<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
----------------------------------------------------
COMMISSION FILE NUMBER 000-26671
ENGAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3281378
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 BRICKSTONE SQUARE, ANDOVER, MASSACHUSETTS 01810
(Address of Principal Executive Offices) (Zip Code)
(978) 684-3884
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of December
1, 2000 was 196,516,656.
================================================================================
<PAGE> 2
ENGAGE, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2000
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of July 31, 2000 and October 31,
2000 (unaudited) ...................................................3
b) Consolidated Statements of Operations (unaudited) for the three
months ended October 31, 1999 and 2000 .............................4
c) Consolidated Statements of Cash Flows (unaudited) for the three
months ended October 31, 1999 and 2000 .............................5
d) Notes to Interim Consolidated Financial Statements ..................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..........................18
Item 6. Exhibits and Reports on Form 8-K ...................................18
SIGNATURES
EXHIBIT INDEX
2
<PAGE> 3
ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
2000 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 119,809 $ 107,275
Available-for-sale securities................................. 16,147 669
Accounts receivable, less allowance for
doubtful accounts of $11,703 and $19,254 at
July 31, 2000 and October 31, 2000 respectively............ 79,799 58,519
Prepaid expenses.............................................. 2,570 4,325
----------- -----------
Total current assets.................................... 218,325 170,788
----------- -----------
Property and equipment, net..................................... 31,334 36,200
Intangible assets, net of accumulated amortization
of $217,454 and $334,118 at July 31, 2000 and
October 31, 2000, respectively............................. 873,323 1,016,921
Other assets.................................................... 9,915 11,053
----------- -----------
Total assets............................................ $ 1,132,897 $ 1,234,962
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligation under capital lease............. $ 4,650 $ 5,157
Current portion of long-term debt............................. 2,010 1,930
Accounts payable.............................................. 33,365 25,625
Due to CMGI................................................... 27,287 29,533
Accrued expenses.............................................. 24,599 37,136
Deferred revenue.............................................. 7,604 12,838
----------- -----------
Total current liabilities............................... 99,515 112,219
----------- -----------
Deferred revenue................................................ 651 180
Obligation under capital lease, net of current portion.......... 2,905 2,541
Long-term debt, net of current portion.......................... 1,843 1,395
Other long-term liabilities..................................... 843 922
----------- -----------
Total liabilities....................................... 105,757 117,257
----------- -----------
Minority interest............................................... 8,812 8,356
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock - Engage, $.01 par value,
1,500 shares authorized, 0 shares issued and
outstanding at July 31, 2000 and October 31, 2000.......... -- --
Series B Preferred Stock, $.01 par value, 239 shares
authorized, 0 shares issued and outstanding
at July 31, 2000 and October 31, 2000...................... -- --
Series C Preferred Stock, $.01 par value, 2,000 shares
authorized, 0 shares issued and outstanding at July 31,
2000 and October 31, 2000.................................. -- --
Common Stock, $.01 par value, 350,000 shares authorized,
178,860 and 195,917 shares issued and outstanding at
July 31, 2000 and October 31, 2000, respectively........... 1,789 1,959
Additional paid-in capital.................................... 3,650,059 3,878,237
Deferred compensation......................................... (1,234) (23,236)
Accumulated other comprehensive loss.......................... (260) (101)
Accumulated deficit........................................... (2,632,026) (2,747,510)
----------- -----------
Total stockholders' equity.............................. 1,018,328 1,109,349
----------- -----------
Total liabilities and stockholders' equity.............. $ 1,132,897 $ 1,234,962
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 4
ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Revenue:
Revenue....................................................... $ 18,163 $ 39,662
Revenue, related party........................................ 1,854 1,360
--------- ---------
Total revenue............................................. 20,017 41,022
--------- ---------
Cost of revenue:
Cost of revenue............................................... 16,223 29,758
Amortization of developed technology.......................... -- 784
--------- ---------
Total cost of revenue..................................... 16,223 30,542
--------- ---------
Gross profit.............................................. 3,794 10,480
--------- ---------
Operating expenses:
In-process research and development........................... -- 700
Research and development...................................... 3,293 11,481
Selling and marketing......................................... 11,947 32,364
General and administrative.................................... 2,773 17,739
Amortization of goodwill and other intangibles................ 4,239 115,902
Restructuring costs........................................... -- 4,130
Stock compensation............................................ 102 3,576
--------- ---------
Total operating expenses.................................. 22,354 185,892
