Party's
insurance.
8.03 Limitation of Landlord's Liability.
(a) Transfer of Premises. If the Building is sold or transferred,
voluntarily or involuntarily, Landlord's Lease obligations and liabilities
accruing after the transfer shall be the sole responsibility of the new
owner, and
(i) the new owner expressly agrees in writing to assume Landlord's
obligations; and
(ii) the Tenant's funds in the hands of Landlord, such as the
Security Deposit, shall be given to the new owner.
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(b) Liability for Money Judgment. If Landlord, its employees, officers,
directors or partners are ordered to pay Tenant a money judgment
because of Landlord's default, Tenant's sole remedy to satisfy the
judgment shall be to execute against Landlord's interest in the
Building and Land. Under no circumstance will Landlord, or its
officers, directors, partners or employees be personally liable for
any money judgment.
ARTICLE IX
LOSS OF PREMISES
9.01 Damages.
(a) Definition. "Relevant Space" means:
(i) the Premises, excluding Tenant's fixtures installed by or at
the request of Tenant;
(ii) access to the Premises; and
(iii) any part of the Building that provides essential services to
the Premises.
(b) Repair of Damage. If the Relevant Space is damaged in part or whole
from any cause and the Relevant Space can be substantially repaired and
restored within one hundred eighty (180) days from the date of the damage
using standard working methods and procedures, Landlord shall at its
expense promptly and diligently repair and restore the Relevant Space to
substantially the same condition as existed before the damage. This repair
and restoration shall be made within one hundred eighty (180) days from the
date of the damage unless the delay is due to causes beyond Landlord's
reasonable control.
If the Relevant Space cannot be repaired and restored within the one
hundred eighty (180) day period, then either party, may, within thirty (30)
days after determining that the repairs and restoration cannot be made
within one hundred eighty (180) days, cancel the Lease by giving notice to
the other party. Nevertheless, if the Relevant Space is not repaired and
restored within one hundred eighty (180) days from the date of the damage,
then Tenant may cancel the Lease at any time within thirty (30) days after
the one hundred eightieth (180th) day. Tenant shall not be able to cancel
this Lease if its willful misconduct causes the damage unless Landlord is
not promptly and diligently repairing and restoring the Relevant Space.
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(c) Determining the Extent of Damage. If the parties cannot agree in
writing whether the repairs and restoration will take more than one
hundred eighty (180) days to make, then the determination will be
made by Landlord's architect.
(d) Abatement. Unless the damage is caused by Tenant's willful
misconduct, the Base Rent and Additional Rent shall abate in
proportion to that part of the Premises that is unfit for use in
Tenant's business. The abatement shall consider the nature and extent
of interference to Tenant's ability to conduct business in the
Premises and the need for access and essential services. The
abatement shall continue from the date the damage occurred until ten
(10) business days after Landlord completes the repairs and
restoration to the Relevant Space or the part rendered unusable and
notice to Tenant that the repairs and restoration are completed, or
until Tenant again uses the Premises or the part rendered unusable,
whichever is first.
(e) Tenant's Property. Notwithstanding anything else in this Article IX,
Landlord is not obligated to repair or restore damage to Tenant's
trade fixtures, furniture, equipment, or other personal property, or
any Tenant improvements.
(f) Damage to Building. If:
(i) more than twenty percent (20%) of the Building is damaged and
the Landlord decides not to repair and restore the Building;
(ii) any mortgagee of the Building shall not allow adequate
insurance proceeds for repair and restoration;
(iii) the damage is not covered by Landlord's insurance; or
(iv) the Lease is in the last twelve (12) months of its Term, then
Landlord may cancel this Lease. To cancel, Landlord must give
notice to Tenant within thirty (30) days after the Landlord
knows of the damage. The notice must specify the cancellation
date, which shall be at least thirty (30) but not more than
sixty (60) days after the date notice is given.
(g) Cancellation. If either party cancels this Lease as permitted above,
then this Lease shall end on the day specified in the cancellation
notice. The Base Rent, Additional Rent, and other charges shall be
payable up to the cancellation date and shall account for any
abatement. Landlord shall promptly refund to Tenant any prepaid,
unaccrued Base Rent and
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Additional Rent, accounting for any abatement, plus Security Deposit,
if any, less any sum then owing by Tenant to Landlord.
9.02 Condemnation.
(a) Definitions. The terms "eminent domain," "condemnation," "taken," and
the like in Section 9.02 include takings for public or quasi-public
use and private purchases in place of condemnation by any authority
authorized to exercise the power of eminent domain.
(b) Entire Taking. If the entire Premises or the portions of the Building
required for reasonable access to, or the reasonable use of, the
Premises are taken by eminent domain, this Lease shall automatically
end on the earlier of:
(i) the date title vests; or
(ii) the date Tenant is dispossessed by the condemning authority.
(c) Partial Taking. If the taking of a part of the Premises materially
interferes with Tenant's ability to continue its business operations
in substantially the same manner and space then Tenant may terminate
this Lease on the earlier of:
(i) the date when title vests;
(ii) the date Tenant is dispossessed by the condemning authority; or
(iii) sixty (60) days following notice to Tenant of the date when
vesting or dispossession is to occur.
