<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
REGISTRATION NO. 333-78015
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
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 Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
---------------
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. [_]
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 Offerings". One small circle is labelled, "Targeted Delivery of
Advertising". One small circle is labelled, "Web Site Traffic Measurement,
Auditing and Analysis". The larger circle is labelled, "Engage Profiling
Products and Services".]
[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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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.
6,000,000 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 6,000,000 shares of common stock are being sold by Engage.
At the request of Engage, the underwriters have reserved at the initial
public offering price up to 600,000 shares of common stock for sale to
employees, customers, resellers and other business associates of Engage and up
to 600,000 shares of common stock for sale to stockholders of CMGI.
It is currently estimated that the initial public offering price per share
will be between $13.00 and $15.00. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "ENGA".
Upon completion of this offering, CMGI, Inc. will directly own approximately
82% of the outstanding shares of Engage common stock and will continue to
control Engage.
Please see "Risk Factors" beginning on page 8 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, subject to the terms of the underwriting agreement,
purchase up to an additional 900,000 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>
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 Technologies, Inc.
Our Business
Engage provides products and services that enable customers to create and
use profiles of individual Web visitors to target advertisements, content and
e-commerce offerings. An Engage profile is an anonymous collection of
information about an individual Web user's consumer interests, demographic
characteristics and geographic location. These profiles are developed through a
combination of a user's browsing behavior on participating sites on the
Internet and information the user has voluntarily declared at those sites, such
as information provided on an online registration form. Each anonymous profile
omits information that would permit the personal identification of the user,
such as name, address and e-mail address.
Based on its proprietary technology, Engage has built a database currently
containing more than 30 million anonymous consumer profiles, which it has
created using data drawn from multiple, diverse Web sites. When a user visits a
Web site of any customer subscribing to the Engage Knowledge data service,
Engage matches that visitor with his or her profile in the profile database.
The Web site can then use that profile to target offerings to the visitor based
on his or her particular preferences, demographic characteristics and
geographic location.
Each Engage profile contains numerical scores that rank a Web user's
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'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 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.
3
<PAGE>
Our Operating History and Future Dependence on Engage Knowledge
Although Engage expects that a significant portion of its future growth will
be attributable to sales of subscriptions to its Engage Knowledge data service
and other products and services that will be based upon Engage's profiling
technology, Engage has to date recognized no revenue from the Engage Knowledge
service. Engage expects to begin to recognize revenue from sales of
subscriptions to the Engage Knowledge service in late July 1999. 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 has incurred aggregate net
losses of approximately $47.6 million since inception in 1995, including net
losses of approximately $13.8 million in fiscal 1998, and expects to continue
to incur significant losses for the foreseeable future. Engage's ability to
reduce these losses will depend in large part on our ability to generate
significant additional revenues. Engage operates in a highly competitive market
and it may not achieve profitability. Sales of products and services to
affiliates of CMGI have accounted for approximately 14% of Engage's total
revenue through April 30, 1999. In the first nine months of fiscal 1999,
approximately 87% of the Company's total revenue was attributable to sales of
products rather than services.
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 provider of profile-driven Internet marketing products and
services:
Establish Engage as a recognized brand for Internet profiling. 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 products based on open standards. To promote broad acceptance
of Engage profiles, we plan to continue to design our products based on open
standards that enable our products 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 products for
specific markets, including Web publishers and advertising networks as well
as the automotive and retail markets.
Offer family of Engage products and services. We intend to offer a range of
different products and services to our existing installed base of customers.
4
<PAGE>
Maintain position as advocate for Internet privacy. We plan to maintain our
commitment regarding issues of consumer privacy on the Internet.
Risks that could affect our opportunity and strategy
Our market opportunity could be diminished by customer concerns about Web
sites that collect data about their visitors and slower than expected growth in
Internet advertising. Our ability to achieve our business strategy could be
hindered by slower than anticipated customer acceptance of the Engage Knowledge
service or the inability of Engage profiles to improve the effectiveness of the
marketing campaigns of advertisers and merchants.
Control by CMGI
CMGI will own approximately 82% of the outstanding common stock after this
offering. CMGI's ownership may have the effect of delaying or preventing a
change of control of Engage. In addition, CMGI will have the power to elect
Engage's entire board of directors and approve or disapprove mergers or other
significant corporate transactions submitted to Engage stockholders for
approval.
The Offering
<TABLE>
<C> <S>
Shares offered by Engage...................... 6,000,000 shares
Shares to be outstanding after this offering.. 46,911,798 shares(1)
Nasdaq National Market symbol................. ENGA
Use of proceeds............................... For general corporate purposes,
including working capital
</TABLE>
- --------
(1) Based on 1,225,324 shares of common stock outstanding as of April 30, 1999,
plus 38,748,474 shares of common stock issuable upon conversion of
outstanding convertible notes and convertible preferred stock as of that
date and 938,000 shares of common stock to be issued prior to the closing
of this offering. Excludes 6,467,794 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, GeoKnowledge Engage Technologies, I/AUDIT and I/PRO
are trademarks of Engage. All other trademarks and service marks are the
property of their respective owners.
Unless otherwise specifically stated, information throughout this prospectus
assumes:
. the underwriters' over-allotment option is not exercised;
. the conversion of $37,446,850 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 two-for-one stock split immediately prior to the
date of this prospectus;
. all stock splits of CMGI common stock with a record date prior to the
date of this prospectus; and
. an initial public offering price of $14.00 per share.
----------------
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.
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 the results of operations of I/PRO since April 7, 1999.
<TABLE>
<CAPTION>
Nine Months Ended
July 18, 1995 Year Ended July 31, April 30,
(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 $ 613 $ 8,997
Cost of revenue......... -- 31 2,238 1,189 5,626
------- --------- --------- -------- --------
Gross (loss) profit... -- (6) (21) (576) 3,371
Operating expenses:
In-process research and
development........... -- -- 9,200 9,200 4,500
Research and
development........... 1,796 7,261 5,859 4,688 5,816
Selling and marketing.. 155 1,566 4,015 2,524 6,614
General and
administrative........ 428 1,429 1,993 1,017 2,409
Amortization of
goodwill and other
intangibles........... -- -- 1,391 358 3,543
Stock compensation..... -- -- 426 65 657
------- --------- --------- -------- --------
Total operating
expenses............. 2,379 10,256 22,884 17,852 23,539
------- --------- --------- -------- --------
Loss from operations.... (2,379) (10,262) (22,905) (18,428) (20,168)
Gain on sale of product
rights................. -- -- 9,240 9,240 --
Equity in loss of joint
venture................ -- -- -- -- (417)
Loss on disposal of
property and
equipment.............. -- -- -- -- (174)
Interest expense, net... -- -- (172) (60) (411)
------- --------- --------- -------- --------
Net loss ............... $(2,379) $ (10,262) $ (13,837) $ (9,248) $(21,170)
======= ========= ========= ======== ========
Pro forma basic and
diluted net loss per
share.................. $ (.83) $ (.62)
========= ========
Weighted average shares
of common stock used in
computing pro forma
basic and diluted net
loss per share......... 16,750 34,210
========= ========
</TABLE>
6
<PAGE>
The following table is a summary of our balance sheet at April 30, 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 the sale of 938,000 shares of common stock to be issued prior to the
closing of this offering for net proceeds of approximately $13.1 million and
(3) on a pro forma as adjusted basis after giving effect to the conversion of
all outstanding convertible preferred stock into common stock and the sale of
938,000 shares of common stock to be issued prior to the closing of this
offering for net proceeds of approximately $13.1 million and to reflect the
sale of 6,000,000 shares of common stock at an assumed initial public offering
price of $14.00 per share, after deducting the underwriting discount and
estimated offering expenses.
<TABLE>
<CAPTION>
April 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents............................ $ 661 $13,743 $ 90,588
Working capital (deficit)....................... (40,204) 10,325 87,170
Total assets.................................... 54,970 68,052 144,897
Debt to CMGI.................................... 37,447 -- --
Stockholders' equity............................ 5,101 55,630 132,475
</TABLE>
7
<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 incurred substantial losses and anticipate continued losses
We have never been profitable. We have incurred net losses totalling $47.6
million from inception to April 30, 1999. 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
profiling capabilities used to create and maintain the Engage Knowledge data
service serve as the platform for most of our current and planned profile-based
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 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-based products and services does not
demonstrably improve the responsiveness of Web visitors, Engage's business,
financial condition and results of operations will be materially adversely
affected.
The value of the Engage Knowledge service depends on continued contributions of
data from customers subscribing to this service
Decisions by our major customers not to contribute their data to the Engage
Knowledge database would hinder the quality and growth of the Engage Knowledge
database and could severely impair the effectiveness and value of the Engage
Knowledge data service and our other planned profile-based products. The
anonymous user profiles currently in the Engage Knowledge database have been
created from data generated by customers that are testing the Engage Knowledge
data service. Organizations subscribing to the Engage Knowledge data service
currently can elect not to contribute user data to the Engage profile database.
These organizations may elect not to contribute data due to concerns relating
to sharing proprietary information about their users and perceived privacy
concerns. Although
8
<PAGE>
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.
Our business may be seriously harmed if we do not successfully develop profile-
based products and services for specific markets
We plan to develop Engage Knowledge data services that are tailored for the
requirements of specific markets, such as the automotive and retail 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
marketing relationships with partners having expertise in these markets. There
can be no assurance that we will be successful in obtaining this data or the
necessary marketing relationships, 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.
The market for profile-based marketing products and services is new. 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 have only been in business for a short period of time and your basis for
evaluating us is limited
We began commercial shipments of our first software products in early 1998.
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 recently commenced commercial sales, 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.
We will continue to be controlled by CMGI, Inc., whose interests may differ
from other stockholders
CMGI, Inc. currently beneficially owns approximately 94% of the outstanding
shares of our common stock, and after the offering will own approximately 82%
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 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
9
<PAGE>
order for CMGI to avoid becoming a registered investment company. Registration
as an investment company would subject CMGI to numerous regulatory requirements
with which CMGI would have difficulty complying. As a result, CMGI may be
motivated to maintain at least a majority ownership position of Engage, even if
other stockholders of Engage might consider a sale of control of Engage to be
in their best interests. As long as it is a majority stockholder, CMGI has
contractual rights to purchase shares in any financing of Engage sufficient to
maintain its majority ownership position. 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.
A material portion of our growth to date has been attributable to sales to CMGI
affiliates
Eleven of our customers are affiliates of CMGI. In fiscal 1998, sales of
products and services to affiliates of CMGI accounted for $235,000, or
approximately 11%, of Engage's total revenue. In the first nine months of
fiscal 1999, sales of products and services to affiliates of CMGI accounted for
$1.4 million, or approximately 15%, of Engage's total revenue. 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.
The terms of our sales to CMGI affiliates could change
While Engage believes that the transactions between it and other affiliates
of CMGI have been on arms'-length terms, it is possible that Engage might have
received more favorable terms than it would have if it were not an affiliate of
CMGI. In addition, the terms of our sales to affiliated customers could change
if these customers cease to be affiliates of CMGI in the future. CMGI has been
and continues to be instrumental in introducing 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" and data collection 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 and privacy advocates 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. While such technology currently exists, it is substantially less
effective than cookies. Replacement of cookies could require significant
reengineering time and resources, might not be completed in time to avoid
negative consequences to our business, financial condition or results of
operations, and might not be commercially feasible.
In addition, privacy concerns may cause some Web users to be less likely to
visit Web sites that subscribe to the Engage Knowledge data service. If enough
Web users choose not to visit sites using or providing information to the
Engage Knowledge data service, our ability to sell subscriptions to the Engage
Knowledge data service would be adversely affected.This would, in turn, have a
material adverse effect on our business, financial condition or results of
operations.
10
<PAGE>
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 aimed at regulating
the collection and use of personal data from Internet users and additional
similar bills are being considered during the current congressional session.
Although we believe that none of the current bills, as drafted, would have a
material adverse effect on our business, it is possible that a bill may be
modified and enacted into law that negatively affects our ability to collect
and use data about Web users. The European Union has recently adopted a
directive addressing data privacy that may result in limitations on the
collection and use of specific personal information regarding Internet users.
In addition, Germany has imposed its own laws protecting data that can become
personally identifiable through subsequent processing. Other countries may also
enact limitations on the use of personal data.
To date, these regulations have not materially restricted the use of 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
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. This growth has
placed a significant strain on our managerial, operational and financial
resources. 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. 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.
11
<PAGE>
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 profiling
solutions market. The primary competitors to our advertising management
software are systems provided by NetGravity 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 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 loss of data used to
create our user profiles. Our business, financial
12
<PAGE>
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 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, 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 two companies 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
13
<PAGE>
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.
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. In
February 1998, we filed two patent applications in the United States. 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, with whom we do not
have employment agreements. 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.
14
<PAGE>
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.
Engage will continue to rely on CMGI for various administrative services, and
conflicts of interest could arise in the provision of such services
Upon the closing of this offering, CMGI and Engage will enter into a
facilities and administrative support agreement under which CMGI will continue
to make available space at its headquarters in Massachusetts and will provide
various services to Engage, including tax and administration, computer and
information systems, telecommunications, utilities and employee benefits
administration. Under this agreement, CMGI has agreed to make available to
Engage at least 28,000 square feet of space at its headquarters facilities in
Andover, Massachusetts, subject to termination upon at least 12 months' notice
by CMGI. The fees payable by Engage for the availability of space and other
services are typically determined through an allocation of CMGI's costs based
upon the proportion of Engage's employee headcount to the total headcount of
CMGI and other CMGI-related companies located in the same facility or using the
same services. We have not independently determined the market value for these
services and may be paying more than fair market value for them if this
allocation method does not fairly reflect Engage's use of these services or if
CMGI were obtaining them at rates greater than their fair market value. This
agreement may be amended by agreement of CMGI and Engage. It is possible that
personnel of CMGI providing these services may encounter conflicts of interests
such as demands on their time by CMGI that might detract from their level of
availability or service to Engage. In addition, Engage's reliance on these
services could result in higher costs than would be incurred if Engage were to
obtain such services from an unrelated third party.
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;
. 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
15
<PAGE>
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
The availability of a large number of shares for sale could result in the
need for sellers to accept a lower price in order to complete a sale. This
would result in a lower market price of our common stock. After this offering,
there will be outstanding 46,911,798 shares of our common stock, or 47,811,798
shares if the underwriters' over-allotment option is exercised in full. Of
these shares, the 6,000,000 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 40,911,798 shares of common
stock held by existing stockholders, 40,219,464 are subject to 180-day lock-up
agreements 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 30,477,194 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.
You will suffer immediate and substantial dilution
The initial public offering price per share will significantly exceed the
net tangible book value per share. If Engage were to liquidate immediately
after the offering, investors purchasing shares in this offering would receive
a per share amount of tangible assets net of liabilities that would be less
than the initial public offering price per share. Investors purchasing shares
in this offering will suffer dilution of $12.11 per share from their
investment.
16
<PAGE>
USE OF PROCEEDS
Engage estimates that the net proceeds from its sale of 6,000,000 shares of
common stock will be $76.8 million, 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 $88.6 million.
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.
17
<PAGE>
CAPITALIZATION
The following table sets forth Engage's capitalization as of April 30,
1999:
. on an actual basis after giving effect to the two-for-one 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 the sale of 938,000
shares of common stock to be issued prior to the closing of this offering
for net proceeds of approximately $13.1 million; 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 sale of
938,000 shares of common stock to be issued prior to the closing of this
offering for net proceeds of approximately $13.1 million and the
application of the estimated net proceeds from the sale of common stock
in this offering, assuming an initial public offering price of $14.00 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>
April 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -------------
(in thousands, except share data)
<S> <C> <C> <C>
Debt to CMGI........................... $ 37,447 $ -- $ --
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;
60,000,000 shares authorized
(actual); 150,000,000 shares
authorized (pro forma and pro forma
as adjusted); 1,225,324 shares issued
and outstanding (actual); 40,911,798
and 46,911,798 shares issued and
outstanding (pro forma and pro forma
as adjusted)(1)...................... 12 408 468
Additional paid-in capital............. 57,964 108,114 184,899
Deferred compensation.................. (4,822) (4,822) (4,822)
Accumulated other comprehensive
income................................ (422) (422) (422)
Accumulated deficit.................... (47,648) (47,648) (47,648)
----------- ----------- -----------
Total stockholders' equity............. 5,101 55,630 132,475
----------- ----------- -----------
Total capitalization.................. $ 42,548 $ 55,630 $ 132,475
=========== =========== ===========
</TABLE>
- --------
(1) Excludes 6,467,794 shares of common stock issuable upon exercise of
outstanding options, as of April 30, 1999, at a weighted average exercise
price of $2.16 per share.
18
<PAGE>
DILUTION
The pro forma net tangible book value of Engage as of April 30, 1999 was
approximately $11.7 million, or approximately $.29 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,
the sale of 938,000 shares of common stock to be issued prior to the closing of
this offering for net proceeds of approximately $13.1 million and the two-for-
one stock split. After giving effect to the sale of the common stock offered by
Engage in this offering at an assumed initial public offering price of $14.00
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 April 30, 1999 would have been approximately $88.6 million or
approximately $1.89 per pro forma share of common stock. This represents an
immediate increase in net tangible book value of $1.60 per share to Engage's
existing stockholders and an immediate dilution in net tangible book value of
$12.11 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............................. $14.00
Pro forma net tangible book value per share at April 30, 1999... $ .29
Increase per share attributable to this offering................ 1.60
-----
Pro forma net tangible book value per share after this offering... 1.89
------
Dilution per share to new investors............................... $12.11
======
</TABLE>
The following table summarizes, on a pro forma basis, as of April 30, 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 $14.00 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.. 40,911,798 87% $108,522,000 56% $ 2.65
New investors.......... 6,000,000 13 84,000,000 44 $14.00
---------- --- ------------ ---
Total................ 46,911,798 100% $192,522,000 100%
========== === ============ ===
</TABLE>
This discussion and table assume no exercise of options outstanding under
Engage's 1995 Equity Incentive Plan. As of April 30, 1999, there were options
outstanding to purchase a total of 6,467,794 shares of common stock at a
weighted average exercise price of $2.16 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Engage's consolidated financial statements and notes to those
statements and other financial information included elsewhere in this
prospectus. The statement of operations data for the period from July 18, 1995
(inception) to July 31, 1996, the years ended July 31, 1997 and 1998 and the
nine months ended April 30, 1999 and the balance sheet data as of July 31, 1997
and 1998 and April 30, 1999 are derived from the audited financial statements
of Engage that have been audited by KPMG LLP, and are included elsewhere in
this prospectus. The statement of operations data for the nine month period
ended April 30, 1998 is derived from the unaudited financial statements of
Engage included in this prospectus. The balance sheet data as of July 31, 1996
is 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>
Nine Months Ended
July 18, 1995 Year Ended July 31, April 30,
(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 $ 379 $ 6,520
Product revenue,
related parties....... -- -- 203 143 1,274
Services and support
revenue............... -- -- 240 82 1,113
Services and support
revenue, related
parties............... -- -- 32 9 90
------- --------- --------- ------- --------
Total revenue.......... -- 25 2,217 613 8,997
Cost of revenue......... -- 31 2,238 1,189 5,626
------- --------- --------- ------- --------
Gross (loss) profit.... -- (6) (21) (576) 3,371
Operating expenses:
In-process research and
development........... -- -- 9,200 9,200 4,500
Research and
development........... 1,796 7,261 5,859 4,688 5,816
Selling and marketing.. 155 1,566 4,015 2,524 6,614
General and
administrative........ 428 1,429 1,993 1,017 2,409
Amortization of
goodwill and other
intangibles........... -- -- 1,391 358 3,543
Stock based
compensation.......... -- -- 426 65 657
------- --------- --------- ------- --------
Total operating
expenses.............. 2,379 10,256 22,884 17,852 23,539
------- --------- --------- ------- --------
Loss from operations.... (2,379) (10,262) (22,905) (18,428) (20,168)
Gain on sale of product
rights................. -- -- 9,240 9,240 --
Equity in loss of joint
venture................ -- -- -- -- (417)
Loss on disposal of
property and
equipment.............. -- -- -- -- (174)
Interest expense, net... -- -- (172) (60) (411)
------- --------- --------- ------- --------
Net loss................ $(2,379) $ (10,262) $ (13,837) $(9,248) $(21,170)
======= ========= ========= ======= ========
Unaudited pro forma
basic and diluted net
loss per share......... $ (.83) $ (.62)
========= ========
Weighted average shares
of common stock used in
computing pro forma
basic and diluted net
loss per share......... 16,750 34,210
========= ========
</TABLE>
<TABLE>
<CAPTION>
July 31,
-------------------------- April 30,
1996 1997 1998 1999
------- -------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents..................... $ -- $ -- $ 96 $ 661
Working deficit.......................... (4,427) (14,209) (8,609) (40,204)
Total assets............................. 2,403 1,782 24,046 54,970
Debt to CMGI............................. 3,507 14,018 7,753 37,447
Stockholders' (deficit) equity........... (2,299) (12,539) 12,720 5,101
</TABLE>
20
<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 various 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 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 advertising management
services, I/PRO web site traffic measurement, auditing and analysis services
and the Engage Knowledge data service.
Product licenses are typically perpetual, although some have a one to three
year term. The fees for licenses of AdManager vary based on the volume of
advertisements served, and the fees for licenses of ProfileServer and
DecisionSupportServer vary based on the volume of activity on the customer's
site. Engage recognizes revenue from product licenses when a signed, non-
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.
Effective April 1998, Engage acquired Accipiter, Inc., and began to sell the
Accipiter AdManager system and subscriptions to the Accipiter AdBureau service.
In April 1999, Engage acquired Internet Profiles Corporation (I/PRO) and began
to sell the I/PRO line of analysis and audit products and services. As of April
30, 1999, Engage had implemented its Engage Knowledge data service with
customers on a test basis.
21
<PAGE>
Engage has not recognized any revenue from the Engage Knowledge data service
through April 30, 1999. However, Engage expects that a significant portion of
its future revenue will be attributable to the Engage Knowledge data service
and other products and services based on its profiling technology that enable
its customers to create and use profiles that categorize information about a
Web user's consumer and demographic characteristics and geographic location.
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 nine months ended
April 30, 1999, Engage sold products and services to 11 affiliates of CMGI.
Engage believes that the terms and conditions of those sales are not materially
different than the terms and conditions of sales to unrelated third parties.
In August 1997, Engage sold rights to some 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 10,109,536 shares of CMGI common stock.
In August 1998, Accipiter was merged with Engage in a stock-for-stock merger in
which 700,000 shares of Engage's Series A convertible preferred stock were
issued to CMGI. Engage has reflected the acquisition of Accipiter in its
consolidated financial statements as if it occurred in April 1998. The total
purchase price for Accipiter was valued at $31.3 million. 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 173,080 shares of CMGI common stock held
in escrow to be issued to employee stockholders of Accipiter who satisfy a two-
year employment continuation provision. Compensation expense is being
recognized over the two-year service period beginning April 1, 1998. The
acquisition has been accounted for using the purchase method, and, accordingly,
the purchase price has been allocated to the assets purchased and liabilities
assumed based upon their fair values at the date of acquisition. The portion of
the purchase price allocated to goodwill and developed technology is being
amortized on a straight-line basis over five years. Amounts allocated to the
employee workforce and the Accipiter trade name are being amortized on a
straight-line basis over two years.
In August 1998, Engage acquired, for $1.4 million in cash, 49% of the shares
of Engage Technologies Japan, a joint venture with Sumitomo Corporation in
Japan. Engage's ownership interest was subsequently reduced to 46% after the
issuance of additional equity in the joint venture to a new investor. The joint
venture was established to sell Engage's
22
<PAGE>
products and services in Japan. This investment is being accounted for under
the equity method of accounting. Engage's share of the joint venture's foreign
currency translation adjustments is reflected in both the investment account
and in shareholders' equity as a component of comprehensive income on the
consolidated balance sheet. Under a separate license agreement, Engage licensed
its Engage Knowledge technology to the joint venture in consideration for a
non-refundable $3.0 million prepaid royalty and future royalties of 11.11% of
future revenue. The initial lump sum royalty has been deferred and is being
recognized as income over three years beginning in December 1998, the estimated
period over which Engage expects to provide maintenance and support. In
addition, Engage and the joint venture entered into a reseller agreement under
which Engage granted the joint venture an exclusive right to resell its
products to end users in Japan. Under the terms of the reseller agreement, the
joint venture is entitled to purchase Engage's products for resale to end-users
in Japan, excluding Japanese distribution rights granted to Red Brick.
In April 1999, Engage acquired I/PRO, which provides Web site traffic
measurement and audit services, for approximately $32.7 million, consisting of
$1.6 million in net cash, $20.9 million in CMGI shares and $10.2 million in
Engage shares and options. The acquisition has been accounted for using the
purchase method, and, accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
dates of acquisition. Engage has recorded an expense of $4.5 million in the
third quarter of fiscal 1999 representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. Goodwill and other intangibles, totaling $27.2 million,
were recorded and are being amortized on a straight-line basis over two or five
years, depending on the asset class. In addition, CMGI must pay up to $3.0
million to I/PRO stockholders if the following performance goals are met:
. the gross revenue of I/PRO for the year ended March 31, 2000 exceeds
$10.8 million;
. as of May 31, 1999 data contributed to the Engage knowledge database
equals 65% or more of the volume of data contributed to I/PRO on the
closing of the transaction and this data constitutes 75% or more of the
data generated by visitors to the Web sites of I/PRO customers as of
March 31, 2000; and
. various employees of I/PRO are employed by Engage on March 31, 2000.
Engage must reimburse CMGI for any such payments, at CMGI's election, in
cash or by issuance of shares of Engage common stock at its then fair market
value. Any additional payment will be treated as additional purchase price and
amortized over the balance of the two or five year period.
Engage recorded deferred compensation of $1.7 million in 1998 related to the
Accipiter acquisition and $4.2 million for the nine months ended April 30,
1999, representing the difference between the exercise price of stock options
granted and the estimated fair market value of the underlying common stock at
the date of grant. The difference is recorded as a reduction of stockholders'
equity and is being amortized over the vesting period of applicable options,
typically four years. Of the total deferred compensation amount, $1.1 million
had been amortized as of April 30, 1999. The amortization of deferred
compensation is recorded as an operating expense. We currently expect to
amortize the following remaining amounts of deferred compensation as of April
30, 1999 in the periods indicated:
<TABLE>
<CAPTION>
in
thousands
---------
<S> <C>
Year ended July 31, 1999.............................................. $ 798
2000.............................................. 1,223
2001.............................................. 1,043
2002.............................................. 1,043
2003.............................................. 715
------
$4,822
======
</TABLE>
Engage's corporate headquarters are shared with CMGI and several other CMGI
affiliates. CMGI allocates facility and services costs among these affiliates
based upon headcount within each affiliate and within each department of each
affiliate. Services provided by CMGI include support for human resources,
23
<PAGE>
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 April 30, 1999, had an accumulated
deficit of approximately $47.6 million. Engage had net losses of $13.8 million
in fiscal 1998 and $21.2 million in the first nine months of fiscal 1999. 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.
Prior to the closing of this offering, Engage expects to enter into an
agreement with Compaq Computer whereby Compaq will license Accipiter AdManager,
Decision SupportServer and ProfileServer from Engage. Prior to the closing of
this offering, Engage will also issue Compaq 938,000 shares of common stock at
a purchase price of $14.00 per share resulting in approximately $13.1 million
of net proceeds to Engage.
Results of Operations
Comparison of the Nine Months Ended April 30, 1998 and April 30, 1999
Revenue
Total revenue increased from $613,000 in the nine months ended April 30,
1998 to $9.0 million in the nine months ended April 30, 1999, primarily as a
result of the commencement of sales of Accipiter AdManager and AdBureau due to
the acquisition of Accipiter as well as the introduction of ProfileServer and
DecisionSupportServer. In addition, a portion of this increase is the result of
the acquisition of I/PRO and the inclusion of I/PRO's April 1999 revenue in
product revenues for the nine months ended April 30, 1999. Revenue from product
licenses accounted for approximately 85% of total revenue during the nine-month
period ended April 30, 1998, compared to approximately 87% during the nine-
month period ended April 30, 1999. Revenue from one customer accounted for
approximately 10% of total revenue during the nine months ended April 30, 1999.
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 and the amortization of developed
technology acquired in the Accipiter and I/PRO acquisitions. Cost of support
and services revenue is primarily comprised of payroll and benefits, and
allocated overhead costs associated with Engage's customer support,
installation and training staff.
Cost of product revenue increased from $36,000 in the nine months ended
April 30, 1998 to $1.3 million in the nine months ended April 30, 1999. The
increase was due primarily to an increase in operational costs associated with
the introduction of Engage's AdBureau services. In addition, a portion of the
increase is the result of costs associated with the resale of a third-party
vendor's products in conjunction with Engage's product offerings. The costs
associated with such arrangements typically provide for lower margins than
Engage's other product offerings. Finally, a portion of the increase is the
result of increased amortization costs resulting from the amortization of
developed technology acquired in the Accipiter and I/PRO acquisitions.
Cost of service and support revenue increased from $1.2 million in the nine
months ended April 30, 1998 to $4.3 million in the nine months ended April 30,
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 30 at April
30, 1998 to 63 at April 30, 1999.
24
<PAGE>
Operating Expenses
In-Process Research and Development. In-process research and development
expense was $9.2 million during the nine months ended April 30, 1998 due to the
completion of the Accipiter transaction, compared to $4.5 million during the
nine months ended April 30, 1999 which resulted from the I/PRO acquisition.
Research and Development. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expenses. Research and development expenses increased from
$4.7 million in the nine months ended April 30, 1998 to $5.8 million in the
nine months ended April 30, 1999. The increases were the result of the growth
of Engage's research and development activities and the inclusion of
Accipiter's operations for the entire nine-month period ended April 30, 1999,
and the inclusion of I/PRO's operations for one month in the nine-month period
ended April 30, 1999. 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 $2.5 million in the
nine months ended April 30, 1998 to $6.6 million in the nine months ended April
30, 1999. The increase in costs was primarily due to the continuing expansion
of Engage's sales force and the inclusion of Accipiter's and I/PRO's
operations. Engage's sales and marketing staff increased from 27 at April 30,
1998 to 66 at April 30, 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 $1.0 million in the nine months ended April 30, 1998 to
$2.4 million in the nine months ended April 30, 1999. The increase was
primarily due to an increase in payroll and related costs associated with the
support of growing operations as well as the inclusion of Accipiter's and
I/PRO's operations. In addition, a portion of this increase was the result of
increased professional fees incurred in connection with increased contract
activity and the formation of Engage's Japanese joint venture.
Amortization of Goodwill and other Intangibles. Amortization of intangible
assets increased from $358,000 in the nine months ended April 30, 1998 to $3.5
million during the nine months ended April 30, 1999. The increase was primarily
due to the acquisition of Accipiter in April 1998, and to a lesser extent, the
acquisition of I/PRO in April 1999.
Stock Compensation
Stock compensation costs increased from $65,000 in the nine months ended
April 30, 1998 to $657,000 during the nine months ended April 30, 1999.
Beginning in April 1998, Engage commenced the recognition of compensation
expense relating to approximately 173,080 shares of CMGI common stock held in
escrow to be issued to employee stockholders of Accipiter who satisfy a two-
year employment continuation provision. Additionally, stock compensation costs
of $69,000 were recorded during the nine months ended April 30, 1999 as a
result of stock options granted during 1999 with exercise prices below the
estimated fair market value of the common stock at the date of grant.
Gain on Sale of Product Rights
Gain on sale of product rights was approximately $9.2 million during the
nine months ended April 30, 1998 as a result of Engage's sale of some 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 $417,000 during
the nine months
25
<PAGE>
ended April 30, 1999. In August 1998, Engage acquired 49% of the shares of
Engage Technologies Japan, a joint venture with Sumitomo Corporation in Japan.
Engage's ownership interest was subsequently reduced to 46% after the issuance
of additional equity in the joint venture to a new investor. The joint venture
was established to sell Engage's products and services in Japan. This
investment is being accounted for under the equity method of accounting, and as
such, Engage's portion of the joint venture's losses during the nine months
ended April 30, 1999 are included in Engage's results of operations.
Interest Expense, Net
Interest expense, net was approximately $60,000 for the nine months ended
April 30, 1998, compared to $411,000 for the nine months ended April 30, 1999.
No interest expense was recorded during the first six months of the nine months
ended April 30, 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.
Net Loss
Net loss increased from $9.2 million in the nine months ended April 30, 1998
to $21.2 million in the nine months ended April 30, 1999. The increase was
primarily due to increased operating expenses. In addition, in the 1998 period,
Engage realized a gain of $9.2 million on the sale of certain product rights.
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.
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 some rights to its data warehouse
products to Red Brick at the beginning of fiscal 1998. In addition, a portion
of the decrease was the result of reassigning employees from research and
development to product support, consulting and training upon the release of
several of Engage's products in fiscal 1998.
Selling and Marketing. Selling and marketing expenses increased from
$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 $2.0 million in
fiscal 1998. The increase was the result of increased payroll and related
costs, as well as increased facilities costs required to support growing
operations.
26
<PAGE>
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangible assets was $1.4 million in fiscal 1998, resulting from the
acquisition of Accipiter in April 1998.
Gain on Sale of Product Rights
Gain on sale of product rights was $9.2 million in fiscal 1998, as a result
of the sale of rights to 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.
Net Loss
Net loss was $2.4 million in fiscal 1996, $10.3 million in fiscal 1997 and
$13.8 million in fiscal 1998. The increase in net loss over this period was
attributable primarily to increased operating expenses.
Combined Historical Quarterly Revenue
The following table sets forth unaudited combined historical revenue for the
six quarters ended April 30, 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, Accipiter 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.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
January 31, April 30, July 31, October 31, January 31, April 30,
1998 1998 1998 1998 1999 1999
----------- --------- -------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total
revenue...... $1,352 $1,827 $2,716 $2,873 $4,090 $5,937
</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 $7.9 million and $7.2 million
for the nine months ended April 30, 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 and the nine
months ended April 30, 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 in operations during the nine
months ended April 30, 1999 included approximately $2.8 million from the
increase in accrued expenses during the period, as well as $3.2 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 $1.2 million during fiscal 1996, fiscal 1997 and the nine
months ended April 30, 1999, respectively, while investing activities provided
$473,000 and $536,000 of cash during fiscal 1998 and the nine months ended
April 30, 1998, respectively. Investing activities used $1.6 million, $490,000,
$216,000, $153,000 and $165,000 during fiscal 1996, fiscal 1997 and fiscal 1998
and the nine months ended April 30, 1998 and 1999 to acquire property and
equipment required to support the growth of the business. Investing activities
during fiscal 1998
27
<PAGE>
and the nine months ended April 30, 1998 included $689,000 of net cash acquired
from the acquisition of Accipiter. Investing activities during the nine months
ended April 30, 1999 used approximately $1.4 million in Engage's investment in
a Japanese joint venture, which was partially offset by $347,000 of net cash
acquired from the acquisition of I/PRO.
Net cash provided by financing activities amounted to approximately $3.6
million, $9.5 million, $10.1 million for fiscal 1996, fiscal 1997 and fiscal
1998, respectively and amounted to $7.9 million and $9.0 million for the nine
months ended April 30, 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 nine months ended April 30, 1999 includes net
proceeds of $1.9 million from the issuance of Series B convertible preferred
stock.
Under an informal 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 bearing interest at an
annual rate of 7% and 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 April 30, 1999, there were outstanding $37.4 million in
principal amount of these notes to CMGI of which $22.1 million in principal
amount was attributable to 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 the sale of 938,000 shares of common stock to be
issued prior to the closing of this offering and 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. On a long-term basis, Engage may require additional
external financing through credit facilities, sales of additional equity or
other financing vehicles. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of 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
Accipiter
CMGI acquired Accipiter on April 8, 1998 for total purchase consideration of
$31.3 million. In August 1998, Accipiter merged with Engage in a
28
<PAGE>
stock-for-stock merger in which consideration of 700,000 shares of Engage
Series A Convertible Preferred Stock were issued to CMGI. The portion of the
purchase price allocated to in-process research and development was $9.2
million, or approximately 29% of the total purchase price. At the acquisition
date, Accipiter's major in-process project was the development of AdManager
version 4.0, which was intended to provide the ad serving functionality that
customers were requiring as the use of the Internet rapidly increased and
customer Web sites became more complex. In general, previous AdManager releases
did not provide for the fault tolerance, redundancy and scalability that
customers began to seek after AdManager versions 1.0 and 2.0 were released.
Accordingly, customers' long-term product needs required Accipiter to
substantially redesign the AdManager architecture to develop new technologies
to provide:
. improved fault tolerance, which is the ability to operate during a system
failure, and scalability, which is the ability to expand capacity,
. an object-oriented user interface, which is a screen display that enables
users to easily operate a computer program,
. application programming interfaces, which enable a program to exchange
data with other programs and
. a new report engine, which is a component that generates reports.
This redesigned AdManager architecture was later released as version 4.0.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. Engage
began beta testing AdManager version 4.0 at a customer site in June 1998 and
commercially released the product in August 1998. The initial development
effort had commenced in late 1997. At the acquisition date, the new AdManager
technology had not reached a completed prototype stage and beta testing had not
yet commenced. At the time of the Accipiter purchase, the AdManager version 4.0
project was approximately 71% complete.
The 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 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, the need for e-
commerce companies to serve ads over the Internet, expected trends in
technology and the nature and expected timing of new product introductions by
Engage and its competitors. These estimates also include growth related to the
use of Accipiter technologies in conjunction with Engage's products, the
marketing and distribution of the resulting products through Engage's sales
force and the benefits of Engage's incremental financial support and stability.
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Engage's estimated cost of sales as a percentage of revenue is expected to
be slightly lower than Accipiter's on a stand-alone basis, which was 16% in
1997, as fixed costs included in cost of sales are spread over a larger revenue
base and provide for the realization of efficiencies due to economies of scale
through combined operations. Due to these savings, the estimated cost of sales
as a percentage of revenue is expected to decrease by 1% each year from
Accipiter's historical percentage, to a low of 11% in the fifth forecast year.
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.