--------- ---------
Loss from operations............................................... (18,560) (175,412)
Other income (expense):
Interest income............................................... 1,356 2,021
Interest expense.............................................. (360) (349)
Equity in loss of joint venture............................... (326) --
Minority interest............................................. -- 343
Other income (expense), net................................... 8 (420)
--------- ---------
Net loss........................................................... $ (17,882) $(173,817)
========= =========
Basic and diluted net loss per share............................... $ (0.92)
=========
Weighted average number of basic and diluted shares outstanding.... 188,739
=========
Pro forma basic and diluted net loss per share..................... $ (0.17)
=========
Pro forma weighted average number of basic and diluted shares
outstanding..................................................... 106,961
=========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 5
ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (17,882) $(173,817)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization..................................... 4,600 118,939
Equity in loss of joint venture................................... 326 --
Provision for bad debts........................................... 204 10,639
Stock compensation................................................ 102 3,576
Amortization of discount on available-for-sale securities......... (94) (6)
Gain on disposal of property and equipment........................ (8) --
Minority interest................................................. -- (456)
In-process research and development............................... -- 700
Changes in operating assets and liabilities, net of impact of
acquisitions:
Accounts receivable.......................................... (8,110) 17,287
Prepaid expenses and other assets............................ (405) (1,445)
Due to CMGI and affiliates................................... 1,183 2,246
Accounts payable............................................. 2,532 (11,492)
Accrued expenses............................................. 818 3,619
Deferred revenue............................................. (714) 628
--------- ---------
Net cash used for operating activities................... (17,448) (29,582)
--------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities............................. (54,016) --
Proceeds from redemption of available-for-sale securities............. -- 15,732
Net cash acquired on acquisition of subsidiaries...................... -- 2,706
Purchases of property and equipment................................... (698) (4,651)
Other................................................................. (1,992) --
--------- ---------
Net cash (used for) provided by investing activities..... (56,706) 13,787
--------- ---------
Cash flows from financing activities:
Net change in debt to CMGI and affiliates............................. 8,328 --
Proceeds from issuance of common stock, net of issuance costs and
repurchases......................................................... 21 4,430
Repayment of capital lease obligations................................ (116) (889)
Repayment of long-term debt........................................... -- (528)
--------- ---------
Net cash provided by financing activities................ 8,233 3,013
--------- ---------
Effect of exchange rate changes on cash and cash equivalents............... 21 248
--------- ---------
Net decrease in cash and cash equivalents.................................. (65,900) (12,534)
Cash and cash equivalents, beginning of period............................. 112,034 119,809
--------- ---------
Cash and cash equivalents, end of period................................... $ 46,134 $ 107,275
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest............................................. $ 360 $ 349
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 6
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, these unaudited consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of our management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of our financial position,
results of operations and cash flows at the dates and for the periods indicated.
While we believe that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 2000 which are contained in our Annual Report on Form
10-K filed with the Securities and Exchange Commission (the "SEC") on October
30, 2000. The results for the three-month period ended October 31, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Effective August 1, 1998, we adopted the provisions of SOP 97-2, Software
Revenue Recognition. For transactions after August 1, 1998, revenue from
software product licenses, Engage Knowledge database services and web-site
traffic audit reports are generally recognized when (i) a signed noncancelable
software license exists, (ii) delivery has occurred, (iii) our 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 our accounting for revenue as a result
of the adoption of SOP 97-2.
For multiple element arrangements involving products, services and support
elements from MediaBridge Technologies, Inc. ("MediaBridge"), a recent
acquisition, we recognize revenue in accordance with SOP 98-9, Software Revenue
Recognition with Respect to Certain Arrangements, when vendor-specific objective
evidence of fair value does not exist for the delivered element. Under the
residual method, the fair value of the undelivered elements are deferred and
subsequently recognized. We have established sufficient vendor-specific
objective evidence of fair value for MediaBridge's services and support elements
based on the price charged when these elements are sold separately. Accordingly,
software license revenue for products developed by MediaBridge is recognized
under the residual method in arrangements in which the software is sold with one
or both of the other elements.