If there is a partial taking and this Lease continues, then the Lease
shall end as to the part taken and the Base Rent and Additional Rent
shall abate in proportion to the part of the Premises taken and
Tenant's pro rata share shall be equitably reduced.
(d) Termination by Landlord. If title to a part of the Building other
than the Premises is condemned, and in the Landlord's reasonable
opinion, the Building should be restored in a manner that materially
alters the Premises, Landlord may cancel this Lease by giving notice
to Tenant. Cancellation notice shall be given within sixty (60) days
following the date title vested. This Lease shall end on the date
specified in the cancellation notice, which date shall be at least
thirty (30) days but not more than ninety (90) days alter the notice
is given.
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(e) Rent Adjustment. If the Lease is canceled as provided in Sections
9.02(b), (c), or (d), then the Base Rent, Additional Rent, and other
charges shall be payable up to the cancellation date, and shall
account for any abatement. Landlord, considering any abatement, shall
promptly refund to Tenant any prepaid, unaccrued Base Rent and
Additional Rent plus Security Deposit, if any, less any sum then
owing. by Tenant to Landlord.
(f) Repair. If the Lease is not canceled as provided for in Sections
9.02(b), (c), or (d), then Landlord at its expense shall promptly
repair and restore the Premises to the condition that existed
immediately before the taking, except for the part taken, to render
the Premises a complete architectural unit, but only to the extent of
the:
(i) condemnation award received for the damage; and
(ii) the Landlord's original obligation under Section 4.05 and
Exhibit D.
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(g) Awards and Damages. Landlord reserves all rights to damages paid
because of any partial or entire taking of the Premises. Tenant
assigns to Landlord any right Tenant may have to the damages or
award. Further, Tenant shall not make claims against Landlord or the
condemning authority for damages. Notwithstanding anything else in
this Paragraph 9.02(g), Tenant may claim and recover from the
condemning authority a separate award for Tenant's moving expenses,
business dislocation damages, Tenant's personal property and
fixtures, the unamortized costs of leasehold improvements paid for by
Tenant, excluding the Landlord's Improvements, and any other award
that would not substantially reduce the award payable to Landlord.
Each party shall seek its own award, as limited by this provision, at
its own expense, and neither shall have any right to the award made
to the other.
(h) Temporary Condemnation. If part or all of the Premises are condemned
for a limited period of time ("Temporary Condemnation"), this Lease
shall remain in effect. The Base Rent and Additional Rent and
Tenant's obligations for the part of the Premises taken shall abate
during the Temporary Condemnation in proportion to the part of the
Premises that Tenant is unable to use in its business operations as a
result of the Temporary Condemnation. Landlord shall receive the
entire award for any Temporary Condemnation.
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ARTICLE X
DEFAULT
10.01 Tenant's Default.
(a) Defaults. Each of the following constitutes a default ("Default"):
(i) Tenant's failure to pay Base Rent or Additional Rent within
five (5) days after it is past due and payable;
(ii) Tenant's failure to pay Base Rent or Additional Rent by the due
date, at any time during a calendar year in which Tenant has
already received two (2) notices of its failure to pay Base
Rent or Additional Rent by the due date;
(iii) Tenant's failure to perform or observe any other Tenant
obligation after a period of thirty (30) business days or the
additional time, if any, that is reasonably necessary to
promptly and diligently cure the failure, after it receives
notice from Landlord setting forth in reasonable detail the
nature and extent of the failure and identifying the applicable
Lease provision(s);
(iv) Tenant's abandoning or vacating the Premises;
(v) Tenant's failure to vacate or stay any of the following within
sixty (60) days after they occur:
(1) a petition in bankruptcy is filed by or against Tenant;
(2) Tenant is adjudicated as bankrupt or insolvent;
(3) a receiver, trustee, or liquidator is appointed for all
or a substantial part of Tenant's property; or
(4) Tenant makes an assignment for the benefit of creditors.
10.02 Landlord's Remedies.
(a) Remedies. Landlord in addition to the remedies given in this Lease or
under the law, may do any one or more of the following if Tenant
commits a Default under Section 10.01:
(i) end this Lease, and Tenant shall then surrender the Premises to
Landlord;
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(ii) enter and take possession of the Premises either with or
without process of law and remove Tenant, with or without
having ended the Lease;
(iii) alter locks and other security devices at the Premises; and
Tenant waives claims for damages by reason of Landlord's reentry,
repossession, or alteration of locks or other security devices and for damages
by reason of any legal process.
(b) No Surrender. Landlord's exercise of any of its remedies or its
receipt of Tenant's keys shall not be considered an acceptance or
surrender of the Premises by Tenant. A surrender must be agreed to in
writing signed by both parties.
(c) Rent. If Landlord terminates this Lease or Tenant's right to possess
the Premises because of a Default, Landlord may hold Tenant liable
for Base Rent, Additional Rent, and other indebtedness accrued to the
date the Lease expires or is terminated. Tenant shall also be liable
for the Base Rent, Additional Rent and other indebtedness that
otherwise would have been payable by Tenant during the remainder of
the Term had there been no default, reduced by any sums Landlord
receives by reletting the Premises during the Term.