I/PRO
Engage acquired I/PRO on April 7, 1999 for total purchase consideration of
$32.7 million. The portion of the purchase price allocated to in-process
research and development was $4.5 million, or approximately 14% of the total
purchase price. At the acquisition date, I/PRO's major in-process project was
the development of a new data processing system, project name Normandy, which
is intended to provide improved functionality. In general, the existing data
processing system does not provide sufficient fault tolerance, scalability and
data processing efficiency to meet future customer needs. Accordingly,
customers' long-term product needs required I/PRO to substantially redesign the
data processing system to develop new technologies in the areas of: (1) fault
tolerance and scalability, (2) system management, (3) data capture and (4) path
analysis functionality, which is the ability to track movement of Web visitors
across Web pages.
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the I/PRO purchase, the Normandy
project was approximately 64% complete.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of return on contributory assets, including core developed
technology, assembled workforce, working capital and fixed assets. The cash
flows are then discounted to present value at an appropriate rate. Discount
rates are determined by an analysis of the risks associated with each of the
identified intangible assets. The discount rate used for in-process research
and development was 30%, a premium over the estimated weighted-average cost of
capital of 25%, and the discount rate used for core developed technology was
22%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenue
related to the Normandy project were separately identified.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in
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e-commerce, the need for e-commerce companies to utilize independent audit,
verification and analysis services, expected trends in technology and the
nature and expected timing of new product introductions by its competitors.
These estimates also include growth related to the use of certain I/PRO
technologies in conjunction with Engage's products and the benefits of Engage's
incremental financial support and stability.
I/PRO's estimated cost of sales as a percentage of revenue is expected to
significantly decrease on a stand-alone basis, which was 85% in 1998, as
certain fixed costs included in cost of sales are spread over a larger revenue
base and provide for the realization of efficiencies due to economies of scale.
The Normandy technology is expected to greatly increase the automation of data
processing, allowing significant labor cost savings per revenue dollar.
Increases in hardware utilization are also expected. Due to these savings, the
estimated cost of sales as a percentage of revenue is expected to decrease to a
low of 20% in the fifth forecast year.
I/PRO's operating expenses are expected to increase on an absolute basis,
but to significantly decrease as a percentage of revenue over the term of the
forecast, which was 192% in 1998. Certain fixed expenses are spread over a
larger revenue base and provide for the realization of efficiencies due to
economies of scale. Due to these savings, the estimated cost of sales as a
percentage of revenue is expected to decrease to a low of 49% in the fifth
forecast year.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way that public business enterprises report
selected information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes the
business operations. SFAS No. 131 has been adopted by Engage effective August
1, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires the capitalization of various internal costs
related to the implementation of computer software obtained for internal use.
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 No. 133
establishes accounting and reporting standards for derivative instruments,
including some derivative instruments embedded in other contracts, collectively
referred to as derivatives, and for hedging activities. SFAS No. 133 requires
the recognition of all derivatives as either assets or liabilities in the
statement of financial position and the measurement of those
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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 No.
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;
. 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
NaviSite, a major third-party vendor, that NaviSite will be responsible for
ensuring that its system is 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 were 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 July 1999.
Costs
Through April 1999, Engage has spent approximately $374,000 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 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
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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 NaviSite to provide outsourced data services.
A significant Year 2000 related disruption of the outsourced data services that
NaviSite 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, 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
is in the process of developing 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 adopting final contingency
plans.
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BUSINESS
Engage
Engage offers a range of products and services that enable Web publishers,
advertisers and merchants to target the delivery of advertisements, content and
e-commerce offerings to their audiences and to measure their effectiveness.
Engage has generated most of its revenue to date through sales of its
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 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.
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 locate customers, advertise and market their products and facilitate
transactions.
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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. Return on investment 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 their return on
investment 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 return on investment 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 return on investment 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 provides products and services that enable customers to create and
use profiles of individual Web visitors to target advertisements, content and
e-commerce offerings.
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 database and e-commerce offerings, which can improve
of anonymous global response rates, brand awareness and
profiles of Web 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 profiles delivered as part
of the Engage Knowledge data service
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
Web Site Traffic
Measurement, Auditing
and Analysis
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
Research Services(2) based on global profile research by analyzing Web-wide user
database behavior, interest trends and patterns
across the Engage Knowledge data service
</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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An Engage profile is an anonymous collection of information about an
individual Web user's consumer interests, demographic characteristics and
geographic location. These profiles are developed through a combination of a
user's browsing behavior on participating sites on the Internet and information
the user has voluntarily declared at these sites, such as information provided
on an online registration form. Each anonymous profile omits information that
would permit the personal identification of the user, such as name, address and
e-mail address.
Based on its proprietary technology, Engage has built a database containing
more than 30 million anonymous consumer profiles, which it has created from
data drawn from multiple, diverse Web sites. Customers can use these profiles
to target relevant advertisements, content and e-commerce offerings to
individual Web users based on each user's particular preferences, demographic
characteristics and geographic location.
Engage's profiling technology can create local and global user profiles.
Local profiles, which are created and maintained by Engage's customers, contain
data derived from the customer's own Web site and typically map preferences
based on particular interest categories designed by the customer and
demographic characteristics. Global profiles, which are compiled from data
contributed to the centralized Engage Knowledge database from the Web sites of
all participating Engage customers, are provided to customers on a subscription
basis 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 numerical scores reflecting
each Web user's inferred preference level in hundreds of standard categories
and subcategories, such as books, business, computers, fashion, sports and
travel as well as demographic and geographic information. Categories can be
further customized to meet the needs of a specific customer or market. Engage
software uses sophisticated proprietary algorithms and methodologies to
continuously update and refine these global profiles based on a visitor's
browsing behavior across multiple Web sites, including pages selected by the
user, the duration 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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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 believes, based on preliminary results of a study conducted for
Engage by a market research organization, Ipsos-ASI, that the use of Engage
profiles to target advertisements can achieve click-through rates greater than
those achieved by untargeted advertisements. Click-through rates represent the
proportion of viewers who click on an advertisement. Engage also believes,
based on this study, that the use of Engage profiles to target advertisements
on Web pages whose content is unrelated to the advertisement can achieve
click-through rates comparable to those achieved by the targeting of
advertisements based on the content of the Web page.
Engage profiles are designed to work with other Engage applications, third-
party software or customers' internally developed solutions, allowing
customers flexibility as the uses of profiling and related applications
develop and evolve.
The 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.
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Building upon its profiling capabilities, Engage offers the following
profile-based 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 global profiles from the Engage Knowledge data service. Engage also
offers a turnkey outsourced advertising management service that allows Web
sites to gain the advantage of profile-based advertising without making a
significant upfront investment of cash and personnel. By allowing advertisers
to target advertisements based not only on the content of the Web page being
viewed, but also on the visitor's profile, these advertising solutions are
designed to enable Web publishers and advertising networks to sell more of
their advertising inventory and to allow advertisers to improve their return on
investment. Engage's advertising management products, when used in 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 Offerings
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.
Web Site Traffic Measurement, Auditing and Analysis
Engage's analysis and traffic measurement products and services allow Web
publishers and merchants to collect, manage and analyze data about visitors and
their behavior. By analyzing how users behave and react to specific
advertising, pages or specific content areas, Web publishers can better
understand their visitors and improve the effectiveness of their Web sites.
Engage offers a range of solutions, from a basic outsourced reporting service
to sophisticated software enabling analysis of large amounts of data. Engage
also offers a comprehensive range of auditing services, including total site
traffic audits and internal reporting verification. Engage's auditing services
allow Web publishers to provide advertising buyers with the standardized
verification from an independent third party that these buyers increasingly
require before they will purchase Internet advertising inventory.
Strategy
Our objective is to enhance our position as a leading provider of profile-
based Internet marketing solutions for Web publishers, advertisers and
merchants. Our strategy to achieve this objective includes the following key
elements:
Establish Engage as a Recognized Brand for Internet Profiling
We believe that we have the opportunity to establish Engage as the
recognized brand for profile-based 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
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behavior at their Web sites. We also plan to develop solutions that will allow
Web publishers, advertisers and merchants to more effectively reach customers
in specific markets, such as automotive and 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.
Offer Multiple Products Based on Open Standards
We offer multiple products and services based on open standards that
facilitate 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 enhancing 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 the automotive and retail and other industry-
specific markets. For each 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
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capabilities so that national retailers can address specific needs and
preferences within each local audience through the Internet.
We also will aggressively pursue distribution arrangements with companies
that install and integrate hardware and software systems for third parties and
with 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.
Offer Family of Engage Products and Services
We will seek to increase our sales to our installed base of customers by
offering a range of software and services that utilize common Engage profiling
technology. For example, if a customer uses Accipiter AdManager software to
deliver Web advertisements, 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 Advocate for 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.
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.
Engage Knowledge Data Service
The Engage Knowledge data service uses a database which contains user
profiles collected from participating sites across the Web. Engage's database
has been designed to create, refine and deliver millions of profiles in real-
time to meet the demands of multiple Web sites. The global profiles used in the
delivery of the Engage Knowledge data service omit personally identifiable
information of individual users such as name, home or e-mail address, IP
address or domain name. The database assigns a computer-generated identifier to
distinguish each Web visitor. This identifier is currently stored as a browser
cookie on the Web user's computer. This Engage Knowledge identifier is
correlated with site-specific identifiers using a proprietary technique called
"dual blind" identification. This technique protects the privacy of the
individual because the participating Web site cannot access the Engage
Knowledge identifier and Engage does not maintain any personally identifiable
information that may have been gathered at the Web site.
Engage Knowledge global profiles contain a series of numerical ranking
codes, as well as demographic and geographic information, with
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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 demographic and geographic
information for each profile by using computer algorithms that infer
demographic characteristics or geographic locations based on Web browsing
behavior at participating sites and by using declared information reported
voluntarily by the visitor, such as data provided by a user on an online
registration form. Engage does not retain any of the personally identifiable
information that may have been provided on the registration form, and therefore
the identity of the Web user cannot be derived from the information contained
in the global profile. Each Web page at a customer site is classified to
indicate the interest categories that will be attributed to visitors to that
page.
When a user visits a Web site of any customer subscribing to the Engage
Knowledge data service, Engage matches that visitor to his or her profile in
the global profile database. The profile is then transmitted in real-time to
the subscribing Engage Knowledge customer site, which can then use the profile
to target advertisements, content and e-commerce offerings to that visitor.
As a Web visitor browses through any Engage-enabled Web site, Engage's
software dynamically updates and refines the profile of that visitor based on
the recency, frequency and duration of the consumer's browsing behavior in each
interest category. The Engage Knowledge database can be integrated with third-
party data sources, such as geographic databases, to further enhance the
consumer profiles. Unlike profiles based solely on static registration data,
Engage Knowledge profiles are constantly changing to more accurately reflect
the current interests of an individual.
Engage Knowledge profiles can be used to enhance third-party software
applications by providing targeting capabilities. These applications include
advertising management, content delivery and e-commerce offerings. Engage
provides software tools and services to facilitate the integration of Engage
Knowledge profiles with these third-party applications.
An Engage Knowledge subscription is combined with a license to the Engage
software modules necessary to identify visitors, 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 data service 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.
In March 1999, Engage introduced GeoKnowledge, a data service that features
multiple types of geographic data combined with profiles from the Engage
Knowledge database.
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 at the
customer's Web site and declared user information reported voluntarily by a
visitor to create and deliver profiles of individual Web site visitors. The
system enables customers to create their own local profile database, which is
maintained at the customer's site, and to use these local profiles to target
advertisements, content and e-commerce offerings. The ProfileServer system
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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.
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
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served, ranging from $1,000 per month for the smallest Web sites to more than
$15,000 per month for high volume sites.
Web Site Traffic Measurement, Auditing and Analysis
Engage offers products and services that 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 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. For example, a
marketer could configure DecisionSupportServer to determine the percentage of a
Web site's repeat visitors who initially visited the Web site from the major
portal sites and who have an interest in sports. DecisionSupportServer can be
used in conjunction with a variety of decision support applications from
Business Objects and other
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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 Research Services. Engage plans to offer Engage Knowledge
Research Services, consisting of custom analysis, research and consulting
services that use information contained in Engage's profile 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.
Customers
Engage licenses its software products to Web publishers and merchants for
use at their Web sites. Engage also offers customers outsourced services
through its AdBureau advertising management service and its I/PRO NetLine
traffic measurement service. Engage had approximately 300 customers as of
April 30, 1999, including the following customers:
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<TABLE>
<S> <C>
Web Site Traffic
Advertising Profiling Measurement, Auditing
Management Solutions (2) and Analysis (3)
Solutions (1)
Digital Entertainment Chicago Tribune
1+1 Network Dell
AdSmart Drug Emporium Macromedia
CNET Lycos MediaOne
Lycos Magnitude Network News Corporation (Fox)
LookSmart National Computer Quokka Sports
Microsoft Board (Singapore) Road Runner
Naspers Net.genesis Weather.com
National Westminster Bank Planet Direct WhoWhere
(XCo) Theglobe.com USA Today
Sumitomo TicketMaster
WebTV
Ulysses (MusicLand)
</TABLE>
(1) Includes customers of Engage as of April 30, 1999 that each accounted for
an aggregate of $75,000 or more of revenue to Engage during the period from
the beginning fiscal 1998 through the end of the first nine months of
fiscal 1999.
(2) Includes customers of Engage as of April 30, 1999 that each accounted for
an aggregate of $20,000 or more of revenue to Engage during the period from
the beginning fiscal 1998 through the end of the first nine months of
fiscal 1999.
(3) Includes customers of Engage as of April 30, 1999 that each accounted for
an aggregate of $63,000 or more of revenue to Engage in calendar year 1998.
Customer Case Studies
The following customer case studies illustrate the selection, use and
implementation of Engage products and services by three customers that Engage
believes represent typical customers for its products.
Ancestry.com -- Profile Based 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 the analysis of Web
traffic collected at its site, 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 the Engage Knowledge data
service. 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 an 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 meet its targeting requirements. Engage worked
with Ticketmaster to integrate a third party's content management application
with Engage's ProfileServer software. Ticketmaster currently
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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 -- Web Site Traffic Measurement, Auditing and Analysis
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 marketing
relationships 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 original equipment manufacturer, 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 Andover, Massachusetts; Raleigh, North
Carolina; Redwood City, California; and San Francisco, California.
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 parties to assist us in marketing and selling our
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products. We will seek to enter into original equipment manufacturer
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. 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 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 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. This identifier is currently stored
as a browser cookie on the Web user's computer. Each Web visitor also is
assigned a different identifier for each Engage-enabled Web site visited. This
technique is known as "dual blind" identification because a Web site does not
have access to the Engage Knowledge identifier and cannot correlate the
information it may have with information from other Web sites. Conversely, 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 all contributors to Engage Knowledge to post a privacy policy
statement on their Web sites disclosing that the site provides non-personally
identifiable information to Engage. The policy statement must include a link to
the Engage Web site where a Web user may opt out of the Engage Knowledge
database by clicking on a link that automatically replaces the Engage Knowledge
identifier on the user's computer. 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 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
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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. TRUSTe is a non-profit organization with the goal of promoting the
adoption of fair information practices on the Web through a program which
permits Web sites to display a seal representing compliance with TRUSTe privacy
guidelines. Engage is also a member of the Online Privacy Alliance, which is an
organization dedicated to improving the protection of individuals' privacy
online through self regulatory efforts. 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
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<PAGE>
traffic analysis is new, rapidly evolving and intensely competitive. Engage
expects competition to increase both from existing competitors and new market
entrants for various components of its services. Engage competes primarily on
the basis of its product features and performance, such as its scalable,
application-independent technology and the anonymity and quality of its global
database of profiles, level of service and, to a lesser extent, on price.
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.
Web Site Traffic Measurement, Auditing and Analysis
The primary competitors for I/PRO's NetLine Web measurement service and the
Engage DecisionSupportServer product are companies offering outsourced
solutions or software solutions, such as Accrue, Andromedia, net.Genesis and
WebTrends. Nielsen I/PRO I/Audit service competes with auditing services from
ABC Interactive, BPA and PricewaterhouseCoopers.
Many of Engage's current competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition and
substantially greater financial, technical and marketing resources than Engage.
Engage's current and potential competitors also may have more extensive
customer bases and larger proprietary databases. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to more effectively
distribute their products or to enhance their product and service offerings.
In addition to these current and potential commercial competitors, Engage
also faces competition from the internal capabilities of some potential
customers. Some of the largest Web publishers use internally developed
interactive marketing solutions rather than the commercial solutions offered by
Engage and its competitors. There can be no assurance that Engage will be able
to compete successfully with these internally developed solutions.
Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could have a material adverse effect on
Engage's business, financial condition and results of operations. There can be
no assurance that Engage will be able to compete successfully against existing
or potential competitors or that competitive pressures will not have a material
adverse effect on Engage's business, financial condition and results of
operations.
Employees
As of 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
50
<PAGE>
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.
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 July 15, 1999.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------
<S> <C> <C>
Paul L. Schaut............. 40 Chief Executive Officer, President and Director
David A. Fish.............. 43 Chief Operating Officer
Daniel J. Jaye............. 34 Chief Technology Officer
Stephen A. Royal........... 43 Chief Financial Officer and Treasurer
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
Fredric D. Rosen........... 55 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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<PAGE>
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.
Mr. Evans was also a founder of Accipiter. 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
a director of CMGI since June 1997. Mr. Goldman has served 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.
Fredric D. Rosen has served as a director of Engage since June 1999. Since
June 1998, Mr. Rosen has been self-employed and has consulted on a part-time
basis. Prior to that, from September 1982 to June 1998, Mr. Rosen served as
President and Chief Executive Officer of Ticketmaster Group, Inc., a provider
of automated ticketing services. Mr. Rosen currently serves on the board of
directors of King World Productions, Inc.
----------------
All directors serve for one-year terms until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
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 system of internal accounting and financial
controls. The audit committee consists of Messrs. Bennett, Goldman and
Hajducky.
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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 Messrs. Evans and Rosen each an
option to purchase 50,000 shares of its common stock, to vest over a four-year
period, at an exercise price of $11.00 per share. Mr. Goldman has been granted
an option to purchase 100,000 shares of Engage common stock, vesting over a
four-year period, at an exercise price of $0.24 per share. Mr. Bennett 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 $4.19 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 $ 25,000 600,000(ENGA) $ --
80,000(CMGI)
Daniel J. Jaye
Chief Technology Offi-
cer................... 118,295 115,500(2) -- 3,529(3)
</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) 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.
(3) Represents the amount of matching contributions made by Engage under the
CMGI 401(k) plan.
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<PAGE>
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.......... 600,000(1) 18.2% $0.19 11/09/02 $ 30,669 $ 67,766
80,000(2) 2.9 2.32 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.
In fiscal 1998, Engage granted to Mr. Fish an option to purchase 200,000
shares of common stock at an exercise price of $0.24 per share and to Mr. Royal
an option to purchase 100,000 shares of common stock at an exercise price of
$0.24 per share and an option to purchase 50,000 shares of common stock at an
exercise price of $2.38 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 $14.00 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 -- $ -- 0 600,000 $ -- $8,286,000
CMGI -- -- 0 80,000 -- 1,777,500(1)
Daniel J. Jaye.......... Engage -- -- 383,330 216,670 5,364,703 3,032,297
CMGI 8,000 43,625(2) 13,998 10,002 215,875(1) 154,249(1)
</TABLE>
- ---------------------
(1) Based on the difference between the option exercise price and $17.03, which
was the closing price of the CMGI common stock on July 31, 1998.
(2) Based on the closing price of the CMGI common stock on the date of exercise
less the option exercise price.
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<PAGE>
Stock Plans
1995 Equity Incentive Plan
The 1995 Equity Incentive Plan provides for the issuance of a maximum of
15,000,000 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 expire within five years after 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 6,467,794 shares of common stock at a weighted average price of
$2.16 per share were outstanding under the 1995 Equity Incentive Plan.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by our board of directors
in June 1999. The 1999 Employee Stock Purchase Plan provides for the issuance
of a maximum of 750,000 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 20 hours per week and for more than 6 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 three month plan 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 plan period.
1999 Stock Option Plan for Non-Employee Directors
The 1999 Stock Option Plan for Non-Employee Directors was adopted by our
board of directors in June 1999. Under the terms of the 1999 Stock Option Plan
for Non-Employee Directors, directors who are not employees of Engage or any
subsidiary of Engage and not affiliates of an institutional investor that owns
shares of Engage's common stock receive nonstatutory options to purchase shares
of Engage's common stock. A total of 250,000 shares of common stock may be
issued upon exercise of options granted under the plan. The board of directors
has discretion to establish the terms of options granted under the plan. All
options must have an exercise price equal to the fair market value of the
common stock on the date of grant.
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<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 94% of Engage's common stock, assuming the
conversion of the convertible note and shares of convertible preferred stock
held by CMGI as of April 30, 1999, and will own 82% 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 the
agreements described below 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 $8.0 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 $2.67 per share.
Each share of Series A convertible preferred stock will convert into 20 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 $5.06 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.
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<PAGE>
All notes held by CMGI were converted into Series C convertible preferred stock
in May 1999. Each share of Series C convertible preferred stock will convert
into twenty 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 has been converted into Series C
convertible preferred stock:
<TABLE>
<CAPTION>
Number of Shares of Series C Per Share Common
Preferred Stock Issued Equivalent
Date of Incurrence Amount of Indebtedness Upon Conversion Conversion Price
- ------------------------ ---------------------- ---------------------------- ----------------
<S> <C> <C> <C>
April 30, 1998.......... $ 5,334,605 112,307 $2.38
July 31, 1998........... 2,418,456 34,798 3.48
October 31, 1998........ 598,117 7,037 4.25
January 31, 1999........ 996,273 10,229 4.87
April 7, 1999........... 22,086,307(1) 218,460 5.06
April 30, 1999.......... 5,531,871 30,733 9.00
</TABLE>
- --------
(1) Excludes $481,221 recorded as additional debt to CMGI pursuant to Engage's
recording the value of the CMGI shares contributed by CMGI for the I/PRO
acquisition. Under an informal agreement with CMGI, Engage anticipates that
this amount will be recorded as additional paid in capital upon the
ultimate conversion of the CMGI debt.
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.
Facilities and Administrative Support Agreement
Upon the closing of this offering, CMGI and Engage will enter a facilities
and administrative support agreement under which CMGI will continue to make
available space at its headquarters in Andover, Massachusetts and will provide
various services to Engage, including tax and administrative, computer and
information systems, telecommunications and utilities. Under this agreement,
CMGI has also agreed to make available to Engage at least 28,000 square feet of
space at its headquarters facilities, subject to termination upon at least 12
months' notice by CMGI. The fees payable by Engage for the availability of
space and other services are typically determined through an allocation of
CMGI's costs based upon the proportion of Engage's employee headcount to the
total headcount of CMGI and other CMGI-related companies located in the same
facility or using the same services.
In fiscal 1998 and the nine months ended April 30, 1999, Engage paid CMGI
$339,000 and $365,000 or services similar to those provided under the
administrative support agreement.
Tax Allocation Agreement
Upon the closing of this offering, Engage will enter into a tax allocation
agreement with CMGI to allocate responsibilities, liabilities and benefits
relating to taxes. Engage will be required to pay its share of income taxes
shown as due on any consolidated, combined, or unitary tax returns filed by
CMGI for tax periods ending on or before or including the date on which date
Engage will no longer be a member of CMGI's group for federal, state, or local
tax purposes, as the case may be. CMGI will indemnify Engage against liability
for all taxes in respect of consolidated, combined, or unitary tax returns for
such periods. Accordingly, any redetermined tax liabilities for such periods
will be the responsibility of CMGI, and any refunds or credits of taxes
attributable to Engage or its subsidiaries in respect of consolidated,
combined, or unitary tax returns for such periods will be for the account of
CMGI. Engage will be responsible for filing any separate tax returns for any
taxable period and will be responsible for any tax liabilities (and entitled to
any refunds or credits of taxes) in respect of such returns. Engage will
indemnify CMGI against liability for such taxes.
59
<PAGE>
Neither CMGI nor Engage will have any obligation to make any payment to the
other party for the use of such other party's tax attributes such as net
operating losses. However, if one party realizes a windfall tax benefit because
of an adjustment to items on the other party's tax return, the party that
realizes the windfall tax benefit will be required to pay to the other party
the actual incremental tax savings it has realized. For example, if an expense
deducted by CMGI for a period prior to the closing date were disallowed and
required to be capitalized by Engage for a period after the closing date,
thereby generating future depreciation deductions to Engage, Engage would be
required to pay to CMGI any incremental tax savings as a result of such
depreciation deductions when such tax savings are actually realized by Engage.
Each of Engage and CMGI has control of any audit, appeal, litigation or
settlement of any issue raised with respect to a tax return for which it has
filing responsibility. Payments of claims under the agreement must be made
within 30 days of the date that a written demand for the claim is delivered.
Interest accrues on payments that are not made within 10 days of the final due
date at the rate applicable to under payments of the applicable tax. Any
dispute concerning the calculation or basis of determination of any payment
provided under the tax allocation agreement will be resolved by a law firm or
"big five" accounting firm selected and paid for jointly by the parties.
Investor Rights Agreement
Upon the closing of the offering, Engage and CMGI will enter into an
investor rights agreement under which Engage will grant CMGI registration
rights and rights to purchase shares to maintain its majority ownership. Under
this agreement, CMGI and its assignees will have the right to demand, on up to
seven 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 the underwriters' right to
reduce the number of included shares. Engage will pay all costs associated with
such registration of shares pursuant to this agreement, other than underwriting
discounts and commissions and various other expenses. Also under this
agreement, until such time as CMGI, or any permitted transferee, owns less than
a majority of voting power of the outstanding shares of capital stock of
Engage, Engage will permit CMGI, or the transferee, to purchase a portion in
any shares that it may in the future issue so that CMGI or the transferee may
maintain its majority ownership position. Any such purchases will be at the
same price as is paid by third parties for the shares. This right is
transferable by CMGI to any party that acquires directly from CMGI shares of
common stock representing at least a majority of the outstanding shares of
common stock of Engage.
Other Transactions with CMGI Affiliates
Engage outsources its data center operations for Engage Knowledge and its
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. Engage paid a total of
$1.2 million, $889,000 and $1.6 million to NaviSite for these services in
fiscal 1997, fiscal 1998 and the nine months ended April 30, 1999.
Engage sells its products and services to customers affiliated with CMGI. In
fiscal 1998 and the nine months ended April 30, 1999, revenue of Engage from
sales to these affiliated companies totalled $235,000 and $1.4 million.
60
<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 and the sale of 938,000 shares of common stock to be issued prior to
the closing of the 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. ............. 38,271,280 93.5% 81.6%
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 39,973,798 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.......... 237,500(1) * 5,000(1) *
Daniel J. Jaye.......... 516,666(1) 1.3% 5,332(1) *
David S. Wetherell...... 38,271,280(2) 93.5 10,772,224(3) 11.2%
Edward A. Bennett....... 0 * 0 *
Christopher A. Evans.... 70,000(1) * 293,600 *
Craig D. Goldman........ 31,250(1) * 195,200(1) *
Andrew J. Hajducky,
III.................... 38,271,280(2) 93.5 68,742(4) *
Fredric D. Rosen........ 0 * 0 *
All directors and
executive officers as a
group (10 persons)..... 39,228,780(5) 93.6% 11,340,098(6) 11.9%
</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.
61
<PAGE>
(2) Consists of shares owned by CMGI on an as converted basis. Messrs.
Wetherell and Hajducky disclaim beneficial ownership of all 38,271,280
shares.
(3) Includes 2,305,888 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999. Includes 1,701,732
shares held in trust for the benefit of Mr. Wetherell's minor children and
23,372 shares held by Mr. Wetherell and his wife as trustees for the David
S. Wetherell Charitable Trusts, for which 1,725,104 shares Mr. Wetherell
disclaims beneficial ownership.
(4) Includes 47,990 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
(5) Includes 957,500 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
(6) Includes 2,439,410 shares issuable upon the exercise of outstanding options
that are exercisable within 60 days of April 30, 1999.
62
<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 150,000,000 shares of common stock, par value
$.01 per share, and 5,000,000 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 39,973,798 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 6,467,794 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 5,000,000 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
63
<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 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 -- Investor Rights Agreement" for information
concerning registration rights granted to CMGI.
Section 203 of Delaware General Corporation Law
The certificate of incorporation of Engage contains a provision expressly
electing not to be governed by Section 203 of the Delaware General Corporation
Law. In general, Section 203 restricts some 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
various 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.
64
<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
46,911,798 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 40,911,798
shares, all 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 39,901,614 shares of common stock,
including all of our officers and directors who hold shares of common stock or
options to purchase shares of common stock, 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 1,010,184 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 469,000 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
65
<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 38,748,474 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 --Investor Rights Agreement".
Stock Options
Ninety days after this offering, Engage intends to file a registration
statement under the Securities Act covering 15,250,000 shares of common stock
reserved for issuance under our 1995 Equity Incentive Plan and 1999 Stock
Option Plan for Non-Employee Directors. 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 6,467,794 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 as of April 30, 1999, and the
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the three years in the period ended July 31, 1998 and the nine month
period ended April 30, 1999 have been included in reliance on the reports of
KPMG 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 1996 and
the statements of operations, stockholders' deficit and cash flows for the year
ended December 31, 1997 and for the period from April 14, 1996 (inception) to
December 31, 1996 have been included in reliance on the reports of KPMG 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 this
prospectus 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.
66
<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).
67
<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 April 30,
1999..................................................................... F-3
Consolidated Statements of Operations for the three years ended July 31,
1998
and for the nine months ended April 30, 1998 (unaudited) and 1999........ F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the three years ended July 31, 1998 and for the nine months ended April
30, 1999................................................................. F-5
Consolidated Statements of Cash Flows for the three years ended July 31,
1998
and for the nine months ended April 30, 1998 (unaudited) and 1999........ F-6
Notes to Consolidated Financial Statements................................ F-7
Accipiter, Inc.
Independent Auditors' Report.............................................. F-27
Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998 (unau-
dited)................................................................... F-28
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-29
Statements of Stockholders' Deficit for the two years ended December 31,
1997
and for the three months ended March 31, 1998 (unaudited)................ F-30
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-31
Notes to Financial Statements............................................. F-32
Internet Profiles Corporation
Report of Independent Accountants......................................... F-37
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(unaudited).............................................................. F-38
Statements of Operations for the two years ended December 31, 1998 and the
three months ended March 31, 1999 (unaudited)............................ F-39
Statements of Stockholders' Equity (Deficit) for the two years ended
December 31, 1998
and the three months ended March 31, 1999 (unaudited).................... F-40
Statements of Cash Flows for the two years ended December 31, 1998
and the three months ended March 31, 1999 (unaudited).................... F-41
Notes to Financial Statements............................................. F-42
Unaudited Pro Forma Combined Condensed Financial Data for Engage
Technologies, Inc., Accipiter, Inc. and Internet Profiles Corporation
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended
July 31, 1998 and for the nine months ended April 30, 1999............... F-53
</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 April 30,
1999, 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 and the nine months ended April 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Engage
Technologies, Inc. and subsidiaries as of July 31, 1997 and 1998 and April 30,
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended July 31, 1998 and the nine months ended
April 30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
June 4, 1999, except as to note 16
which is as of June 11, 1999
Boston, Massachusetts
F-2
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, Pro forma
------------------ April 30, April 30,
1997 1998 1999 1999
-------- -------- --------- -----------
(unaudited)
(In thousands, except par value)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash................................ $ -- $ 96 $ 661
Available-for-sale securities....... -- 567 1,036
Accounts receivable, less allowance
for doubtful accounts of $0, $360
and $940 at July 31, 1997 and 1998
and April 30, 1999, respectively... 30 1,824 5,016
Prepaid expenses.................... 82 230 654
-------- -------- --------
Total current assets................ 112 2,717 7,367
-------- -------- --------
Property and equipment, net.......... 1,670 789 2,012
Investment in joint venture.......... -- -- 1,303
Intangible assets, net of accumulated
amortization of $1,498 and $5,385 at
July 31, 1998 and April 30, 1999,
respectively........................ -- 20,540 43,919
Other assets......................... -- -- 369
-------- -------- --------
Total assets ....................... $ 1,782 $ 24,046 $ 54,970
======== ======== ========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Debt to CMGI........................ $ 14,018 $ 7,753 $ 37,447
Obligation under capital lease...... -- -- 364
Accounts payable.................... -- 499 1,590
Accrued expenses.................... 288 1,614 5,342
Deferred revenue.................... 15 1,460 2,828
-------- -------- --------
Total current liabilities........... 14,321 11,326 47,571
-------- -------- --------
Deferred revenue..................... -- -- 1,856
-------- -------- --------
Obligation under capital lease, net
of current portion.................. -- -- 442
-------- -------- --------
Commitments and contingencies
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,
April 30, 1999 and April 30, 1999
(pro forma), respectively
(liquidating preference of
$16,340)........................... -- 15 15 $ --
Series B Preferred Stock, $.01 par
value, 239 shares authorized,
239 and 0 shares issued and
outstanding at April 30, 1999 and
April 30, 1999 (pro forma),
respectively (liquidating
preference of $2,000).............. -- -- 2 --
Common Stock, $.01 par value,
150,000 shares authorized, 16,188,
190, 1,226 and 39,974 shares issued
and outstanding at July 31, 1997
and 1998, April 30, 1999, and April
30, 1999 (pro forma),
respectively....................... 162 2 12 399
Additional paid-in capital.......... (60) 41,679 57,964 95,041
Deferred compensation............... -- (1,305) (4,822) (4,822)
Accumulated other comprehensive
(loss)............................. -- (1,193) (422) (422)
Accumulated deficit................. (12,641) (26,478) (47,648) (47,648)
-------- -------- -------- --------
Total stockholders' equity
(deficit).......................... (12,539) 12,720 5,101 $ 42,548
-------- -------- -------- ========
Total liabilities and stockholders'
equity (deficit)................... $ 1,782 $ 24,046 $ 54,970
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Year ended July 31, April 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue........... $ -- $ 25 $ 1,742 $ 379 $ 6,520
Product revenue, related
parties.................. -- -- 203 143 1,274
Services and support
revenue.................. -- -- 240 82 1,113
Services and support reve-
nue, related
parties.................. -- -- 32 9 90
------- -------- -------- -------- --------
Total revenue........... -- 25 2,217 613 8,997
------- -------- -------- -------- --------
Cost of revenue:
Cost of product revenue... -- 31 185 36 1,327
Cost of services and
support revenue.......... -- -- 2,053 1,153 4,299
------- -------- -------- -------- --------
Total cost of revenue... -- 31 2,238 1,189 5,626
------- -------- -------- -------- --------
Gross (loss) profit... -- (6) (21) (576) 3,371
------- -------- -------- -------- --------
Operating expenses:
In-process research and
development.............. -- -- 9,200 9,200 4,500
Research and development.. 1,796 7,261 5,859 4,688 5,816
Selling and marketing..... 155 1,566 4,015 2,524 6,614
General and
administrative........... 428 1,429 1,993 1,017 2,409
Amortization of goodwill
and other
intangibles.............. -- -- 1,391 358 3,543
Stock compensation........ -- -- 426 65 657
------- -------- -------- -------- --------
Total operating
expenses............... 2,379 10,256 22,884 17,852 23,539
------- -------- -------- -------- --------
Loss from operations........ (2,379) (10,262) (22,905) (18,428) (20,168)
Other income (expense):
Gain on sale of product
rights................... -- -- 9,240 9,240 --
Equity in loss of joint
venture.................. -- -- -- -- (417)
Loss on disposal of
property and equipment... -- -- -- -- (174)
Interest expense, net..... -- -- (172) (60) (411)
------- -------- -------- -------- --------
Net loss.................... $(2,379) $(10,262) $(13,837) $ (9,248) $(21,170)
======= ======== ======== ======== ========
Unaudited pro forma basic
and diluted net loss per
share...................... $ (.83) $ (.62)
======== ========
Pro forma weighted average
number of basic and diluted
shares outstanding......... 16,750 34,210
======== ========
</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 Comprehensive Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Income (Loss) Deficit
------- ------- ------- -------- ------- ------ ---------- ------------ ------------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
31, 1995......... -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock.... -- -- -- -- 16,000 160 (80) -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (2,379)
------- ------- ------ -------- ------- ----- ------- ------- ------- --------
Balance at July
31, 1996......... -- -- -- -- 16,000 160 (80) -- -- (2,379)
Exercise of
stock options... -- -- -- -- 188 2 20 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (10,262)
------- ------- ------ -------- ------- ----- ------- ------- ------- --------
Balance at July
31, 1997......... -- -- -- -- 16,188 162 (60) -- -- (12,641)
Reorganization.. 800 8 -- -- (16,000) (160) 8,072 -- -- --
Acquisition of
Accipiter....... 700 7 -- -- -- -- 33,667 (1,731) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 426 -- --
Exercise of
stock options... -- -- -- -- 2 -- -- -- -- --
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- -- (1,193) --
Net loss........ -- -- -- -- -- -- -- -- -- (13,837)
------- ------- ------ -------- ------- ----- ------- ------- ------- --------
Balance at July
31, 1998......... 1,500 15 -- -- 190 2 41,679 (1,305) (1,193) (26,478)
Issuance of pre-
ferred stock,
net of
issuance costs
of $66 ......... -- -- 239 2 -- -- 1,932 -- -- --
Acquisition of
I/PRO........... -- -- -- -- 1,010 10 10,171 -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 4,174 (4,174) -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 302 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 657 -- --
Exercise of
stock options .. -- -- -- -- 26 -- 8 -- -- --
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- -- 469 --
Net loss........ -- -- -- -- -- -- -- -- -- (21,170)
------- ------- ------ -------- ------- ----- ------- ------- ------- --------
Balance at April
30, 1999 ........ 1,500 $ 15 239 $ 2 1,226 $ 12 $57,964 $(4,822) $ (422) $(47,648)
======= ======= ====== ======== ======= ===== ======= ======= ======= ========
<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.. 7,920
Acquisition of
Accipiter....... 31,943
Amortization of
deferred
compensation.... 426
Exercise of
stock options... --
Unrealized loss
on available-
for-sale
securities...... (1,193)
Net loss........ (13,837)
---------
Balance at July
31, 1998......... 12,720
Issuance of pre-
ferred stock,
net of
issuance costs
of $66 ......... 1,934
Acquisition of
I/PRO........... 10,181
Amortization of
deferred
compensation.... --
Foreign currency
translation
adjustment...... 302
Amortization of
deferred
compensation.... 657
Exercise of
stock options .. 8
Unrealized gain
on available-
for-sale
securities...... 469
Net loss........ (21,170)
---------
Balance at April
30, 1999 ........ $ 5,101
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Years ended July 31, April 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(2,379) $(10,262) $(13,837) $(9,248) $(21,170)
Adjustments to reconcile
net loss to net cash used
for operating activities:
Depreciation and
amortization............. 530 947 1,863 679 4,277
Equity in loss of joint
venture.................. -- -- -- -- 417
Provision for bad debts... -- -- 240 -- 175
Stock compensation........ -- -- 426 65 657
Gain on sale of product
rights................... -- -- (9,240) (9,240) --
Loss on disposal of
property and equipment... -- -- -- -- 174
In-process research and
development.............. -- -- 9,200 9,200 4,500
Changes in operating
assets and liabilities,
net of impact of
acquisitions:
Accounts receivable...... -- (30) (1,438) (97) (2,398)
Prepaid expenses......... (276) 194 (147) 29 (245)
Accounts payable......... -- -- 475 637 356
Accrued expenses......... 151 137 835 17 2,837
Deferred revenue......... -- 15 1,117 56 3,207
------- -------- -------- ------- --------
Net cash used for
operating activities... (1,974) (8,999) (10,506) (7,902) (7,213)
------- -------- -------- ------- --------
Cash flows from investing
activities:
Investment in joint
venture................... -- -- -- -- (1,424)
Net cash acquired on
acquisition of
subsidiaries.............. -- -- 689 689 347
Purchases of property and
equipment................. (1,613) (490) (216) (153) (165)
------- -------- -------- ------- --------
Net cash (used for)
provided by investing
activities............. (1,613) (490) 473 536 (1,242)
------- -------- -------- ------- --------
Cash flows from financing
activities:
Net change in debt to
CMGI...................... 3,587 10,511 10,129 7,852 7,119
Proceeds from stock option
exercises................. -- 22 -- -- 8
Issuance of preferred
stock, net of issuance
costs..................... -- -- -- -- 1,934
Repayment of capital lease
obligations............... -- -- -- -- (47)
Principal payments on
notes..................... -- (1,044) -- -- --
------- -------- -------- ------- --------
Net cash provided by
financing activities... 3,587 9,489 10,129 7,852 9,014
------- -------- -------- ------- --------
Effect of exchange rate
changes on cash............ -- -- -- -- 6
------- -------- -------- ------- --------
Net increase in cash........ -- -- 96 486 565
Cash, beginning of period... -- -- -- -- 96
------- -------- -------- ------- --------
Cash, end of period......... $ -- $ -- $ 96 $ 486 $ 661
======= ======== ======== ======= ========
</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 as of and for
the nine months ended April 30, 1998 is unaudited
(1) Description of Business
Engage provides products and services that enable customers to create and
use profiles of individual Web visitors to target advertisements, content and
e-commerce offerings.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI"). The
accompanying consolidated financial statements, which have been prepared as if
the Company had operated as a separate stand-alone entity for all periods
presented, include only revenue and expenses attributable to the Company since
it commenced operations in September 1995.