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.
Substantially all of the revenue from our Media and Media Management
segments is recognized on a gross basis and amounts paid to web sites are
recorded as cost of revenue. Revenue is generally recorded on a gross basis in
arrangements in which we act as principal in the transaction. Revenue is
recognized on a net basis of the related web site expense in arrangements in
which we act primarily as a sales agent.
Amounts collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenue.
Net Loss per Share
We calculate earnings per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic earnings per
share is computed based on the weighted average number of common shares
outstanding during the period.
6
<PAGE> 7
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The dilutive effect of common stock equivalents are included in the calculation
of diluted earnings per share only when the effect of their inclusion would be
dilutive.
Pro forma basic and diluted loss per share reflects the impact of the
conversion of debt to CMGI and preferred stock for Adsmart Corporation
("Adsmart"), after adjustment for the Engage exchange ratio, as of the date of
the beginning of each period, or date of issuance, if later, using the
"if-converted method".
Adsmart had a formal borrowing arrangement with CMGI under which advances
made by CMGI to Adsmart, and the related accrued interest, may be converted at
the option of CMGI into shares of convertible preferred stock. CMGI elected to
convert all advances and accrued interest outstanding on April 28, 2000 into
shares of Adsmart convertible preferred stock. CMGI then elected to convert all
shares of Adsmart convertible preferred stock into shares of Adsmart common
stock. Conversion of all of Adsmart's common stock into our common stock
occurred upon the completion of our acquisition of Adsmart (see Notes C and D).
The pro forma basic and diluted net loss per share information included in the
accompanying statements of operations for the three months ended October 31,
1999 reflects the impact on pro forma basic and diluted net loss per share of
such conversions as of the beginning of the period or date of issuance, if
later, using the if-converted method. Historical basic and diluted net loss per
share has not been presented on the face of the consolidated statements of
operations for the three month period ended October 31, 1999 because it is
irrelevant due to the change in our capital structure and resultant basic and
diluted loss per share that resulted upon conversions of the convertible
preferred stock and debt to CMGI. Pro forma basic and diluted net loss per share
has been presented for comparative purposes.
The reconciliation of the numerators and denominators of the basic and
diluted loss per share computation for our reported net loss is as follows:
BASIC AND DILUTED NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 2000
------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
NUMERATOR:
Net loss ...................................................... $(173,817)
---------
DENOMINATOR:
Weighted average shares outstanding ........................... 188,739
---------
Basic and diluted net loss per share .......................... $ (0.92)
=========
</TABLE>
The reconciliation of the numerators and denominators of the pro forma
basic and pro forma diluted loss per share computation for our reported net loss
is as follows:
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 1999
------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
NUMERATOR:
Net loss ...................................................... $ (17,882)
---------
DENOMINATOR:
Weighted average shares outstanding ........................... 97,446
Assumed conversion of preferred stock ......................... 694
Assumed conversion of debt to CMGI ............................ 8,821
---------
Weighted average number of diluted shares outstanding ......... 106,961
---------
Pro forma basic and diluted net loss per share ................ $ (0.17)
=========
</TABLE>
Had we presented the historical basic and diluted net loss per share, the
reconciliation of the numerators and denominators of the historical basic and
diluted net loss per share would have been as follows:
7
<PAGE> 8
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
HISTORICAL BASIC AND DILUTED NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 1999
------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
NUMERATOR:
Net loss ...................................................... $(17,882)
--------
DENOMINATOR:
Weighted average shares outstanding ........................... 97,446
--------
Basic and diluted net loss per share .......................... $ (0.18)
========
</TABLE>
At October 31, 2000, we had outstanding stock options to purchase
26,562,220 shares of common stock at a weighted average exercise price of $12.59
that could potentially dilute earnings per share. The dilutive effect of the
exercise of these options has been excluded from the computation of diluted net
loss per share, as the effect would have been antidilutive for the periods
presented.