(d) Other Expenses. Tenant shall also be liable for that part of the
following sums paid by Landlord and attributable to that part of the
Term ended due to Tenant's Default:
(i) reasonable broker's fees incurred by Landlord for reletting
part or all of the Premises prorated for that part of the
reletting Term ending concurrently with the then current Term
of this Lease;
(ii) the cost of removing and storing Tenant's property;
(iii) the cost of repairs, alterations, and remodeling necessary to
put the Premises in a condition reasonably acceptable to a new Tenant;
and
(iv) other necessary and reasonable expenses incurred by Landlord in
enforcing its remedies, including, without limitation, reasonable
attorneys fees.
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(e) Payment. Tenant shall pay the sums due in Sections 10.02(c) and (d)
within thirty (30) days of receiving Landlord's proper and correct invoice
for the amounts.
(f) Reletting. Landlord may relet for a shorter or longer period of time
than the Lease Term and make any necessary repairs or alterations. Landlord
may relet on any reasonable terms including a reasonable amount of free
rent.
10.03 Self-Help. If Tenant defaults, Landlord may, without being obligated and
without waiving the Default, cure the Default, and may enter the Premises to do
so. Tenant shall pay Landlord, upon demand, as Additional Rent, all costs,
expenses and disbursements incurred by Landlord.
10.04 Survival. The remedies permitted by this Article X and the parties'
indemnities in Section 8.02 shall survive the Expiration Date or earlier
termination of this Lease.
ARTICLE XI
NON DISTURBANCE
11.01 Subordination.
(a) Mortgages. Subject to Section 11.01(b), this Lease is subordinate to
prior or subsequent mortgages covering the Building.
(b) Foreclosures. If any mortgage is foreclosed, then:
(i) This Lease shall continue;
(ii) Tenant's quiet possession shall not be disturbed if Tenant is
not in Default;
(iii) Tenant will attorn to and recognize the mortgagee or purchaser
at foreclosure sale (Successor Landlord) as Tenant's landlord for the
remaining Term; and
(iv) The Successor Landlord shall not be bound by:
(1) any payment of Base Rent or Additional Rent for more than
one month in advance, except the Security Deposit and free
rent, if any, specified in the Lease,
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(2) any amendment, modification, or ending of this Lease
without Successor Landlord's consent after the Successor
Landlord's name is given to Tenant unless the amendment,
modification, or ending is specifically authorized by the
original Lease and does not require Landlord's prior agreement
or consent, and
(3) any liability for any act or omission of a prior Landlord.
(c) Self-Operating. This Section 11.01 is self-operating. However, Tenant
shall promptly execute and deliver any documents needed to confirm this
arrangement.
11.02 Estoppel Certificate.
(a) Obligation. Tenant shall from time to time, within ten (10) business
days after receiving a written request from Landlord, execute and deliver
to Landlord a written statement which may be relied upon by Landlord and
any third party with whom the Landlord is dealing and which shall certify:
(i) the accuracy of the Lease document;
(ii) the Commencement and Expiration Dates of the Lease;
(iii) that the Lease is unmodified and in full effect or in full
effect as modified, stating the date and nature of the modification;
(iv) whether to the Tenant's knowledge the Landlord is in default or
whether the Tenant has any claims or demands against Landlord, and, if
so, specifying the Default, claim, or demand; and
(v) to other correct and reasonably ascertainable facts that are
covered by the Lease terms.
(b) Remedy. The Tenant's failure to comply with its obligations in Section
11.02(a) shall be a Default, except that the cure period for this Default
shall be five (5) business days after the Tenant receives notice of the
Default.
11.03 Quiet Possession. If Tenant is not in default, and subject to the Lease
terms, Landlord warrants that Tenant's peaceable and quiet enjoyment of the
Premises shall not be disturbed by anyone claiming by or through Landlord.
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ARTICLE XII
LANDLORD'S RIGHTS
12.01 Rules.
(a) Rules. Tenant, its employees and invitees, shall comply with:
(i) the Rules attached as Exhibit E; and
---------
(ii) reasonable modifications and additions to the Rules adopted by
Landlord.
(b) Conflict with Lease. If a Rule issued under Section 12.01(a) conflicts
with or is inconsistent with any Lease provision, the Lease provision
controls.
(c) Enforcement. Although Landlord is not responsible for another tenant's
failure to observe the Rules, Landlord shall not unreasonably enforce the
Rules against Tenant.
12.02 Mechanic's Liens.
(a) Discharge Lien. Tenant shall, within twenty (20) days after receiving
notice of any mechanic's lien for material or work claimed to have been
furnished to the Premises on Tenant's behalf and at Tenant's request:
(i) discharge the lien; or
(ii) post a bond equal to the amount of the disputed claim with
companies reasonably satisfactory to Landlord.
If Tenant posts a bond, it shall contest the validity of the lien.
Tenant shall indemnify, defend, and hold Landlord harmless from losses
incurred from these liens.
(b) Landlord's Discharge. If Tenant does not discharge the lien or post
the bond within the twenty (20) day period, Landlord may pay any amounts,
including interest and legal fees, to discharge the lien. Tenant shall
then be liable to Landlord for the amounts paid by Landlord as Additional
Rent.