The consolidated financial statements include certain allocations based on
headcount from CMGI for certain general and administrative expenses such as
rent, legal services, insurance and employee benefits. Management believes that
the method used to allocate the costs and expenses is reasonable; however, such
allocated amounts may or may not necessarily be indicative of what actual
expenses would have been incurred had the Company operated independently of
CMGI.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Internet Profiles Corporations ("I/PRO") and
Engage Technologies Limited, after elimination of all significant intercompany
balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Prior to August 1, 1998, revenue from sales of product licenses to customers
were generally recognized when the product was shipped, provided no significant
obligations remain and collectibility is probable, in accordance with Statement
of Position ("SOP") 91-1, Software Revenue Recognition. Effective August 1,
1998, the Company adopted the provisions of SOP 97-2, Software Revenue
Recognition. For transactions after August 1, 1998, revenues from software
product licenses and web-site traffic audit reports are generally recognized
when (i) a signed noncancelable software license exists, (ii) delivery has
occurred, (iii) the Company's fee is fixed or determinable, and (iv)
collectibility is probable. Revenue from license agreements that have
significant customizations and modifications of the software product is
deferred and recognized using the percentage of completion method. There was no
material change to the Company's accounting for revenue as a result of the
adoption of SOP 97-2.
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 in the "Debt to CMGI" account.
Customer receipts and other cash receipts of the Company are remitted to CMGI
upon receipt by the Company and serve to reduce the "Debt to CMGI" account.
Cash on hand at July 31, 1998 and April 30, 1999 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 Company's acquisition of Accipiter
(see note 7) in exchange for 700,000 shares of the Company's Series A
Convertible Preferred Stock.
During fiscal 1998, non-cash financing activities included the issuance of
800,000 shares of the Company's Series A Convertible Preferred Stock in
exchange for 16,000,000 shares of the Company's common stock and an $8,000,000
reduction in the debt to CMGI (see note 10).
During fiscal 1999, non-cash investing activities include the acquisition of
I/PRO (see note 7) in exchange for 1,010,184 shares of the Company's common
stock, and additional debt to CMGI totaling $22,086,000.
Marketable Securities
The appropriate classification of marketable securities is determined at the
time of acquisition and reevaluated at each balance sheet date. Marketable
securities have been classified as available-for-sale and are carried at fair
value, based on quoted market prices, with unrealized gains and losses included
in accumulated other comprehensive income (loss) on the consolidated balance
sheets.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets under capital leases are amortized using the
straight-line method over the shorter of the lease term or estimated useful
life of the asset. Expenditures for maintenance and repairs are charged to
expense as incurred.
F-8
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investment in Joint Venture
The Company's investment in the common stock of a Japanese joint venture is
accounted for by the equity method.
Intangibles
Intangibles relate to the Company's purchase of Accipiter, Inc. in April
1998 and I/PRO in April 1999 (see note 7). Such costs are being amortized on a
straight-line basis over either two or five years, depending on the periods
expected to be benefited.
Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an on-
going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including costs in excess of net assets of
companies acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although
the assumptions may vary from transaction to transaction, they generally
include revenue growth, operating results, cash flows and other indicators of
value. Management then determines whether there has been a permanent impairment
of the value of long-lived assets by comparing future estimated undiscounted
cash flows to the asset's carrying value. If the estimated future undiscounted
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value.
Research and Development Costs and Software Costs
Expenditures related to the development of new products and processes,
including significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when
a product's technological feasibility has been established by completion of a
detailed program design or working model of the product, and ending when a
product is available for general release to customers. To date, the
establishment of technological feasibility and general release have
substantially coincided. As a result, there have been no capitalized software
development costs to date. Additionally, at the date of acquisition or
investment, the components of the purchase price of each acquisition or
investment are evaluated to identify amounts allocated to in-process research
and development. Upon completion of acquisition accounting and valuation, such
amounts are charged to expense if technological feasibility had not been
reached at the acquisition date.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiary and its
investment in joint venture is its local currency. The financial statements of
this subsidiary and the joint venture are translated into United States dollars
using period-end exchange rates for assets and liabilities and average exchange
rates during the period for revenues and expenses. The resulting translation
adjustments are included in accumulated other comprehensive income (loss) on
the consolidated balance sheets. Net gains and losses resulting from foreign
currency transactions arising from exchange rate fluctuations on transactions
denominated in currencies other than the functional currencies are included in
the consolidated statements of operations and were immaterial for all periods
presented.
F-9
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. The tax sharing agreement between the Company and CMGI requires the
Company to reimburse CMGI to the extent it contributes to the consolidated tax
liability of the CMGI group; however, under the policy, CMGI is not obligated
to reimburse the Company for any losses utilized in the consolidated CMGI
group.
Advertising Costs
The Company expenses advertising costs as incurred. The Company did not
incur any advertising costs during the year ended July 31, 1996. Advertising
expense was approximately $40,000, $175,000 and $564,000 for the fiscal years
ended July 31, 1997 and 1998 and the nine months ended April 30, 1999,
respectively.
Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Compensation cost for stock options granted with exercise prices below
estimated fair market value is recognized over the vesting period, typically
four years. The adoption of SFAS 123 was not material to the Company's
financial condition or results of operations; however, the pro forma impact on
earnings has been disclosed in the notes to the consolidated financial
statements as required by SFAS 123 (see note 11).
Segment Reporting
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
the use of the "management approach" in disclosing segment information, based
largely on how senior management generally analyzes the business operations.
SFAS 131 has been adopted effective August 1, 1998. The Company currently
operates in only one segment, and as such, no additional disclosures are
required.
F-10
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 debt 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 nine months ended April 30, 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.
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 Nine Months Ended
July 31, 1998 April 30, 1999
------------- -----------------
(In thousands,
except per share data)
<S> <C> <C>
Numerator:
Loss..................................... $(13,837) $(21,170)
-------- --------
Denominator:
Weighted average shares outstanding...... 15,398 296
Assumed conversion of preferred stock.... 790 30,444
Assumed conversion of debt to CMGI....... 562 3,470
-------- --------
Weighted average number of diluted shares
outstanding............................. 16,750 34,210
-------- --------
Basic and diluted loss per share .......... $ (.83) $ (.62)
======== ========
</TABLE>
See note 16.
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the
F-11
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. On May 20, 1999, a proposed Statement of Financial Accounting
Standards was issued for public comment in which the proposal, if approved,
will delay implementation until the first quarter of the Company's fiscal year
2000.
Unaudited Interim Financial Information
The consolidated financial statements for the nine months ended April 30,
1998 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 rights to some of its data warehouse
software products to Red Brick Systems, Inc. ("Red Brick") for $9,500,000 in
cash and 238,160 shares of Red Brick common stock, recording a pretax gain of
$9,240,000 on the sale. The cash component was received directly by CMGI and
Debt to CMGI was reduced by a corresponding amount. In January 1999, the Red
Brick shares were exchanged for 142,896 shares of Informix Corp. due to
Informix's acquisition of Red Brick.
(4) Available-for-Sale Securities
Available-for-sale securities at July 31, 1998 consists of 238,160 shares of
Red Brick common stock received as part of the Company's sale of product rights
to Red Brick. Available-for-sale securities at April 30, 1999 consists of
142,896 shares of Informix Corp. (see note 3). These securities are carried at
fair value based on quoted market prices. A $1,193,000 and $724,000 unrealized
holding loss was recorded on the Red Brick shares at July 31, 1998 and April
30, 1999, respectively, based on the change in market value since the date of
acquisition. The unrealized holding loss is presented in the equity section of
the Company's consolidated balance sheet as a component of accumulated other
comprehensive loss.
F-12
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Property and Equipment
<TABLE>
<CAPTION>
July 31,
Estimated -------------- April 30,
Useful Life 1997 1998 1999
------------------------ ------- ----- ---------
(In
thousands)
<S> <C> <C> <C> <C>
Office furniture and
computer equipment..... 3-5 years $ 911 $ 940 $2,327
Software licenses....... 3 years 2,131 273 305
Leasehold improvements.. 4 years or life-of-lease 105 105 429
------- ----- ------
3,147 1,318 2,862
Less: Accumulated
depreciation and
amortization........... (1,477) (529) (849)
------- ----- ------
$ 1,670 $ 789 $2,012
======= ===== ======
</TABLE>
Property and equipment recorded under capital leases amounted to
approximately $735,000 at April 30, 1999. Total accumulated amortization
related to these assets amounted to approximately $49,000 at April 30, 1999.
The Company had no assets under capital lease at July 31, 1997 or 1998.
(6) Investment in Joint Venture
In August 1998, the Company acquired for $1.4 million in cash, 49% of the
shares of Engage Technologies Japan (the "Joint Venture"), a joint venture with
Sumitomo Corporation in Japan. The Company's ownership interest was reduced to
46.3% in March 1999 as a result of the Joint Venture's selling an ownership
interest to an additional investor. The Joint Venture was established to sell
the Company's products and services in Japan. The Joint Venture is authorized
to solicit additional investors so long as the new investors' ownership
interests do not exceed 30% on a fully diluted, aggregate ownership basis. If
the Joint Venture requires funds in excess of $4 million (excluding the
parties' initial capital contributions) for its operations, the Company is
required to provide a bank guarantee in an amount proportionate to its
ownership interest. This investment is being accounted for under the equity
method of accounting. The Company's share of the Joint Venture's foreign
currency translation adjustments is reflected in both the investment account
and shareholders' equity on the consolidated balance sheet as a component of
accumulated other comprehensive income (loss).
Under a separate license agreement, the Company licensed its Engage
Knowledge technology to the Joint Venture in consideration for a non-refundable
$3 million prepaid royalty and royalties of 11.11% of all future revenues. The
initial prepaid royalty has been recorded as deferred revenue and is being
recognized as income over three years, the estimated period over which the
Company expects to provide maintenance and support. In addition, the Company
and the Joint Venture entered into a reseller agreement under which the Company
granted the Joint Venture an exclusive right to resell its products to end
users in Japan, excluding certain Japanese distribution rights granted to Red
Brick (see Note 3).
(7) Acquisitions
Accipiter
In April 1998, CMGI acquired Accipiter, Inc. ("Accipiter"), a company
specializing in Internet advertising management solutions, in exchange for
10,109,536 shares of CMGI Common Stock
F-13
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(which number reflects three CMGI two-for-one stock splits between April 1998
and the date of these financial statements). In August 1998, Accipiter was
legally merged with the Company in a stock-for-stock merger in which
consideration of 700,000 shares of the Company's Series A Convertible Preferred
Stock was issued to CMGI. The Company has reflected in its consolidated
financial statements and the acquisition of Accipiter as if they occurred in
April 1998. The total purchase price for Accipiter was valued at $31,253,000,
including acquisition costs of $198,000. The value of the CMGI shares included
in the purchase price was recorded net of a weighted average 10% market value
discount to reflect the restrictions on transferability.
Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the purchase
price allocated to in-process research and development was $9,200,000, or
approximately 29% of the total purchase price. At the acquisition date,
Accipiter's major in-process project was the development of AdManager version
4.0, which was intended to provide the ad serving functionality that customers
were requiring as the use of the Internet rapidly increased and customer Web
sites became more complex. In general, previous AdManager releases did not
provide for the fault tolerance, redundancy and scalability that customers
began to seek after AdManager versions 1.0 and 2.0 were released. Accordingly,
customers' long-term product needs required Accipiter to substantially redesign
the AdManager architecture (later released as version 4.0) to develop new
technologies in the areas of: (1) fault tolerance and scalability, (2) an
object-oriented user interface, (3) application programming interfaces and (4)
a new report engine.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. Engage
began testing AdManager version 4.0 at a customer's site (beta testing) in June
1998 and commercially released the product in August 1998. The initial
development effort had commenced in late 1997. At the acquisition date, the new
AdManager technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the Accipiter purchase, the
AdManager version 4.0 project was approximately 71% complete.
The 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.
F-14
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce (which is
supported by independent market data), the need for e-commerce companies to
serve ads over the Internet, expected trends in technology (such as increased
speed of the Internet, reduced hardware costs and the resulting increase in new
Internet users to whom ads will be served) and the nature and expected timing
of new product introductions by Engage and its competitors. These estimates
also include growth related to the use of certain Accipiter technologies in
conjunction with Engage's products, the marketing and distribution of the
resulting products through Engage's sales force and the benefits of Engage's
incremental financial support and stability.
Engage's estimated cost of sales as a percentage of revenue is expected to
be slightly lower than Accipiter's (classified as support and royalties by
Accipiter) on a stand-alone basis (16% in 1997), as certain fixed costs
included in cost of sales are spread over a larger revenue base and provide for
the realization of efficiencies due to economies of scale through combined
operations. Due to these savings, the estimated cost of sales as a percentage
of revenue is expected to decrease by 1% each year from Accipiter's historical
percentage, to a low of 11% in the fifth forecast year.
Engage's selling, general and administrative costs are expected to be higher
than Accipiter's on an absolute basis, but lower as a percentage of revenue.
Due to the small revenue base in 1997 and the impact of significant costs
associated with building a corporate infrastructure and building a workforce
for future operations, Accipiter's selling, general and administrative costs in
1997, as a percent of revenue, are not representative of the expected costs for
the combined operations of Engage and Accipiter. Efficiencies due to economies
of scale through combined operations, such as consolidated marketing and
advertising programs, are expected to be realized immediately.
Approximately $1,700,000 of deferred compensation was recorded during fiscal
1998 relating to approximately 173,080 shares of CMGI common stock issued to
the then employee stockholders of Accipiter, which are being held in escrow.
These shares are subject to forfeiture upon termination of employment over a
two-year period. Compensation expense is being recognized over the two-year
service period beginning August 1, 1998.
I/PRO
In April 1999, Engage acquired I/PRO, a provider of Web-site traffic
measurement and audit services, for approximately $32,651,000, including
acquisition costs of $244,000. The purchase price consisted of $1,563,000 in
net cash, $20,907,000 in CMGI common shares and $10,181,000 in Engage common
shares and options. The per share value of the CMGI shares included in the
purchase price was $57.99, net of a 9% weighted average market value discount
to reflect the restriction on transferability. The per share value of the
Engage shares included in the purchase price was $6.58 per share. In addition,
CMGI must pay up to $3,000,000 to the former I/PRO stockholders if stated
performance goals are met by I/PRO one year after the closing. Engage must
reimburse CMGI for any payments, due under stated performance goals, in cash or
by issuance of shares of Engage's Series C convertible preferred stock at its
then fair market value, at CMGI's election. Any additional payments will be
treated as additional purchase price.
F-15
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I/PRO's major in-process project was the development of a new data
processing system, project name Normandy, which is intended to provide the
improved functionality required as the use of the Internet rapidly increases
and customer Web site activity increases in volume and complexity. In general,
the existing data processing system does not provide sufficient fault
tolerance, scalability, and data processing efficiency that will be required to
meet future customer needs. Accordingly, customer's long-term product needs
required I/PRO to substantially redesign the data processing system to develop
new technologies in the areas of: (1) fault tolerance and scalability, (2)
system management, (3) data capture and (4) path analysis functionality.
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August, 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the I/PRO purchase, the Normandy
project was approximately 64% complete.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of returns on contributory assets, including core developed
technology, assembled workforce, working capital and fixed assets. The cash
flows are then discounted to present value at an appropriate rate. Discount
rates are determined by an analysis of the risks associated with each of the
identified intangible assets. The discount rate used for in-process research
and development was 30%, a premium over the estimated weighted-average cost of
capital of 25%, and the discount rate used for core developed technology was
22%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Management projected average annual revenues increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenues
related to the Normandy project were identified.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce, the need
for e-commerce companies to utilize independent audit, verification and
analysis services, expected trends in technology (such as increased speed of
the Internet, reduced hardware costs and the resulting increase in new Internet
users) and the nature and expected timing of new product introductions by
Engage and its competitors. These estimates also include growth related to the
use of certain I/PRO technologies in conjunction with Engage's products and the
benefits of Engage's incremental financial support and stability.
I/PRO's estimated cost of sales as a percentage of revenue is expected to
significantly decrease on a stand-alone basis (85% in 1998), as certain fixed
costs included in cost of sales are spread over a larger revenue base and
provide for the realization of efficiencies due to economies of scale. Normandy
technology is expected to greatly increase the automation of data processing
allowing significant labor cost savings per revenue dollar. Increases in
hardware utilization are also expected.
F-16
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to these savings, the estimated cost of sales as a percentage of revenue is
expected to decrease to a low of 20% in the fifth forecast year.
The acquisitions of Accipiter and I/PRO have been accounted for using the
purchase method, and, accordingly, the purchase prices have been allocated to
the assets purchased and liabilities assumed based upon their fair values at
the dates of acquisition. The amount of the purchase prices allocated to
goodwill and developed technology is being amortized on a straight-line basis
over five years. The amount of the purchase price allocated to other
identifiable intangible assets is being amortized on a straight line basis over
the following periods; Accipiter and I/PRO work force over two years, Accipiter
trade name over two years, and I/PRO tradename over five years. Amortization of
developed technology is charged to cost of product revenue while both goodwill
and other identifiable intangible assets are reflected as separate components
within operating expenses.
The purchase price of the Accipiter and I/PRO acquisitions was allocated as
follows:
<TABLE>
<CAPTION>
Accipiter I/PRO
--------- -------
(In thousands)
<S> <C> <C>
Working capital deficit, net of cash acquired of
$689 for Accipiter and $347 for I/PRO................. $ (249) $ (498)
Property and equipment................................. 262 1,676
Other assets........................................... 2 230
In-process research and development.................... 9,200 4,500
Long-term obligations.................................. -- (465)
Goodwill............................................... 20,158 22,288
Developed technology................................... 1,600 3,000
Other identifiable intangible assets................... 280 1,920
------- -------
Purchase price, net of cash acquired................... $31,253 $32,651
======= =======
</TABLE>
The following table represents the unaudited pro forma results of operations
of the Company for the years ended July 31, 1997 and 1998, and the nine months
ended April 30, 1999, as if the Accipiter acquisition had occurred on August 1,
1996 and the I/PRO acquisition had occurred on August 1, 1997. These pro forma
results include adjustments for the amortization of goodwill and other
intangibles and deferred compensation and the elimination of amounts expensed
for in-process research and development. They have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisitions been made at the beginning of the periods
noted or of results that may occur in the future.
<TABLE>
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
------------ ------------ ---------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues.................... $ 428 $ 7,348 $ 12,899
Net loss........................ (16,825) (23,149) (25,274)
Net loss per share.............. (.56) (.64) (.65)
</TABLE>
(8) Leases
The Company leases certain computer equipment under capital leases which
expire at various dates through November 2002.
F-17
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to leasing computer equipment under various capital leases, the
Company has entered into noncancelable operating leases covering certain of its
office facilities and equipment which expire through 2004. In addition, the
Company pays CMGI for office facilities used as the Company's headquarters for
which it is charged based upon an allocation of the total costs for the
facilities at market rates.
The Company leases certain property and equipment from a subsidiary of CMGI.
Under the arrangement, the related party negotiates the terms and conditions of
the lease and obtains the assets to be leased. The related party bears all
liability for payment, and the Company is not financially obligated under the
leases. The Company is charged the actual lease fees paid by the related party,
plus an additional administrative charge that approximates the fair value of
the services received.
Total rent expense amounted to $36,000, $305,000, $483,000 and $758,000 for
the years ended July 31, 1996, 1997 and 1998 and the nine months ended April
30, 1999, respectively. Rent expense for office facilities paid to CMGI
amounted to approximately $35,000, $274,000, $258,000 and $214,000 for the
years ended July 31, 1996, 1997 and 1998 and the nine months ended April 30,
1999, respectively. Rent expense for equipment paid to a subsidiary of CMGI
amounted to approximately $1,000, $31,000, $125,000 and $231,000 for the years
ended July 31, 1996, 1997 and 1998 and the nine months ended April 30, 1999,
respectively.
Minimum annual rental commitments are as follows at April 30, 1999:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(in thousands)
<S> <C> <C>
1999 (three months)...................................... $ 254 $ 152
2000..................................................... 828 331
2001..................................................... 715 309
2002..................................................... 643 78
2003..................................................... 206 4
2004..................................................... 154 --
------- -----
$ 2,800 874
=======
Less: amount representing interest....................... 68
-----
Present value of capital lease obligations............... $ 806
=====
Comprised of:
Current portion........................................ $ 364
Non-current portion.................................... 442
-----
$ 806
=====
</TABLE>
(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 April 30,
1999, the Company had no significant net operating loss carryforwards available
to offset future federal taxable income as the Company's parent, CMGI, has
utilized substantially all of the Company's net operating losses through April
30, 1999. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after considering all the
available objective evidence, both positive and
F-18
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, April
---------------- 30,
1997 1998 1999
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Research credits............................. $ 212 $ 72 $ 72
Deferred revenue............................. -- 288 175
Accruals and other reserves.................. 84 377 1,164
Loss carryforwards........................... 692 1,862 12,142
Depreciation and amortization................ 31 345 --
Deferred compensation........................ -- -- 28
Basis difference in available for sale secu-
rities...................................... -- 821 627
------- ------- --------
1,019 3,765 14,208
Less: Valuation allowance...................... (1,019) (3,765) (12,856)
------- ------- --------
Net deferred tax assets........................ -- -- 1,352
------- ------- --------
Deferred tax liabilities:
Intangibles, other than goodwill............. -- -- (1,352)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of July 31, 1997 and 1998 and April 30, 1999 will be
allocated as follows:
<TABLE>
<CAPTION>
July 31,
--------------- April 30,
1997 1998 1999
------- ------- ---------
(In thousands)
<S> <C> <C> <C>
Income tax benefit that would be recognized in
the consolidated statements of operations...... $ 1,019 $ 2,085 $ 2,327
Goodwill and other non-current intangible as-
sets........................................... -- 1,189 10,231
Accumulated other comprehensive income (loss)... -- 491 298
------- ------- --------
$ 1,019 $ 3,765 $ 12,856
======= ======= ========
</TABLE>
The Company has net operating loss carryforwards for Massachusetts tax
purposes of approximately $10,700,000 as of July 31, 1998 and April 30, 1999.
The net operating loss carryforwards will expire from 2001 through 2003. In
addition, the Company has net operating loss carryforwards for North Carolina
tax purposes of approximately $4,400,000 and $8,600,000 as of July 31, 1998 and
April 30, 1999, respectively, which will expire from 2001 through 2003, of
which $2,700,000 is related to losses incurred by Accipiter, Inc. prior to its
acquisition by the Company 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 net operating loss carryforwards for California tax
purposes of $15,100,000 as of April 30, 1999, of which, $15,000,000 is related
to the pre-acquisition period of I/PRO. The Company also has $2,700,000 of
federal net operating loss carryforwards, which will expire from 2011 through
2012, related to losses incurred by Accipiter, Inc. prior to its acquisition.
F-19
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax benefits related to net operating loss carryforwards from the pre-
acquisition periods of Accipiter and I/PRO, when realized, will be recorded as
a decrease in goodwill and other non-current intangible assets. The utilization
of these net operating losses may be limited pursuant to Internal Revenue Code
Section 382 as a result of prior and future ownership changes.
(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"). 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").
Series A Preferred Stock
In July 1998, the Board of Directors authorized and issued 800,000 shares of
Series A Preferred Stock in exchange for 16,000,000 shares of the Company's
common stock and $8,000,000 in principal amount of debt to CMGI. The Series A
Preferred Stock is entitled to receive annual dividends at 7%, as and if
declared. As of and prior to July 31, 1998, no dividends had been declared or
paid by the Company. Each share of Series A Convertible Preferred Stock votes
on an as-converted basis and is convertible into twenty shares of common stock
under certain conditions and subject to certain adjustments. In the event of
any liquidation, dissolution or winding up of the Company, the Series A
Preferred Stock has a liquidation preference of $5 per share, plus cumulative
dividends of 7% compounded annually beginning on February 1, 1998. The Series A
Preferred Stock is convertible into common stock immediately at the option of
the holder, and automatically converts into common stock upon the completion of
a qualifying initial public offering, as defined. See note 16.
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 April 30, 1999, 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 $6,000. Each share of Series B Preferred Stock votes on an
as-converted basis and is convertible into two shares of common stock under
certain conditions and subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series B Preferred
Stock has a liquidation preference of $8.38 per share, subject to the prior
payment of the liquidation preference on Series A Preferred Stock. The Series B
Preferred Stock is convertible into common stock immediately at the option of
the holder, 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, debt to CMGI will
convert to Series C Preferred Stock, and all of the outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
will convert to 38,748,474 shares of the Company's common stock. This
conversion has been reflected in the unaudited pro forma balance sheet as of
April 30, 1999. See note 16.
F-20
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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. 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 and the nine
months ended April 30, 1999:
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------------- Nine Months Ended
1996 1997 1998 April 30, 1999
------------------ ------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
of Exercise of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... -- $ -- 2,575,500 $0.15 2,391,000 $0.24 4,148,054 $1.09
Granted................. 2,575,500 0.15 903,500 0.60 3,290,500 1.46 2,508,710 3.80
Exercised............... -- -- (187,500) 0.12 (1,600) 0.43 (26,040) 0.35
Cancelled............... -- -- (900,500) 0.38 (1,531,846) 0.57 (162,930) 0.46
--------- --------- ---------- ---------
Options outstanding, end
of period.............. 2,575,500 $0.15 2,391,000 $0.24 4,148,054 $1.09 6,467,794 $2.16
========= ===== ========= ===== ========== ===== ========= =====
Options exercisable, end
of period.............. -- $ -- 606,178 $0.12 639,444 $0.30 1,704,888 $0.79
========= ===== ========= ===== ========== ===== ========= =====
Options available for
grant, end of period... 1,424,500 1,421,500 1,452,320 470,146
========= ========= ========== =========
</TABLE>
The following table summarizes information about stock options under the
Company's 1995 Plan outstanding at April 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 0.42 2,834,860 3.3 $ 0.23 1,249,216 $ 0.19
$ 0.43-$ 0.84 81,000 2.4 0.71 51,788 0.71
$ 0.85-$ 1.68 45,674 2.9 1.03 28,282 1.03
$ 2.10-$ 2.94 1,693,478 3.4 2.56 345,206 2.38
$ 2.95-$ 4.19 314,000 4.5 4.19 13,540 4.19
$ 4.20-$ 5.05 1,419,738 4.8 4.95 -- 0.00
$ 5.06-$14.91 79,044 4.9 6.70 16,856 9.18
--------- ---------
6,467,794 3.7 $ 2.16 1,704,888 $ 0.79
========= =========
</TABLE>
F-21
<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 and the nine months ended
April 30, 1999:
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------------- Nine Months Ended
1996 1997 1998 April 30, 1999
------------------ ------------------ ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number of Exercise Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 105,360 $0.08 160,320 $0.91 181,240 $1.25 140,780 $ 2.11
Granted................. 76,000 1.84 48,800 1.95 80,000 2.32 296,400 10.00
Exercised............... (21,040) 0.08 (21,880) 0.15 (106,292) 0.84 (57,264) 2.03
Cancelled............... -- -- (6,000) 1.77 (14,168) 1.85 -- --
------- ------- -------- -------
Options outstanding, end
of period.............. 160,320 $0.91 181,240 $1.25 140,780 $2.11 379,916 8.28
======= ===== ======= ===== ======== ===== ======= ======
Options exercisable, end
of period.............. 42,346 $0.22 83,598 $0.81 18,602 $1.76 10,766 $ 2.02
======= ===== ======= ===== ======== ===== ======= ======
</TABLE>
The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at April 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.22-$ 3.89 14,840 2.13 $ 3.62 8,846 $3.31
$ 4.63 25,834 3.49 4.63 -- --
$ 7.53 1,084 1.58 7.53 453 7.53
$20.00 148,200 4.38 20.00 -- --
------- -----
189,958 4.07 $16.56 9,299 $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 Nine Months Ended
July 31, 1996 July 31, 1997 July 31, 1998 April 30, 1999
--------------------- --------------------- --------------------- ---------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss................ $(2,379) $(2,402) $(10,262) $(10,385) $(13,837) $(14,195) $(21,170) $(23,190)
</TABLE>
F-22
<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, and the nine moneths ended
April 30, 1999, respectively: volatility of 80.30%, 66.69%, 90.07% and 100.00%;
risk-free interest rate of 5.81%, 6.19%, 5.48% and 5.16%; expected life of
options of 4.0, 4.0, 3.4 and 2.5 years; and 0% dividend yield for all years.
The weighted average fair value per share of options granted during fiscal
1996, 1997 and 1998 and the nine months ended April 30, 1999 was $0.10, $0.34,
$0.86 and $1.42, 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, and the nine months ended April 30, 1999, respectively: volatility of
80.30%, 66.69%, 90.07% and 100.00%; risk-free interest rate of 5.81%, 6.19%,
5.50% and 5.16%; expected life of options of 4.0, 6.2, 4.2 and 2.5 years; and
0% dividend yield for all years. The weighted average fair value per share of
options granted during fiscal 1996, 1997 and 1998 and the nine months ended
April 30, 1999 was $2.02, $2.60, $3.16 and $11.96, 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>
Nine Months
Year Ended July 31, Ended
------------------------------ April 30,
1996 1997 1998 1999
-------- --------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Net loss....................... $ (2,379) $ (10,262) $ (13,837) $ (21,170)
Foreign currency adjustments... -- -- -- 302
Net unrealized holding gain
(loss) arising during the
period........................ -- -- (1,193) 469
-------- --------- --------- ---------
Comprehensive loss............. $ (2,379) $ (10,262) $ (15,030) $ (20,399)
======== ========= ========= =========
</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, nine months ended April
30, 1999......................... 302 469 771
---- ------- -------
Balance, April 30, 1999........... $302 $ (724) $ (422)
==== ======= =======
</TABLE>
F-23
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Concentration of Credit Risk
Amounts included in the consolidated balance sheets for accounts receivable,
debt to CMGI, accounts payable and accrued expenses approximate their fair
value due to their short maturities. Financial instruments that potentially
subject the Company to credit risk consist primarily of accounts receivable.
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 two customers accounted for
17% and 16% of total revenues for the nine months ended April 30, 1998 and
sales to one customer accounted for 10% of total revenues for the nine months
ended April 30, 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. Accounts receivable from
two customers approximated 20% and 13% of total accounts receivable at April
30, 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. 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, Nine Months
-------------------- Ended
1996 1997 1998 April 30, 1999
------ ------ ------ --------------
(In thousands)
<S> <C> <C> <C> <C>
Enterprise services...................... $ -- $ 129 $ 201 $173
Rent and facilities...................... $ 35 $ 312 $ 366 $303
Human resources.......................... $ -- $ 11 $ 30 $102
</TABLE>
In addition, beginning in fiscal 1997, the Company outsources data center
operations and management information services from CMGI and one of its
affiliates, for which fees were charged at estimated fair value of $1,162,000,
$889,000 and $1,633,000 during the years ended July 31, 1997 and 1998 and the
nine months ended April 30, 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-24
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,364,000 for the fiscal year
ended July 31, 1998 and the nine months ended April 30, 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, Nine Months
------------------- Ended
1996 1997 1998 April 30, 1999
------ ---- ------- --------------
(In thousands)
<S> <C> <C> <C> <C>
United States........................... $ -- $ 25 $ 1,584 $ 7,457
Europe.................................. -- -- 71 577
Rest of world........................... -- -- 562 963
------ ---- ------- -------
$ -- $ 25 $ 2,217 $ 8,997
====== ==== ======= =======
</TABLE>
(16) Subsequent Events
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. Each share of Series C Preferred Stock votes on an as-
converted basis and is convertible at the option of the holder into twenty
shares of common stock, subject to certain adjustments. Upon the closing of a
qualifying initial public offering, all outstanding shares of Series C
Preferred Stock will convert into common stock.
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 April 30, 1999 in the amount of $37,447,000
into 413,564 shares of Series C Preferred Stock.
F-25
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Authorized Share Increase and Stock Split
In June 1999, the Board of Directors approved an increase in the number of
authorized common shares from 30,000,000 to 150,000,000. Upon approval of the
share increase, a two-for-one stock split was declared. All share data shown in
the accompanying consolidated financial statements have been retroactively
restated to reflect this split.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the board of directors
in June 1999. The 1999 Employee Stock Purchase Plan provides for the issuance
of a maximum of 750,000 shares of common stock and will be administered by the
compensation committee. All employees of Engage whose customary employment is
for more than 20 hours per week and for more than 6 months in any calendar year
are eligible to participate in the 1999 Employee Stock Purchase Plan.
1999 Stock Option Plan for Non-Employee Directors
The 1999 Stock Option Plan for Non-Employee Directors was adopted by the
board of directors in June 1999. Under the terms of the 1999 Stock Option Plan
for Non-Employee Directors, directors who are not employees of Engage or any
subsidiary of Engage and not affiliates of an institutional investor that owns
shares of Engage's common stock receive nonstatutory options to purchase shares
of Engage's common stock. A total of 250,000 shares of common stock may be
issued upon exercise of options granted under the plan. The board of directors
has discretion to establish the terms of options granted under the plan. All
options must have an exercise price equal to the fair market value of the
common stock on the date of grant.