C. ACQUISITIONS
During the quarter ended October 31, 2000, management conducted its ongoing
business review and impairment analysis under its existing policy. As part of
this review, management concluded that certain previously recorded intangible
assets were impaired as of October 31, 2000 and the related intangible assets
were written off or adjusted to their estimated fair value. The impairment
charge was recorded as additional amortization of goodwill and other
intangibles. The components of the impairment charge included $15.2 million
related to writing off the Flycast Communications Corporation ("Flycast")
tradename that is no longer being used in our business and $1.6 million related
to writing down Flycast and AdKnowledge Inc. ("AdKnowledge") workforce
intangible assets as a result of higher employee turnover than originally
anticipated.
On August 31, 2000, we completed our acquisition of Space Media Holdings
Limited ("Space"), a leading independent Internet marketing network in Asia, in
an all-stock transaction for approximately $35.8 million including acquisition
costs of $425,000 and net of cash acquired of $70,000. The purchase price
consisted of approximately 3,174,000 common shares at a per share value of
$11.17. We also recorded approximately $18.9 million in deferred compensation
related to approximately 1,525,000 common shares issuable to the employee
shareholders of Space contingent upon the employees' remaining with us for one
year after the date of acquisition. Contingent consideration, consisting of
approximately 1,404,000 common shares, has been placed in escrow to secure
certain performance obligations by Space. The value of the escrow shares will be
recorded as additional purchase price at the then-fair value upon the attainment
of the performance goals measured through December 31, 2000. At October 31,
2000, the probability that the performance goals will be attained is remote, and
therefore it is unlikely that additional purchase price will be recorded. The
value of our shares included in the purchase price was recorded net of a
weighted average 10% market discount to reflect restrictions on transferability
on certain of these shares.
On September 11, 2000, we completed our acquisition of MediaBridge, a
leading provider of cross-media, closed loop targeted marketing systems for
approximately $219.1 million including acquisition costs of approximately
$482,000 and net of cash acquired of $2.6 million. The purchase price consisted
of approximately 11,741,000 common shares at a weighted average per share value
of $16.20 and stock options to acquire our common stock valued at approximately
$31.1 million. We also recorded approximately $7.0 million in deferred
compensation related to the intrinsic value of stock options issued to
MediaBridge employees. Approximately twelve percent of the shares issued are
subject to an escrow period of one year to secure certain indemnification
obligations of the former stockholders of MediaBridge. The value of our shares
included in the purchase price was recorded net of a weighted average 6.25%
market discount to reflect restrictions on transferability on certain of these
shares.
The Space and MediaBridge acquisitions 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 amounts of the purchase prices allocated to goodwill
and other identifiable intangible assets are being amortized on a straight-line
basis over three years. Amortization of goodwill and other identifiable
intangible assets, excluding developed technology amortization, is reflected as
a separate component within operating expenses. Amortization of developed
technology is reflected as a separate component within cost of revenue. The
acquired companies are included in our consolidated financial statements from
the dates of acquisition.
8
<PAGE> 9
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The purchase prices for the acquisitions were allocated as follows:
<TABLE>
<CAPTION>
MEDIABRIDGE SPACE
----------- -----
(IN THOUSANDS)
<S> <C> <C>
Working capital (deficit), net of cash acquired of $2,636 for MediaBridge and $70 for Space ... $ (7,257) $ (1,042)
Property and equipment, net ................................................................... 2,034 434
Other assets .................................................................................. 286 --
In-process research and development ........................................................... 700 --
Long-term obligations ......................................................................... (690) --
Goodwill ...................................................................................... 199,692 36,416
Other identifiable intangible assets .......................................................... 24,300 --
--------- ---------
Purchase price, net of cash acquired .......................................................... $ 219,065 $ 35,808
========= =========
</TABLE>
The following table represents our unaudited pro forma results of
operations for the three months ended October 31, 1999 and 2000, as if the
AdKnowledge, Flycast, Virtual Billboard Network ("VBN"), Interactive Solutions
Inc. ("ISI"), MediaBridge and Space acquisitions had all occurred on August 1,
1999 and as if we owned 66.6% of Engage Technologies Japan on August 1, 1999.