(c) Consent not Implied. This Section 12.02 is not a consent to subject
Landlord's property to these liens.
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12.03 Right to Enter.
(a) Permitted Entries. Landlord and its agents, servants, and employees
may enter the Premises at reasonable times, and at any time if an
emergency, without charge, liability, or abatement of Base Rent, to:
(i) examine the Premises;
(ii) make repairs, alterations, improvements, and additions either
required by the Lease or advisable to preserve the integrity, safety,
and good order of part or all of the Premises or Building;
(iii) provide janitorial and other services required by the Lease;
(iv) comply with Applicable Laws;
(v) show the Premises to prospective lenders or purchasers;
(vi) post notices of non responsibility;
(vii) remove any Alterations made by Tenant in violation of Section
7.01; and
(vi) post "For Sale" signs and, during the one-hundred twenty (120)
days immediately before this Lease ends, post "For Lease" signs.
(b) Entry Conditions. Notwithstanding Section 12.03(a), entry is
conditioned upon Landlord:
(i) giving Tenant at least twenty-four (24) hours advance notice,
except in an emergency;
(ii) promptly finishing any work for which it entered; and
(iii) causing the least practical interference to Tenant's business.
12.04 Holdover.
(a) Holdover Status. If Tenant continues occupying the Premises after the
Term ends ("Holdover") then:
(i) if the Holdover is with Landlord's written consent, it shall
be a month-to-month tenancy, terminable on thirty (30) days advance
notice by either party. Tenant shall pay at the beginning of each
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month Base Rent and Additional Rent that is five percent (5%) higher
than the amount due in the last full month immediately preceding the
Holdover period unless Landlord specifies a lower or higher Rent and
Additional Rent in the written consent;
(ii) if the Holdover is without Landlord's written consent, then
Tenant shall be a tenant-at-sufferance. Tenant shall pay by the first
day of each month twice the amount of Base Rent and Additional Rent
due in the last full month immediately preceding the Holdover period
and shall be liable for any damages suffered by Landlord because of
Tenant's Holdover, Landlord shall retain its remedies against Tenant
who holds over without written consent.
(b) Holdover Terms. The Holdover shall be on the same terms and
conditions of the Lease except:
(i) the Term;
(ii) Base Rent and Additional Rent;
(iii) the extension Term is deleted;
(iv) the Quiet Possession provision is deleted;
(v) Landlord's obligation for services and repairs is deleted; and
(vi) consent to an assignment or sublease may be unreasonably
withheld and delayed.
12.05 Signs. Tenant shall not place or have placed any other signs, listings,
advertisements, or any other notices anywhere in the Building without Landlord's
prior written consent.
12.06 Right to Relocate. If the demised Premises comprise less than fifty
percent (50%) of the floor where located, Landlord, at its option, may
substitute for the Demised Premises other space (hereafter called "Substitute
Premises") within the project before the commencement date or at any time during
the term or any extension of their lease. Insofar as reasonably possible, the
Substitute Premises shall have a comparable square foot area and a configuration
substantially similar to the Demised Premises.
Landlord shall give Tenant at least sixty (60) days written notice of its
intention to relocate Tenant to the Substitute Premises. This notice will be
accompanied by a
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floor plan of the Substitute Premises. After such notice, Tenant Shall have ten
(10) days within which to agree with Landlord on the proposed new space and
unless such agreement is reached within such period of time, this lease shall
terminate at the end of the sixty (60) day period of time following the
aforesaid notice. In the event suitable substitute space is not available after
Landlord's written notice then either party may terminate this lease with sixty
(60) days advance written notice.
Landlord agrees to construct or alter, at its own expense, the Substitute
Premises as expeditiously as possible so that they are in substantially the same
condition that the Demised Premises were in immediately prior to the relocation.
Landlord shall have the right to reuse the fixtures, improvements, and
alterations used in the Demised Premises. Tenant agrees to occupy the
Substitute Premises as soon as Landlord's work is substantially completed.
Landlord shall pay Tenant's reasonable cost of moving Tenant's furnishings,
trade fixtures, and inventory to the Substitute Premises. Except as provided
herein, Tenant agrees that all of the obligations of this lease, including the
payment of rent, will continue despite Tenant's location. Tenant's rent shall
abate from the date the Demised Premises are closed until the date the
Substitute Premises are open for business. Tenant agrees to use all reasonable
efforts to open for business in the Substitute Premises as quickly as is
reasonably possible under the circumstance.
Except as provided above, Landlord shall not be liable or responsible in any way
for damages or injuries suffered by Tenant pursuant to the relocation in
accordance with this provision including, but not limited to, loss of goodwill,
business, or profits.
ARTICLE XIII
MISCELLANEOUS
13.01 Broker's Warranty. The parties warrant that Anthony and Co. is the only
broker they dealt with on this Lease. The party who breaches this warranty
shall defend, hold harmless, and indemnity the non breaching party from any
claims or liability arising from the breach. Landlord is solely responsible for
paying the commission of Anthony & Co.