F-26
<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 LLP
Raleigh, North Carolina
March 26, 1998
F-27
<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-28
<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-29
<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-30
<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-31
<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) Research and Development
Research and development expenditures are expensed as incurred. Software
development costs are required to be capitalized when a product's technological
feasibility has been established either by completion of a detail program
design or a working model of the product and ending when a product is available
for general release to consumers. To date, attainment of technological
feasibility
F-32
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
of the Company's products and general release to customers have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
(f) 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 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>
F-33
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(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
F-34
<PAGE>
ACCIPITER, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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-35
<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 CMGI entered into a letter agreement,
providing for the acquisition of the Company by CMGI. The transaction closed
on April 8, 1998. The agreement provides that the Company will be merged with
a newly created wholly-owned subsidiary of CMGI. 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 CMGI common stock, price determined on March 2, 1998 as
$55.50 per share. If the price of common stock of CMGI 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-36
<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-37
<PAGE>
INTERNET PROFILES CORPORATION
BALANCE SHEETS
December 31, 1998 and 1997 and March 31, 1999
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 5,641,857 $ 1,191,604 $ 410,578
Accounts receivable, net of allowance
of $232,655 and $308,586 as of
December 31, 1997 and 1998, and
$434,002 as of March 31, 1999,
respectively.......................... 680,785 778,693 799,417
Accounts receivable from corporate
partner and investor, net of allowance
of $47,074 and $50,000 as of December
31, 1997 and 1998, and $50,000 as of
March 31, 1999, respectively.......... 222,209 268,090 168,934
Prepaid expenses and other current
assets................................ 210,840 376,999 322,834
----------- ----------- -----------
Total current assets................... 6,755,691 2,615,386 1,701,763
Property and equipment, net............. 2,365,613 1,875,951 1,675,660
Other assets, net....................... 230,606 254,403 255,068
----------- ----------- -----------
Total assets........................... $9,351,910 $4,745,740 $3,632,491
=========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of capital lease and
loan obligation....................... $ 913,071 $ 3,065,221 $ 2,867,989
Accounts payable....................... 492,083 60,913 540,122
Accrued expenses....................... 513,589 821,799 1,044,659
Commission payable to corporate partner
and investor (Note 6)................. 259,688 236,454 97,926
Deferred revenue....................... 37,973 15,525 17,325
Current portion of license accrual..... 58,334 175,000 --
----------- ----------- -----------
Total current liabilities.............. 2,274,738 4,374,912 4,568,021
Capital lease and loan obligation, less
current portion........................ 884,973 533,762 465,318
License accrual, less current portion... 116,666 -- --
----------- ----------- -----------
Total liabilities...................... 3,276,377 4,908,674 5,033,339
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 as of December 31, 1997 and
1998, and March 31, 1999.............. 1,140 1,140 1,140
Series B (liquidation value: $679,542):
Issued and outstanding: 2,788,289
shares as of December 31, 1997 and
1998, and 2,889,639 shares as of March
31, 1999.............................. 2,788 2,788 2,889
Series C (liquidation value:
$4,113,184): Issued and outstanding:
2,168,586 shares as of December 31,
1997, 1998, and March 31, 1999........ 2,169 2,169 2,169
Series D (liquidation value:
$7,178,167): Issued and outstanding:
18,303,009 shares as of December 31,
1997, and 21,174,535 shares as of
December 31, 1998 and March 31, 1999.. 18,303 21,175 21,175
Common stock, $0.001 par value:
Authorized: 75,000,000 shares Issued
and outstanding: 2,383,475 shares as
of December 31, 1997, 4,553,463 shares
as of December 31, 1998, and 8,010,206
shares as of March 31, 1999........... 2,384 4,554 8,011
Notes receivable from stockholders (Note
7)..................................... -- (69,468) (206,338)
Additional paid-in capital.............. 25,899,443 27,643,086 27,895,046
Accumulated deficit..................... (19,850,694) (27,768,378) (29,124,940)
----------- ----------- -----------
Total stockholders' equity (deficit)... 6,075,533 (162,934) (1,400,848)
----------- ----------- -----------
Total liabilities and stockholder's
equity (deficit)...................... $ 9,351,910 $ 4,745,740 $ 3,632,491
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended For three months ended
December 31, March 31,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues.................. $ 3,050,244 $ 4,557,754 $ 911,880 $ 1,701,312
Cost of revenues.......... 3,502,485 3,889,330 971,225 1,133,099
----------- ----------- ----------- -----------
Gross margin (loss)... (452,241) 668,424 (59,345) 568,213
Operating expenses:
Research and
development............ 2,631,864 2,890,819 519,486 639,063
General and
administrative......... 1,751,975 2,766,812 569,582 594,911
Sales and marketing..... 1,882,742 3,112,174 569,080 962,911
----------- ----------- ----------- -----------
Loss from operations.. (6,718,822) (8,101,381) (1,717,493) (1,628,672)
Interest income........... 78,043 125,935 62,125 3,562
Interest expense.......... (186,930) (127,238) (42,570) (26,916)
Other income (Note 9)..... -- 185,000 -- 295,464
----------- ----------- ----------- -----------
Net loss.............. $(6,827,709) $(7,917,684) $(1,697,938) $(1,356,562)
=========== =========== =========== ===========
Net loss per share--basic
and diluted.............. $ (3.38) $ (2.70) $ (0.17) $ (0.06)
=========== =========== =========== ===========
Shares used in computing
per share calculation--
basic and diluted........ 2,022,536 2,933,689 9,704,000 21,756,211
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1997 and 1998 and for the three months ended
March 31, 1999
<TABLE>
<CAPTION>
Convertible Prefered 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
Issuance of
preferred stock
in connection
with exercise of
warrants........ -- -- 101,350 101 -- -- -- -- -- -- -- 112,397
Exercise of
options in
exchange for
cash............ -- -- -- -- -- -- -- -- 35,000 35 -- 1,365
Exercise of
options in
exchange for
promissory
notes........... -- -- -- -- -- -- -- -- 3,421,743 3,422 (136,870) 133,448
Issuance of
common stock
warrants........ -- -- -- -- -- -- -- -- -- -- -- 4,750
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ---------- ------- --------- ------ --------- -----------
Balances, March
31, 1999
(unaudited)...... 1,140,350 $1,140 2,889,639 $2,889 2,168,586 $2,169 21,174,535 $21,175 8,010,206 $8,011 $(206,338) $27,895,046
========= ====== ========= ====== ========= ====== ========== ======= ========= ====== ========= ===========
<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)
Issuance of
preferred stock
in connection
with exercise of
warrants........ -- 112,498
Exercise of
options in
exchange for
cash............ -- 1,400
Exercise of
options in
exchange for
promissory
notes........... -- --
Issuance of
common stock
warrants........ -- 4,750
Net loss........ (1,356,562) (1,356,562)
------------- ------------
Balances, March
31, 1999
(unaudited)...... $(29,124,940) $(1,400,848)
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
INTERNET PROFILES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended For the three months
December 31, ended March 31,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(6,827,709) $(7,917,684) $(1,697,938) $(1,356,562)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 1,356,235 1,608,217 354,528 355,940
Fair value of common
stock warrants issued.... -- 18,763 -- 4,750
Common stock issued in
exchange for technology
or services.............. 245,411 -- -- --
Non-statutory stock
options issued to
employees................ -- 690,000 -- --
Provision for doubtful
accounts................. (2,271) 78,857 31,647 125,416
Changes in assets and
liabilities:
Accounts receivable...... (88,617) (176,765) (31,847) (146,140)
Accounts receivable from
corporate partner and
investor................ (106,430) (45,881) (96,712) 99,156
Prepaid expenses and
other current assets.... (68,399) (166,159) (118,600) 54,165
Other assets............. (222,606) (23,797) -- (5,667)
Accounts payable......... 141,104 (431,170) (131,132) 479,209
Accrued expenses......... (24,511) 308,210 285,376 222,860
Commission payable to
corporate partner and
investor................ 204,188 (23,234) 12,129 (138,528)
Deferred revenue......... 9,635 (22,448) (12,885) 1,800
License accrual.......... 175,000 -- -- (175,000)
----------- ----------- ----------- -----------
Net cash used in
operating activities... (5,208,970) (6,103,091) (1,405,434) (478,601)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment................ (532,073) (987,737) (207,932) (156,006)
Proceeds from disposal of
property and equipment... -- -- -- 5,359
----------- ----------- ----------- -----------
Net cash used in
investing activities... (532,073) (987,737) (207,932) (150,647)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
convertible debt......... -- 1,999,721 -- --
Proceeds from issuance of
Series D preferred
stock.................... 6,144,799 958,975 958,975 --
Proceeds from exercise of
options.................. 64,194 8,259 4,085 1,400
Proceeds from issuance of
common stock in
connection with the
exercise of warrants..... -- 3,220 -- 112,498
Principal borrowings on
capital lease............ -- 748,495 -- --
Payments on capital lease
and loan obligations..... (715,986) (1,078,095) (210,537) (265,676)
----------- ----------- ----------- -----------
Net cash provided by
financing activities... 5,493,007 2,640,575 752,523 (151,778)
----------- ----------- ----------- -----------
Net decrease in cash and
cash equivalents.......... (248,036) (4,450,253) (860,843) (781,026)
Cash and cash equivalents,
beginning of year......... 5,889,893 5,641,857 5,641,857 1,191,604
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of year............... $ 5,641,857 $ 1,191,604 $ 4,781,014 $ 410,578
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash payments for
interest................. $ 189,430 $ 127,238 42,570 $ 26,916
Taxes paid................ $ 2,500 $ 2,138 $ -- $ 1,677
Proceeds from sale of
intellectual property.... $ -- $ 300,000
Supplemental schedule of
noncash financing
activities:
Acquisition of property
and equipment under
capital lease and loan... $ 309,472 $130,818 $ 119,538 $ --
Notes receivable from
stockholders............. $ -- $ 69,468 $ -- $ 136,870
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<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-42
<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, 1997 and 1998.
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-43
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment at December 31, 1997 and 1998 and March 31, 1999
consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Computer and office equipment.......... $ 4,496,479 $ 4,381,655 $ 4,532,303
Furniture and fixtures................. 201,360 268,205 268,205
Leasehold improvements................. 13,507 299,020 299,020
----------- ----------- -----------
4,711,346 4,948,880 5,099,528
Less accumulated depreciation and
amortization.......................... (2,345,733) (3,072,929) (3,423,868)
----------- ----------- -----------
$ 2,365,613 $ 1,875,951 $ 1,675,660
=========== =========== ===========
</TABLE>
At December 31, 1997 and 1998 and March 31, 1999, equipment on capital
leases accounted for $2,339,710, $3,088,206 and $3,088,206, respectively, of
the computer and office equipment, and $1,258,313, $2,090,899 and $2,289,310,
respectively, of the accumulated depreciation and amortization.
4. Accrued Expenses
Accrued expenses at December 31, 1997 and 1998 and March 31, 1999 consist
of the following:
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll and related expenses.............. $ 50,974 $ 50,635 $ 54,414
Accrued vacation.................................. 100,000 110,213 133,617
Professional fees payable......................... 96,102 89,490 77,236
Accrued bonuses................................... 103,000 269,558 365,058
Other accrued liabilities......................... 163,513 301,903 414,334
-------- -------- ----------
$513,589 $821,799 $1,044,659
======== ======== ==========
</TABLE>
F-44
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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% (9.00% and 8.25% at December 31,
1997 and 1998, 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
F-45
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997 and 1998, and for the
three months ended March 31, 1998 and 1999 was $702,434, $578,839, $251,555 and
$271,693 respectively.
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, 1997 and 1998 totaled $390,995 and
$363,508, respectively. Commissions incurred relative to this agreement on
products sold through the efforts of the Company for the years ended December
31, 1997 and 1998 totaled $146,188 and $236,454 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, 1997 and 1998 under this agreement, amounts payable to the corporate
partner totaled $259,688 and $236,454 respectively, and amounts receivable from
the corporate partner totaled $222,209 and $268,090, 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.
F-46
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-47
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-48
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
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
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-$1.50 789,321 $0.11
Options granted................ 46,500 $0.04 1,860 $0.04
Options exercised.............. (3,456,743) $0.04-$0.75 (138,270) $0.04
Options canceled............... (460,416) $0.04-$1.50 (89,146) $0.20
---------- ----------
Balances, March 31, 1999
(unaudited)..................... 4,084,886 $0.01-$1.50 $ 563,765 $0.20
========== ==========
</TABLE>
F-49
<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>
December 31, 1998
----------------------------------------------------------------------------------
Options
Options Outstanding Exercisable
-------------------------------------------- -----------
Weighted
Average
Remaining
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 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
Weighted Weighted
Shares average Shares average
outstanding years outstanding years
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Options granted at $0.01 per share... 60,000 7.27 60,000 6.27
Options granted at $0.04 per share... 66,500 9.93 7,322,575 9.70
Options granted at $0.11 per share... 100,000 8.02 81,500 7.03
Options granted at $0.75 per share... 1,283,011 9.29 314,470 8.38
Options granted at $1.00 per share... 44,000 8.35 29,000 7.35
Options granted at $1.50 per share... 169,000 8.95 148,000 8.03
</TABLE>
The risk free interest rate for 1997 and 1998 were 6.36% and 5.42%,
respectively. The weighted average fair value of those options granted in 1997
and 1998 was $0.77 and $0.04, respectively.
F-50
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following pro forma loss information has been prepared following the
provisions of SFAS No. 123:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net loss--pro
forma............ $ 6,880,503 $ 7,948,894
</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.
8. Income Taxes
The primary components of the net deferred tax asset as of December 31,
1997 and 1998 are:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Net operating loss carryforwards -federal and state... $7,658,836 $10,105,689
Depreciable assets.................................... 194,836 229,659
Reserves and allowances............................... 476,021 390,858
Other temporary differences, net...................... (569,511) (565,662)
---------- -----------
7,760,182 10,160,544
Valuation allowance................................... (7,760,182) (10,160,544)
---------- -----------
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 $2,616,592 in 1997 and $2,400,362 in 1998.
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
F-51
<PAGE>
INTERNET PROFILES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997 or 1998.
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 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. and Engage Technologies, 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 majority 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-52
<PAGE>
ENGAGE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma combined condensed statements of operations of the
Company for the year ended July 31, 1998 and the nine months ended April 30,
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 nine months ended
April 30, 1999 have been combined with the results of operations of I/PRO for
the eight months ended March 31, 1999 (the results of operations of I/PRO for
April 1999 are included In the Consolidated Statement of Operations of the
Company. The results of operations of I/PRO for August 1998 through September
1998 have been included in both unaudited pro forma combined condensed
statements of operations presented.
The Company has accounted for its 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 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-53
<PAGE>
ENGAGE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended July 31, 1998 and the nine months ended April 30, 1999
<TABLE>
<CAPTION>
Year Ended July 31, 1998 Nine Months Ended April 30, 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 $ 3,973 $ 965 $ -- $ 6,883 $ 7,794 $ 3,902 $ -- $ 11,696
Services and support
revenue............... 272 -- 193 -- 465 1,203 -- -- 1,203
-------- ------- ------- ------ -------- -------- ------- ------ --------
Total revenue........... 2,217 3,973 1,158 -- 7,348 8,997 3,902 -- 12,899
-------- ------- ------- ------ -------- -------- ------- ------ --------
Cost of revenue:
Cost of product
revenue............... 185 3,849 36 813 (c) 4,883 1,327 2,658 400 (c) 4,385
Cost of services and
support revenue....... 2,053 -- 215 2,268 4,299 -- -- 4,299
-------- ------- ------- ------ -------- -------- ------- ------ --------
Total cost of revenue... 2,238 3,849 251 813 7,151 5,626 2,658 400 8,684
-------- ------- ------- ------ -------- -------- ------- ------ --------
Gross (loss) margin..... (21) 124 907 (813) 197 3,371 1,244 (400) 4,215
-------- ------- ------- ------ -------- -------- ------- ------ --------
Operating expenses:
In-process research and
development........... 9,200 -- -- (9,200)(a) -- 4,500 -- (4,500)(a) --
Research and
development........... 5,859 3,565 534 9,958 5,816 1,775 -- 7,591
Selling and marketing.. 4,015 2,694 796 7,505 6,614 2,499 -- 9,113
General and
administrative........ 1,993 1,959 1,164 5,116 2,409 2,323 -- 4,732
Amortization of
goodwill and other
intangibles........... 1,391 -- -- 7,748 (b) 9,139 3,543 -- 3,312 (b) 6,855
Stock compensation..... 426 -- -- 520 (e) 946 657 -- -- 657
-------- ------- ------- ------ -------- -------- ------- ------ --------
Total operating
expenses............... 22,884 8,218 2,494 (932) 32,664 23,539 6,597 (1,188) 28,948
-------- ------- ------- ------ -------- -------- ------- ------ --------
Loss from operations.... (22,905) (8,094) (1,587) 119 (32,467) (20,168) (5,353) 788 (24,733)
Gain on sale of product
rights................. 9,240 185 -- -- 9,425 -- -- -- --
Equity in loss of joint
venture................ -- -- -- -- -- (417) -- -- (417)
Other income (expense),
net.................... (172) (32) 30 67 (d) (107) (585) 428 33 (d) (124)
-------- ------- ------- ------ -------- -------- ------- ------ --------
Net (loss) income....... $(13,837) $(7,941) $(1,557) $ 186 $(23,149) $(21,170) $(4,925) $ 821 $(25,274)
======== ======= ======= ====== ======== ======== ======= ====== ========
Pro forma basic and
diluted net loss per
share.................. $ (.83) $ (.64) $ (.62) $ (.65)
======== ======== ======== ========
Pro forma weighted
average number of basic
and diluted shares
outstanding............ 16,750 36,128 34,210 39,134
======== ======== ======== ========
</TABLE>
F-54
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended July 31, 1998 and the nine months ended April 30, 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 and $4,500 related to the
acquisition of I/PRO in April 1999.
(b) Reflects additional goodwill and other intangible asset amortization
expense related to the acquisition of Accipiter and I/PRO. For both
Accipiter and I/PRO, (a) goodwill is being amortized over five years and
the employee workforce is being amortized over two years, (b) the tradename
is being amortized over two years for Accipiter and five years for I/PRO,
all using the straight-line method as follows:
<TABLE>
<CAPTION>
Amortization of goodwill
and other intangibles: Accipiter I/PRO
- ------------------------ ------------------------------ ------------------------------
Goodwill Workforce Trade Name Goodwill Workforce Trade Name Total
-------- --------- ---------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase price allocat-
ed..................... $20,158 $ 200 $ 80 $22,288 $ 420 $1,500 $44,646
Amortization period, in
months................. 60 24 24 60 24 60
Amortization expense per
month.................. $ 336 $ 8 $ 3 $ 371 $ 18 $ 25 $ 762
Year ended July 31,
1998:
Pro forma expense to be
recognized............. $ 4,031 $ 100 $ 40 $ 4,458 $ 210 $ 300 $ 9,139
Actual expenses recog-
nized.................. (1,345) (33) (13) -- -- -- (1,391)
------- ------ ------ ------- ------ ------ -------
Pro forma adjustment to
amortization of good-
will and other intangi-
bles................... $ 2,686 $ 67 $ 27 $ 4,458 $ 210 $ 300 $ 7,748
======= ====== ====== ======= ====== ====== =======
Nine months ended
April 30, 1999:
Pro forma expense to be
recognized............. $ 3,024 $ 75 $ 30 $ 3,343 $ 158 $ 225 $ 6,855
Actual expenses recog-
nized.................. (3,024) (75) (30) (371) (18) (25) (3,543)
------- ------ ------ ------- ------ ------ -------
Pro forma adjustment to
amortization of good-
will and other intangi-
bles................... $ -- $ -- $ -- $ 2,972 $ 140 $ 200 $ 3,312
======= ====== ====== ======= ====== ====== =======
</TABLE>
(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 as follows:
<TABLE>
<CAPTION>
Cost of product revenue: Accipiter I/PRO Total
- ------------------------ --------- ------ ------
<S> <C> <C> <C>
Purchase price allocated to developed technology..... $1,600 $3,000 $4,600
Amortization period, in months....................... 60 60
Amortization expense per month....................... $ 27 $ 50 $ 77
Year ended July 31, 1998:
Pro forma expense to be recognized................... $ 320 $ 600 $ 920
Actual expenses recognized........................... (107) -- (107)
------ ------ ------
Pro forma adjustment to cost of product revenue...... $ 213 $ 600 $ 813
====== ====== ======
Nine months ended April 30, 1999:
Pro forma expense to be recognized................... $ 240 $ 450 $ 690
Actual expenses recognized........................... (240) (50) (290)
------ ------ ------
Pro forma adjustment to cost of product revenue...... $ -- $ 400 $ 400
====== ====== ======
</TABLE>
(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 recorded
in the purchase of Accipiter. Deferred compensation is being amortized over
two years using the straight-line method.
F-55
<PAGE>
UNDERWRITING
Engage and the underwriters named below have entered into an underwriting
agreement that sets out the parties' agreement about the terms and conditions
of this offering. 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 900,000
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.
Engage will sell the shares to the underwriters at a per share price of $ ,
which represents a $ discount from the initial public offering price set forth
on the cover page of this prospectus. This discount is the underwriters'
compensation. The following table shows the per share and total underwriting
discounts that the underwriters will receive in the offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
Underwriters' Compensation
-------------------------
<TABLE>
<CAPTION>
No Full
Exercise Exercise
--------- ---------
<S> <C> <C>
Underwriting Discount Per Share............................. $ $
Total Underwriting Discount ................................ $ $
</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 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 and its directors, officers and persons beneficially owning more than
98% of its common stock 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 Eligible for Future Sale" for a
discussion of various transfer restrictions.
An aggregate of 300,000 shares of common stock offered by this prospectus
have been reserved for purchase from the underwriters through a directed share
program by customers, suppliers, distributors and other of Engage's business
partners. An aggregate of 300,000 shares of common stock offered by this
prospectus have been reserved for purchase from the underwriters through a
U-1
<PAGE>
directed share program by employees of Engage. An aggregate of 600,000 shares
of common stock offered by this prospectus have been reserved for purchase from
the underwriters through a directed share program by United States shareholders
of CMGI, who hold more than 100 shares of CMGI stock as of June 15, 1999 and
who have access to the Internet and a personal e-mail address. Such sales will
be at the initial public offering price. 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 purchased will be offered to the
general public on the same basis as the other shares offered by this
prospectus.
The CMGI directed share program is being administered by Wit Capital.
Purchases of the reserved shares are to be made through an account at Wit
Capital in accordance with Wit Capital's procedures for opening an account and
transacting in securities. In addition, Wit Capital is an underwriter of
additional shares in the offering. A prospectus in electronic format is being
made available on a Web site maintained by Wit Capital. Other than the
prospectus in electronic format, the information on Wit Capital's Web site and
any information provided on any other Web site maintained by Wit Capital is not
part of this prospectus and has not been approved or endorsed by Engage or any
underwriter and should not be relied upon by prospective investors.
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. Engage and the representatives expect that the primary factors
they will consider in determining the initial public offering price of the
shares, in addition to prevailing market conditions, will be Engage's
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's common stock has been approved for quotation 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
$1,275,000.
Engage has agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act of 1933.
U-2
<PAGE>
[Engage logo]
<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............................................................. 8
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization .......................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 34
Management............................................................... 52
Transactions and Relationship Between Engage and CMGI.................... 58
Security Ownership of Principal Stockholder and Management............... 61
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 65
Validity of Common Stock................................................. 66
Experts.................................................................. 66
Available Information.................................................... 67
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 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............................................. $ 21,100
NASD filing fee.................................................. 17,000
Nasdaq National Market listing fee............................... 90,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 250,000
Directors and officers insurance................................. 200,000
Blue Sky fees and expenses (including legal fees)................ 15,000
Transfer agent and registrar fees and expenses................... 17,000
Miscellaneous.................................................... 64,900
----------
Total.......................................................... $1,275,000
==========
</TABLE>
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 $2.67 per
share. Every one share of Series A Preferred Stock will convert into 20 shares
of common stock upon the consummation of this offering. These shares were
issued pursuant to Section 4(2) under the Securities Act.
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 477,194 shares of common stock.
These shares were issued pursuant to Rule 506 under the Securities Act.
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 20 shares of common stock upon
the consummation of this offering. These shares were issued pursuant to
Section 4(2) under the Securities Act.
In April 1999, Engage acquired I/PRO. As part of the acquisition, Engage
issued to I/PRO stockholders 1,010,184 shares of Engage common stock in
exchange for I/PRO common stock. These shares were issued pursuant to Rule 506
under the Securities Act.
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. These shares were issued pursuant to Section
4(2) under the Securities Act.
In June 1999, Engage agreed to issue to CMGI, in cancellation of $5,531,871 of
indebtedness incurred by Engage, 30,733 shares of Series C convertible
preferred stock. These shares were issued pursuant to Section 4(2) under the
Securities Act.
Prior to the closing of the offering, Engage expects to issue to Compaq
Computer 938,000 shares of its common stock at $14.00 per share. These shares
will be issued pursuant to Rule 506 under the Securities Act.
(b) Grants and Exercises of Stock Options.
As of April 30, 1999, Engage had granted options to purchase an aggregate of
6,467,794 shares of common stock under the 1995 Equity Incentive Plan
exercisable at a weighted average exercise price of $2.16 per share. From
August 1, 1995 to April 30, 1998, Engage issued 215,140 shares of common stock
for an aggregate purchase price of $31,682 pursuant to exercise of employee
options. These options and shares were issued pursuant to Rule 701 under the
Securities Act.
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** Amended and Restated Certificate of Incorporation.
3.2** Form of Second 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 Stock Option Plan for Non-Employee Directors.
10.4** Letter Agreement by and among Engage, CMGI and Red Brick Systems,
Inc., dated October 6, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
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** Capital & Counties plc and Engage Technologies Limited underlease,
dated April 27, 1999.
10.15** Anthony & Co. Office Lease between Milkson Associates, LLC and
Accipiter, Inc., dated April 9, 1997.
10.16** Amendment to Lease Agreement between Milkson Associates, LLC and
Accipiter, Inc., dated November 5, 1997.
10.17** Form of Director Indemnification Agreement.
10.18** Form of Investor Rights Agreement by and among Engage and CMGI.
10.19** Form of Facilities and Administrative Support Agreement between
Engage and CMGI.
10.20** Separation Agreement by and between CMGI and Chris Evans, dated
May 3, 1999.
10.21** Consulting, Invention and Non-Disclosure Agreement between Engage
and Chris Evans, dated May 3, 1999 (filed as Exhibit A to Exhibit
10.20).
10.22** Inter-Company Agreement between CMGI and Engage, 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 by and between Engage and CMGI, dated as of May
3, 1999.
10.25** Intellectual Property Security Agreement by and between Engage and
CMGI, dated as of May 3, 1999.
10.26** Stock Purchase Agreement among, Engage, CMGI, Internet Profiles
Corporation and the stockholders of Internet Profiles Corporation
listed on Schedule 1 attached thereto, dated April 7, 1999.
10.27** Form of Tax Allocation Agreement by and among CMGI and Engage.
21.1** Subsidiaries.
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG LLP (Accipiter).
23.4 Consent of PricewaterhouseCoopers LLP.
24.1** Power of Attorney of Paul L. Schaut, Stephen A. Royal, David S.
Wetherell, Edward A. Bennett, Christopher A. Evans, Andrew J.
Hajducky III and Craig D. Goldman.
24.2** Power of Attorney of Fredric D. Rosen.
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
II-3
<PAGE>
(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 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 Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Andover, Massachusetts on July 19, 1999.
Engage Technologies, Inc.
*
By: _________________________________
Paul L. Schaut
Chief Executive Officer,
President and Director
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the 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>
* Chief Executive Officer, July 19, 1999
______________________________________ President and Director
Paul L. Schaut (Principal Executive
Officer)
/s/ Stephen A. Royal Chief Financial Officer July 19, 1999
______________________________________ and Treasurer (Principal
Stephen A. Royal Financial and Accounting
Officer)
* Chairman of the Board of July 19, 1999
______________________________________ Directors
David S. Wetherell
* Director July 19, 1999
______________________________________
Edward A. Bennett
* Director July 19, 1999
______________________________________
Christopher A. Evans
* Director July 19, 1999
______________________________________
Andrew J. Hajducky, III
* Director July 19, 1999
______________________________________
Craig D. Goldman
* Director July 19, 1999
______________________________________
Fredric D. Rosen
</TABLE>
*By: /s/ Stephen A. Royal
-----------------------------
Stephen A. Royal
Attorney-in-Fact
II-5
<PAGE>
Schedule II
ENGAGE TECHNOLOGIES
VALUATION AND QUALIFYING ACCOUNTS
for the years ended July 31, 1996, 1997 and 1998 and
the nine months ended April 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
----------------
Balance at Charged to Deductions Balance
Beginning Costs and From at End
Description of Year Expenses Other Reserves of Year
- ----------- ---------- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 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 (1) -- $360
Nine months ended April 30,
1999:
Allowance for doubtful ac-
counts.................... $360 175 454 (2) (49) $940
</TABLE>
- --------
(1) Represents allowance for doubtful accounts of Accipiter, Inc. as of
April 1, 1998.
(2) Represents allowance for doubtful accounts of I/PRO as of April 1,
1999.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Form of Second 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 Stock Option Plan for Non-Employee Directors.
10.4**+ Letter Agreement by and among Engage, CMGI and Red Brick Systems,
Inc., dated October 6, 1998.
10.5**+ Letter Agreement by and among Engage, NaviSite Internet Services
Corporation and ServerCast Communications, L.L.C., dated September
16, 1998.
10.6** Series B Convertible Preferred Stock Purchase Agreement by and
among Engage, Sumitomo Corporation and Sumitomo Corporation of
America, dated July 31, 1998.
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** Capital & Counties plc and Engage Technologies Limited underlease,
dated April 27, 1999.
10.15** Anthony & Co. Office Lease between Milkson Associates, LLC and
Accipiter, Inc., dated April 9, 1997.
10.16** Amendment to Lease Agreement between Milkson Associates, LLC and
Accipiter, Inc., dated November 5, 1997.
10.17** Form of Director Indemnification Agreement.
10.18** Form of Investor Rights Agreement by and among Engage and CMGI.
10.19** Form of Facilities and Administrative Support Agreement between
Engage and CMGI.
10.20** Separation Agreement by and between CMGI and Chris Evans, dated
May 3, 1999.
10.21** Consulting, Invention and Non-Disclosure Agreement between Engage
and Chris Evans, dated May 3, 1999 (filed as Exhibit A to Exhibit
10.20).
10.22** Inter-Company Agreement between CMGI and Engage, 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 by and between Engage and CMGI, dated as of May
3, 1999.
10.25** Intellectual Property Security Agreement by and between Engage and
CMGI, dated as of May 3, 1999.
10.26** Stock Purchase Agreement among, Engage, CMGI, Internet Profiles
Corporation and the stockholders of Internet Profiles Corporation
listed on Schedule 1 attached thereto, dated April 7, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.27** Form of Tax Allocation Agreement by and among CMGI and Engage.
21.1** Subsidiaries.
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG LLP (Accipiter).
23.4 Consent of PricewaterhouseCoopers LLP.
24.1** Power of Attorney of Paul L. Schaut, Stephen A. Royal, David S.
Wetherell, Edward A. Bennett, Christopher A. Evans, Andrew J.
Hajducky, III and Craig D. Goldman.
24.2** Power of Attorney of Fredric D. Rosen.
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
Exhibit 4.1
This certificate is transferable Engage Technologies, Inc. CUSIP 292827102
in Boston, MA or New York, NY Incorporated under the laws
of the State of Delaware
ENGAGE TECHNOLOGIES, INC. transferable on the books of the Company by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed or assigned. This Certificate and the shares
represented hereby are issued under and shall be held subject to the laws of the
State of Delaware and the provisions of this Second Amended and Restated
Certificate of Incorporation and the Amended and Restated By-Laws of the
Company, as amended from time to time, to which the holder by acceptance hereof
assents. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
_______________________ ______________________
Chief Financial Officer [Seal of Corporation Here] President and
and Treasurer Chief Executive Officer
ENGAGE TECHNOLOGIES, INC.
The Corporation is authorized to issue more than one class of stock. Upon
written request, made by the holder of this Certificate, the Corporation will
furnish to such holder without charge a copy of the full text of the
preferences, voting powers, qualifications and special and relative rights of
the shares of each class authorized to be issued, as set forth in the Second
Amended and Restated Certificate of Incorporation, as amended from time to time.
For value received, _____________________________ hereby sell, assign and
transfer unto _____________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________ Attorney to transfer the said stock on
the books of the within named Company with full power of substitution in the
premises.
Dated: _____________________
<PAGE>
_______________________________________________________
Notice: The signature to this assignment must correspond with
the name as written upon the face of the certificate in
every particular without alteration or enlargement or
any change whatever.
Signature(s) _______________________________________________________
Guaranteed: The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings and
loan associations and credit unions with membership in
an approved signature guarantee medallion program),
pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 5.1
[Hale and Dorr LLP Letterhead]
July 16, 1999
Engage Technologies, Inc.
100 Brickstone Square
Andover, MA 01810
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-78015) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of 6,900,000 shares of Common Stock, $.01 par value per share (the "Shares"), of
Engage Technologies, Inc., a Delaware corporation (the "Company"), including
900,000 Shares issuable upon exercise of an over-allotment option granted by the
Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Goldman, Sachs & Co., Hambrecht & Quist LLC and Bear, Stearns & Co.
Inc., as representatives of the several underwriters named in the Underwriting
Agreement, the form of which has been filed as Exhibit 1 to the Registration
Statement.
We are acting as counsel for the Company in connection with the issue
and sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
<PAGE>
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer
and sale of the Shares in accordance with the Underwriting Agreement, to
register and qualify the Shares for sale under all applicable state securities
or "blue sky" laws.
We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts, the
Delaware General Corporation Law statute and the federal laws of the United
States of America. To the extent that any other laws govern the matters as to
which we are opining herein, we have assumed that such laws are identical to the
state laws of the Commonwealth of Massachusetts, and we are expressing no
opinion herein as to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used by you only in
connection with the offer and sale of the Shares while the Registration
Statement is in effect.
Please note that we are opining only as to the matters expressly set
forth herein, and no opinion should be inferred as to any other matters. This
opinion is based upon currently existing statutes, rules, regulations and
judicial decisions, and we disclaim any obligation to advise you of any change
in any of these sources of law or subsequent legal or factual developments which
might affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
2
<PAGE>
Exhibit 10.7
------------
LICENSE AGREEMENT
This License Agreement ("Agreement") dated as of July 31, 1998 (the
"Effective Date"), is by and between Engage Technologies, Inc., with offices at
100 Brickstone Square, Andover, Massachusetts, U.S.A. 01810 ("Engage") and
Engage Technologies Japan, Inc., with offices at Hitotsubashi 1-2-2, Chiyoda-ku,
Tokyo, Japan 100-8601, formerly known as Sumisho Mineral Resources Development
Co., Ltd. ("Provider").
WHEREAS, Engage is in the business of providing certain data services
useful for marketing on the Internet; and
WHEREAS, Provider desires to maintain and distribute, and Engage agrees to
permit Provider to maintain and distribute, such Engage data services in Japan
upon the terms and conditions set forth below.
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions.
-----------
"Customer" means a person or entity domiciled in the Territory that
--------
purchases a Product.
"Data Services" means the Engage proprietary Internet behavioral profiling
-------------
and marketing data services as is currently marketed by Engage as
"Engage.Knowledge", which services permit a Subscriber to access and use a
repository of data generated by user activity on the Internet.
"Know-How" mean all inventions (whether or not patentable), results,
--------
discoveries, improvements, know-how, techniques, materials, products, designs,
processes or other technology or intellectual property rights, including without
limitation the Technology, owned or controlled by Engage and reasonably useful
for the development, use and sale of the Data Services and Products in the
Territory.
"Mark" means the Engage proprietary trademark "Engage.Knowledge."
----
1
<PAGE>
"Product" means a report or analysis generated by Provider through use of
-------
the Technology.
"Provider Technology" means the Engage-proprietary computer software
-------------------
programs required for Provider to operate the Data Services which Engage
currently owns, controls or has the right to use and which Engage is currently
marketing as of the date hereof, which are: Journal Server, Link Server,
Knowledge DSS Engine, Knowledge Profile Engine, and Knowledge Report Engine, as
well as all updates, upgrades and revisions thereto, including the localized
versions thereof. In addition to the foregoing, in the event that Engage
intends to license any additional technology not included above in the Territory
for which Engage may have the right to so license, Engage shall so notify
Provider, and, if requested by Provider within 10 days of receipt of such
notification, shall negotiate for a period not to exceed 60 days the terms under
which such technology shall be added to this Agreement as Provider Technology.
If the parties fail to reach agreement on the addition of such technology
hereunder within such 60-day period, Engage shall be free to license such
technology to any third party; if an agreement is reached on such terms, such
technology shall additionally be Provider Technology under this Agreement.
"Subscriber" means any person or entity domiciled in the Territory that
----------
purchases a subscription to the Data Services.
"Subscriber Technology" means the Engage-proprietary computer software
---------------------
programs required for a Subscriber to utilize the Data Services which Engage
currently owns, controls or has the right to use and which Engage is currently
marketing as of the date hereof, which are: Journal Client and Link Client, as
well as all updates, upgrades and revisions thereto, including the localized
versions, if any, thereof. In addition to the foregoing, in the event that
Engage intends to license any additional technology not included above in the
Territory for which Engage may have the right to so license, Engage shall so
notify Provider, and, if requested by Provider within 10 days of receipt of such
notification, shall negotiate for a period not to exceed 60 days the terms under
which such technology shall be added to this Agreement as Subscriber Technology.
If the parties fail to reach agreement on the addition of such technology
hereunder within such 60-day period, Engage shall be free to license such
technology to any third party; if an agreement is reached on such terms, such
technology shall additionally be Subscriber Technology under this Agreement.
"Subscription Agreement" means an Agreement between Provider and a
----------------------
Subscriber pursuant to which Provider shall sell each subscription to its Data
Services, which agreement shall be substantially similar to the Engage.Knowledge
Agreement attached hereto as Exhibit A as modified by the terms of this
------------------------------------------
Agreement.
- ---------
2
<PAGE>
"Technology" means the Provider Technology and Subscriber Technology
----------
collectively.
"Territory" means Japan.
---------
2. Data Services.
-------------
2.1 Grant of Rights. Subject to the terms of this Agreement, Engage
---------------
grants Provider an exclusive, non-transferable right, without the right to grant
sublicenses except as permitted in Section 2.2, to take the following actions in
the Territory: (i) use the Know How, including the Technology, internally only
at Provider's principal sales office to construct and maintain a data repository
for the purposes of (a) marketing and selling to Subscribers subscriptions to
the Data Services and (b) marketing and selling Products to Customers; (ii) make
one copy of the Technology for back up and archival purposes; (iii) market,
distribute, sell and maintain the Subscriber Technology to and for Subscribers,
and (iv) use the Mark, as permitted in Section 5, solely for purposes of
marketing, distributing, selling and maintaining subscriptions to the Data
Services to Subscribers and Products to Customers. Provider shall not authorize
or appoint any third party as a subdistributor or other sales agent with respect
to the Data Services or Products except in accordance with Section 2.2.
2.2 Subdistributors. With the prior written consent of Engage (which
---------------
shall not be unreasonably withheld), Provider may sublicense its rights under
Section 2.1(iii)-(iv) to further the objectives set forth in this Agreement;
provided that (i) no subdistributor shall be permitted to use the Provider
Technology, or to construct or maintain a data repository, or offer Data
Services or Products, other than in association with the data repository and
Data Services of Provider, and (ii) each such subdistributor agrees to perform
the duties set forth in this Agreement listed below. Provider shall notify
Engage in writing of its intention to appoint any such subdistributor and the
subdistributor's proposed territory, and provide with such notification a full
description of the proposed appointee, including without limitation a
description of its existing territory, facilities, management, sales and
marketing personnel, clientele, product lines, including products or services
which might be competitive with the Data Services or Products, financial
resources, reputation in the marketplace, and any other factors relevant to the
capability of such appointee to effectively market and service the Data Services
and Products in the Territory. Provider shall execute an agreement with each
subdistributor under which the subdistributor is obligated to comply with the
provisions set forth in this Agreement to the extent applicable, including
without limitation those set forth in Sections 2.3, 2.4, 4.1, 5, 6, 8, 9.2 and
10-13. In addition, such agreement shall provide that (i) termination or
expiration of this Agreement shall automatically terminate such agreement, and
(ii) each subdistributor shall provide Provider with the records and right of
inspection set forth in Section 3.5. Provider shall at all times during the
term
3
<PAGE>
of this Agreement make its best endeavors to ensure that each subdistributor
complies with the terms of said agreement. If Provider becomes aware of any
violation of the agreement, it will immediately notify Engage, and Provider
shall take all reasonable steps as directed by Engage to stop such violation
and/or terminate such agreement. Provider shall remain primarily responsible to
Engage for all of its subdistributors' activities. Notwithstanding anything in
this Agreement to the contrary, no subdistributor shall have the right to grant
sublicenses with respect to the rights in Section 2.1.