These pro forma results include adjustments for the amortization of goodwill and
other intangibles and deferred compensation, acquisition related costs expensed
by Flycast and MediaBridge prior to the date of acquisition, the elimination of
amounts expensed for in-process research and development and for the issuance of
shares used in the acquisition, and the elimination of intercompany
transactions. 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>
THREE MONTHS ENDED OCTOBER 31,
---------------------------------
1999 2000
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenue ...................................... $ 41,447 $ 42,319
Net loss ......................................... (147,359) (194,014)
Pro forma net loss per share ..................... (0.79) (0.99)
</TABLE>
Under the terms of the Flycast Merger Agreement, upon the exercise of CMGI
options by former Flycast employees, CMGI is obligated to pay us the exercise
price of the related CMGI options issued to the former Flycast employees as part
of CMGI's acquisition of Flycast. Additionally, in the event that former Flycast
employees terminate their employment with us, their unexercised CMGI options are
cancelled and CMGI is obligated to return Engage common shares to us based on
the number of CMGI options cancelled multiplied by the exchange ratio as defined
in the Merger Agreement. Engage common shares returned to us are valued based
upon the per share value originally used to record the non-cash dividend to
CMGI. Any cash or Engage common shares returned to us are treated as a reduction
to the previously recorded dividend to CMGI. A reconciliation of the net
dividend to CMGI recorded as a component of accumulated deficit for the three
months ended October 31, 2000 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net dividend to CMGI recorded as of July 31, 2000 ......................... $ 2,169,441
Value of Engage common shares due from CMGI for
option cancellations for the period August 1,
2000 through October 31, 2000 ........................................ (57,661)
Cash consideration for exercise price of CMGI stock
options exercised from August 1, 2000 through
October 31, 2000 ..................................................... (673)
-----------
Cumulative net dividend to CMGI as of October 31, 2000 .......... $ 2,111,107
===========
</TABLE>
D. COMBINING FINANCIAL INFORMATION
The Adsmart acquisition has been accounted for as an "as-if pooling" and
accordingly, our historical consolidated financial statements have been restated
to include the accounts and results of operations of Adsmart back to April 1,
1996, the date CMGI founded Adsmart. The results of operations previously
reported by Adsmart and the combined amounts presented in the accompanying
consolidated financial statements are presented below.
9
<PAGE> 10
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 1999
(UNAUDITED)
------------------
<S> <C>
Revenue:
Engage.............................................................................. $ 8,302
Adsmart............................................................................. 11,820
Eliminations........................................................................ (105)
-----------
Total revenue................................................................... $ 20,017
===========
Net loss:
Engage.............................................................................. $ (10,546)
Adsmart............................................................................. (7,336)
-----------
Total net loss.................................................................. $ (17,882)
===========
</TABLE>
All significant transactions between Engage and Adsmart within the periods
for which consolidated results of operations have been pooled have been
eliminated.
E. COMPREHENSIVE LOSS
The components of our comprehensive loss include net loss, the net change
in foreign currency translation adjustments and unrealized holding gains and
losses on available-for-sale securities.
The components of comprehensive loss, net of income taxes, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
1999 2000
--------- ---------
<S> <C> <C>
Net loss ........................................................ $ (17,882) $(173,817)
Foreign currency adjustments .................................... 109 125
Net unrealized holding gain arising during the period ........... 6 34
--------- ---------
Comprehensive loss ......................................... $ (17,767) $(173,658)
========= =========
</TABLE>
F. NON-CASH TRANSACTIONS
During both the three months ended October 31, 1999 and 2000, as the result
of the termination of employment of certain employees prior to the vesting of
their stock options, unvested stock options for which deferred compensation
costs had been recorded in a prior period were cancelled. As a result of these
cancellations, we have recorded a reduction of $1,673,000 and $320,000 in both
deferred compensation and additional paid-in capital in the three months ended
October 31, 1999 and 2000, respectively.
During the three months ended October 31, 2000, we acquired MediaBridge and
Space through the issuance of common stock. See Note C.
During the three months ended October 31, 2000, as a result of the
termination of employment of former Flycast employees, non-cash financing
activities included the return of Engage Common Shares previously issued to CMGI
as part of the Flycast acquisition (see Note C). As a result, we have recorded a
reduction to additional paid-in capital and dividend to CMGI (included within
accumulated deficit) of approximately $57.7 million.