13.02 Attorney's Fees. In any litigation between the parties regarding this
Lease, the losing party shall pay to the prevailing party all reasonable
expenses and court costs including attorneys' fees incurred by the prevailing
party. A party shall be considered the prevailing party if:
(a) it initiated the litigation and substantially obtains the relief it
sought, either through a judgment or voluntary action before (after it is
scheduled) trial or judgment;
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(b) the other party withdraws its action without substantially obtaining
the relief it sought; or
(c) it did not initiate the litigation and judgment it entered for either
party, but without substantially granting the relief sought.
13.03 Notices. Unless a Lease provision expressly authorizes verbal notice, all
notices under this Lease shall be in writing and sent by registered or certified
mail, postage prepaid, as follows:
To Tenant: ACCIPITER (mailing address)
4000 Wake Forest Road
Suite 210
Raleigh, NC 27609
and
To Landlord:
Milkson Associates, LLC
c/o Anthony & Co.
Post Office Box 10810
Raleigh, NC 27605-0810
Attn: Property Management
(919) 832-1110
Either party may change these persons or addresses by giving notice as provided
above. Tenant shall also give required notices to Landlord's mortgagee after
receiving notice from Landlord of the mortgagee's name and address. Notice
shall be considered given and received on the latest original delivery or
attempted delivery date as indicated on the postage receipt(s) of all persons
and addresses to which notice is to be given.
13.04 Partial Invalidity. If any Lease provision is invalid or unenforceable
to any extent, then that provision and the remainder of this Lease shall
continue in effect and be enforceable to the fullest extent permitted by law.
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13.05 Waiver. The failure of either party to exercise any of its rights Is
not a waiver of those rights. A party waives only those rights specified in
writing and signed by the party waiving its rights.
13.06 Binding on Successors. This Lease shall bind the parties' heirs,
successors, representatives, and permitted assigns.
13.07 Governing Law. This Lease shall be governed by the laws of the state in
which the Building is located.
13.08 Lease Not an Offer. Landlord gave this Lease to Tenant for review. It is
not an offer to lease. This Lease shall not be binding unless signed by both
parties and an originally signed counterpart is delivered to Tenant by June 10,
1996.
13.09 Recording. Recording of this Lease is prohibited except as allowed in
this paragraph. At the request of either party, the parties shall promptly
execute and record, at the cost of the requesting party, a short form memorandum
describing the Premises and stating this Lease's Term, its Commencement and
Expiration Dates, and other information the parties agree to include.
13.10 Survival of Remedies. The parties' remedies shall survive the expiration
or termination of this Lease when caused by the Default of the other party.
13.11 Authority of Parties. Each party warrants that it is authorized to enter
into the Lease, that the person signing on its behalf is duly authorized to
execute the Lease, and that no other signatures are necessary.
13.12 Business Days. Business day means Monday through Friday inclusive,
excluding holidays identified at Section 6.02(b). Throughout this Lease,
wherever "days" are used the term shall refer to calendar days. Wherever the
term "business days" is used the term shall refer to business days.
13.13 Entire Agreement. This Lease contains the entire agreement between the
parties about the Premises and Building. Except for the Rules for which Section
12.01(a) controls, this Lease shall be modified only by a writing signed by both
parties.
13.14 Definition of Lease. This Lease consists of the following:
(a) Title Page;
(b) Table of Contents;
(c) Articles I through XIII;
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(d) Signature Page;
(e) Rider containing Option To Extend
(f) Exhibits A through E.
(g) Addendum I - space and Rental Allocation Summary
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease the
day and year first above written.
LANDLORD: MILKSON ASSOCIATES, INC.
SIGNATURE:
/s/ [signature illegible]
-------------------------
DATE: 5/5/97
WITNESS NAME: /s/ [signature illegible]
TITLE:
DATE: 5/5/97
-------
TENANT: ACCIPITER, INC.
SIGNATURE:
/s/ [signature illegible]
-------------------------
DATE: 4/29/97
-------
WITNESS: NAME: /s/ Catherine L. Bearden
-------------------------
TITLE:
DATE: 4/30/97
-------
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EXHIBIT A
[Floor Plan]
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EXHIBIT B
[BUILDING]
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EXHIBIT C
[LAND]
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EXHIBIT D
LANDLORD IMPROVEMENTS
Landlord shall paint and carpet the suite in colors selected by Tenant and
approved by Landlord. Other modifications to the suite will include the
relocation of doors and walls as located on the floor plan below. Landlord shall
provide double wood doors at the suite entrance. The expense of any
modifications and/or additions to this plan shall be borne by Tenant.
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<PAGE>
EXHIBIT E
RULES AND REGULATIONS
(1) Access to Common Areas of the Property. Landlord may from time to time
establish security controls for the purpose of regulating access to the
common areas of the property. Tenant shall abide by all such security
regulations so established and agrees to always leave clear access for
vehicular traffic through all parking lots, loading areas and driveways.
(2) Protecting Demised Premises. Before leaving the Demised Premises
unattended, Tenant shall close and securely lock all doors or other means
of entry to the Demised Premises.
(3) Building Directories. The directories of the building shall be used
exclusively for the display of the name and location of tenants only and
will be provided at the expense of Landlord. Any company names and/or name
changes requested by Tenant to be displayed in the directories must be
approved by Landlord and, if approved, will be provided at the sole expense
of Tenant.