2.3 Restrictions. Provider will not (and will not allow any third party
------------
to) (i) reverse engineer or attempt to discover any source code or underlying
ideas or algorithms of the Technology, (ii) modify, translate, or otherwise
create "Derivative Works" (as defined at 17 U.S.C. Section 101) of the
Technology or Know How, (iii) incorporate or embed the Technology, in whole or
in part, into another product or other computer software code, (iv) reproduce or
otherwise manufacture the Technology, (v) provide, lease, or lend the
Technology, (vi) allow the removal, alteration, covering or obscuring of any
copyright notice or any other notice or mark that appears on the Technology, on
any copies, or any media, or (vii) copy the Technology, except as expressly
permitted herein. Provider shall not solicit or accept any order for Data
Services or Products from a person or entity domiciled or located outside of the
Territory. Provider shall be fully responsible for the actions of each of its
employees and independent contractors with respect to the proper use and
protection of the Know How. All rights not expressly granted to Provider herein
in the Know How and Technology are reserved by Engage. There are no implied
rights.
2.4 Provider's Duties.
------------------
2.4.1 Marketing Efforts. Provider shall use its best efforts to
-----------------
construct, maintain and promote the distribution and use of the Data Services
and Products in the Territory. Provider shall have full freedom to establish
the price for subscriptions to the Data Services and sale of Products in the
Territory.
2.4.2 Organization. Provider shall maintain a sales organization of
------------
sufficient size and qualifications to promote the sale of subscriptions to the
Data Services and Products throughout the Territory.
2.4.3 Subscription Agreements. Provider shall not sell subscriptions
-----------------------
to the Data Services unless the Subscriber has signed and delivered to Provider
a Subscription Agreement. Provider shall sell, price and enforce the agreement
to use the Data Services in accordance with any restrictions set forth in the
applicable Subscription Agreement with respect to the permitted number of seats,
users, transactions, domain names or other specified parameters. In the event
that Engage modifies materially its current form of Engage.Knowledge Agreement
(attached
4
<PAGE>
hereto as Exhibit A), Provider shall, upon prior notification by Engage,
---------
promptly make corresponding modifications to the Subscriber Agreement. Engage
and Provider may mutually agree to change the Subscriber Agreement as
appropriate.
2.4.4 Enforcement of Licenses. Provider shall make its best
-----------------------
endeavors to enforce the terms of the Subscription Agreement and inform Engage
of any breach of such terms of which Provider becomes aware. Provider shall not
make any representations, warranties, or other statements regarding the Data
Services to any third party other than those contained in the documentation
supplied by Engage with the Data Services.
2.4.5 Marketing Materials. Provider shall submit to Engage for
-------------------
review any advertising, promotional or instructional materials relating to the
Data Services or Products (other than materials supplied by Engage) including
translations of Engage-provided materials, and shall not publish or distribute
any such materials without Engage's prior written approval. Provider further
agrees that Engage shall own all rights to and interests in any translation of
Engage-supplied materials and shall undertake any necessary action to perfect
such rights and interests. All such materials shall remain the sole and
exclusive property of Engage.
2.4.6 Maintenance Services. Provider shall be solely responsible for
--------------------
providing maintenance and support services to its Subscribers and
subdistributors for the Subscriber Technology.
2.4.7 Governmental Registrations and Import Permit. Provider shall
--------------------------------------------
be responsible, at its own expense, for obtaining all (i) governmental
registrations in the Territory required for the performance of this Agreement
(and shall provide translated copies of related documents to Engage), and (ii)
necessary export and import permits and certificates.
2.4.8 Leads. Provider agrees to advise Engage promptly of any
-----
license leads or potential customers for the Data Services or Products outside
of the Territory.
2.4.9 Competitive Services. Provider shall not, except with Engage's
--------------------
prior written consent, either directly or indirectly through a third party,
promote, market, sell, distribute, support or maintain any services reasonably
deemed by Engage to be similar to and competitive with the Data Services or
Products.
2.5 Engage Duties.
-------------
2.5.1 Initial Delivery of Technology. On the Effective Date, Engage
------------------------------
shall provide Provider with the Technology.
5
<PAGE>
2.5.2 Promotional Literature. At Provider's request, Engage shall
----------------------
supply without cost to Provider an initial allotment of Engage's standard
promotional literature (which are written in the English language) for the Data
Services, in accordance with Engage's standard policies. Engage agrees upon
request to provide additional copies of such promotional literature at Engage's
standard rates.
2.5.3 Maintenance Services. Engage shall provide only to Provider
--------------------
on-going localization, support, maintenance and up-grades to the Technology, the
cost of which shall be deemed included in the Royalties (as defined in Section
3.2) received under this agreement and shall not be paid separately.
3. Fees; Payments Terms.
--------------------
3.1 Initial Payment. In consideration of Engage's performance hereunder,
---------------
Provider shall pay to Engage a non-refundable payment in the amount of
$3,000,000 (the "Initial Payment"). Engage shall invoice Provider for this
amount on July 31, 1998, and Provider shall pay the amount on or before January
31, 1999. As soon as practicable after the date hereof Provider shall enter into
a forward exchange contract fixing the Yen/Dollar exchange rate for the initial
payment pursuant to the terms set forth in the first sentence of this Clause
3.1.
3.2 Ongoing Royalty. Provider shall pay Engage 11.11% of all revenues
---------------
received by Provider from sale of subscriptions to the Data Services, sale of
Products and use of the Know How in any manner (the "Royalty").
3.3 Payment Terms. Except as expressly provided otherwise, all payments
-------------
hereunder shall be made in U.S. dollars on a quarterly basis within thirty (30)
days from the end of each calendar quarter. Royalties payable on revenues
received shall be calculated by multiplying the royalty rate times the revenue
received and converting the resulting amount into United States dollars at the
rate quoted in the Wall Street Journal on the last business day of the quarterly
reporting period to which such royalty payments relate. Any payments more than
thirty (30) days overdue will bear a late payment fee of 1.5% per month, or, if
lower, the maximum rate allowed by law.
3.4 Tax.
---
3.4.1 Initial Payment. If Japanese withholding tax should become due
---------------
on Provider's payment to Engage of the Initial Payment, then Provider shall pay
such withholding tax, as well as any other duties, assessments and taxes
(exclusive of taxes
6
<PAGE>
on Engage's net income). Engage shall reimburse Provider Provider's payment of
any such withholding tax at such time as Engage is ensured of receiving a tax
credit against Engage's U.S. tax liability, and such reimbursement shall be
limited to the amount of any such credit realized by Engage.
3.4.2 Royalty. Provider shall deduct from amounts paid to Engage
-------
under Section 3.2 and pay Japanese withholding taxes. Provider shall pay any
other duties, assessments and taxes (exclusive of taxes on Engage's net income)
applicable to the rights and licenses granted hereunder, to the parties'
respective performance hereunder, or to this Agreement without offset to or
deduction in the amount due to Engage under Section 3.2. Engage shall reimburse
Provider Provider's payment of any such withholding tax at such time as Engage
is ensured of receiving a tax credit against Engage's U.S. tax liability, and
such reimbursement shall be limited to the amount of any such credit realized by
Engage.
3.5 Records; Inspection. Provider shall provide Engage with a written or
-------------------
electronic monthly report, in a mutually agreed upon format, which report shall
be sufficient to verify the sale of subscriptions to the Data Services and
Products and other revenue received, recorded or invoiced from the Know How
(including names and addresses of Subscribers and subdistributors). Upon
Engage's request, at mutually agreeable times, but in no event later than
fifteen (15) days following Engage's request, Engage or an agent or accounting
firm chosen by Engage shall be provided reasonable access during normal business
hours to the records of Provider for purposes of audit of fees, if any, due and
may make copies of such records. In addition, Provider will cooperate with
Engage's reasonable request for Provider to make such inspection with respect to
a subdistributor. Engage shall be provided a reasonable opportunity to
interview Provider's Subscribers and subdistributors and any employees who have
engaged in the marketing related to the Data Services in order to corroborate
the information contained in such records. If any such audit reveals an
underpayment of more than 5% with respect to amounts due in any fiscal quarter
of Provider, Provider shall pay the cost of Engage's audit.
4. Proprietary Rights.
------------------
4.1 Ownership of Know How. For purposes of this Agreement only, as
---------------------
between the parties, Engage and its suppliers have and shall retain all right,
title and interest in and to the Technology and Know How (subject to the
licenses granted herein), all copies, enhancements, improvements and Derivative
Works thereof (including revisions, updates, versions and releases), and all
other materials, including intellectual property rights therein whether existing
as of the Effective Date or created by Engage thereafter, subject to the rights
granted to Provider hereunder. Provider shall retain all right, title and
interest (subject to the licenses granted herein) to technology and data created
by Provider. In the event that Sumitomo Corporation or Provider (each an
"Inventing Party") creates a module or other functionality that
7
<PAGE>
may function independently from the Know How, such Inventing Party shall, at the
request of Engage, grant Engage a worldwide, royalty-bearing, perpetual license
to use and commercialize such module or functionality (i) outside of the
Territory and (ii) inside the Territory upon the termination or expiration of
this Agreement, subject to mutual agreement between the Inventing Party and
Engage on the additional terms and conditions governing such license.
4.2 Rights to Data.
--------------
4.2.1 Rights of Provider. Provider and Engage shall agree on
------------------
reasonable terms and conditions (including without limitation price) upon which
Provider shall be permitted to access and use, solely within the Territory, data
from Engage's proprietary data repository. The price for such access and use
shall be a reasonable cost plus nominal margin.
4.2.2 Rights of Engage. Provider hereby grants to Engage a paid-up,
----------------
royalty-free, worldwide, perpetual, irrevocable license to access, copy and use,
solely outside of the Territory, data from Provider's data repository.
5. Trademark License.
-----------------
Engage hereby grants to Provider the right in the Territory during the term
of this Agreement to use the name "Engage.Knowledge" (the "Mark") only on or in
connection with the Data Services and Products and Provider's advertising for
the Data Services and Products, provided that Provider shall: (i) only use the
Mark in the form and manner, and in accordance with the quality standards, that
Engage prescribes (and which it may change from time to time); (ii) at Engage's
request, submit samples of packaging and advertising to Engage for approval;
(iii) upon termination of this Agreement for any reason, immediately cease all
use of the Mark. All goodwill associated with the Mark and Provider's use of
such Mark shall inure to Engage. Provider shall not contest the validity of,
use, register or attempt to register, or take other action with respect to any
name, logo, trademark, service mark, or other identifier used anywhere in the
world by Engage (or a mark confusingly similar thereto), except to the extent
authorized in writing by Engage in advance. Provider's use of the Mark shall
clearly identify Engage as the owner of the Mark. Provider shall immediately
notify Engage of any potential infringement of the Mark of which Provider
becomes aware.
6. Confidentiality.
---------------
6.1 Confidential Information. The parties acknowledge and agree that
------------------------
during the course of performing their respective duties under this Agreement,
the parties may exchange confidential and proprietary information ("Confidential
Information"). Confidential Information shall include, without limitation, the
Know
8
<PAGE>
How, the terms of this Agreement, customer lists, trade secrets, product plans
and schedules, new product information, technical data and know-how,
instructional and operating manuals, financial information, marketing and sales
data and plans, and other oral and written information. Each party acknowledges
that the Confidential Information of the other party constitutes valuable trade
secrets of that party. Each party agrees, therefore, to preserve the
confidential nature of the other party's Confidential Information by retaining
such Confidential Information in strict confidence and using such Confidential
Information only as required to perform hereunder. Each party agrees to promptly
report to the other party any violations of these provisions by its employees,
consultants, or agents of which they are aware. Except as expressly permitted
under this Agreement, neither party shall use, copy, make, modify, display or
transmit the Confidential Information, in whole or in part, or cause or permit
any third party to do so, without the prior written consent of the other party.
A party shall have no duty of confidentiality under this Section 6.1 with
respect to information the receiving party can document: (a) is or has become
readily publicly available without restriction through no fault of the receiving
party or its employees or agents; (b) is received without restriction from a
third party lawfully in possession of such information and lawfully empowered to
disclose such information; (c) was rightfully in possession of the receiving
party without restriction prior to its disclosure by the other party; (d) was
independently developed by the receiving party without access to such
Confidential Information; or (e) was required to be disclosed by a court or
other governmental authority after reasonable notice is given to the other
party.
6.2 Equitable Relief. If either party breaches any obligation with
----------------
respect to the use or confidentiality of the Confidential Information, the other
party shall be entitled to equitable relief to protect its interests therein,
including without limitation preliminary and permanent injunctive relief in
addition to any other remedies it may have.
7. Term and Termination.
--------------------
7.1 Term. This Agreement shall commence as of the Effective Date and,
----
unless sooner terminated as set forth in Section 7.2, continue indefinitely.
7.2 Termination.
-----------
7.2.1 Termination for Cause. Either party may, at its option,
---------------------
terminate this Agreement if (i) the other party materially breaches a material
provision of this Agreement, (ii) such party gives the other party written
notice of such material breach (the "Default Notice") stating such party's
intention to terminate this Agreement, (iii) the other party fails to correct
such breach within thirty (30) days following its receipt of the Default Notice,
and (iv) such party gives the other party
9
<PAGE>
written notice of termination of this Agreement, which termination will be
effective upon its receipt.
7.2.2 Termination for Financial Distress. In the event that either
----------------------------------
party files a petition in bankruptcy, or has such a petition filed against it
that is not dismissed within thirty (30) days after filing, or is placed in a
receivership or reorganization proceeding or is placed in a trusteeship
involving an insolvency, or ceases doing business in the ordinary course, this
Agreement automatically shall terminate.
7.2.3 Additional Termination Rights. Engage may elect to terminate
-----------------------------
this Agreement immediately upon notice to Provider in the event that: (i) the
Shareholders Agreement between Engage and Sumitomo Corporation of even date
herewith (the "Shareholders Agreement") is terminated for a reason not
attributable to Engage, or (ii) Provider is liquidated or dissolved for any
reason, in which case termination of this Agreement shall be effected
immediately prior to Provider's duly authorized decision to liquidate or
dissolve and otherwise in such a manner as to comply with applicable law and the
objective of this Section 7.2.3, or (iv) Sumitomo Corporation has not, on or
prior to August 31, 1998, satisfied the conditions of Sections 2.2 and 2.3 of
the Shareholders Agreement and consummated an equity investment in Engage of no
less than $1,500,000 due to a reason solely attributable to Sumitomo.
7.2.4 Nonexclusive Remedy. Termination is not an exclusive remedy
-------------------
and all other remedies will be available whether or not termination occurs.
8. Effect of Termination.
---------------------
8.1 Consequences. Upon expiration or termination of this Agreement for
------------
any reason: (i) all licenses and other rights granted to Provider under this
Agreement will become null and void; (ii) each party will return all tangible
embodiments of Confidential Information, catalogs and sales literature in its
possession or control, or at the other party's option, destroy such materials
and provide the other party with a certificate signed by an executive officer
attesting to the destruction thereof; and (iii) all outstanding obligations or
commitments of either party to pay amounts to the other party, if any, will
become immediately due and payable. Each party understands that the rights of
termination hereunder are absolute. Notwithstanding the foregoing, upon the
expiration or termination of this Agreement (but not in the event of termination
of this Agreement due to a breach by Provider), Provider may retain and use
internally, solely for purposes of providing maintenance and support services to
Subscribers, a copy of the Technology if Provider is contractually obligated, as
of the effective date of termination or expiration, to provide such services;
provided, however, that (a) the foregoing right shall terminate earlier of (i)
expiration of the last such Subscriber agreement and (ii) one (1) year from the
date of
10
<PAGE>
such termination, and (b) Engage shall have no obligation to provide Provider or
its Subscribers with any maintenance or support services.
8.2 No Separation Compensation. Under no circumstances shall Engage be
--------------------------
liable to Provider or any of its subdistributors by reason of termination,
expiration or nonrenewal of this Agreement for indemnification, compensation,
reimbursement, or damages for loss of prospective compensation, goodwill or loss
thereof, or expenditures, investments, leases, or any type of commitment made in
connection with the business of such party or in reliance on the existence of
this Agreement including, but not limited to advertising and promotion costs,
costs of supplies, termination of employees, employee salaries, and other such
costs and expenses.
9. Indemnification.
---------------
9.1 Indemnification of Provider. Engage shall, at its expense, indemnify,
---------------------------
hold harmless and defend Provider from and against any and all damages, costs
and expenses, including reasonable attorneys' fees, incurred by Provider in
connection with a claim that the Technology, as delivered by Engage and used by
Provider within the scope of this Agreement, infringes any copyright, provided
that Provider notifies Engage promptly in writing of the infringement claim and
Engage has sole control over the defense or settlement of such claim and
Provider, at its expense, provides reasonable assistance in the defense of the
same. Notwithstanding the foregoing, in the event that an infringement is found
and continued use of the Technology is enjoined, Engage will, at its option and
expense, either: (i) procure for Provider the right to continue to use the
Technology; (ii) modify or alter the Technology so that it becomes non-
infringing; or (iii) replace the Technology with a non-infringing alternative.
If all of these options may only be exercised by Engage at an unreasonable cost,
then Engage may require Provider to immediately cease all use and distribution
of the Technology and terminate the Subscription Agreements under this Agreement
and pay to the Provider the Technology purchase fees that Provider paid to
Engage, less a portion for prior usage, amortized over a 3 year period.
Engage shall have no obligation to indemnify Provider with respect to any
claim based upon (i) any modification of the Technology by a party other than
Engage; (ii) the combination, operation or use of the Technology with a non-
Engage software program or data if the claim would have been avoided had such
combination, operation or use not occurred; or (iii) the use of other than the
latest release of the Technology, if such claim could have been avoided by use
of the latest unmodified release. Engage's obligation to indemnify Provider
will be reduced to the extent the damages could have been reduced by Provider's
use of the latest release.
9.2 Indemnification of Engage. Provider shall, at its expense, indemnify,
-------------------------
hold harmless and defend Engage from, and against any and all damages, costs and
expenses including reasonable attorneys' fees, incurred by Engage in connection
with
11
<PAGE>
any claim (i) against Engage by any Subscriber which relates to such
Subscriber's relationship with Provider or a subdistributor (and not to any
direct relationship which Engage may have with such Subscriber), (ii) arising
from the performance of the Data Services by Provider, or (iii) any
representation, promise, guarantee or warranty made or implied by Provider or a
subdistributor to the extent it exceeds or differs from those expressly set
forth in the documentation accompanying the Data Services EXCEPT as may be
attributed to Engage's failure to meet the representations, warranties,
covenants or other agreements herein or in the Shareholders Agreement:
10. Warranty and Disclaimer.
-----------------------
10.1 Warranty of Authority. Engage represents and warrants that it
---------------------
possesses the rights in the Know How to perform its obligations hereunder. The
representations and warranties contained in Clauses 22.2 and 22.4 of the
Shareholders Agreement shall apply in relation to the Technology as if they were
set forth in full herein for the benefit of Provider.
10.2 DISCLAIMER OF WARRANTIES. EXCEPT AS SET FORTH HEREIN OR IN THE
------------------------
SHAREHOLDERS AGREEMENT, ENGAGE MAKES NO WARRANTIES OR REPRESENTATIONS TO
PROVIDER OR ANY OTHER PERSON AS TO THE TECHNOLOGY, SOFTWARE OR ANY SERVICES
RENDERED WITH THE TECHNOLOGY OR SOFTWARE. ENGAGE DISCLAIMS ALL EXPRESS AND
IMPLIED WARRANTIES, ORAL OR WRITTEN, INCLUDING BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT
AND ANY WARRANTIES ARISING FROM COURSE OF DEALING, COURSE OF PERFORMANCE OR
USAGE OF THE TRADE.
10.3 Acknowledgment. Provider acknowledges that the Know How and
--------------
Technology have not been prepared to meet the individual requirements of
Provider or its Subscribers. It is the responsibility of Provider and its
Subscribers to ensure that the functions and facilities performed by the
Technology and Data Services meet the Subscriber's requirements.
11. Limitation of Liability.
-----------------------
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER
ENGAGE NOR ITS AFFILIATES SHALL BE LIABLE OR OBLIGATED WITH RESPECT TO THE
SUBJECT MATTER OF THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (I) FOR ANY AMOUNTS IN EXCESS IN
THE AGGREGATE OF THE FEES PAID TO IT HEREUNDER; OR (II) SPECIAL, CONSEQUENTIAL,
INCIDENTAL, RELIANCE, EXEMPLARY, OR INDIRECT DAMAGES (INCLUDING SUCH DAMAGES DUE
TO LOSS OF DATA, PROFITS,
12
<PAGE>
OR COMPUTER FAILURE) EVEN IF ENGAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
12. Export Control.
--------------
Provider shall comply with all applicable export laws and restrictions.
13. Miscellaneous.
-------------
13.1 Assignment. Provider shall not assign this Agreement (by operation
----------
of law or otherwise), or any rights or obligations hereunder, without the prior
written consent of Engage (and any attempt to do so shall be null and void).
Subject to the limitations above, this Agreement will mutually benefit and be
binding upon the parties, their successors and assigns.
13.2 Waiver. No waiver of any portion of this Agreement shall be
------
effective unless in writing. The failure of a party at any time to require
performance by the other party of any provision shall in no way affect the right
of such party to enforce that or any other provision of this Agreement. No
waiver of any breach of this Agreement shall constitute a waiver of any
subsequent breach of the same or any other provision of this Agreement.
13.3 Notices. All notices given pursuant to this Agreement shall be in
-------
writing sent prepaid by certified or registered mail or overnight express
service, with return receipt requested in each case. All notices sent by
certified mail shall be effective three days after being sent out provided that
a facsimile copy is contemporaneously sent. Notices sent by overnight express
service shall be effective as of the first business day following submission to
the overnight express delivery service. All such notices shall be directed to
the respective parties at the addresses set forth on the first page of this
Agreement unless either party notifies the other in writing of a new address.
13.4 Law and Jurisdiction. This Agreement shall be governed and
--------------------
interpreted in all respects by and according to the laws of the Commonwealth of
Massachusetts, U.S.A., excluding its choice of law provisions. It is the
express intent and agreement of the parties that the United Nations Convention
for the International Sale of Goods shall not apply to this Agreement or to
purchase orders thereunder. This Agreement is written in the English language.
13.5 Disputes. Any dispute, controversy or difference which may arise
--------
among the parties out of or in relation to or in connection with this Agreement
or for the breach thereof shall be amicably settled by consultation among the
parties. All such disputes, controversies and differences, if not settled
amicably, shall be finally settled by arbitration pursuant to the Rules of
Conciliation and Arbitration of the
13
<PAGE>
International Chamber of Commerce by three arbitrators appointed in accordance
with the said rules. In the event that the arbitration is sought by Engage, the
arbitration shall be held in Tokyo, Japan. In the event that the arbitration is
sought by Provider, the arbitration shall be held in Boston, Massachusetts,
U.S.A. The arbitration shall be in the English language. Notwithstanding the
foregoing, each party shall have the right to institute judicial proceedings
against the other party or anyone acting by, through or under such other party
in order to enforce the instituting party's rights hereunder through reformation
of contract, specific performance, injunction or similar equitable relief.
13.6 Compliance With Law. Each party shall at all times during the term
-------------------
of this Agreement perform its duties hereunder in accordance with all local,
state, federal and international laws and regulations, including without
limitation the Foreign Corrupt Practices Act of the United States. Provider
shall take all actions that are reasonably required to ensure that this
Agreement and the transaction contemplated hereby comply with all applicable
laws, regulations, rules or other legal and administrative requirements in the
Territory.
13.7 Independent Contractor. Provider agrees that it is an independent
----------------------
contractor and that this Agreement and relations between Engage and Provider
hereby established do not constitute a joint venture, agency or contract of
employment between them, or any other similar relationship. Neither party has
the right or authority to assume or create any obligation or responsibility on
behalf of the other.
13.8 Severability. If any provision of this Agreement shall be adjudged
------------
by any court of competent jurisdiction to be unenforceable or invalid, that
provision shall be limited or eliminated to the minimum extent necessary so that
this Agreement shall otherwise remain in full force and effect and enforceable.
13.9 English. This Agreement has been drafted and executed in the English
-------
language. In the event of any ambiguity between the English language version
and any translation into any other language, the meaning and intent contained in
the English language version shall prevail.
13.10 Entire Agreement. This Agreement, including Exhibit A attached
---------------- ---------
hereto, constitutes the complete and exclusive statement of the mutual
understanding of the parties relating to the subject matter hereof, and
supersede and cancel all previous written and oral agreements and communications
relating to the subject matter of this Agreement and said agreements.
13.11 Section Headings. Section headings are for convenience only and
----------------
shall not be considered in the interpretation of this Agreement.
14
<PAGE>
13.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be a
condition to effectiveness that each party shall have executed the same
counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized representatives as of the date first
written above.
ENGAGE TECHNOLOGIES, INC. ENGAGE TECHNOLOGIES JAPAN, INC.
By: /s/ Paul Schaut By: /s/ Makoto Shibahara
-------------------------------- -------------------------------
Name: Paul Schaut Name: Makoto Shibahara
------------------------------ -----------------------------
Title: CEO Title: President
----------------------------- ----------------------------
15
<PAGE>
EXHIBIT A
ENGAGE.KNOWLEDGE AGREEMENT
This Engage.Knowledge Agreement ("Agreement") is entered into as of _____
("Effective Date") by and between Engage Technologies, Inc. ("Engage") and
_____________ ("Licensee").
1. SCOPE OF AGREEMENT
This Agreement sets forth the terms and conditions governing Licensee's
subscription and/or contribution to Engage's Data Repository (as defined below).
By placing an "X" in the appropriate box(es) below, Licensee will elect to
subscribe and/or contribute to the Data Repository:
o Subscription o Contribution
2. DEFINITIONS
2.1 "Contributor" means a Licensee that has elected to contribute Visitor
Data to the Data Repository as set forth in Section 4.
2.2 "Data" means the past, present and future compilation of "clickstream"
data generated by user activity on the web, as well as such data itself, within
the Data Repository.
2.3 "Data Repository" means the proprietary global Data repository
compiled and maintained by Engage.
2.4 "Documentation" means the user information for the Software, in any
form or medium, provided by Engage to Licensee.
2.5 "Domain Name(s)" means the alphanumeric phrase(s) used by Licensee to
designate a particular site on the Internet or an intranet and identified on
Attachment 1.
- ------------
2.6 "Enterprise Server" means a computer server used by Licensee solely to
collect or combine information from or for one or more Local Servers.
2.7 "Local Server" means a computer server used by Licensee to host one or
more Domain Names.
2.8 "Personal Information" means the name, personal identity, phone
number, mailing address and social security number of a person.
16
<PAGE>
2.9 "Profile" means a set of Data associated with a unique web browser,
which Data provides a demographic and interest description of such web browser.
2.10 "Software" means the object code form of the Engage computer software
programs identified on Attachment 1 including any Updates that Engage provides
------------
to Licensee, as well as related Documentation.
2.11 "Specified Configuration" means the computer hardware and software
products specified in Attachment 1. Engage may change the Specified
------------
Configuration as required for operation of an Update by providing Licensee a
revised Attachment 1.
------------
2.12 "Subscriber" means a Licensee that has purchased a right to access and
use the Profiles in the Data Repository as set forth in Section 3.
2.13 "Update" means any update, version, release, revision or modified form
of the Software that Engage elects to make available at no additional charge to
licensees of the Software.
2.14 "Visitor Data" means any data generated by a web browser's http
requests and posts within a domain name served by a Contributor Enterprise
Server (or, if no Enterprise Server is in use, Local Server) that is collected
by Contributor using Engage software.
3. SUBSCRIPTION
This Section 3 governs Subscriber access to and use of the Data Repository,
and will apply to Licensee only if Licensee has elected (as indicated in Section
1) to subscribe to such Data Repository.
3.1 Grant of Rights. Subject to Subscriber's compliance with the terms
---------------
and conditions of this Agreement, Engage hereby grants to Subscriber a
nonexclusive, nontransferable worldwide right to request and be served Profiles.
Subscriber may use each Profile only for one "Session" (i.e., the period of time
commencing as of a web browser's initial http request within a Domain Name
served by an Enterprise Server (or, if no Enterprise Server is in use, a Local
Server) and concluding after such web browser has failed for 60 consecutive
minutes to make an http request within a Domain Name served by such Enterprise
Server or Local Server).
3.2 Restrictions. Use of a Profile other than as expressly permitted in
------------
Section 3.1 is prohibited, and all rights in the Profiles, Data, and Data
Repository are reserved by Engage; Subscriber has no implied rights. Without
limiting the generality of the foregoing, Subscriber will not (i) retain a
Profile or a copy of a Profile, in whole or in part, after conclusion of a
Session, (ii) use a Profile, through
17
<PAGE>
combination with other data or otherwise, to attempt to derive Personal
Information or associate Personal Information with a Profile, (iii) combine a
Profile with other information and store the results for later use, or (iv)
resell or transfer a Profile to a third party in return for anything of value.
Any violation of this Section 3.2 will constitute a material breach of this
Agreement.
3.3 Fees and Payment.
----------------
a. Subscription Fee. In consideration of the rights granted in
----------------
Section 3.1, Subscriber will pay to Engage monthly in advance the fee set forth
on Attachment 1 hereto ("Subscription Fee"). Payment of the Subscription Fee
------------
will entitle Subscriber to receive each month the number of Profiles specified
on Attachment 1; Subscriber shall pay Engage for any additional Profiles
------------
received in such month at the rate specified on Attachment 1. Upon the
------------
conclusion of the first three-month period of this Agreement and again upon the
conclusion of each three-month period thereafter during the term of this
Agreement (each a "Contract Quarter"), the Subscription Fee will be adjusted to
reflect a Profile usage level equal to eighty percent (80%) of the average
monthly number of Profiles received by Subscriber during the trailing Contract
Quarter. Engage may change the Profile "cost per mil" upon thirty (30) days
prior notice to Subscriber.
b. Contribution Discount. In the event that Subscriber has elected to
---------------------
contribute Visitor Data to the Data Repository, Subscriber will receive a
discount from the Subscription Fee in the amount set forth on Attachment 1.
------------
c. Payment. Subscriber will pay all fees due hereunder within thirty
-------
(30) days of the date of invoice. Engage reserves the right to impose a late
payment interest charge on amounts past due of 1.5% per month or, if lower, the
maximum rate permitted by law.
d. Taxes. Subscriber shall pay all taxes and government-imposed charges
-----
resulting from this Agreement or activities under this Agreement, excluding
taxes on Engage's net income.
3.4 Subscriber Obligations. Subscriber is solely responsible for its use
----------------------
of Profiles and represents and warrants to Engage that its use of Profiles will
be in compliance with all foreign, federal, state and local laws and
regulations. Subscriber will defend, indemnify and hold harmless Engage against
any third-party claims based on Subscriber's use of the Profiles.
18
<PAGE>
3.5 Access to Data Repository. Subscriber access to the Data Repository
-------------------------
shall be through the Internet or, at Subscriber's option and expense, through a
dedicated telecommunications line as further detailed in Attachment 1.
------------
4. CONTRIBUTION
This Section 4 governs Contributor provision of Visitor Data to Engage, and
will apply to Licensee only if Licensee has elected (as indicated in Section 1)
to contribute to the Data Repository.
4.1 Contribution of Visitor Data. In consideration of the Subscription
----------------------------
Fee discount set forth on Attachment 1, Contributor will deliver to Engage the
------------
Visitor Data from each Domain Name. The Software automatically will deliver the
Visitor Data from Contributor to Engage.
4.2 Engage Use of Visitor Data. Engage will not (i) collect or store
--------------------------
Personal Information, (ii) sell, report or transfer unprocessed Visitor Data
from Contributor to any third party, or (iii) aggregate or present Visitor Data
from Contributor in a form or manner that would permit a third party to (a)
identify any individual's Personal Information or identity, (b) identify the
data as originating from Contributor or (c) associate an individual with a
Profile.
4.3 Classification File. The Software includes a classification table
-------------------
permitting Contributor to map Visitor Data to predefined demographic and other
categories ("Classification File"). Contributor will actively maintain and
manage the Classification File in cooperation with Engage so that the
Classification File is accurate and comprehensive in its mapping of Visitor
Data. In the event that Engage reasonably believes that Contributor is failing
to meet the foregoing standard, Engage will notify Contributor or such failure
and, unless Contributor cures the failure within 30 days from such notification,
Engage may either cancel the Subscription Fee discount for contribution of
Visitor Data or terminate this Agreement.
5. PRIVACY POLICY
Licensee, whether a Subscriber or Contributor or both under this Agreement,
will at all times during the term of this Agreement establish, maintain and post
on each web site served by an Enterprise Server or Local Server a written policy
regarding the collection and use by Licensee of visitor information.
6. RIGHT TO USE SOFTWARE
6.1 License. Subject to the terms and conditions of this Agreement,
-------
Engage hereby grants to Licensee a royalty-free, personal, non-transferable
(except for temporary transfer for the limited duration of a CPU malfunction),
non-exclusive
19
<PAGE>
license to install and operate only on Licensee's premises in the U.S. the
Software solely for Licensee's own internal use on one or more Enterprise or
Local Servers hosting the Domain Name(s).
6.2 Restrictions. Licensee may use the Software only for the purpose of
------------
subscribing and/or contributing to the Data Repository. Without limiting the
foregoing, Licensee may not use the Software for the purpose of creating,
maintaining or operating an enterprise or any other data repository. Except as
expressly provided herein, Licensee shall not, and shall not permit others to,
use, modify, copy (except for one Licensee back-up copy containing Engage's
copyright notices and other proprietary marks), distribute, sublicense, assign,
use for service bureau purposes, share, timeshare, rent or otherwise transfer,
or decompile, disassemble, reverse engineer or otherwise attempt to derive the
source code form of the Software, in whole or in part. All rights not expressly
granted to Licensee are reserved by Engage. There are no implied rights.
6.3 Indemnification. Engage, at its expense, shall defend any action,
---------------
suit or proceeding brought against Licensee which alleges that the Software
infringes any U.S. copyright and Engage shall pay damages finally awarded
against Licensee; provided that Licensee promptly notifies Engage of the action
and gives Engage the opportunity, sole authority, information and assistance (at
Engage's expense) for control of the defense and settlement of the action; but
Engage shall not be responsible for any legal costs incurred or settlement made
without notice and its consent. Engage may, at its sole option and at its
expense, either: (i) replace or modify the Software to make it non-infringing
without material impairment of its functionality; (ii) obtain for Licensee the
right to continue using the Software, or (iii) terminate this Agreement. Engage
shall have no liability for any infringement or claim thereof based upon: (a)
the combination of the Software with products not provided by Engage, or (b)
modification or alteration of the Software by any person or entity other than
Engage. THIS SECTION STATES ENGAGE'S SOLE LIABILITY WITH RESPECT TO
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
6.4 Maintenance Services. Subject to the terms and conditions of this
--------------------
Agreement, Engage will provide Licensee with the Software maintenance services
set forth in Attachment 1 during the term of this Agreement.
------------
7. PROPRIETARY RIGHTS AND CONFIDENTIALITY
7.1 Proprietary Rights. As between Engage and Licensee, Engage will own
------------------
all right, title and interest in and to the Profiles, Data, Visitor Data, Data
Repository and Software, as well as all intellectual property and proprietary
rights therein.
20
<PAGE>
7.2 Visitor Data. Contributor hereby assigns, and agrees to assign in the
------------
future, to Engage and its successors and assigns, all right, title and interest
in and to the Visitor Data, as well as all intellectual property rights therein.
From time to time upon the request of Engage or its successor or assign,
Contributor will make such further assignments and confirm such assignments by
execution and delivery of such assignments, confirmations of assignment, or
other written instruments as Engage may reasonably request in order to
effectuate this Section 7.2.
7.3 Confidentiality. Licensee acknowledges and agrees that (i) the Data,
---------------
Profiles, Documentation and the design, operational methods and coding of the
Software (collectively "Confidential Materials") are not generally known to, or
readily ascertainable by, the public, (ii) Engage uses all reasonable efforts on
a consistent basis to prevent the acquisition, disclosure or use of the
Confidential Materials without the specific consent of Engage, (iii) Engage
derives substantial economic value from the secrecy of the Confidential
Materials, and (iv) acquisition, disclosure or use, beyond the limited extent
permitted herein, of the Confidential Materials would cause significant damage
to Engage's business. Accordingly, Licensee agrees to hold the Confidential
Materials in strict confidence and not to disclose the Confidential Materials to
any third party without the prior consent of Engage.
7.4 Equitable Relief. Licensee acknowledges that the unauthorized
----------------
disclosure or use of the Confidential Materials other than as expressly set
forth herein will (i) substantially diminish the value to Engage of the
Confidential Materials and (ii) cause irreparable injury in a short period of
time, and that Engage's remedy at law for such unauthorized disclosure or use is
inadequate. Accordingly, if Licensee breaches any of its obligations with
respect to the confidentiality or use of the Confidential Materials, Engage will
be entitled to equitable relief to protect its interests therein, including, but
not limited to, preliminary and permanent injunctive relief, in addition to any
other remedies it may have, without the necessity of posting bond.
8. LIMITED WARRANTY
8.1 Data. Engage will use commercially reasonable efforts to promptly
----
serve to Subscriber Profiles matching Subscriber requests.
8.2 Software. Engage warrants that the Software, if operated on the
--------
Specified Configuration will function in material conformity with the related
Documentation for a period of ninety (90) days from shipment (the "Warranty
Period"). Receipt by Engage of a written claim under this limited warranty must
occur within such period as a condition of this limited warranty. Engage does
not warrant that the Software will be error free or that all errors and defects
can or will be remedied. Engage's entire liability and Licensee s exclusive
remedy under this warranty shall be for Engage to make commercially reasonable
efforts to remedy in a
21
<PAGE>
commercially reasonable manner any material nonconformance reported by Licensee
in writing within the Warranty Period, which obligation may be discharged by
modifying erroneous Documentation.