G. STOCK COMPENSATION
Had we recorded stock compensation expense within the functional
departments of the employee or director, stock compensation would have been
allocated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
------------------
1999 2000
---- ----
<S> <C> <C>
Cost of revenue...................................................... $ 10 $ 404
Research and development............................................. 82 86
Selling and marketing................................................ 83 1,925
General and Administrative........................................... (73) 1,161
------- ---------
Total............................................................. $ 102 $ 3,576
======= =========
</TABLE>
10
<PAGE> 11
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
H. SEGMENT REPORTING
Our operations and corresponding organizational structures are aligned into
three segments: Media, Media Management and Software and Consulting based on the
type of products and services offered. Media provides a comprehensive system for
planning, buying, selling, and managing Web advertising to advertisers and
agencies. Media Management delivers solutions to help advertisers execute,
measure, analyze and optimize their Internet marketing campaigns. Software and
Consulting is primarily engaged in the development and sale of software that
provides a scalable, enterprise-wide set of software applications to facilitate
the development of integrated promotional campaigns and enable Web publishers,
advertisers and merchants to target and deliver advertisements, content and
e-commerce offerings to their audiences. In addition, consulting services
includes traditional consulting as well as installation, training, and software
support.
Revenue and gross profit (loss) by segment are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------
1999 2000
---- ----
<S> <C> <C>
MEDIA
Revenue ........................................... $ 11,761 $ 21,302
Gross profit (loss) ............................... (1,790) 1,812
MEDIA MANAGEMENT
Revenue ........................................... 2,394 6,310
Gross profit ...................................... 925 1,437
SOFTWARE AND CONSULTING
Revenue ........................................... 5,862 13,410
Gross profit ...................................... 4,659 7,231
CONSOLIDATED SEGMENT TOTALS
Revenue ........................................... 20,017 41,022
Gross profit ...................................... 3,794 10,480
</TABLE>
Assets information by operating segment is not reported since we do not
identify assets by segment.
I. RELATED PARTY TRANSACTIONS
We outsource data center operations and ad serving services from companies
in which CMGI has a significant ownership interest. Total cost of revenue
related to outsourcing from related parties for the three months ended October
31, 1999 and 2000 was approximately $2.4 million and $3.2 million, respectively.
J. RESTRUCTURING
In the first fiscal quarter of fiscal 2001, we implemented a restructuring
plan designed to bring costs more in line with revenue and strengthen our
financial performance. The restructuring plan included a reduction of our
workforce by approximately 170 persons or approximately 12% of our worldwide
headcount. All of these actions were completed prior to October 31, 2000. As a
result of the reduction in headcount, we have undertaken plans to close two
office locations and consolidate operations. In connection with this
restructuring plan, we incurred severance costs for terminated employees,
accrued future lease costs and wrote off unamortized leasehold improvements for
office locations being closed.
The following table sets forth a summary of these restructuring costs and
related charges (in thousands):
<TABLE>
<S> <C>
Severance and applicable payroll taxes................................. $1,852
Write-off of leasehold improvements.................................... 496
Accrual for future lease costs......................................... 1,782
------
Total restructuring expense ....................................... $4,130
======
</TABLE>
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ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Included in the $4.1 million restructuring charge incurred in the first
fiscal quarter of fiscal 2001 are $3.6 million of cash costs and $500,000 in
non-cash related costs. As of October 31, 2000, approximately $1.5 million,
primarily severance and applicable payroll taxes, of the restructuring costs
have been paid and the remaining restructuring costs are expected to be paid
through July 2001.
K. STOCK OPTION PLAN
In August 2000, our Board of Directors approved the 2000 Equity Incentive
Plan (the "2000 Plan"). Under the 2000 Plan up to 10,000,000 non-qualified stock
options may be granted to employees or consultants of Engage or any affiliate,
except to individuals who are subject to the reporting obligations of Section 16
of the Securities Exchange Act of 1934. The Board of Directors administers this
plan, selects the individuals to whom options will be granted, and determines
the number of shares, vesting period and exercise price of each option.
L. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act; as amended and Section 21E of the Exchange Act; as amended. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe," "plan," "expect" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause our results to differ materially from those indicated
by such forward-looking statements. These factors include those set forth in
this section, the "Factors That May Affect Future Results and Market Price of
Stock" section included in our Annual Report on Form 10-K filed with the SEC on
October 30, 2000, and the risk factors discussed in our other filings with the
SEC.