(4) Large Articles. Furniture, freight and other large or heavy articles may
be brought into the building in a manner so as to not damage the property
and always at Tenant's sole responsibility. All damage done to the
building, its furnishings, fixtures or equipment by moving or maintaining
such furniture, freight or articles shall be repaired at the expense of
Tenant.
(5) Signs. Tenant shall not paint, display, inscribe, maintain or affix any
sign, placard, picture, advertisement, name, notice, lettering or direction
on any part of the outside or inside of the building, or on any part of the
inside of the Demised Premises which can be seen from the outside of the
Demised Premises, without the written consent of Landlord, and then only
such name or names or matter and in such color, size, style, character and
material as shall be first approved by Landlord in writing. Landlord
reserves the right to remove at Tenant's expense all matter other than that
above provided for without notice to Tenant.
(6) Compliance with Laws. Tenant shall comply with all applicable laws,
ordinances, governmental orders or regulations and applicable orders or
directions from any public office or body having jurisdiction, whether now
existing or hereinafter enacted with respect to the Demised Premises and
the use or occupancy thereof. Tenant shall not make or permit any use of
the
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Demised Premises which directly or indirectly is forbidden by law,
ordinance, governmental regulations or order or direction of applicable
public authority, or which may be dangerous to person or property.
(7) Hazardous Materials. Tenant shall not use or permit to be brought into the
Demised Premises or the building any flammable oils or fluids, or any
explosive or other articles deemed hazardous to persons or property, or do
or permit to be done any act or thing which will invalidate or which if
brought in would be in conflict with any insurance policy covering the
building or its operation, or the Demised Premises, or any part of either,
and will not do or permit to be done anything in or upon the Demised
Premises, or bring or keep anything therein, which shall not comply with
all rules, orders, regulations or requirements of any organization,
bureaus, department or body having jurisdiction with respect thereto (and
Tenant shall at all times comply with all such rules, orders, regulations
or requirements), or which shall increase the rate of insurance on the
building, its appurtenances, contents or operation.
(8) Defacing Demised Premises and Overloading. Tenant shall not place anything
or allow anything to be placed in the Demised Premises near the glass or
any door, partition, wall or window which may be unsightly from outside the
Demised Premises. Tenant shall not place or permit to be placed any
article of any kind on any window ledge or on the exterior walls; blinds,
shades, awnings or other forms of inside or outside window ventilators or
similar devices shall not be placed in or about the outside windows in the
Demised Premises except to the extent that the character, shape, color
material and make thereof is approved by Landlord. Tenant shall not do any
painting or decorating in the Demised Premises or install any floor
coverings in the Demised Premises or make, paint, cut or drill into, or in
any way deface any part of the Demised Premises or building without in each
instance obtaining the prior written consent of Landlord. Tenant shall not
overload any floor or part thereof in the Demised Premises, or any facility
in the building or any public corridors or elevators therein by bringing in
or removing any large or heavy articles and, Landlord may direct and
control the location of safes, files, and all other heavy articles and, if
considered necessary by Landlord, require supplementary supports at
Tenant's expense of such material and dimensions necessary to properly
distribute the weight.
(9) Obstruction of Public Areas. Tenant shall not, whether temporarily,
accidentally or otherwise, allow anything to remain in, place or store
anything in, or obstruct in any way, any sidewalk, court, passageway,
entrance, or shipping area. Tenant shall lend its full cooperation to keep
such areas free from all obstruction and in a clean and sightly condition,
and move all supplies, furniture and equipment as soon as received directly
to the Demised Premises, and shall move all such items, and waste (other
than waste
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customarily removed by building employees) that are at any time being taken
from the Demised Premises directly to the areas designated for disposal.
All courts, passageways, entrances, exits, elevators, escalators,
stairways, corridors, halls and roofs are not for the use of the general,
public and Landlord shall in all cases retain the right to control and
prevent access thereto by all persons whose presence in the judgment of
Landlord shall be prejudicial to the safety, character, reputation and
interest of the building and its tenants provided, however, that nothing
herein contained shall be construed to prevent such access to persons with
whom Tenant deals within the normal course of Tenant's business unless such
persons are engaged in illegal activities.
(10) Additional Locks. Tenant shall not attach or permit to be attached
additional locks or similar devices to any door or widow, change any
existing locks or the mechanism thereof, or make or permit to be made any
keys for any door other than those provided by Landlord. Upon termination
of this lease or of Tenant's possession, Tenant shall surrender all keys to
the Demised Premises. Tenant shall be solely responsible for the costs of
all locks and keys other than the original set in the premises as of the
date of occupancy.
(11) Communications or Utility Connections. If Tenant desires signal, alarm or
other utility or similar service connections installed or changed, Tenant
may install or change the same without the approval of Landlord, but at
Tenant's expense. Tenant shall not install in the Demised Premises any
equipment which requires a substantial amount of electrical current without
the advance written consent of Landlord. Tenant shall ascertain from
Landlord the maximum amount of load or demand for or use of electrical
current which can safely be permitted in the Demised Premises, taking into
account the capacity of the electric wiring in the building and the Demised
Premises, taking into account the capacity of the electric wiring in the
building and the Demised Premises and the needs of other tenants in the
building, and shall not in any event connect a greater load than that which
is safe.