8.3 LIMITATION. THE LIMITED WARRANTY STATED IN THIS SECTION 8 AND THE
----------
REMEDIES SET FORTH HEREIN ARE EXCLUSIVE AND IN LIEU OF ALL OTHERS WITH RESPECT
TO THE PROFILES, DATA, VISITOR DATA, DATA REPOSITORY AND SOFTWARE, AND ENGAGE
AND ITS LICENSORS HEREBY DISCLAIM ALL OTHER WARRANTIES, REPRESENTATIONS, AND
CONDITIONS, ORAL OR WRITTEN, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING
WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT.
9. LIMITATION OF LIABILITY AND REMEDIES
9.1 ENGAGE'S LIABILITY FOR ANY CAUSE WHATSOEVER ARISING UNDER THIS
AGREEMENT, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR TORT,
INCLUDING NEGLIGENCE, SHALL BE LIMITED TO THE TOTAL AMOUNT PAID TO ENGAGE UNDER
THIS AGREEMENT IN THE CALENDAR YEAR IN WHICH THE EVENT GIVING RISE TO SUCH
LIABILITY FIRST OCCURRED. LICENSEE RECOGNIZES THAT THE FEES HEREUNDER ARE BASED
IN PART ON THE LIMITED WARRANTY AND LIMITATION OF LIABILITY AND REMEDIES SET
FORTH ABOVE.
9.2 IN NO EVENT WILL ENGAGE OR ITS LICENSORS BE LIABLE FOR ANY (a) DAMAGES
CAUSED BY LICENSEE'S FAILURE TO PERFORM LICENSEE OBLIGATIONS, (b)INDIRECT,
INCIDENTAL, SPECIAL, RELIANCE, EXEMPLARY, COVER OR CONSEQUENTIAL DAMAGES,
INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST SAVINGS OR LOST DATA, EVEN IF
ENGAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, (c) CLAIMS AGAINST
LICENSEE BY ANY THIRD PARTY EXCEPT AS PROVIDED IN SECTION 6.3, (d) CLAIMS,
WHETHER IN CONTRACT OR TORT, THAT AROSE MORE THAN ONE (1) YEAR PRIOR TO
INSTITUTION OF SUIT THEREON, OR (e) DAMAGES, INCLUDING PRODUCT LIABILITY
DAMAGES, CAUSED BY ANY NON-ENGAGE PRODUCT.
10. TERM AND TERMINATION
10.1 Term. This Agreement will commence as of the Effective Date and
----
continue in effect for an initial term of one (1) year, and thereafter will
renew automatically for successive one (1) year terms unless either party elects
not to renew the Agreement by providing written notice thereof to the other
party no later than ninety (90) days prior to the date of expiration of the
then-current term. A Subscriber
22
<PAGE>
may at any time elect to also become a Contributor hereunder, in which case the
term of the Contribution services will be commensurate with the then-current
term of the Subscription services, and the Subscription Fee will be adjusted in
accordance with Section 3.3(b).
10.2 Termination of the Agreement. Either party may terminate this
----------------------------
Agreement in the event of a material breach of any provision this Agreement that
is not cured within thirty (30) days of receipt of written notice thereof from
the other party; provided that such cure period will be ten (10) days in the
event of a material breach of Sections 3.1, 3.2, 6.1, 6.2 or 7.
10.3 Effect of Termination. Upon termination or expiration of this
---------------------
Agreement, (i) each party will promptly pay to the other any amounts due and
owing, (ii) all of Licensee's rights to use the Software and access the Data
Repository shall automatically terminate, and Licensee shall cease use of all
Software and access to the Data Repository and immediately either return or
destroy (with the written certification of an officer of destruction) all copies
of the Software, in whole or in part, and (iii) Licensee shall promptly return
to Engage all tangible embodiments of Confidential Materials in its possession.
Sections 3.2, 3.3(c)-(d), 3.4, 4.2, 6.2, 7, 9, 10.3, and 11 of this Agreement
will survive termination or expiration of this Agreement.
11. GENERAL
11.1 Export Control. Licensee acknowledges that the export of any Software
--------------
is or may be subject to export or import control and Licensee agrees that any
such items or the direct or indirect product thereof will not be exported (or
re-exported from a country of installation) directly or indirectly, unless
Licensee obtains all necessary licenses from the U.S. Department of Commerce or
other agency as required by law.
11.2 Assignment. Licensee may not sublicense, assign (by operation of law
----------
or otherwise) or otherwise transfer this Agreement or any license or any right,
duty or obligation under this Agreement without Engage's prior written consent,
and any attempt to do so shall be null and void. Engage shall not unreasonably
withhold its consent to the assignment of this Agreement by Licensee to an
affiliate, to its successor in connection with a merger, acquisition or
consolidation, or to the purchaser in connection with the sale of all or
substantially all of Licensee's assets.
11.3 No Waiver. Failure or delay by either party to exercise any right or
---------
remedy under this Agreement shall not constitute a waiver of such right or
remedy.
11.4 Entire Agreement. This Agreement, including Attachment 1 hereto
---------------- ------------
constitutes the entire agreement between the parties with respect to the subject
matter hereof. Different or additional terms contained in purchase orders,
other documents
23
<PAGE>
supplied by Licensee, and all other communications, both oral and written,
between the parties relating thereto, shall not apply. Except as set forth in
Section 2.11, this Agreement may only be modified by a mutually agreed signed
amendment that expressly references this Agreement and is executed by duly
authorized representatives of the parties and attached hereto.
11.5 Severability. If any provision or portion of this Agreement is held
------------
to be unenforceable or invalid, the remaining provisions and portions thereof
shall nevertheless be given full force and effect, and the parties agree to
negotiate, in good faith, a substitute valid provision which most nearly effects
the parties' intent in entering this Agreement or attached Schedule.
11.6 Force Majeure. Excluding the payment of money, neither party will be
-------------
deemed in default of any obligation hereunder nor be liable for any failure or
delay in performance which results directly or indirectly from any cause beyond
its reasonable control, including without limitation, "Acts of God", delays or
failures in the Internet or related carriers and third party equipment, acts of
civil or military authority, strikes, fire, theft, delays by suppliers, or
action or inaction by the other party or any third party.
11.7 Independent Contractors. Nothing in this Agreement shall be construed
-----------------------
to imply a joint venture, partnership or agency relationship between the
parties; Engage shall be considered an independent contractor when performing
any Services under this Agreement.
11.8 Notices. Any written notice required to be provided pursuant to this
-------
Agreement shall be deemed given (a) if by hand delivery, upon receipt hereof or
(b) if mailed, three (3) days after deposit in the U.S. mails, postage prepaid,
certified mail, return receipt requested. All notices shall be addressed to the
parties at the respective addresses indicated herein.
11.9 United States Government Restricted Rights. The Software is provided
------------------------------------------
with restricted rights. Use, duplication, or disclosure by the U.S. government
or any agency or instrumentality thereof is subject to restrictions as set forth
in subparagraphs (a) through (d) of the Commercial Computer - Restricted Rights
clause at FAR 52.2227-19 when applicable, or subparagraph (c)(i)(ii) of the
Rights in Technical Data and Computer Software Clause at 48 C.F.R. 52.227-19,
and in similar clauses in the NASA FAR Supplement as applicable. Manufacturer
is as set forth initially above.
11.10 Governing Law. The laws of the Commonwealth of Massachusetts shall
-------------
govern this Agreement, excluding its choice of laws provisions. The U.N.
Convention on the International Sale of Goods shall not apply to this Agreement.
With respect to all claims or actions related to this Agreement, Licensee waives
all objections to the
24
<PAGE>
personal jurisdiction of and venue in the appropriate federal, state and local
courts in the Commonwealth of Massachusetts.
11.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives.
ENGAGE TECHNOLOGIES, INC. LICENSEE
Signature Signature
Name: Name:
Title: Title:
25
<PAGE>
Attachment 1
------------
1. Section 2.5 - Domain Name(s):
----------------------------
2. Section 2.10 - Software:
-----------------------
3. Section 2.11 - Specified Configuration:
--------------------------------------
Hardware:
--------
Software:
--------
4. Maintenance Services:
--------------------
Engage will provide Licensee with the following maintenance services for
the Software ("Maintenance Services"). The Maintenance Services will be
provided only for the current release of the Software.
Telephone Support:
. Engage shall provide Licensee telephone support for answers to
specific questions and guidance in diagnosing suspected Software
problems between 8:00 a.m. and 5:00 p.m. (Eastern Standard Time)
Monday through Friday excluding Engage holidays (the "Contract
Hours"). Licensee may designate up to four (4) employees as contacts
for such service. Engage shall not be obligated to respond to
telephone calls from persons other than the four (4) designated
employee contacts. Telephone support does not include training of
Licensee's staff or consulting services or non-Software matters.
. Licensee may call to report Errors in the Software and request Error
response. Engage shall verify receipt of such requests and assign an
appropriate priority classification. Depending on the classification,
Engage will either:
a) provide a software solution or workaround;
b) provide an avoidance procedure;
c) address the request in the next revision/iteration; or
d) discuss with Licensee possible custom professional
services to resolve Licensee's request.
. Emergency telephone support is available outside of Contract Hours
solely for reporting of Errors that render the following Software
products unusable or the use thereof commercially infeasible. Engage
will make every reasonable effort to return such emergency calls
within two (2) hours of receipt. Emergency calls are initiated through
the standard Engage telephone support number.
. Engage will make every reasonable effort to respond to Licensee's
calls within four (4) Contract Hours.
Error Response:
. Consistent with the priorities set forth above, Engage shall use
commercially reasonable efforts to address verifiable and reproducible
Errors reported by Licensee to Engage so that the Software functions
in material conformity with the Documentation and/or erroneous
Documentation is corrected. The parties acknowledge that, despite
Engage's performance in accordance with this Agreement, not all Errors
can or will be remedied.
. If Engage is unable by remote telephone support to address an Error
as specified above, then Engage, at its sole discretion, may dispatch
a software engineer to the site to address the Error using
commercially reasonable efforts. Dispatch shall be within twenty four
(24) hours after Engage has determined at its sole discretion that
telephone assistance is not sufficient. If Licensee requests an
on-site Software support visit and Engage determines that the reported
problem is not the responsibility of Engage, then Licensee, in
addition to reimbursing Engage's expenses, shall be charged for the
service call on a time and materials basis plus a surcharge.
26
<PAGE>
Updates:
. From time to time during the term of this Agreement, Engage shall
provide Licensee with Updates.
27
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Exhibit 10.11
-------------
EXCLUSIVE STRATEGIC ALLIANCE AGREEMENT
between
Engage Technologies, Inc. and ADSmart Corporation
and
Cross Beam Networks Corporation
January 7, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF CONTENTS.......................................................... 2
1. DEFINITIONS........................................................... 3
2. LOCALIZATION OF SYSTEM................................................ 5
3. LICENSE OF LOCALIZED SYSTEM........................................... 6
4. MARKETING AND DISTRIBUTION OBLIGATIONS OF XBEAM....................... 8
5. MARKETING AND DISTRIBUTION OBLIGATIONS OF ADSMART..................... 9
6. COMPENSATION.......................................................... 12
7. REPRESENTATIONS AND WARRANTIES........................................ 14
8. LIMITATION OF LIABILITY............................................... 15
9. PROPRIETARY RIGHTS.................................................... 15
10. INDEMNIFICATION....................................................... 17
11. CONFIDENTIAL INFORMATION.............................................. 18
12. TERM AND TERMINATION.................................................. 19
13. MISCELLANEOUS......................................................... 21
</TABLE>
SCHEDULES
Schedule A --Description of ADSmart System
Schedule B --ADSmart Marks
Schedule C --This Page Left Intentionally Blank
Schedule D --Error Correction
Schedule E --Implementation Timeline
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXCLUSIVE STRATEGIC ALLIANCE AGREEMENT
THIS EXCLUSIVE STRATEGIC ALLIANCE AGREEMENT (the "Agreement"), dated as of
January 7, 1998 (the "Effective Date"), is by and between Engage Technologies,
Inc., with offices at 100 Brickstone Square, Andover, MA, USA 01810 ("Engage")
and ADSmart Corporation, with offices at 100 Brickstone Square, Andover, MA, USA
01810 ("ADSmart"), sister companies under common management, and Cross Beam
Networks Corporation, with offices at 1-32-2 Harmony Tower 14F Honcho, Nakano-
ku, Tokyo, 100 Japan ("Xbeam").
WHEREAS, ADSmart has developed and operates a system for the sale and
distribution of advertisements on the World Wide Web (the "Web"); and
WHEREAS, Xbeam desires to operate on an exclusive basis within a limited
territory a version of such system localized for the Japanese market, and
ADSmart agrees to grant Xbeam such rights and develop such localized version on
the terms and conditions set forth below.
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
As used herein, the following capitalized terms shall have the meanings set
forth below.
1.1 "Ad Services" means the provision by Xbeam, solely in conjunction with
ADSmart's provision of Interim System Services as set forth in Section 5.1 or
Xbeam's use of the Localized System pursuant to Section 3, to Customers who are
advertisers and ad agencies, of the following advertisement sales and management
services, which are similar to the services provided by ADSmart to its network
of Web sites: Web media placement services, campaign-based ad serving and
management services, sales representation (including site promotion to
advertisers and agencies, audience promotion to advertisers and agencies,
proposal generation, client support, campaign and revenue reporting, overall
marketing and branding of the network of Xbeam affiliated Web sites) and
management services (including order entry and provision of sales automation for
a site's sales force, creative management and approval, ad serving and
targeting, client support, campaign reporting and billing and collections).
3
<PAGE>
1.2 "Affiliate" means any person or entity directly or indirectly
Controlling, Controlled by or under common Control with either party, as the
context may require. "Control" shall mean an ownership interest of more than
fifty percent (50%).
1.3 "Confidential Information" means, subject to the limitations set forth
in Section 11 of this Agreement, any written or visual, technical, trade secret
or business information of either party hereto or an Affiliate (the "Disclosing
Party") which is confidential or proprietary in nature and specifically
designated as confidential or proprietary or, where orally or visually
disclosed, reduced to writing by the Disclosing Party within three (3) days
after the disclosure, including, without limitation, the following: business
plans and/or strategy, the System and the Localized System, in whole or in part,
business activities (past, present and future), pricing, financial information,
product development, customer information and the terms and conditions of this
Agreement.
1.4 "Customer" means a person with a primary residence, or an entity with
a principal place of business or corporate headquarters, in the Territory that
purchases Ad Services from Xbeam as contemplated hereunder.
1.5 "Derivative Works" means works that are based upon the System and
Localized System, in whole or in part, such as a revision, modification,
translation, abridgment, condensation, expansion, or any other form in which the
System or Localized System may be recast, transformed, or adapted, and which, if
prepared without authorization of the owner of the copyright in the System or
Localized System would constitute a copyright infringement.
1.6 "Documentation" means the administrator and user documentation of
software and processes, provided in hard copy or electronic on-line format,
required for the intended and proper use of the System or the Localized System,
as the context may require.
1.7 "Enhancements" means new features added to the System or Localized
System.
1.8 "Error" means a Class 1, Class 2 or Class 3 error, as defined in
Schedule D
- ----------
1.9 "Internationalized System" means the core code base which is double
byte enabled or further enhanced and which supports the System to be localized.
1.10 "Localized System" means the version of the System localized pursuant
to Section 2 for use solely in the Territory.
1.11 "Proprietary Materials" has the meaning set forth in Section 10.1.
4
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
1.12 "Revenues" means the [**] that Xbeam or AdSmart, as applicable,
charges a customer for Ad Services and/or management services, less (i) an
agency discount (typically [**] percent), if applicable, and (ii) the amount(s)
paid by Xbeam and AdSmart, as applicable, to the Web site(s), if any, on which
ads were placed.
1.13 "System" means the ADSmart proprietary materials, techniques,
processes and know-how, including computer software, Documentation and related
materials, as further described in Schedule A.
----------
1.14 "Term" has the meaning set forth in Section 12.
1.15 "Territory" means the country of Japan.
2. LOCALIZATION OF SYSTEM.
2.1 ADSmart Obligations. With the assistance and cooperation of Xbeam as
-------------------
set forth in Sections 2.2, 2.3 and 2.4, ADSmart shall according to schedule as
set forth in Schedule E use best efforts to localize the System and deliver the
System and Localized System to Xbeam, and provide updates and revisions thereof
on an ongoing basis, including double byte-enablement, user interface,
translation of user interface and end user documentation and modification of
operational policies and procedures. ADSmart shall be solely responsible for the
Localized System and System, excluding all contributions solely by Xbeam.
2.2 Xbeam Obligations. Xbeam shall use vigorous and diligent efforts to
-----------------
provide ADSmart assistance required for ADSmart to comply with its obligations
under Section 2.1, including advising ADSmart on the legal, cultural and other
requirements for the Localized System and providing ADSmart the financial and/or
personnel resources available for Xbeam and agreed by parties for reduction of
the amount of the costs pursuant to Section 2.5.
2.3 Testing of Localized System. Upon initial completion of the Localized
---------------------------
System, ADSmart shall provide one (1) copy of the Localized System and (1) copy
of the Documentation thereof to Xbeam to be used solely for testing purposes and
not for any productive or other use. Xbeam shall test the Localized System, and,
in accordance with Schedule D, shall promptly report to ADSmart any substantial
----------
Errors related to the Localized System. ADSmart shall address such Errors as set
forth in Schedule D.
----------
2.4 Receipt of Localized System for service by Xbeam. After successful
------------------------------------------------
testing of the Localized System according to operational criteria to be mutually
5
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
established and accepted by the parties, Xbeam shall submit to ADSmart written
certification of acceptance of the Localized System.
2.5 Costs and Expenses of Localization Efforts. The parties shall share
------------------------------------------
equally the cost and expense incurred by ADSmart in internationalizing and
localizing the System, both initially and applicable to later new releases (the
"Expenses") provided that Xbeam's share of the Expenses shall not exceed [**]
payable on a monthly basis as expenses are accrued ("Xbeam's Share") the ADSmart
sends invoices to Xbeam with proper voucher. Notwithstanding the foregoing
provision, the amount of the costs borne by Xbeam shall, after prior agreement
by both parties, be reduced if Xbeam provides engineering resources for
localization. The amount of the reduction shall be decided based on the amount
of the engineering resources provided by Xbeam as agreed by parties before Xbeam
provides engineering resources. Xbeam shall not be required or obliged to bear
any costs other than those of internationalization and localization of the
System for Japan pursuant to this provision.
Xbeam's payment, or reimbursement, of monies to ADSmart pursuant to this
Section 2 shall be in accordance with Section 6.4.
2.6 Localization of On-Going Features and Enhancements. Xbeam agrees to
--------------------------------------------------
share equally the costs and expense incurred by ADSmart for any on-going
features and enhancements, which have not been developed and planned to be
developed for US market, to the System and Localized System required
specifically for the Japanese market.
3. LICENSE OF LOCALIZED SYSTEM.
3.1 Grant of Rights. Provided that Xbeam timely pays all fees due ADSmart
---------------
hereunder and otherwise complies with the terms of this Agreement during the
term of this Agreement, ADSmart grants to Xbeam a non-transferable, exclusive
right, with the right of sublicence to the joint venture when established by
Xbeam and ADSmart and/or third parties which Xbeam shall be free to select
subject to AD Smart's prior approval, such approval not being unreasonably
withheld, (provided that in the joint venture Sumitomo Corporation has a
controlling interest in the joint venture and Xbeam shall create a joint venture
with no more than one (1) ad network at any one time), for the operation of the
System or Licensed System in Japan to use only internally the object code
version of the System, subject to Section 5.1, and the Localized System solely
for the purpose of performing Ad Services in the Territory for Customers, and
not for internal advertising purposes or for Affiliates, unless Xbeam shall
compensate ADSmart for such uses as provided in Section 6.1. Xbeam
6
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
may make two (2) back-up copies of the Localized System. Prior to the
completion, testing and delivery of the Localized System as set forth in Section
2, ADSmart shall provide Xbeam with the System services set forth in Section 5.1
so that Xbeam can market and sell Ad Services in the Territory on an interim
basis.
3.2 Restrictions. Xbeam may not use the System or Localized System for
------------
any purpose other than that specified in Section 3.1. Xbeam shall not, and shall
not permit any employee, contractor or other third party to, use, modify, copy,
disclose, publish, distribute, assign, sublicense, sell, rent, lease, transfer,
reverse engineer, disassemble, decompile, dispose of, or use for "outsourcing"
or "service bureau" purposes the System or Localized System, in whole or in
part, except as specifically permitted herein. Xbeam has the right to request
modifications to the Oracle database tables and ADSmart shall respond to such
enhancement requests as specified in Schedule D or give approval to modify to
Xbeam. All of Xbeam's rights to use the System and Localized System are
expressly stated herein; there are no implied rights and ADSmart reserves all
rights not expressly granted to Xbeam. All clickstream data collected by Xbeam
in furtherance of this Agreement shall be used by Xbeam only for the purpose of
(i) the targeting of AdSmart ads in the Territory and (ii) providing consulting
services to AdSmart customers in the Territory by analyzing the clickstream data
using software tools licensed from Engage.
3.3 Misuse of System or Localized System. Xbeam shall provide ADSmart
------------------------------------
with written notice of any material breach of this Agreement, including any
misuse of the System or Localized System by Xbeam, where misuse is defined as
any usage beyond that specified in Section 3.2 or expressly authorized under the
terms and conditions of this Agreement (hereafter 'Misuse'), excluding with
ADSmart's prior approval, such approval shall not be unreasonably withheld,
including but not limited to (i) copying, sale, rental, distribution or
repackaging of the System, Localized System and clickstream data in any form;
(ii) use of the System, Localized System or clickstream data for sites outside
the ADSmart network in the Territory; (iii) use of the System, Localized System
or clickstream data with software tools other than those provided by ADSmart and
Engage; and (iv) operating the System, Localized System and clickstream data on
hardware and software platforms not certified by ADSmart or Engage; and (v)
modifying Oracle database tables for the System or Localized System. If Xbeam
materially breaches the terms of this Agreement or if Xbeam Misuses the System
or Localized System and such breach or Misuse is not cured within thirty (30)
days after written notice thereof from Xbeam, ADSmart shall have no further
obligation with respect to any warranty, support or maintenance of the part of
the System or Localized System, and, notwithstanding any provision to the
contrary herein, Xbeam shall not be entitled to a refund of any amounts paid to
ADSmart and shall discontinue all Ad Service operations in Japan.
3.4 Equitable Relief. Xbeam acknowledges that the Misuse of ADSmart's
----------------
System or Localized System will substantially diminish the value to ADSmart of
the System and/or Localized System and cause irreparable injury in a short
period of
7
<PAGE>
time, and that ADSmart's remedy at law for such Misuse is inadequate.
Accordingly, if Xbeam materially breaches any of its obligations with respect to
the use of the System or Localized System, ADSmart shall be entitled to
equitable relief to protect its interests therein, induding, but not limited to,
preliminary and permanent injunctive relief, in addition to any other remedies
it may have.
3.5 Marketing and Sale of Xbeam Ad Services. The parties respective
---------------------------------------
obligations regarding the marketing and sale of the Ad Services are set forth in
Sections 4 and 5.
4. MARKETING AND DISTRIBUTION OBLIGATIONS OF XBEAM.
With respect to marketing and sale of Ad Services, Xbeam shall have the
following obligations:
4.1 Market Development. Xbeam shall, at all times during the Term, use
------------------
its best efforts to develop the market for the Ad Services and to sell the Ad
Services in the Territory in a vigorous and diligent manner which shall
favorably reflect upon ADSmart's name, trademarks and the quality of its System
and Localized System.
4.2 Advertising and Promotion. Xbeam shall use its efforts through its
-------------------------
sales and merchandizing programs to advertise and promote the Ad Services
throughout the Territory in an adequate manner. Xbeam shall be responsible for:
(i) the distribution of all advertising and promotional materials provided to
Xbeam by ADSmart; (ii) the translation of such materials as well as all
instructional materials provided to Xbeam by ADSmart, as necessary to meet legal
and marketing requirements; and (iii) the distribution of advertising and
promotional materials, at Xbeam's expense, as appropriate in fulfilling its
obligations hereunder to develop the market for the Ad Services. For the
foregoing, ADSmart shall furnish to Xbeam, at no cost, with a reasonable
quantity of advertising, promotional and instructional materials, including
catalogues, quotation sheets, specifications and technical data in an electronic
on-line format. All advertising, promotional and instructional materials not
supplied by ADSmart, including any translations of any English-language
materials provided by ADSmart, must be approved in writing by AD Smart prior to
use. Xbeam further agrees that ADSmart shall own all rights to and interests in
any such translation of materials and shall undertake any necessary action to
perfect such rights and interests. All such materials shall remain the sole and
exclusive property of ADSmart and, except insofar as they are distributed by
Xbeam in the course of its performance of its duties under this Agreement, must
be promptly destroyed in accordance with Section 12.7 hereof upon the expiration
or termination of this Agreement.
4.3 Xbeam Prices. Xbeam shall be free to establish its own pricing for Ad
------------
Services that it sells. Xbeam shall notify ADSmart of its pricing, as in effect
from time to time.
8
<PAGE>
4.4 Facilities and Staff. Throughout the term of this Agreement Xbeam
---------------------
shall maintain the facilities and a staff of competent sales, marketing,
technical and support personnel reasonably necessary to properly market, service
and support the Ad Services in the Territory. ADSmart shall not be responsible
for any performance failures significantly due to Xbeam's facilities or staff.
Xbeam shall be solely responsible for upgrades required by any third party
hardware, software and communications systems listed in Schedule A as well as
----------
staying current on all third party hardware, software and communications systems
listed in Schedule A. If the equipment, staff, facilities and personnel are not
----------
sufficient for ADSmart to fulfill its obligations then the penalty in Section
6.2 will not be applied.
4.5 Training. Xbeam shall be responsible for the instruction and training
--------
of its personnel as may be necessary to effectively support, market and
distribute the Ad Services in the Territory. Without limiting the foregoing,
Xbeam shall ensure that an adequate number of its (i) sales and technical
personnel attend the ADSmart sales and technical training courses described in
Section 5.4; and (ii) technical and support personnel receive formal training
from third-party certified trainers in Oracle database applications, Oracle web
server software, the Solaris operating system and third party router vendor
classes to the extent necessary or appropriate for the performance by Xbeam of
this Agreement.
4.6 Books and Records. Xbeam shall keep accurate and complete books and
-----------------
records of all sales of all Ad Services, whether such services are provided by
Xbeam or by ADSmart (as set forth in Section 5.7). Upon the reasonable prior
request of ADSmart, Xbeam shall permit ADSmart and its agents and
representatives, at ADSmart's cost and expense, to review such books and records
for the sole purpose of ensuring the accuracy of the amounts payable hereunder
pursuant to Section 6. Such audits shall be carried out at reasonable times and
in a manner that does not disrupt or otherwise adversely affect the conduct of
Xbeam's business. If an audit reveals that Xbeam has failed to account
accurately for any amounts due ADSmart, Xbeam shall promptly pay ADSmart such
amounts, and reimburse ADSmart for the cost and expense of such audit.
4.7 Support. Xbeam shall be responsible for (i) communicating with all
-------
Customers regarding maintenance and support, (ii) replicating and documenting
errors and problems identified by Customers, and (iii) reporting such errors and
problems to ADSmart. ADSmart shall have no direct responsibility for Xbeam's
Customers, but shall be responsible for performing error correction, as provided
in Schedule D.
----------
4.8 Non-Competition. Xbeam shall not, during the Term, research, design,
---------------
develop, sell, market or distribute in the Territory, either directly or
indirectly, any service or product that may reasonably be regarded as
competitive with the Ad Services or Localized System, and shall keep ADSmart
fully informed regarding any
9
<PAGE>
services or products that might be considered so competitive whether then being
researched, designed, developed, distributed or being considered for
distribution by Xbeam, Xbeam also shall provide current market information to
ADSmart on a regular basis, including without limitation, general economic
trends and conditions affecting the industry, competitor activities, customer
attitudes and reactions, and other relevant information.
5. MARKETING AND DISTRIBUTION OBLIGATIONS OF ADSMART.
With respect to Xbeam's marketing and sale of the Ad Services, ADSmart
shall have the following obligations:
5.1 Interim System Services.
-----------------------
a. Commencing as per Schedule E and continuing in effect through the
----------
date that the Localized System is first used by Xbeam for productive purposes as
set forth in subsection 5.1(b), hereinafter the Interim Period, ADSmart, at its
facilities, where Xbeam shall bear the costs of setting up the Xbeam advertising
center including hardware and software platform costs (hereafter the 'Interim
Equipment') and communications costs of establishing the interim system in
Japan, shall provide Xbeam the services set forth in Schedule A according to the
----------
schedule in Schedule E for Xbeam to market and sell Ad Services to Customers in
----------
the Territory on an interim basis. At the conclusion of the Interim Period,
Xbeam shall be responsible for all transportation costs, tariffs and taxes
associated with shipping the Interim Equipment to the designated Xbeam
facilities in Japan.
b. ADSmart shall endeavor, as soon after the Effective Date as
commercially practicable, to provide Xbeam a copy of the System solely for Xbeam
to market and sell Ad Services to Customers in the Territory on an interim
basis. Xbeam's limited right to use the System under this subsection shall
terminate upon the date of its first productive use of the Localized System,
whereupon Xbeam shall immediately cease all use of the System and return to
ADSmart all tangible elements of the System, including without limitation all
software and documentation.
c. Xbeam is responsible for managing ad campaigns for their
customers, including proposal generation, order entry, order reservation,
booking and scheduling, creative submission and approval, inventory management,
reporting and billing, and ADSmart will provide web-based interfaces and access
rights to the advertising database applications during the Interim Period to
enable Xbeam to do so.
5.2 Advertising Material. ADSmart shall make available to Xbeam at no
--------------------
charge a reasonable supply of printed English language advertising,
instructional and promotional material for use by Xbeam in carrying out its
obligations in the Territory under this Agreement together with the electronic
on-line format thereof Such
10
<PAGE>
materials shall remain the sole and exclusive property of ADSmart and, except
insofar as they are distributed by Xbeam in the course of its performance of its
duties under this Agreement, must be promptly returned to ADSmart or destroyed
in accordance with Section 12.7 hereof upon the expiration or termination of
this Agreement.
5.3 Quality and Delivery. ADSmart shall use best efforts to ensure that
--------------------
the Localized System is of a quality consistent with its intended use.
5.4 Training. At no charge to Xbeam, ADSmart shall make available initial
--------
technical training to Xbeam technical operations staff, customer service manager
and database administrator at a location designated by ADSmart to train
representatives of Xbeam to properly perform the Ad Services; provided that
Xbeam shall be responsible for payment of all associated travel, lodging, meal
and other expenses of Xbeam personnel. ADSmart will also endeavor to make
reasonably available further training services, support services, and in the
event of an emergency, including telephone support and localized system repair
services.
5.5 Improvements. ADSmart shall provide written notice to Xbeam of new
------------
models of, and improvements and enhancements to, the System that become
available for use by Xbeam in the Territory, and the localized models,
improvements and enhancements shall be considered to be part of the Localized
System defined in Section 1.10. Xbeam shall provide written notice to ADSmart
regarding enhancements specifically required for the Japanese market in the
Territory and for any joint venture created as per Section 3.1. ADSmart will
respond to these requests as per Schedule D and Xbeam will share equally the
----------
costs incurred by ADSmart for these enhancements according to Section 2.6.
5.6 Exclusivity. During the Term, ADSmart will sell the Ad Services in
-----------
the Territory exclusively to and through Xbeam, subject to the exclusivity
granted in Section 3.1 and will refer to Xbeam any orders or inquiries
concerning sale of Ad Services in the Territory.
5.7 Use of ADSmart's Network of Web Sites by Customer. Notwithstanding
-------------------------------------------------
any provision contained herein to the contrary, ADSmart shall, during the Term,
use vigorous and diligent efforts to provide ad services using ADSmart's System
and network of Web sites to Customers referred by Xbeam. If ADSmart accepts such
an order, ADSmart shall pay to Xbeam a Commission of five percent (5%) of the
Revenues derived, attributable or reasonably imputed to the sale or use of
services provided by ADSmart to such Customer. ADSmart hereby agrees that Xbeam
may, for and on behalf of ADSmart and at its discretion, receive the service
charges, fees or commissions to be received by ADSmart from the Customers in
respect of said service, and that Xbeam may deduct and set off the commission to
be paid by ADSmart to Xbeam hereunder from and against such service charges,
fees or commissions to be paid by Xbeam to ADSmart.
11
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5.8 Commitment to Technology. ADSmart has an intention to continue during
------------------------
the Term its involvement and investment in web media technology, and to maintain
its efforts to develop and market leading-edge technology.
5.9 Right of First Refusal. The parties agree to work together for the
----------------------
drafting and negotiation of a Letter of Intent between Sumitomo Corporation
("Sumitomo") and Engage for the purposes of granting to Sumitomo the right of
first refusal for creating a business relationship between Sumitomo and Engage
whereby Sumitomo would become an exclusive license of Engage's global
clickstream repository and associated software for use in the Territory.
6. COMPENSATION.
License Fee.
6.1 In consideration of the exclusive license granted and the technical
assistance and services to be rendered by ADSmart hereunder, Xbeam agrees to pay
to ADSmart:
a. a down payment of [**] (the "Initial Fee") which shall be paid
within thirty (30) days after the Effective Date by telegraphic transfer
remittance to the bank account of ADSmart to be designated by ADSmart, provided
that, if this Agreement is terminated by Xbeam for any material breach of the
Agreement by ADSmart, and excluding any termination of the Agreement by ADSmart
pursuant to Article 12.2 and 12.3 or termination of the Agreement by Xbeam
pursuant to Section 12.9, ADSmart shall immediately refund to Xbeam an amount
equal to the Initial Fee less the amount set forth below:
<TABLE>
<CAPTION>
Time of Termination of this Agreement Amount
-------------------------------------
(Each Year being measured from the Commencement Date)
-----------------------------------------------------
<S> <C>
First Year [**]
Second Year [**]
Third Year [**]
Fourth Year [**]
</TABLE>
and;
b. the Annual License Fee amount set forth below for the Second Year
to the Fourth Year (each year being measured from the Commencement Date on which
ADSmart commences provision of the interim system set forth in Section 5.1 (the
the Annual License Fee amount set forth below for the Second Year "Commencement
Date"):
First Year [**]
Second Year [**]
Third Year [**]
12
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Fourth Year [**]
Fifth Year and each [**] of the Revenue (the "Running Royalty")
year thereafter
if the parties hereto acting in good faith have not agreed to modify terms and
conditions within the last [**] to the end of the [**] as measured from the
Commencement Date. In the event of formation of a joint venture as per Section
3.1, the [**] Running Royalty payable by Xbeam to ADSmart shall be applied to
the aggregate revenue of the joint venture.
Within thirty (30) days after the Effective Date Xbeam shall pay to ADSmart the
Annual License Fee for the First year, and by end of prior year for Second to
Fourth year. Within thirty (30) days after the end of each calendar quarter or
after termination, Xbeam shall pay to ADSmart the Running Royalty (for the Fifth
year and each year thereafter) accrued during such calendar quarter or any
period immediately prior to the termination. The above payment shall be made by
Xbeam to ADSmart by telegraphic transfer remittance to the bank account of
ADSmart to be designated by ADSmart.
For the Fifth Year and each year thereafter Xbeam shall pay ADSmart [**] if the
parties hereto acting in good faith have not agreed to modify terms and
conditions within the last [**] to the end of the [**] as measured from the
Effective Date, as Prepaid Royalty to be credited against the Running Royalty
which shall be paid by the end of Prior year of such year, provided that, if
this Agreement is terminated by Xbeam for any material breach of the agreement
by ADSmart, excluding any termination of the Agreement by ADSMART pursuant to
Article 12.2 and 12.3 or termination of the Agreement by Xbeam pursuant to
Section 12.9, ADSmart shall immediately refund to Xbeam the amount equal to the
amount of the Prepaid Royalty less the aggregate amount of the Running Royalty
which has accrued until such termination in such year.
For the avoidance of doubt, if this Agreement is terminated or expires for any
reason, Xbeam shall not be obligated or required to pay any further Annual
License Fee for the years following the year in which the Agreement is
terminated or expires.
6.2 Delayed Delivery. If the completion of the Localized System will be
----------------
delayed beyond Schedule F, ADSmart shall be obligated to Xbeam [**] for every
----------
[**] the Localized System has not been completed as per Schedule E.
6.3 Reimbursement for Localization Efforts. ADSmart shall submit invoices
--------------------------------------
to Xbeam for reimbursement of costs and expenses incurred by ADSmart in the
13
<PAGE>
localization effort with the relevant voucher. Subject to the limitation set
forth in Section 2.4, Xbeam shall pay such invoices within thirty (30) days of
receipt.
6.4 Payment. All payments due to ADSmart hereunder shall be paid in full
-------
in U.S. Dollars without deduction for import duties or other charges of any
nature whatsoever (except as stated in Section 6.6), by wire transfer, to such
bank or account as ADSmart may from time to time designate in writing. All costs
incurred in connection with such wire transfer shall be the responsibility of
Xbeam.
6.5 Overdue Amounts. In addition to any other remedies available to
---------------
ADSmart hereunder, if Xbeam fails to pay any amounts due and owing within thirty
(30) days of the date the amounts become due and payable, then Xbeam shall pay
ADSmart a late payment charge in U.S. Dollars) equal to one and one-half percent
(1.5%) per month on all overdue amounts, or the maximum percentage permitted by
law, whichever is lower, together with all costs and expenses incurred by
ADSmart in collecting such overdue amounts.
6.6 Taxes. Payments from Xbeam to ADSmart hereunder are exclusive of any
-----
sales, use and/or all other taxes or duties, however designated, except for (i)
taxes on AD Smart's net income and (ii) withholding taxes on the Initial Fee,
License Fee and Running Royalty payments payable the fifth year and each year
thereafter as per Section 6.1(b) that are required to be paid by Xbeam to a
Japanese taxing authority, if any. Any such taxes or duties required to be
withheld and paid by Xbeam shall be borne by ADSmart, provided that Xbeam shall
furnish ADSmart with all related tax receipts or other evidence showing payment
of any such taxes.