(12) Office of the Building. Service requirements of Tenant will be attended to
only upon application at the office of Anthony & Co. Employees of Landlord
shall not perform any work outside of their duties unless under special
instructions from Landlord.
(13) Restrooms. The restrooms, toilets, urinals, vanities and the other
apparatus shall not be used for any purpose other than that for which they
were constructed and no foreign substance of any kind whatsoever shall be
thrown therein and the expense of any breakage, stoppage or damage
resulting from the violation of this rule shall be borne by Tenant who, or
whose employees or invitees, shall have caused it.
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(14) Intoxication. Landlord reserves the right to exclude or expel from the
building any person who, in the judgment of Landlord, is intoxicated or
under the influence of liquor or drugs, or who shall in any manner do any
act in violation of any of the rules and regulations of the building.
(15) Nuisances and Certain Other Prohibited Uses. Tenant shall not (a) install
or operate any internal combustion engine, boiler, machinery,
refrigerating, heating or air conditioning apparatus in or about the
Demised Premises; (b) engage in any mechanical business, utilize any
article or thing, or engage in any service in or about the Demised Premises
or building, except those ordinarily embraced within the permitted use of
the Demised Premises specified in, Article 7; (c) use the Demised Premises
for housing, lodging, or sleeping purposes; (d) place any antennae on the
roof or on or in any part of the inside or outside of the building other
than the inside of the Demised Premises, or place a musical or sound
producing instrument or device inside or outside the Demised Premises which
may be heard outside the Demised Premises; (e) use any illumination or
power for the operation of any equipment or device other than electricity;
(f) operate any electrical device from which may emanate electrical waves
which may interfere with or impair radio or television broadcasting or
reception from or in the building or elsewhere; (g) bring or permit to be
in the building complex any bicycle or other vehicle, or dog (except in the
company of a blind person) or other animal or bird; (h) make or permit any
objectionable noise or odor to emanate from the Demised Premises; (i)
disturb, solicit or canvass any occupant of the building; (j) do anything
in or about the Demised Premises tending to create or maintain a nuisance
or do any act tending to injure the reputation of the building.
(16) Solicitation. Tenant shall not make any room-to-room canvass to solicit
business from other tenants in the building and shall not exhibit, sell or
offer to sell, use, rent or exchange any products or services in or from
the Demised Premises unless ordinarily embraced within the Tenant's use of
the Demised Premises specified herein and specific authority granted in the
lease agreement.
(17) Energy Conservation. Tenant shall not waste electricity, water, heat or
air conditioning and agrees to cooperate fully with Landlord to assure the
most effective operation of the building's heating and air conditioning,
and shall not allow the adjustment (except by Landlord's authorized
building personnel) or any controls.
(18) Building Security. Upon entry to or exit from the building the exterior
building doors and suite entry door(s) should be kept locked at all times
to assist in security. The janitorial service (if any) shall, upon
completion of its
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duties, lock all building doors. Problems in building and suite security
should be directed to Anthony & Co.
(19) Parking. Parking is in designated parking areas only. There should be no
vehicles in "no parking" zones, or at curbs. Handicapped spaces are for
handicapped persons and the Police Department will ticket unauthorized
(unidentified) cars in handicapped spaces. No vehicles may be abandoned or
repaired on the property, and vehicles requiring extended parking should be
identified to Landlord.
(20) Janitorial Service. Tenants will remove excessive trash from inside and
outside their premises and shall deposit same in the dumpsters provided by
Landlord. Any large volume of trash resulting from delivery of furniture,
equipment, etc., should be removed by the delivery company, Tenant, or
Landlord at Tenant's expense. Any requests for extraordinary trash removal
should be directed to Anthony & Co. at 832-1110.
(21) Landlord reserves the right to make such other reasonable Rules and
Regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the Building and the Land, and for the
preservation of good order therein.
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Exhibit 10.16
-------------
AMENDMENT TO LEASE AGREEMENT
AGREEMENT, made this 5th day of November, 1997, by and between MILKSON
ASSOCIATES, LLC (hereinafter called Lessor) and ACCIPITER, INC. (hereinafter
called Lessee).
WITNESSETH:
WHEREAS, Lessor and Lessee entered into a written agreement of lease
bearing date of April 9, 1997 (hereinafter The Lease Agreement), whereby Lessor
leased to Lessee and Lessee rented from Lessor approximately 6,014 rentable
square feet in Suite 200, 4000 Wake Forest Road, located in the City of Raleigh,
Wake County, North Carolina, for the term of May 1, 1997 through April 30, 1999.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto with the intent
to be legally bound, hereby agree as follows:
Tenant shall occupy the balance of the second floor of the building,
consisting of approximately an additional 6,231 rentable square feet for a total
of 12,245 rentable square feet in the following two phases.
1. Phase I:
-------
(a) Effective November 1, 1997 Lessee shall expand their premises to Suite
200 at 4000 Wake Forest Road, Raleigh, North Carolina. The premises
shall consist of approximately 2,832 rentable square feet, as shown in
Exhibit A.