7. REPRESENTATIONS AND WARRANTIES.
7.1 ADSmart Representations and Warranties. ADSmart hereby represents and
--------------------------------------
warrants that:
a. Authority to Enter into Agreement. ADSmart has full power and
---------------------------------
authority to enter into this Agreement and to perform hereunder. This Agreement
has been duly authorized, executed and delivered by ADSmart and constitutes a
valid and binding obligation of ADSmart.
b. Right to Grant License. ADSmart has all the necessary right,
----------------------
title and interest in the System and Localized System to grant the licenses
contemplated herein.
c. Other Agreements. This Agreement and the licenses contemplated
----------------
herein do not and will not violate the terms of any other agreement or license
between ADSmart and any third party.
14
<PAGE>
d. DISCLAIMER. THE WARRANTIES STATED ABOVE IN THIS SECTION 7.1 ARE
----------
THE ONLY WARRANTIES MADE BY AD SMART. ADSMART DOES NOT MAKE AND HEREBY DISCLAIMS
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
7.2 Xbeam's Representations and Warranties. Xbeam hereby represents and
--------------------------------------
warrants that:
a. Authority to Enter into Agreement. Xbeam has full power and
---------------------------------
authority to enter into this Agreement and to perform hereunder. This Agreement
has been duly authorized, executed and delivered by Xbeam and constitutes a
valid and binding obligation of Xbeam.
b. Other Agreements. This Agreement and the licenses contemplated
----------------
herein do not and will not violate the terms of any other agreement or license
between Xbeam and any third party.
c. DISCLAIMER. THE WARRANTIES STATED ABOVE IN THIS SECTION 8.2 ARE
----------
THE ONLY WARRANTIES MADE BY XBEAM. XBEAM DOES NOT MAKE AND HEREBY DISCLAIMS ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
8. LIMITATION OF LIABILITY
ADSMART'S LIABILITY FOR DAMAGES TO XBEAM FOR ANY CAUSE, REGARDLESS OF THE
FORM OF ACTION, SHALL NOT EXCEED THE LESSER OF (i) XBEAM'S ACTUAL DAMAGES OR
(ii) THE AGGREGATE AMOUNT PAID TO ADSMART BY XBEAM UNDER THIS AGREEMENT AS OF
THE DATE SUCH LIABILITY IS INCURRED. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER OR ANY THIRD PARTY FOR ANY DAMAGES CAUSED BY A PARTY'S FAILURE TO
PERFORM ITS COVENANTS AND RESPONSIBILITIES HEREUNDER, BY REASON OF NEGLIGENCE OR
OTHERWISE. ADSMART SHALL NOT BE LIABLE TO XBEAM OR ANY THIRD PARTY FOR DAMAGES
CAUSED BY XBEAM'S REPAIRS OR ALTERATIONS TO THE SYSTEM OR LOCALIZED SYSTEM
WITHOUT AD SMART'S PRIOR WRITTEN APPROVAL.
NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR
PUNITIVE, INCIDENTAL, INDIRECT, SPECIAL, RELIANCE, EXEMPLARY, COVER, OR
CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST PROFITS, COSTS OF
DELAY, ANY FAILURE OF DELIVERY, COSTS OF LOST OR DAMAGED DATA OR DOCUMENTATION,
OR LIABILITIES TO THIRD PARTIES ARISING FROM ANY SOURCE, EXCEPT AS REQUIRED BY
APPLICABLE LAW.
15
<PAGE>
9. PROPRIETARY RIGHTS.
9.1 Ownership of System and Localized System. Title to, and ownership of,
----------------------------------------
the System and Localized System, as well as any Derivative Works, translations,
releases or other versions thereof, including all patents, copyrights and other
intellectual property rights applicable thereto (collectively, the "Proprietary
Materials"), are and shall at all times remain solely and exclusively with
ADSmart, notwithstanding that Xbeam may contribute to the cost of or participate
in the making of such Proprietary Materials. Xbeam hereby assigns, and agrees to
assign in the future, to ADSmart and its successors and assigns, ownership of
all such Proprietary Materials, including all intellectual property rights
therein. From time to time upon ADSmart's request, Xbeam shall make such further
assignments and confirm such assignment by execution and delivery of such
assignments, confirmations of assignment, or other written instruments as
ADSmart may request. Except as specifically set forth in this Agreement, Xbeam
shall have no other rights to use the Proprietary Materials.
9.2 Xbeam Compliance. Xbeam agrees to abide by the terms of all patent,
----------------
trademark, copyright and other proprietary notices contained on any of ADSmart's
printed materials or Localized System made available by ADSmart to Xbeam
pursuant to this Agreement. Xbeam agrees that it will not at any time do
anything which may adversely affect the registration, validity or enforceability
of any trade secret, patent, trademark or copyright of ADSmart or the rights of
ADSmart therein. In addition, Xbeam shall not, and shall not permit any other
person or entity to, attempt to reverse engineer, disassemble, re-engineer,
decompile, or otherwise discover or recreate the structural framework or
functionality of the Localized System, in whole or in part, including without
limitation any computer software in the Localized System.
9.3 AD Smart's Proprietary Rights. Xbeam acknowledges that it has no
-----------------------------
interest in, and agrees that it will not at any time assert or claim any
interest in, nor register or attempt to register, AD Smart's trademarks, trade
names, insignias, or logos set forth on Schedule B attached hereto and
----------
incorporated herein (the "Marks") or any Marks confusingly similar thereto, and
will cooperate with ADSmart to secure ADSmart's registration of such Marks in
the Territory at ADSmart's cost and expense. Except in printed materials made
available by ADSmart to Xbeam, any use of such Marks shall be subject to
ADSmart's prior written approval. Xbeam shall not use the name "ADSmart" in the
name of the Xbeam without prior written permission from ADSmart. Xbeam shall
immediately notify ADSmart, upon discovery thereof, of any infringement or
potential infringement of ADSmart's interests in the Marks and undertakes to
cooperate with ADSmart in its efforts to cure such infringement at ADSmart's
cost and Expense.
16
<PAGE>
9.4 License to Use Marks. ADSmart hereby grants Xbeam a non-transferable,
--------------------
exclusive, royalty-free license to use the Marks in the Territory for the Term,
provided that the Marks are used solely in connection with the marketing and
sale of the Ad Services. Upon termination or expiration of this Agreement, Xbeam
shall immediately take all action necessary to transfer and assign to ADSmart,
or its nominee, any right, title or interest in or to any of the Marks, and all
goodwill related thereto, and Xbeam shall immediately cease to use any Mark of
ADSmart.
9.5 No Association with Other Localized System. Xbeam shall not advertise
------------------------------------------
or promote the Ad Services or Localized System in any manner that could imply
ADSmart's association with or endorsement of any non-ADSmart products or
services.
9.6 No Interference with Marks. Xbeam shall not change, alter or remove
--------------------------
any Mark, patent notice, copyright notice or any other designation affixed to
any Localized System, and shall not attach any additional designation to any
such Localized System.
9.7 Change of the Marks. If for any reason ADSmart should change the
-------------------
trade name or trademark of its service offering, currently identified as "the
ADSmart Network," Xbeam shall have the right to use the new trade name or
trademark under the same terms and conditions as any earlier trade name or trade
mark licensed to Xbeam as per this Agreement.
10. INDEMNIFICATION.
10.1 ADSmart Duty of Indemnification. ADSmart will indemnify and hold
-------------------------------
harmless Xbeam from all demands, costs, damages, expenses, including reasonable
attorneys' fees, and liabilities for any claim or suit ("Claim") brought against
Xbeam by a third party (i) alleging that the use of the System or Localized
System by Xbeam, its directors, officers employees or agents hereunder infringes
upon any U.S. trademark, copyright, or trade secret, existing as of the
Effective Date of this Agreement or (ii) based on the System or Localized
System, if such Claim does not concern the actions of inaction of Xbeam, its
Affiliates, or their respective directors, officers employees or agents;
provided that Xbeam gives ADSmart written notice of the Claim of infringement
within ten (10) days of the date of notice of the same to Xbeam and Xbeam gives
ADSmart all necessary information, reasonable assistance and sole authority to
defend and/or settle the Claim. At ADSmart's option, it may satisfy its entire
obligation under this paragraph by: (a) modifying or replacing the System or
Localized System so that it performs comparable functions without material
degradation in efficiency and without infringement; (b) obtaining a royalty-free
license for Xbeam to use the infringing portion of the System or Localized
System; or (c) refunding to Xbeam the fees paid with respect to the infringing
portion of the System or Localized System less a pro-rata usage charge. ADSmart
shall have no liability for any claim or infringement based on (x) use or
17
<PAGE>
combination of the System or Localized System with equipment, devices, software,
data or equipment not supplied by ADSmart; (y) the System or Localized System
having been modified by Xbeam, an Affiliate or a third party without the prior
written consent of ADSmart; (z) use of the System or Localized System in a
manner for which the System or Localized System was not designed.
10.2 Xbeam Duty of Indemnification. Xbeam shall indemnify and hold
-----------------------------
harmless ADSmart from all demands, costs, damages, expenses, including
reasonable attorneys' fees, and liabilities for any claim or suit ("Claim")
brought against ADSmart by a third party (i) alleging infringement resulting
from or arising out of the importation, manufacture, sale or use of the system
or Localized System in combination with another item not furnished by ADSmart,
(ii) alleging negligence of Xbeam, its directors, officers, employees, or
agents, or (iii) failing to allege facts that would, assuming their veracity,
constitute a material breach of this Agreement by ADSmart; provided that ADSmart
gives Xbeam written notice of such Claim within ten (10) days of the date of
notice of the same to ADSmart and ADSmart gives Xbeam all necessary information,
reasonable assistance and sole authority to defend and/or settle the Claim.
10.3 LIMITATION OF LIABILITY. THE PROVISIONS OF THIS SECTION 10 STATE THE
-----------------------
ENTRE LIABILITY OF ADSMART FOR PATENT, TRADEMARK, COPYRIGHT, TRADE SECRET AND
ALL OTHER PROPRIETARY RIGHT INFRINGEMENT BY THE SYSTEM, LOCALIZED SYSTEM OR ANY
MARK FURNISHED HEREUNDER.
11. CONFIDENTIAL INFORMATION.
11.1 Confidential Treatment. In the performance of this Agreement or in
----------------------
contemplation thereof, each "Party" (which, for purposes of this Section 11
shall include each party's Affiliates, employees, contractors and agents) may
disclose or receive sensitive Confidential Information. Accordingly, each Party
shall (i) hold in strict confidence Confidential Information of the other Party,
(ii) refrain from using, copying or publishing, disclosing Confidential
Information of the other Party, except strictly as necessary to perform its
obligations hereunder, and (iii) return Confidential Information of the other
Party at the Party's request. A Party disclosing Confidential Information
hereunder shall retain sole ownership of the contents of such information.
Nothing contained in this Section shall restrict either Party with respect to
information that becomes publicly available to a Party through no fault of such
Party, was lawfully received from a third party who rightfully acquired it and
did not obtain it in violation of any confidentiality agreement, or was required
to be disclosed by a court or other governmental authority and reasonable notice
was given to the disclosing Party. The Parties hereby acknowledge that the
burden of proving the exceptions set forth above resides with the Party
receiving such information.
18
<PAGE>
Xbeam shall not publish, disclose, disseminate or use the ideas, concepts,
know-how or techniques related to the System or Localized System disclosed by
ADSmart hereunder; provided, however, that Xbeam shall be allowed to disclose
such information solely to the extent reasonably necessary to market and sell Ad
Services to Customers and prospective Customers.
This Section 11.1 shall survive termination or expiration of this Agreement
for a period of three (3) years.
11.2 Equitable Relief. If either Party breaches any obligation with
----------------
respect to the use or confidentiality of the Confidential Information, the other
Party shall be entitled to equitable relief to protect its interests therein,
including without limitation preliminary and permanent injunctive relief in
addition to any other remedies it may have.
11.3 Publicity. Neither Party shall identify the other as having entered
---------
into a strategic alliance relationship or into this Agreement in any
advertising, promotional literature or any other material, whether in written,
electronic or other form, distributed to any third party, without obtaining the
prior written approval of the other Party. Neither party may disclose the terms
of this Agreement to any third party.
12. TERM AND TERMINATION.
12.1 Term. This Agreement shall commence as of the Effective Date and
----
continue for a period of four (4) years after the Commencement Date, and
thereafter shall automatically renew for successive two (2)-year terms (the
"Term"); provided that either party may terminate this Agreement by giving the
other party written notice no later than sixty (60) days prior to the expiration
of the initial or any renewal term.
12.2 Events Permitting Termination. Either party shall have the right to
-----------------------------
terminate this Agreement, effective immediately, upon written notice to the
other party in the event any of the following should occur:
a. The other party becomes insolvent; is adjudicated bankrupt; a
receiver, trustee or custodian is appointed for it; there is an assignment of
the other party's business for the benefit of creditors; the other party
liquidates or dissolves; or the occurrence of any action or event involving
Xbeam which is, in the Territory, the equivalent of one or more of the events
described in this subsection;
b. The other party ceases to conduct its operations in the normal
course of business;
19
<PAGE>
c. If any merger or consolidation occurs, which materially adversely
affects the ability of ADSmart or Xbeam to fulfill its obligations hereunder; or
d. Any Misuse of the System or Localized System by Xbeam, as defined
in Sec. 3.3, and such Misuse is not cured within thirty (30) days after written
notice thereof from ADSmart to Xbeam; or
e. Any change in control of Xbeam or Xbeam comes under the control
of any third party other than Sumitomo Corporation or any sale of all or
substantially all of the assets of Xbeam or if Sumitomo Corporation ceases to
have a controlling interest in any joint venture created by Xbeam as set forth
in Section 3.1.
12.3 Material Breach. Other than for occurrences covered by Section 12.2
---------------
hereof, either party shall have the right to terminate this Agreement upon
thirty (30) days' written notice if the other party materially breaches or fails
to perform any of its obligations, representations or undertakings hereunder,
and fails to cure such breach or failure within such thirty (30) day notice
period.
12.4 Termination of License. Upon the termination or expiration of this
----------------------
Agreement, Xbeam's right to use the System or Localized System shall terminate,
and Xbeam shall immediately cease all use of System and Localized System Code,
including without limitation any Error corrections or enhancements thereto that
have become a part of the System or Localized System, and shall make no further
copies of any of the foregoing. Xbeam shall immediately return to ADSmart all
copies of the System and Localized System, including without limitation any
Error corrections and enhancements that have become a part of the System or
Localized System. Xbeam shall warrant in writing, upon request of ADSmart, that
no copies of any such material have been retained or are within the control of
Xbeam.
12.5 Losses Due to Termination. ADSmart shall not by reason solely of any
-------------------------
expiration or termination of this Agreement be liable to Xbeam for any
compensation, reimbursement, expenses or damages, or on account of any loss of
prospective profits on anticipated sales, or on account of expenditures,
investments, leases or commitments in connection with Xbeam's business or good
will, or on any other account, and Xbeam hereby expressly waives any right to
make any such claim in any proceeding or otherwise with regard to such damages.
12.6 Payment of Monies Owed at Termination. Upon expiration or termination
-------------------------------------
of this Agreement, Xbeam shall immediately cease to be an ADSmart licensee and
all monies then owed to either party hereunder shall become immediately due and
payable notwithstanding any credit terms previously made available to Xbeam, and
each party's obligations to pay any sum of money due, payable or accrued under
this Agreement shall survive such expiration or termination.
20
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
12.7 Advertising Material. Upon the expiration or termination of this
--------------------
Agreement for any reason, Xbeam shall immediately cease any reference to its
status as an ADSmart licensee and any use of, or reference to, the Marks for any
purpose. In such event, Xbeam shall, either destroy all advertising and
promotional materials and all other materials concerning the Localized System or
the Marks.
12.8 Additional Remedies. Each party's remedies hereunder are in addition
-------------------
to any additional rights and remedies at law or in equity.
12.9 After the [**] year beginning on the Effective Date, and for a period
ending at the end of the [**] year from the Commencement Date, Xbeam may
terminate this Agreement by giving ADSmart written notice of intent to
terminate, such termination becoming effective [**] after receipt (the "Notice
Period"). Xbeam's termination as per this Section 12.9 shall not absolve Xbeam
of obligations for payments owed ADSmart during the Notice Period, including but
not limited to Licensee Fees, Localization fees, and Enhancements fees.
Notwithstanding anything to the contrary in this Agreement, upon Xbeam's
triggering of the Section 12.9, ADSmart shall be no longer liable for any refund
of the Initial Fee, License Fees, or Localization and Enhancements fees paid by
Xbeam to ADSmart prior to the effective date of termination. Upon effective date
of termination at the end of the Notice Period Xbeam shall be responsible for
operating the ADSmart Network for ten (10) additional months and ADSmart shall
be free to enter into an agreement with a new partner and initiate service
immediately.
13. MISCELLANEOUS.
13.1 Independent Contractors. Xbeam shall be considered to be an
-----------------------
independent contractor. The relationship between ADSmart and Xbeam shall not be
construed to be that of employer and employee, nor to constitute a partnership,
joint venture or agency of any kind. Xbeam shall have no right to enter into any
contracts or commitments in the name of, or on behalf of, ADSmart, or to bind
ADSmart in any respect whatsoever. In addition, Xbeam shall not obligate or
purport to obligate ADSmart by issuing or making any affirmations,
representations, warranties or guaranties with respect to the System or
Localized System to any third party, other than the warranties set forth in
Section 8 below or otherwise provided to Xbeam by ADSmart in writing during the
Term. Xbeam shall pay all of its expenses, including without limitation all
travel, lodging and entertainment expenses, incurred in connection with its
performance hereunder. ADSmart shall not reimburse Xbeam for any of those
expenses.
21
<PAGE>
13.2 Compliance with Law. Each party's performance hereunder shall be in
-------------------
compliance with all applicable laws, regulations and other legal and
administrative requirements.
13.3 Regulatory Approvals. ADSmart shall be responsible for obtaining, and
--------------------
shall use its best efforts to obtain, any and all required U.S. governmental
approvals, authorization and permits pertaining to the System and Localized
System, including without limitation, any such approvals related to electrical
devices and medical devices. Xbeam shall be responsible for obtaining, and shall
use its best efforts to obtain, any and all required non-U.S. governmental
approvals, authorization and permits pertaining to the System and Localized
System, including without limitation, any such approvals related to electrical
devices and medical devices. Neither party shall be liable if any authorization
is delayed, denied, revoked, restricted or not renewed; each party shall bear
all such risks and costs caused thereby. In addition, upon termination of this
Agreement for any reason, ADSmart or its designee shall be exclusively entitled
to any rights Xbeam may have acquired as a result of, or in, governmental
approvals authorization or permits, and Xbeam shall take all necessary actions
to effect the transfer of interest in same to ADSmart or any third party
identified by AD Smart.
13.4 Force Majeure. Except with respect to the payment of monies due
-------------
hereunder and the responsibility to maintain the Confidential Information in
confidence, neither party shall be responsible for failure to perform hereunder
due to causes beyond its reasonable control, including, but not limited to,
governmental requirements (including, without limitation, export control laws
and regulations), work stoppages, fires, civil disobedience, embargo, war,
riots, rebellions, strikes, inability to secure products, raw materials or
transport, acts of God, and similar occurrences which are beyond the reasonable
control of the parties hereto. Performance shall be resumed as soon as possible
after the cessation of such cause.
13.5 Waiver. The waiver by either party of any breach of this Agreement by
------
the other party in a particular instance shall not operate as a waiver of prior
or subsequent breaches of the same or different kind.
13.6 Governing Law. This Agreement shall be governed and interpreted in
-------------
all respects by and according to the laws of the Commonwealth of Massachusetts,
USA, excluding its choice of law provisions. Words and phrases shall also be
interpreted as understood in the USA. It is the express intent and agreement of
the parties that the United Nations Convention for the International Sale of
Goods shall not apply to this Agreement or to purchase orders hereunder. All
disputes arising between the parties in connection with this Agreement shall be
settled by arbitration under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce before a single arbitrator selected under
those rules. In the event that ADSmart seeks arbitration, the place of
arbitration shall be Tokyo, Japan. In the event
22
<PAGE>
that Xbeam seeks arbitration, the place of arbitration shall be Boston,
Massachusetts. The arbitral award may be enforced in any court having
jurisdiction thereof
13.7 Notices. All notices under this Agreement shall be in writing and
-------
shall be by registered or certified air mail, postage prepaid, return receipt
requested, reputable international express courier service providing return
notice of receipt, or by telecopy with hard copy to follow immediately via air
mail or express courier service in accordance with this Section 15.4, to the
addresses set forth below, or at such different addresses as may be designated
in writing by like notice from time to time. Such notice shall, when mailed, be
effective on the tenth day after it has been deposited in the mails, or, if sent
by courier, on the second business day in the jurisdiction of the recipient
after delivery to the courier, or if given by telecopy, upon receipt thereof by
the recipient's telecopy machine as indicated either in the sender's
identification line produced by recipient's telecopy machine or in the sender's
transmission confirmation report as produced electronically by sender's telecopy
machine.
If to Engage: 100 Brickstone Square
Andover, MA, USA 01810
Attention: ____________________
Fax Number:
If to ADSmart: 100 Brickstone Square
Andover, MA, USA 01810
Attention: ____________________
Fax Number:
If to Xbeam: at 1-32-2 Harmony Tower 14F Honcho, Nakano-ku,
Tokyo, 100 Japan
Attention: ___________________
Fax Number:
13.8 Assignment. Except as expressly provided herein, neither party may
----------
assign this Agreement, or any of its interests herein, without the prior written
consent of the other party, except that each party may assign this Agreement
without such consent to an Affiliate, to its successor in connection with a
merger, acquisition or consolidation, or to the purchaser in connection with the
sale of all or substantially all of its assets; provided that (i) such assignee
shall agree in writing in a form reasonably satisfactory to the other party to
comply with such party's obligation under, and to be bound by, this Agreement.
Any assignment in violation of this Section shall be void. In the event of a
merger, acquisition or consolidation of ADSmart by Engage, Engage shall agree to
assume ADSmart's obligation under, and to be bound by, this Agreement.
23
<PAGE>
13.9 Prior Agreements. This Agreement cancels and supersedes all prior
----------------
agreements and understandings, oral or written, entered into by the Parties.
This Agreement, including the Schedules A-E attached hereto, sets forth the
-------------
entire understanding of the Parties with respect to its subject matter and may
be changed or amended only by a writing signed by duly-authorized officers of
both Parties. All captions and headings contained in this Agreement are for
convenience only and are not a part of this Agreement.
13.10 Cumulative Rights. Any rights and remedies of either party shall be
-----------------
cumulative and may be exercised singularly or concurrently. The failure of
either party, in any one or more instances, to enforce any of the terms of this
Agreement shall not be construed as a waiver of future enforcement of that or
any other term.
13.11 Survival. Sections 3.2, 3.4, 6, 7.1, 8, 9.1, 9.3, 10, 11, 12.4,
12.5, 12.6, 12.7, and 13 shall survive the termination of this Agreement for an
indefinite period.
13.12 Severability. In the event that any one or more of the provisions
------------
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provisions had
never been contained herein. In such event, the Parties shall use their best
efforts to replace such invalid, illegal, or unenforceable provisions by
provisions that, to the extent permitted by the applicable law, achieve the
purposes intended under such invalid, illegal, or unenforceable provisions,
unless the deletion or replacement of such provision or provisions would result
in such a material change as to cause completion of the transactions
contemplated herein to be unreasonable.
13.13 Successors. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties and their respective successors and other legal
representatives and, to the extent that any assignment is permitted hereunder,
their assignees.
13.14 English. This Agreement has been drafted and executed in the English
-------
language. In the event of any ambiguity between the English language version and
any translation into any other language, the meaning and intent contained in the
English language version shall prevail.
24
<PAGE>
13.15 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Exclusive
Strategic Alliance Agreement under seal as of the date first written above.
ENGAGE TECHNOLOGIES, INC.
By: /s/Paul Schaut
---------------------
Name: Paul Schaut
----------------
Title:_______________
ADSMART CORPORATION
By: /s/Paul Schaut
---------------------
Name: Paul Schaut
----------------
Title:_______________
CROSS BEAM NETWORKS CORPORATION
By: /s/Isao Momata
---------------------
Name: Isao Momata
----------------
Title: President
----------------
25
<PAGE>
SCHEDULE A
----------
Description of ADSmart System
The System is defined as ADSmart's software and business processes for Internet
advertising, including the following:
The ADSmart Network Enabling System
Sales Automation
Proposal Generation Software
Order Entry Software
Inventory Status Software
True Targeting Planner Software
Sales Policies and Procedures
Inventory Management System
Inventory Scheduling, Reservation & Tracking Software
Inventory Classification Categories
Classification Policies & Procedures
Creative Management
Online Creative Submission Software
Online Creative Approval Software
Client Support
Order Confirmation and Booking Software
Campaign Administration Software
Campaign Status Reports
Web Site Implementation Policies & Procedures
Email Notification Policy
Web Site Promotion
Online Media Kit Format
Financial Management
Billing Software
Ad Serving
Ad Server Software
Targeting Software
Targeting Methodology
Clickstream Targeting Software compatible with Engage Technologies' clickstream
repository
Monitoring Software
Operations Policies & Procedures
ADSmart Business Model for Operating Advertising Networks
Staffing
Policies & Procedures
Financial Model
Customer Terms & Conditions
Third Party Hardware, Software and Communications Requirements
The ADSmart System runs on these specified platforms. One or more of each
platform may be required to run the ADSmart System. Additional communications
hardware and software may be required to meet mutually agreed upon performance
requirements.
Sun Ultra Servers
Sun Solaris Operating System
Oracle Database for Sun Solaris
Clarion 200GB Disk Array
Cisco Pix Firewall
Cisco 2900 Switch
Cisco 7507
Cisco Router
F5 Big/IP2 or Cisco Local Director
T1 line to New York IIJ Line
HP LANPROBE
Portmaster
USR Modem Pool
Digital Link DSM
26
<PAGE>
SCHEDULE B
----------
ADSmart Marks
ADSmart(TM)
ADSmart Corporation(TM)
ADSmart.net(TM)
ADSmart.net(TM)
Network Enabling System(TM)
Site Enabling System(TM)
The ADSmart Network(TM)
The ADSmart Network(TM)
True Targeting P1anner(TM)
True Targeting(TM)
True Targeting(TM)
27
<PAGE>
SCHEDULE C
----------
THIS PAGE LEFT INTENTIONALLY BLANK.
28
<PAGE>
SCHEDULE D
----------
Error Correction and Enhancements
Error Correction
- ----------------
During the terms of this Agreement, ADSmart shall provide error correction
services ("Error Correction Services") pursuant to the following procedures:
Each party shall designate a primary and secondary contact (with telephone,
pager and fax numbers and email addresses) for communications and receipt of
materials related to Error Correction Services.
1. Each party shall designate a primary and secondary contact (with telephone,
pager and fax numbers and email addresses) for communications and receipt of
materials related to Error Correction Services.
2. ADSmart's designated representative shall receive and process Xbeam's
reports of~any Errors in the Localized System between the hours of 9:00 a.m. to
5:00 p.m. EST Monday through Friday, excluding ADSmart holidays. For reporting
of a Class 1 Error, an ADSmart representative will be available by pager on a
24-hours per day.
3. Xbeam shall advise ADSmart of any Error within two (2) working days after
its becoming aware of such Errors. Xbeam shall provide all information
reasonably requested by ADSmart from time to time to assist ADSmart in
identifying and solving the Errors. Xbeam shall bear all shipping charges,
communications charges, and the like that are associated with providing such
data to AD Smart.
4. ADSmart and Xbeam shall mutually agree to classify reported Errors as
follows:
Class 1 Error: Renders the Localized System unusable or the use
thereof commercially infeasible.
Class 2 Error: Renders a significant function of the Localized System
unusable or the use thereof commercially unfeasible.
Class 3 Error All other Errors are Class 3 Errors, in particular, all
Documentation shortcomings and deviations that do not
have the operational or economic consequences as
defined for Class 1 and Class 2 Errors shall be deemed
Class 3 Errors.
29
<PAGE>
In the event of any dispute related to the classification of an Error, Xbeam's
classification, if reasonable, shall govern.
5. With respect to Class 1 and Class 2 Errors, within two (2) working days of
receipt of notice of any such Error, ADSmart shall, at no additional charge, use
best efforts to either: (i) provide Xbeam with a response specific to the Errors
described, sufficient to alleviate any adverse effect of the Error on the
utility of the Localized System satisfactory to Xbeam, or (ii) provide Xbeam
with a response describing ADSmart's then-existing diagnosis of the Errors
described and outlining ADSmart's then existing plan and timetable for
correcting the Errors, in which case ADSmart shall report its progress in
correcting the Errors to correcting the Errors. As well as informing Xbeam at
least weekly. In addition, ADSmart shall inform Xbeam of any action that ADSmart
believes should be taken by Xbeam for data preservation or other damage.
6. With respect to Class 3 Errors ADSmart will respond with a proposed plan of
action back to Xbeam via email within five (5) working days and the parties will
mutually agree on the plan of action.
If Xbeam determines that the Errors will not be corrected by any action as above
and ask reasonably, ADSmart shall dispatch its competent engineer to correct
such Errors.
This paragraph states Xbeam's exclusive remedy and ADSmart's sole obligation~for
Error Correction. Under no circumstances does ADSmart warrant that all Errors
can or will be corrected.
Enhancements
- ------------
Xbeam will notify ADSmart, in writing, of all proposed enhancements to the
System and Localized System. ADSmart will respond with a proposed plan of action
back to Xbeam via email within fourteen working days and the parties will
mutually agree on the plan of action.
30
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE E
----------
Implementation Timeline
Within 15 days of the Effective Date of the Agreement:
- -----------------------------------------------------
Xbeam and ADSmart agree upon facilities plan and order equipment, software and
network bandwidth.
Within 30 days of the Effective Date of the Agreement:
- -----------------------------------------------------
ADSmart trains Xbeam customer service manager and jointly defines Xbeam
classification system, user roles and access rights.
Xbeam and ADSmart agree upon staffing levels, hire appropriate staff and arrange
for training. ADSmart trains Xbeam technical operations staff and database
administrator at ADSmart's facility in Andover, MA.
Within 75 days of the Effective Date of the Agreement:
- -----------------------------------------------------
Interim System Services (as listed in Section 5.1.a) provided by ADSmart.
Within 120 days of the Effective Date of the Agreement:
- ------------------------------------------------------
Xbeam uses English language Ad Server from their facility in Japan to serve ads
within Territory using ADSmart's English-Language database applications based in
ADSmart's Andover facility.
Within 160 days of the Effective Date of the Agreement:
- ------------------------------------------------------
Xbeam uses Japanese language Ad Server from their facility in Japan to serve ads
within Territory using ADSmart's English-language database applications located
in ADSmart's Andover facility.
Within 200 days of the Effective Date of the Agreement:
- ------------------------------------------------------
Xbeam uses Japanese-language Ad Server along with Japanese-language database
applications from their facility in Japan to serve ads.
31
<PAGE>
ADDENDUM
--------
Reference is made to Exclusive Strategic Alliance Agreement dated January 7,
1998 (the "Agreement") between Engage Technologies, Inc. ("EG"), ADSmart
Corporation ("ADSmart") and Cross Beam Networks Corporation ("Xbeam").
EG for itself and ADS mart and Sumitomo Corporation for itself and Xbeam hereby
agree as follows:
1. EG acknowledges that it has acquired the engineering division of ADSmart
and it shall be responsible for developing the next version of Accipiter
based ADSmart and also for providing on-going version-up of the same.
2. EG/ADSmart and SC/Xbeam shall immediately meet to clarify the status of the
project of such development on the part of ADSmart and shall discuss and
agree upon (i) the completion date for the localization of the next version
of Accipiter based ADS mart and (ii) the commencement date of the services
based on that next version, each of which shall be on or before the end of
December, 1998. Such next version needs to be acceptable to the customers
in Japan. Until the completion of such next version, EG shall provide full
support and assistance utilizing their commercial and technical resources
in order to keep the reputation and goodwill of ADSmart and keep the
services of ADSmart attractive to the customers in Japan. EG shall at its
responsibility procure that the localization and the commencement of the
services of ADSmart shall be completed by the above-mentioned dates. It is
a condition to SC's execution of the contract in relation to the
establishment of a joint venture company between SC and EG for the purpose
of pursuing the business opportunities in the territory of Japan through
the commercialization of Internet behavioral profiling and marketing
products, database subscription services and the performance of related
consulting services (the "Contract") that the above mentioned dates shall
have been agreed upon among EG/ADSmart and SC/Xbeam by the end of June,
1998. For avoidance of doubt, the foregoing shall be without prejudice to
SC/Xbeam's right to the payment of liquidated damages for delay payable by
ADSmart under the Agreement.
3. This Addendum is an integral part of the Agreement. Terms already defined
in the Agreement but not otherwise defined in this Addendum shall have the
same meanings defined in the Agreement.
32
<PAGE>
Signature below by both parties signifies the foregoing:
<TABLE>
<S> <C> <C> <C>
For and on behalf of For and on behalf of
Engage Technologies, Inc. Sumitomo Corporation
/s/ Paul E. Schaut /s/ Hiroji Iwasaki
- ------------------ -------- ------------------- --------
Paul E. Schaut Date Hiroji Iwasaki Date
President & CEO Director
Engage Technologies, Inc. Deputy General Manager
Media Business Division
Sumitomo Corporation
For and on behalf of For and on behalf of
ADSmart Corporation Cross Beam Networks Corporation
/s/ Paul E. Schaut /s/ Isao Momota
- ------------------ -------- ---------------- --------
Paul E. Schaut Date Isao Momota Date
President & CEO General Manager
Engage Technologies, Inc. Information & Telecommunication
Business Department No. 2
Sumitomo Corporation
</TABLE>
33
<PAGE>
SCHEDULE A
- ----------
Description of Advertising System
The Advertising System is defined as ADSmart's business processes and
Accipiter's software for automating Internet advertising placement. The business
processes have already been delivered to Xbeam. The software will be delivered
in two phases, the first phase based on Accipiter Ad Manager 2.2 and the second
based on Accipiter Ad Manager 4.0.
Business Processes
ADSmart Business Model for Operating Advertising Networks
staffing
Policies & Procedures
Financial Model
Customer Terms & Conditions
Software
Phase 1: Accipiter Ad Manager 2.2 (English) with Advertising Network
Enhancements and Interface to Engage profiles
. Accipiter Ad Manager 2.2
. Direct Server Software for Remote Ad Serving
. Taxonomy for Organizing Multiple Sites with Multiple Content Areas
. Automatically Generated Reports for Web Sites in Email Format
. Targeting by Engage.Knowledge user profiles
. Technical Consulting, including Taxonomy set up, Technical Training and
Software Installation
. Customer Support Training
Phase 2: Accipiter Ad Manager 4.0 (English) with Localized Reports, Advertising
Network Enhancements and Interface to Engage profiles
. Accipiter Ad Manager 4.0, Double-byte Enabled
. Direct Server Software for Remote Ad Serving
. Taxonomy for Organizing Multiple Sites with Multiple Content Areas
. Automatically Generated Localized Reports for Web Sites with remote access
. Secured access for individual web sites to create and manage their own
campaigns
. Secured access for individual web sites to create and manage their own
content
. Secured access for agencies and advertisers to plan and reserve campaigns
. Targeting by Engage.Knowledge user profiles
. Additional documentation for all features listed above which are not
covered in Accipiter 4.0 standard documentation set
. Technical Consulting, including Taxonomy set up, Technical Training and
Software Installation
. Customer Support Training
Phase 3: Localized Accipiter Ad Manager 4.0 with Advertising Network
Enhancements and Interface to Engage Profiles
. Accipiter Ad Manager 4.0 with localized user interfaces and documentation.
(Technical documentation will not be localized)
. Localized Direct Server Software for Remote Ad Serving
. Localized secure access for individual web sites to create and manage their
own campaigns
. Localized secure access for individual web sites to create and manage their
own content
. Localized secure access for agencies and advertisers to plan and reserve
campaigns
. Localized targeting interface for Engage.Knowledge user profiles
. Additional localized documentation for all features listed above which are
not covered in Accipiter 4.0 standard documentation set.
34
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE E
----------
Implementation Timeline
[**] after conclusion of original Agreement
---------------------------------------
Xbeam and ADS mart agree upon facilities plan and order equipment, software and
network bandwidth.
[**] after conclusion of original Agreement:
---------------------------------------
Xbeam provides ADSmart with site classification data, user roles and access
rights. Xbeam and ADSmart agree upon staffing levels, hire appropriate staff and
arrange for training.
ADSmart trains Xbeam technical operations staff and database administrator at
ADSmart's facility in Andover, MA.
[**] after conclusion of original Agreement:
---------------------------------------
ADSmart trains Xbeam customer service staff at ADSmart's facility in Andover,
MA.
[**] after conclusion of original Agreement:
---------------------------------------
Interim System Services (as listed in Section 5.1 .a) provided by ADSmart.
[**]
Engage delivers Phase 1 of the Advertising System, as described in Schedule A,
with the exception of Technical Consulting and Customer Support Training. Engage
continues to support ADSmart Interim System Services up until [**].
[**]
Engage delivers Technical Consulting and Customer Support Training for Phase 1
of the Advertising system, as described in Schedule A. Xbeam implements Phase 1
of the Advertising System, as described in Schedule A, in Japan. Xbeam ceases
use of AD Smart proprietary software.
[**]
Engage delivers Phase 2 of the Advertising System, as described in Schedule A,
with the exception of Technical Consulting and Customer Service Training.
After [**] but No Later Than [**]
- ----- ------------------
Engage delivers Phase 3 of the Advertising System, as described in Schedule A,
with the exception of Technical Consulting and Customer Service Training.
35
<PAGE>
SECOND AMENDMENT TO
EXCLUSIVE STRATEGIC ALLIANCE AGREEMENT
--------------------------------------
This Second Amendment (the "Amendment") to the Exclusive Strategic Alliance
Agreement is entered into as of November 26, 1998 (the "Effective Date") by and
among Engage Technologies, Inc. ("Engage"), ADSmart Corporation ("ADSmart"),
Sumitomo Corporation ("Sumitomo"), Cross Beam Networks Corporation ("Xbeam"),
and Interactive Solutions, Inc. ("1S1").
WHEREAS Engage, ADS mart and Xbeam are parties to an Exclusive Strategic
Alliance Agreement dated January 7, 1998 (the "Agreement");
WHEREAS Engage, ADSmart, Sumitomo and Xbeam are parties to an addendum to
the Agreement executed as of June 18, 1998; and
WHEREAS Engage, ADSmart, Sumitomo, Xbeam and ISI desire to amend the
Agreement in order to assign all of the rights, obligations and liabilities
under the Agreement from Xbeam to ISI, a wholly-owned subsidiary of Sumitomo.