(b) Effective November 1, 1997 through April 30, 1998 the following
monthly rent shall apply to Phase I portion of the premises: Three
Thousand, Four Hundred Twenty-two and 00/100 Dollars ($3,422.00) per
month (see Paragraph 5, Rent Schedule for total rent due), subject to
three percent (3%) escalator annually in May.
(c) The lease term for this space is November 1, 1997 through April 30,
2001. It is understood by both parties that the term of this space is
not concurrent with the term of the original space.
2. Phase II:
--------
(a) Effective May 1, 1998 Lessee shall further expand their premises at
Suite 200 at 4000 Wake Forest Road, Raleigh, North Carolina to include
an additional 3,399 rentable square feet, as shown in Exhibit B.
<PAGE>
(b) Effective May 1, 1998 the following monthly rent shall apply to Phase
II of expanded premises: Four Thousand, One Hundred Seven and 13/100
Dollars ($4,107.13) per month (see Paragraph 5, Rent Schedule for
total rent due) subject to three percent (3%) escalator on anniversary
date of lease.
(c) The lease term for this space is May 1, 1998 through April 30, 2001.
It is understood by both parties that the term for this space is not
concurrent with the lease term of the original space.
3. Landlord Improvements:
---------------------
(a) Landlord agrees to improve elevator cab with new carpeting and paint.
(b) Landlord agrees to replace carpeting, paint, demolish walls and
construct new walls as needed by Tenant with a budget not to exceed
Ten Dollars ($10.00) per square foot or Sixty-two Thousand, Three
Hundred Ten and 00/100 Dollars ($62,310.00) for the total renovation
of Phase I and Phase II.
(c) Landlord will furnish architectural design and construction which
shall be included in the above budgeted number.
(d) Tenant is solely responsible for all costs associated with the
relocation of reception area and kitchen.
4. Signage:
-------
(a) Landlord agrees that Tenant may participate with other building
tenants in the expense of a monument sign to be erected at the street,
with Tenant's name receiving top billing on the sign, if Tenant so
desires.
(b) Landlord further agrees that Tenant may, at Tenant's expense, and on
the day that Tenant takes possession of the entire second floor, have
a sign placed on the exterior of the building reflecting the name of
Tenant's company.
(c) This sign must meet code requirements of the City of Raleigh and be
attached to the building in such a way as not to permanently damage
the building surface or structure.
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<PAGE>
5. Rent Schedule:
-------------
<TABLE>
<CAPTION>
Annual Base Rent Monthly Base Rent
---------------- -----------------
<S> <C> <C>
Phase I: 2,832 RSF added
(Total 8,846 RSF)
11/1/97 - 4/30/98 $128,267.00 $10,688.92
Phase II: 3,399 RSF added
(Total 12,245 RSF)
5/1/98 - 4/30/99 $180,168.72 $15,014.06
5/1/99 - 4/30/00 $ 93,060.00 $ 7,755.00**
5/1/00 - 4/30/01 $ 95,851.80 $ 7,987.65**
</TABLE>
* Includes three percent (3%) escalator.
** Lease term for original 6,014 square feet expires 4/30/99.
Except as expressly modified by this Amendment and as heretofore modified,
all terms and provisions of the Lease are hereby ratified and confirmed and
shall remain in full force and effect through the term of the Lease.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their respective hands
and seals the day and year first above written.
WITNESS SEAL:
/s/ [signature illegible] /s/ [signature illegible]
- ---------------------------------- ----------------------------------
Milkson Associates, LLC, Lessor
WITNESS SEAL:
/s/ [signature illegible] /s/ [signature illegible]
- ---------------------------------- ----------------------------------
Accipiter, Inc., Lessee
-3-
<PAGE>
EXHIBIT 21.1
Subsidiaries
Internet Profiles Corporation California
Engage Technologies Limited United Kingdom
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Engage Technologies, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
May 7, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Accipiter, Inc.:
We consent to the inclusion of our report on Accipiter, Inc. dated March 26,
1998 in the prospectus constituting part of this Registration Statement on
Form S-1 of Engage Technologies, Inc. and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Raleigh, North Carolina
May 7, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of Engage Technologies, Inc. of our report
dated March 1, 1999 relating to the financial statements of Internet Profiles
Corporation, a California corporation, which appears in such prospectus. We
also consent to the reference to us under the heading "Experts" in such
prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
May 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 96
<SECURITIES> 567
<RECEIVABLES> 2,184
<ALLOWANCES> 360
<INVENTORY> 0
<CURRENT-ASSETS> 2,717
<PP&E> 1,318
<DEPRECIATION> 529
<TOTAL-ASSETS> 22,400
<CURRENT-LIABILITIES> 11,326
<BONDS> 0
0
15
<COMMON> 1
<OTHER-SE> 11,058
<TOTAL-LIABILITY-AND-EQUITY> 22,400
<SALES> 1,945
<TOTAL-REVENUES> 2,217
<CGS> 185
<TOTAL-COSTS> 2,242
<OTHER-EXPENSES> 22,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172
<INCOME-PRETAX> (13,719)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,719)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