NOW, THEREFORE, Engage, ADSmart, Sumitomo, Xbeam and 1S1 agree as follows:
1. Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Agreement.
2. Pursuant to Section 13.8 of the Agreement, Xbeam hereby assigns to ISI all
of its rights, obligations and liabilities under the Agreement, and ISI hereby
assumes all of the rights, obligations and liabilities (whether past, present or
future) of Xbeam under the Agreement, and the parties hereto hereby consent to
such assignment and assumption effective as of the Effective Date. All notices
to ISI under the Agreement shall be sent to the following address:
Interactive Solutions, Inc.
2FShinshu-Meitetsu Yasuda Building
3-15 Kandanishikicho
Chiyoda-ku, Tokyo 101-0054, Japan
3. Except as specifically set forth herein, no other portion of the Agreement
shall be affected.
4. This Amendment may be executed in one or more counterparts, each of which
shall for all purposes be deemed to be an original and all of which shall
constitute the same instrument.
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective authorized representatives below as of the day and
year first above written.
ENGAGE TECHNOLOGIES, INC. ADSMART CORPORATION
By: /s/ Stephen A. Royal By: /s/ John Federman
-------------------------------- --------------------------
Name: Stephen A. Royal Name: John Federman
Title: Chief Financial Officer Title: President
INTERACTIVE SOLUTIONS, INC. CROSS BEAM NETWORKS CORPORATION
By: /s/ Ikuo Matsumoto By: /s/ Motohiko Ikweda
------------------------- --------------------------
Name: Ikuo Matsumoto Name: Motohiko Ikeda
Title: President Title: President
SUMITOMO CORPORATION
By: /s/ Isao Momota
----------------------------
Name: Isao Momota
Title: General Manager
Information & Telecommunications
Business Department No. 2
37
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
THIRD AMENDMENT TO
EXCLUSIVE STRATEGIC ALLIANCE AGREEMENT
--------------------------------------
This Third Amendment(the "Amendment") to the Exclusive Strategic Alliance
Agreement is entered into as of January 20, 1999 (the "Effective Date") by and
among Engage Technologies, Inc. ("Engage"), ADSmart Corporation ("ADSmart"),
Sumitomo Corporation ("Sumitomo"), and Interactive Solutions, Inc. ("ISI")
(collectively the "Parties").
WHEREAS the Parties entered into an Exclusive Strategic Alliance Agreement
dated January 7, 1998 (the "Agreement") as amended by addendum executed as of
June 18, 1998 and amendment dated November 26, 1998; and
WHEREAS the Parties desire to further amend the Agreement as set forth
below.
NOW, THEREFORE, the Parties agree as follows:
1. Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Agreement. In the event of any conflict between the
terms and conditions of this Amendment and the terms and conditions of the
Agreement, this Amendment shall control,
2. Section 6.1(b) of the Agreement shall be amended as follows:
Notwithstanding any other provision of this Agreement: (i) the Annual
License Fee for the Third Year shall be [**], which amount shall represent
Engage's entire liability and sole and final payment for any delayed
delivery of the Localized System and/or any other deliverable under the
Agreement as amended; and (ii) by [**] Engage shall deliver Phases 2 and 3
of the Advertising System, as described in Schedule A, with the exception
----------
of Technical Consulting and Customer Service Training.
3. Except as specifically set forth herein, no other portion of the Agreement
shall be affected.
4. This Amendment may be executed in one or more counterparts, each of which
shall for all purposes be deemed to be an original and all of which shall
constitute the same instrument.
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective authorized representatives below as of the day and
year first above written.
ENGAGE TECHNOLOGIES, INC. ADSMART CORPORATION
By: /s/ Stephen A. Royal By: /s/John Federman
-------------------------------- --------------------------
Name: Stephen A. Royal Name: John Federman
Title: Chief Financial Officer Title: President
INTERACTIVE SOLUTIONS, INC. SUMITOMO CORPORATION
By: /s/ Ikuo Matsumoto By: /s/ Isao Momota
------------------------- ----------------------------
Name: Ikuo Matsumoto Name: Isao Momota
-------------------
Title: President Title: General Manager
Information &
Telecommunications
Business Department
No. 2
39
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Exhibit 10.13
-------------
SALES AND MARKETING AGREEMENT
This Agreement is made and entered into effective as of September 5, 1995,
("Effective Date") by and between Internet Profiles Corporation, a California
corporation ("I/PRO"), with its principal place of business at 785 Market
Street, 13th Floor, San Francisco, CA 94103, and the Nielsen Media Research
division ("Nielsen") of A.C. Nielsen Company, a Delaware corporation, with
offices at 299 Park Avenue, New York, New York 10171-0074 (collectively I/PRO
and Nielsen are referred to as the "Parties" and individually as a "Party").
A. I/PRO has developed and distributes certain software products and
related services for the measurement of Internet usage.
B. I/PRO and Nielsen desire to enter into a strategic partnership for the
sale and marketing of existing Internet usage measurement and analysis products
and services developed by I/PRO.
C. The parties desire to set forth the terms and conditions under which
I/PRO and Nielsen will engage in the marketing of certain of I/PRO's Internet
usage measurement and analysis products and services;
D. I/PRO and Nielsen desire to establish a framework under which they may
implement future joint development and/or marketing agreements covering Internet
measurement products and services.
In consideration of the foregoing and the agreements contained herein, the
parties agree as follows:
1. Definitions.
------------
(a) "Confidential Information" shall mean all information provided by one
Party to the other which is marked to be confidential or verbally
indicated to be such prior to an oral/visual presentation (or, in the
case of information which is designated in writing to be confidential
subsequent to such presentation by a Party, such information shall
from the time of receipt by the other of such designation be
Confidential Information), including without limitation technical
information not included in user documentation related to the
Products, customer lists, marketing plans, financial information and
the terms of this Agreement.
<PAGE>
(b) "End Customer" shall mean a person or entity that acquires the right
to use the Products for the person or entity's own personal or
internal business use, rather than for distribution or other transfer.
(c) "Future Products" shall mean products and services for the measurement
and analysis of Internet usage that may be developed in the future by
either Party, including but not limited to the product and related
services currently offered by I/PRO under the name "I/CODE."
(d) "I/PRO Proprietary Rights" shall mean all rights held by I/PRO in the
Products and its Confidential Information, including, without
limitation, patents, copyrights, authors' rights, trademarks,
tradenames, know-how and trade secrets, irrespective of whether such
rights arise under U.S. or international intellectual property, unfair
competition, trade secret or other laws.
(e) "Nielsen Proprietary Rights" shall mean all rights held by Nielsen in
its Confidential Information, including, without limitation, patents,
copyrights, authors' rights, trademarks, tradenames, know-how and
trade secrets, irrespective of whether such rights arise under U.S. or
international intellectual property, unfair competition, trade secret
or other laws.
(f) "Products" shall mean I/PRO's computer software products (and related
reporting services, technical maintenance and support) known as
I/COUNT and I/AUDIT (in each case as described on Exhibit A),
---------
including the accompanying user documentation, and any current and
future revisions and releases thereof, including all modifications,
upgrades and improvements made to the Products during the term of this
Agreement.
(e) "Product Development" shall mean the periodic refinement, enhancement
and development of new features and functionalities for the Products.
(g) "Reseller" shall mean a person (other than I/PRO or Nielsen) who
acquires the right to distribute the Products.
(h) "Technical Support" shall mean customer support services provided in
accordance with I/PRO's technical support policies then in effect and
as modified from time to time.
-2-
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
2. Co-Branding of Products.
------------------------
(a) Exclusive Tradenames for Products. The Parties agree that during the
-----------------------------------
term of this Agreement, the Products will be marketed by I/PRO,
Nielsen and any Reseller only under the tradenames "Nielsen-I/PRO
I/COUNT" and "Nielsen-I/PRO I/AUDIT", without regard to the sales
channel employed.
(b) Co-Branding of Future Products. To the extent either Party intends to
-------------------------------
commercially introduce any Future Product during the term of this
Agreement, [**] under which such Future Product would be [**] the
Parties. [**]. Notwithstanding the foregoing, neither party will have
an obligation under this Agreement to develop any such Future
Products, and Nielsen will have no obligation under this Agreement to
sell and/or market any Future Products, absent an amendment of this
Agreement or a new agreement regarding such Future Products.
3. Sales and Distribution Rights; License Agreements.
--------------------------------------------------
(a) Grant of Marketing Rights. Subject to the terms and conditions of
-------------------------
this Agreement, I/PRO grants to Nielsen a world-wide non-exclusive,
non-transferable (except as set forth in Section 16(a) hereto) license
to market the Products and Services to End Customers and to Resellers
of the Products and Services. Promptly following notice from Nielsen
of a completed Product sale by Nielsen, Nielsen will enter into a
license agreement with the End Customer or Reseller and I/PRO will
implement the Product in accordance with I/PRO's installation
procedures.
(b) License Agreements. Distribution of the Product to End Customers or
-------------------
Resellers shall be made only pursuant to a license agreement executed
and delivered by the Party (either I/PRO or Nielsen, as the case may
be), which shall be in such form as the Parties may adopt from time to
time. Except as expressly provided herein, Nielsen shall have no
independent right to bind I/PRO to any agreement or to reproduce,
license or distribute the Products. Nielsen will be provided with the
opportunity to review the forms of agreements to be used with End
Customers and Resellers, and may provide I/PRO with suggested
modifications. I/PRO will promptly evaluate and, when appropriate,
incorporate such suggestions into I/PRO's form agreements. The Parties
will review the forms of agreement to be used with End customers and
-3-
<PAGE>
Resellers and will attempt to establish mutually acceptable forms of
agreement to be used for such purposes. In the event the Parties are
unable to agree, each Party shall be entitled to use its preferred
form of agreement, provided that the terms of such agreement shall not
impose any material obligation on the other Party not otherwise
imposed upon that Party herein, or materially disadvantage or
otherwise damage the legitimate business interests of the other Party.
(c) No Restrictions on End Customer Sales. Each Party may market the
--------------------------------------
Products to any End Customer, even if such End User is or could be
deemed to be a competitor of Nielsen or I/PRO.
(d) Notice of I/PRO Resellers. I/PRO shall provide Nielsen with prompt
--------------------------
notice of the identity of all of I/PRO's End customers and Resellers
for the Products, and all sales by I/PRO of the Products shall be
subject to the terms and conditions of this Agreement. If Nielsen has
objections to any standards and quality levels then practiced by
Nielsen), Nielsen will document such objections to I/PRO, so that a
joint decision can be taken on whether the relationship with the
objectionable Reseller should be continued. If I/PRO chooses to
continue its relationship with such Reseller, I/PRO will provide
Nielsen with a list of End Customers served by the objectionable
Reseller, and Nielsen will be permitted to notify those customers that
it is not supporting product sold by that Reseller. In addition,
I/PRO shall remove Nielsen's name or logo from Products licensed to
such objectionable Reseller by I/PRO.
4. Joint Sales and Marketing.
--------------------------
(a) Concerted Efforts. Each Party agrees to use its reasonable efforts to
------------------
sell the Products through all distribution channels that they may deem
appropriate including, in the case of Nielsen, through all reasonable
efforts of existing sales organizations within Nielsen Media Research.
The parties currently anticipate that Nielsen will focus on direct
sales to End Customers, while I/PRO will focus on indirect sales
thorough Resellers; provided that each Party may employ either
indirect or direct sales strategies in such Party's discretion, and it
is expressly understood and agreed between the parties that nothing
herein shall prevent either Party from accepting inquiries and
business from potential customers within the other Party's area of
focus.
(b) Coordination of Efforts. I/PRO shall be responsible for the
------------------------
coordination of sales and marketing efforts, including the development
and maintenance of a shared leads and sales database, and the
scheduling of monthly joint sales meetings. The parties will
coordinate their efforts to
-4-
<PAGE>
ensure that branding, logos, promotional look and product messages
used by each Party shall be as consistent as possible. I/PRO and
Nielsen will use reasonable efforts to minimize sales and customer
conflicts in the Parties' respective sales efforts. Each Party will
designate a contact person for the other Party with respect to
activities under this Agreement, and the operational employees form
the major departments of each Party will establish direct
relationships.
(c) Confirmation of Capacity. Nielsen agrees that in the course of its
-------------------------
sales efforts it will not schedule installations or other service
activities by I/PRO except with I/PRO's prior confirmation of
availability of capacity.
(d) Reseller Materials. The Parties shall ensure that the messages and
------------------
materials used by Resellers shall be consistent with those used by the
Parties. Neither Nielsen nor any Reseller identified by Nielsen will
make any representations, warranties or guaranties with respect to the
specifications, features or capabilities of the Products or Services
that are not consistent with I/PRO's then-current published Product
descriptions and specifications.
5. Price, Payment and Commissions.
------------------------------
(a) Pricing. Nielsen and I/PRO will market the Products only in
--------
accordance with a pricing schedule to be jointly established from time
to time by mutual agreement of the Parties. The pricing schedule will
include a range of allowable discounts applicable under specified
market and customer conditions. I/PRO and Nielsen may from time to
time and by mutual agreement change the prices and discounts set forth
on the rate card. Pricing for separate but related Products and
related services will identify each component separately and will be
consistently valued.
(b) Commissions.
------------
(i) Amount. During the term of this Agreement, I/PRO will pay to
------
Nielsen commissions equal to a percentage of Net Revenues (as defined below)
from Products (a) sold primarily through the efforts of Nielsen (or through any
Reseller identified and closed by Nielsen), in the percentage amounts set forth
on Exhibit B with respect to sales to U.S.-based End customers or Resellers
---------
("U.S. Customers"); and (b) sold primarily through the efforts of I/PRO (or by
any Reseller not identified and closed by Nielsen), in the percentage amounts
set forth on Exhibit C with respect to sales to U.S. Customers. The Parties
---------
agree to negotiate in good faith to set Commissions payable on sales to
non-U.S.-based End Customers and
-5-
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Resellers ("foreign Customers") on a country-by-country basis. If the Parties
cannot agree upon Commissions payable to Foreign Customers in any particular
country within thirty (30) days of the commencement of such good faith
negotiations, which thirty-day period shall begin to run upon receipt by one
Party of written notice that the other Party desires to begin such negotiations
accompanied by such information as the notifying party believes, in good faith,
provides a well-founded basis for the commissions proposed by the notifying
Party, then Commissions payable with respect to such sales in such country shall
be as set forth on Exhibit B (with respect to sales by Nielsen), or Exhibit C
--------- ---------
(with respect to sales by I/PRO), as the case may be. The Parties recognize that
because the costs associated with sales and service for Foreign Customers are
likely higher than for U.S. Customers, prices of the Products and Commissions
payable on sales of the Products to Foreign Customers may be adjusted upon
mutual agreement of the Parties. As used herein, "Net Revenues" means[**].
Each Party will invoice its respective Customers or Resellers. Commissions will
be paid to Nielsen at the end of each quarter with respect to Net Revenues and
accounts which are thirty (30) days or more overdue. It is understood that
whichever Party is responsible in law for the payment of taxes (if any) upon
revenues received from a Customer or Reseller shall pay such taxes, and shall be
responsible for the collection of such taxes.
(ii) Disputes. The Parties agree to mutually determine in good
---------
faith the amount of commission due in the event that I/PRO and Nielsen shall
disagree as to the Party responsible for the sale to the End Customer or
Reseller. I/PRO agrees to give Nielsen credit and pay Nielsen in accordance
with Exhibit B for any End Customers or Resellers over which a reasonable
---------
conflict arises.
(iii) Adjustments. The commissions set forth on Exhibit B and
------------ ---------
Exhibit C may be adjusted by mutual agreement of the Parties to reflect changes
- ---------
in pricing, costs, and market conditions, as the case may be. The Parties
acknowledge and agree that commissions must be set and periodically adjusted so
that prices can remain competitive with the marketplace, provide a reasonable
profit to I/PRO in each Product category, and a reasonable compensation to
Nielsen for its sales, support, and promotional efforts. In addition to
adjustments to commissions, the Parties also agree to consider other alternate
means of responding to competitive pressures on pricing of the Products.
Commissions on Future Products, if any, Parties subject to this Agreement will
be established upon mutual agreement of the Parties.
(iv) During the term of this Agreement, and for a period of two
(2) years thereafter, each Party will maintain books and records in connection
with its sales and marketing of the Products pursuant to this Agreement in
sufficient
-6-
<PAGE>
detail to permit the other Party to verify compliance with the terms and
conditions of this Agreement. Each Party will have the right through its
independent auditors to inspect such books and records of the other Party solely
to verify the amount of commissions payable pursuant to this Section 5. Any such
audit will be conducted on reasonable notice and during regular business hours
and will not interfere unreasonably with either Party's business activities.
Audits will be made not more than twice annually.
6. Product Development and Maintenance. I/PRO will use its best efforts
------------------------------------
to ensure high quality standards for the Products, and will use its best efforts
to resolve any errors in systems or reports. I/PRO will be responsible for
Product Development. I/PRO agrees to consider suggestions and requirements of
the respective sales personnel of each Party, as well as customer response data
and feedback, and shall make such enhancements to the Products as are reasonable
and appropriate in light of overall technical and operational constraints of
I/PRO. I/PRO will schedule monthly coordination meetings between its Product
Development staff and sales personnel of each Party as an aid in meeting its
Product Development obligations. I/PRO will devote its reasonable best efforts
to continue to provide superior value to End Customers, including sufficient
resources to maintain the Products. I/PRO acknowledges that it is I/PRO's
intention to develop and maintain Products that are deemed in customer technical
evaluations to be demonstrably superior overall to similarly priced competitive
products. If at any time a majority of customer technical evaluations clearly
indicate that the Products are inferior overall to similarly priced competitive
products, Nielsen shall provide I/PRO with the results of such studies and shall
make specific recommendations (the "Recommendations") regarding the manner in
which the Products shall be improved. I/PRO shall have a reasonable time, which
shall not be less than six (6) months or substantially more than nine (9)
months, to implement the Recommendations. If after such period a majority of
customer technical evaluations clearly indicate that, for the reasons addressed
by the Recommendations, the Product is inferior overall to similarly priced
competitive products, Nielsen shall have the right to terminate this Agreement
upon 30 days written notice to I/PRO.
7. Support. Each Party shall be responsible, through its respective
--------
sales organization and at its own expense, to provide an initial response to End
Customers and Resellers closed by such Party as to questions concerning
technical issues, problems or questions regarding the Products. Further
Technical Support will be provided solely by I/PRO, in accordance with I/PRO's
customer support policies in effect from time to time. Nielsen shall have the
right, at Nielsen's expense, to supplement the Technical Support provided by
I/PRO. If at any time Nielsen can demonstrate to I/PRO based upon significant
indications of customer dissatisfaction that I/PRO's technical support is
insufficient to meet the needs of End Customers and Resellers, Nielsen and I/PRO
shall work together to establish adequate customer support, which shall be
financed by appropriate offsets to commissions payable, or
-7-
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
such other method upon which the parties mutually agree. In addition, Nielsen
may provide additional analysis products and services to I/COUNT End Customers.
Nielsen may price such products and services separately; provided that the I/PRO
will receive a commission upon such products and services which is mutually
acceptable to both Parties. Nielsen may at its own expense also set up a hot-
line for third party I/AUDIT support, in addition to the standard I/AUDIT
support provided by I/PRO.
8. Exclusivity.
------------
(a) No Substantially Similar Agreements. During the term of the
------------------------------------
Agreement, I/PRO will not enter into any other comprehensive
agreement, such as this one, for the co-branding and marketing of the
Products; provided that I/PRO shall be permitted to enter into
bundling relationships with respect to other companies' products or
services.
(b) [**]. During the term of this Agreement, if the Parties [**] for the
[**] then the party [**] the other of such [**] will include a [**] of
the [**] including the [**] of such [**] of the [**] to be [**] and
other material terms [**]. The party [**] shall have the [**] in such
[**] of the [**] on terms that [**] with the [**] of such Party to
[**] shall be [**] such party's [**] under the [**]. In the event that
[**] within [**] party shall be [**] into the [**] on the [**] in the
[**]. Information [**] under this Section 8(b) shall be deemed to be
Confidential Information [**], and shall be treated in accordance with
Section 10 of this Agreement. Neither party shall be [**] the other
with respect to the [**] of any [**]. The Parties hereby expressly
acknowledge that Nielsen's relationship with Anywhere Online shall not
be subject to this Section 8(b).
(c) Derivative Informational Products and Services. The Parties may, upon
-----------------------------------------------
mutual agreement, develop and brand derivative informational products
and services based on data collected through use of the Products sold
pursuant to this Agreement. The Parties will share the revenues from
such products in such manner as the Parties may agree.
9. Property Rights.
----------------
(a) Intellectual Property Rights. I/PRO and Nielsen acknowledge and agree
----------------------------
that I/PRO owns all of the I/PRO Proprietary Rights. Any use by
Nielsen of such I/PRO Proprietary Rights is authorized only for the
purposes herein set forth and upon termination of this Agreement for
any reason, such authorization will cease. Nielsen and I/PRO
acknowledge and agree that Nielsen owns all of the Nielsen Proprietary
Rights. Any use by I/PRO of such Nielsen Proprietary Rights is
authorized only for the purposes herein set forth and upon termination
of this Agreement for any reason, such authorization will cease.
-8-
<PAGE>
Ownership of products and services developed jointly by the Parties in
the future shall be determined by mutual agreement of the Parties.
(b) No Other Rights. Nielsen may not, directly or through any person or
----------------
entity, in any form or manner, copy, distribute, reproduce,
incorporate, use or allow access to the Products or modify, prepare
derivative works of, decompile, reverse engineer, disassemble or
otherwise attempt to derive source code or object code from the
Products, except as I/PRO may agree in writing. Each Party will take
appropriate steps with End Customers and Resellers, as the other Party
may reasonably request, to inform them of and assure their compliance
with the restrictions contained in this Agreement.
(c) Proprietary Notices. Neither Party will remove from any copy of the
--------------------
Products any copyright and other proprietary notices of the other
Party.
(d) Use of Trademarks. Subject to the terms and conditions of this
------------------
Agreement, during the term of this Agreement each Party grants to the
other a non-exclusive, world-wide license to use the other Party's
tradename and trademarks (collectively, the "Trademarks") to the
extent included in the Product names set forth in Section 2(a), and
for the purpose of marketing and selling the Products; provided that
the user submits all such media to the other Party for prior approval
and follows reasonable trademark usage guidelines communicated by the
other Party. Each Party understands that the other has applied for
and/or obtained applicable federal and state registration of certain
of the Trademarks and agrees, to so indicate on the box containing the
Products and in any advertisement, promotional materials or other
documents that contain the Trademarks. Except as expressly provided
herein, their Agreement shall not be construed to grant to any Party
any right, title or interest in the other's Trademarks. Upon
termination of this Agreement for any reason, each Party will
immediately cease all use of Products' names and Trademarks and
destroy or deliver to the other Party all materials in the user's
control or possession which bear such names and trademarks, including
any sales literature. At no time during or after the term of this
Agreement will either Party challenge or assist others to challenge
the other's Trademarks or the registration thereof or attempt to
register any trademarks, marks or tradenames confusingly similar to
those of the other. Each Party will present and promote the sale of
the Products and Services fairly.
-9-
<PAGE>
10. Confidentiality.
----------------
(a) General. Except as provided in this Agreement, each Party will not
--------
use in any way for its own account of any third party, nor disclose to
any third party, any such Confidential Information revealed to it by
the other Party. Each Party agrees to protect any Confidential
Information from disclosure to others with at least the same degree of
care as that which is accorded to its own proprietary information, but
in no event with less than reasonable care. In the event of
termination of this Agreement, each Party agrees not use or disclose
any Confidential Information, to destroy or return all written or
electronic copies of Confidential Information of the other Party and
each Party will not develop or have developed any product programs
utilizing any of the Confidential Information.
(b) Exceptions. The foregoing restrictions will not apply to information
-----------
that (i) is known to each Party at the time of disclosure to that
Party as demonstrated by written or electronic records of the
receiving Party, (ii) has become publicly known through no wrongful
act of the receiving Party, (iii) has been rightfully received by a
Party from a third party authorized to make such disclosure without
restriction, or (iv) has been approved for release by written
authorization of the disclosing Party.
(c) Notice. Each Party agrees to notify the other promptly in the event
-------
of any breach of confidentiality its security under conditions in
which it would appear that any Confidential Information was prejudiced
or exposed to loss. Each Party shall, upon request of the other, take
all reasonable steps necessary to recover any confidential Information
disclosed to or placed in the possession of the receiving Party by
virtue of this Agreement. The cost of taking such actions shall be
borne solely by the breaching Party.
(d) Non-Disclosure Agreement. The parties agree that the Non-Disclosure
-------------------------
Agreement dated January 20, 1995 shall remain in full force and effect
as to disclosures made prior to the date of this Agreement.
11. Indemnity.
---------
(a) Indemnification by I/PRO. I/PRO agrees, at its own expense, to defend
------------------------
or at its option to settle any claim or action brought against Nielsen
on the issue of infringement of any patent, copyright or other
intellectual property right of any third party by the Products as used
or distributed within the scope of this Agreement, and to indemnify
Nielsen against all damages and costs, including reasonable legal
fees, which may be
-10-
<PAGE>
assessed against Nielsen under any such claim or action; provided that
--------
Nielsen provides I/PRO with (i) prompt written notice of such claim or
action, (ii) sole control and authority over the defense or settlement
of such claim or action and (iii) the authority, information and
assistance that is reasonably necessary for defense or settlement of
the claim or action. In the event that the Products, or a part
thereof, are held, or in I/PRO's sole opinion, may be held to
constitute an infringement, I/PRO, at its option and expense, may
either (w) procure, at no additional cost to Nielsen or any and all
End Customers or Resellers with whom Nielsen has completed a Product
sale, the right to continue to use the Product(s), (x) modify the
Products so they become non-infringing, (y) replace the Products with
functionally equivalent non-infringing materials reasonably acceptable
to Nielsen or (z) accept return of the Products. Notwithstanding the
foregoing, I/PRO will have no liability if the alleged infringement
arises from (i) the use, in the manner specified in relevant I/PRO
documentation, of other than a then current release of the Products,
or (ii) combinations of the Products with non-I/PRO programs or
products, including any Nielsen products, unless such combination is
authorized in advance in writing by I/PRO. THE FOREGOING STATES THE
ENTIRE LIABILITY AND OBLIGATIONS OF I/PRO AND THE EXCLUSIVE REMEDY OF
NIELSEN, WITH RESPECT TO ANY ALLEGED OR ACTUAL INFRINGEMENT OF
PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS OR OTHER INTELLECTUAL
PROPERTY RIGHTS BY THE PRODUCTS. In addition, I/PRO agrees to
indemnify and hold Nielsen harmless from and against any cost, loss,
expense (including attorney's fees) resulting from any and all claims
by third parties for loss, damage or injury allegedly caused by any
wrongful act, misrepresentation or omission by I/PRO in connection
with I/PRO's activities under this Agreement; Nielsen has have the
right to participate at its expense in any such dispute.
(b) Indemnification by Nielsen. Nielsen agrees to indemnify and hold
--------------------------
I/PRO harmless from and against any cost, loss, expense (including
attorney's fees) resulting from any and all claims by third parties
for loss, damage or injury allegedly caused by any wrongful act,
misrepresentation or omission by Nielsen in connection with Nielsen's
activities under this Agreement; I/PRO shall have the right to
participate at its expense in any such dispute. Notwithstanding the
foregoing, Nielsen assumes no liability hereunder for claims or
actions resulting from or arising out of the design, development
and/or operation of the Products.
-11-
<PAGE>
12. Warranty Disclaimer. EXCEPT AS EXPRESSLY PROVIDED HEREIN, I/PRO
-------------------
GRANTS NO WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, REGARDING THE
PRODUCTS, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY, THEIR MERCHANTABILITY,
OR OTHERWISE.
13. Termination.
-----------
(a) Term. This Agreement shall become effective on the date first written
----
on this Agreement and shall continue for a period of three (3) years,
and shall be continued thereafter unless either Party notifies the
other of termination of the Agreement not less than nine (9) months
prior to the effective date of such termination.
(b) Termination for Cause. Either Party may terminate this Agreement at
---------------------
any time if the other Party materially breaches this Agreement and
fails to cure such breach within sixty (60) days after written notice
of such breach, or if the other Party shall become insolvent, or if
either Party makes an assignment for the benefit of creditors, or if
there are instituted by or against either party proceedings in
bankruptcy or under any insolvency or similar law or for
reorganization, receivership or dissolution.
(c) Termination Liability. Neither party shall be liable in any manner on
---------------------
account of such Party's determination on termination or cancellation
of this Agreement in accordance with its terms. Each Party shall
immediately discontinue all advertising and marketing references of
any kind to the other Party and/or its products upon such termination
or cancellation. The rights of termination and cancellation as set
forth herein are absolute.
(d) Obligations Upon Termination. The termination or expiration of this
----------------------------
Agreement shall in no way relieve either party from its obligations to
pay the other any sums accrued hereunder prior to such termination or
expiration.
14. Limitation of Liability. EXCEPT AS SET FORTH IN SECTION 11 HERETO,
-----------------------
NEITHER I/PRO NOR NIELSEN SHALL HAVE ANY LIABILITY TO THE OTHER, FOR ANY LOST
PROFITS OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES HOWEVER CAUSED AND WHETHER ARISING
UNDER CONTRACT, TORT OR OTHER THEORY OF LIABILITY. IT IS ACKNOWLEDGED BY THE
PARTIES THAT NOTHING IN THIS SECTION 14 SHALL LIMIT A PARTY'S OBLIGATION TO PAY
AMOUNTS ALREADY DUE AND OWING TO THE OTHER PARTY. THESE LIMITATIONS SHALL APPLY
-12-
<PAGE>
NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
15. Certain Equity Matters. The Parties acknowledge and agree that,
----------------------
concurrently with the execution and delivery of this Agreement, I/PRO is
delivering to Nielsen certain warrants to purchase Common Stock of I/PRO. I/PRO
also agrees during the term of this Agreement to provide notice of each meeting
of I/PRO's Board of Directors and will permit a representative of Nielsen (who
shall be reasonably acceptable to I/PRO) to attend such meetings, without any
power to vote and subject to exclusion with respect to any portion of any Board
meeting which, in the good faith determination of I/PRO's Board of Directors,
involves confidential information of I/PRO disclosure of which to Nielsen would
be expected to involve a conflict of interest detrimental to I/PRO. Nielsen
may, upon appropriate notice to I/PRO's President or Chairman of the Board of
Directors, submit appropriate matters for the agenda at any such Board meeting.
16. Miscellaneous.
-------------
(a) Assignment. This Agreement will be binding upon and inure to the
----------
benefit of the parties hereto and their permitted successors and
assigns. Notwithstanding the foregoing, neither this Agreement, nor
any rights or obligations hereunder, may be assigned or otherwise
transferred by either Party, except to any successor to all or
substantially all of such Party's assets or a majority of the voting
power of such Party's capital stock or, in the case of Nielsen, to an
assignee of or successor to substantially all of the business or
assets of Nielsen's Nielsen Media Research division. Any other
assignment or transfer without prior written consent will be null and
void.
(b) Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the
parties cannot reach a mutually agreeable and enforceable replacement
for such provision, then (x) such provision shall be excluded from
this Agreement, (y) the balance of the Agreement shall be interpreted
as if such provision were so excluded and (z) the balance of the
Agreement shall be enforceable in accordance with its terms.
(c) Legal Expenses. The prevailing party in any legal action brought by
--------------
one Party against the other and arising out of or relating to this
Agreement shall be entitled, in addition to any other rights and
remedies it may have, to reimbursement for its expenses, including
court costs and reasonable attorneys' fees (including those incurred
in any appeal).
-13-
<PAGE>
(d) Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of
which together shall constitute one instrument.
(f) Entire Agreement; Enforcement of Rights. This Agreement sets forth
---------------------------------------
the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them.
No modification of or amendment to this Agreement, nor any waiver of
any rights under this Agreement, shall be effective unless in writing
signed by the party to be charged. The failure by either party to
enforce any rights hereunder shall not be construed as a waiver of any
rights of such party.
(g) Governing Law. The validity, construction and enforceability of this
-------------
Agreement shall be governed in all respects by the law of California
applicable to agreements negotiated, executed and performed in
California, whether one or more of the parties shall be or hereafter
become a resident of another state or country, and without reference
to conflict of laws principles.
(h) Exclusive Jurisdiction. The Parties agree that all disputes arising
----------------------
among them related to this Agreement, whether arising in contract,
tort, equity or otherwise, shall be resolved only in the United States
federal courts in the Northern District in California or California
State courts located in San Francisco County, California. Each Party
hereby irrevocably submits to the personal jurisdiction of such
courts.
(i) Force Majeure. If the performance of this Agreement or any
-------------
obligations hereunder is prevented, restricted or interfered with by
reason of fire or other casualty or accident, strikes or labor
disputes, war or other violence, any law, order, proclamation,
regulation, ordinance, demand or requirement of any government agency,
or any other act or condition beyond the reasonable control of the
parties hereto, the party so affected upon giving prompt notice to the
other parties shall be excused from such performance during such
prevention, restriction or interference.
(j) Notices and Other Communications. Notice by any party under this
--------------------------------
Agreement shall be in writing and personally delivered or given by
registered mail, overnight courier, telecopy confirmed by registered
mail, telefax or prepaid cable, or e-mail transmission via Internet
(with a
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<PAGE>
copy by first class, certified mail, postage prepaid on the first
business day thereafter) addressed to the other party at its
respective address given herein (or at any such other address as may
be communicated to the notifying party in writing) and shall be deemed
to have been served when delivered or, if delivery is not accomplished
by reason of some fault of the addressee, when tendered.
(k) Import and Export Controls. Nielsen understands and acknowledges that
--------------------------
I/PRO may be subject to regulation by agencies of the U.S. government,
including the U.S. Department of Commerce which prohibit export or
diversion of certain products and technology to certain countries. Any
and all obligations of I/PRO to provide Products or any media in which
the Products is contained, as well as any training or technical
assistance will be subject in all respects to such U.S. laws and
regulations as will from time to time govern the license and delivery
of technology and products abroad by persons subject to the
jurisdiction of the U.S., including the Export Administration Act of
1979, as amended, any successor legislation, and the Export
Administration Regulations issued by the Department of Commerce,
International Trade Administration, Bureau of Export Administration.
Notwithstanding anything to the contrary contained herein, the parties
agree that unless prior authorization is obtained from the Office of
Export Licensing, the parties shall not export, reexport, or
transship, directly or indirectly, to country groups Q, S, W, Y or Z
(as defined in the Export Administration Regulations), or Afghanistan
or the People's Republic of China (excluding Taiwan), the Products or
any of the technical data disclosed hereunder or the direct product of
such technical data.
(l) Remedies. The parties acknowledge that any breach of any of the
--------
obligations under Sections 10, 11 and 14 is likely to cause or
threaten irreparable harm, and, accordingly, the parties agree that in
such event, the other party shall be entitled to equitable relief to
protect its interest therein, including but not limited to preliminary
and permanent injunctive relief, as well as money damages.
[SIGNATURE PAGE FOLLOWS]
-15-
<PAGE>
The parties have executed this Agreement as of the date first written
above.
INTERNET PROFILES CORPORATION, NIELSEN MEDIA RESEARCH, A
a California corporation DIVISION OF A.C. NIELSEN
COMPANY, a Delaware corporation
By: /s/ Ariel Poler By: /s/ David Harkness
---------------------- ------------------------
Name: Ariel Poler Name: David Harkness
-------------------- ----------------------
Title: President Title: Sr. Vice President
------------------- ---------------------
Address: Address:
Internet Profiles Corporation Nielsen Media Research
785 Market Street, 13th floor 299 Park Avenue
San Francisco, California 94103 New York, New York 10171-0074
Attn: Chief Financial Officer Attn: Sr. Vice President, Planning
and Development
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<PAGE>
Exhibit A
---------
Produce Description
-------------------
I/AUDIT is that certain software program and related services referred to
by I/PRO as I/AUDIT, all as more fully described on I/PRO's World Wide Web site
with the URL http://www.ipro.com/iaudit.html. I/AUDIT does not include the
I/PRO product known as "I/CODE".
I/COUNT is that certain software program and related services referred to
by I/PRO as I/COUNT, all as more fully described on I/PRO's World Wide Web site
with the URL http://www.ipro.com/icount.html. I/COUNT does not include the
I/PRO product known as "I/CODE".
-17-
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Exhibit B
---------
Nielsen Commission Terms
------------------------
(U.S. End Customers or Resellers)
- ------------------------------------------------------------------------
Product Percentage [**]
------- ---------------
- ------------------------------------------------------------------------
I/AUDIT [**]
- ------------------------------------------------------------------------
I/COUNT [**]
(aggregate cumulative sales of I/COUNT
by Nielsen [**])
- ------------------------------------------------------------------------
I/COUNT [**]
(aggregate cumulative sales of I/COUNT
by Nielsen [**])
- ------------------------------------------------------------------------
-18-
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Exhibit C
---------
I/PRO Commission Terms
----------------------
(U.S. End Customers or Resellers)
- -----------------------------------------------------------------------------
Product Percentage [**]
------- ---------------
- -----------------------------------------------------------------------------
I/AUDIT [**]
- -----------------------------------------------------------------------------
I/COUNT [**]
(sold directly by I/PRO)
- -----------------------------------------------------------------------------
I/COUNT [**]
(sold by any Reseller or other channel)
- -----------------------------------------------------------------------------
-19-
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Engage Technologies, Inc.:
The audits referred to in our report dated June 4, 1999, except for note 16,
which is as of June 11, 1999, included the related financial statement
schedule as of July 31, 1996, 1997 and 1998, and April 30, 1999, and for the
three years ended July 31, 1998 and the nine month period ended April 30,
1999, included in the Registration Statement. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the inclusion of our report dated June 4, 1999, except for note
16, which is as of June 11, 1999, with respect to the consolidated balance
sheets of Engage Technologies, Inc., as of July 31, 1997 and 1998, and April
30, 1999, 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 and the nine months ended April 30,
1999, which report appears in this Registration Statement, and to the
references to our firm under the headings "Selected Consolidated Financial
Data," and "Experts" in this Registration Statement.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
July 19, 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 LLP
KPMG LLP
Raleigh, North Carolina
July 19, 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
July 16, 1999