OVERVIEW
We are a leading provider of marketing solutions. At October 31, 2000, we
were an approximately 78% owned subsidiary of CMGI, Inc. Our broad offering of
products and services enable marketers, Web sites and e-commerce merchants to
use the Internet as well as other interactive media to recruit and retain
customers. Our products and services allow marketers to get better results from
their marketing campaigns and allow Web sites to more effectively monetize their
audiences. We have generated most of our revenue to date through sales of
advertising management software and outsourced services and sales of media and
media management services. As a result of our recent acquisitions, our services
and products are grouped into three segments: Media, Media Management and
Software and Consulting.
Our Media segment offers a range of products and services that enable Web
marketers to target and deliver marketing campaigns to their desired audience.
This segment is primarily made up of the former AudienceNet, Flycast and Adsmart
networks, and our recently launched business-to-business network. Our Media
Management segment offers products and services that allow Web marketers to
execute, analyze, measure and optimize the effectiveness of their online media
campaigns as well as to measure web site traffic. This segment of our business
is primarily made up of our wholly-owned subsidiaries, AdKnowledge and Internet
Profiles Corporation ("I/PRO"). Our Software and Consulting segment offers
customers a host of enterprise marketing software and services, including
software to automate online advertising management, create and deliver web-site
specific local profiles of Web users and create, plan, deliver and refine
integrated promotional campaigns.
In February 2000, our Board of Directors approved a two-for-one common
stock split, effected in the form of a 100% stock dividend. The stock dividend
was paid on April 3, 2000 to stockholders of record at the close of business on
March 20, 2000. Accordingly, the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect this event. Unless
otherwise indicated, all share information in this Management's Discussion and
Analysis of Financial Condition and Results of Operations reflect the
two-for-one stock split.
BUSINESS COMBINATIONS
In April 1998, CMGI acquired Accipiter Inc., which sells Internet
advertising management solutions for total purchase consideration of
approximately $31.3 million. In August 1998, Accipiter was merged with us in a
stock-for-stock merger in which shares of our Series A convertible preferred
stock were issued to CMGI. We have reflected the acquisition of Accipiter in our
consolidated financial statements as if it occurred in April 1998.
In March 1999, Adsmart acquired 2Can Media ("2Can"), an online advertising
representation firm for total purchase consideration of approximately $33.7
million, inclusive of contingent consideration paid subsequent to the closing
date. The acquisition has been accounted for using the purchase method of
accounting 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.
In April 1999, we acquired I/PRO, which provides Web site traffic
measurement and audit services for total purchase consideration of approximately
$32.7 million. 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.
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<PAGE> 14
In December 1999, we acquired AdKnowledge, a provider of products and
services which allow online marketers and ad agencies to plan, target, serve,
track and analyze advertising campaigns for total purchase consideration of
approximately $161.0 million. 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.
In April 2000, we acquired Adsmart, an online advertising network, and
Flycast, a leading provider of Internet direct response advertising solutions
for total purchase consideration of approximately $3.24 billion. The
acquisitions have been accounted for as a combination of entities under common
control (i.e., "as if pooling"). Our results of operations reflect the results
of operations of Adsmart beginning April 1, 1996, 2Can beginning March 11, 1999
and Flycast beginning January 13, 2000.
In June 2000, we acquired substantially all of the assets of VBN for total
purchase consideration of approximately $4.7 million and ISI for total purchase
consideration of approximately $4.8 million. The acquisitions 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 date of acquisition.
In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, KK ("ETJ"), our joint venture with Sumitomo Corporation.
Accordingly, our results of operations reflect the results of operations of ETJ
beginning in June 2000.
In August 2000, we acquired Space, a leading independent Internet marketing
network in Asia, in an all-stock transaction for total purchase consideration of
approximately $35.8 million. 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.
In September 2000 we acquired MediaBridge, a leading provider of
cross-media closed loop targeted marketing systems for total purchase
consideration of approximately $219.1 million. 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.
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 2000
REVENUE, COST OF REVENUE AND GROSS MARGIN
MEDIA. Media revenue is derived primarily from the delivery of
advertisements across a network of over 5,000 Web sites. Pricing of advertising
is generally based on cost per advertising impression and varies depending on
whether the advertising is run across the network, across specific categories or
on individual Web sites. Cost of revenue consists primarily of amounts paid to
each Web site in the network based on an agreed upon percentage of the revenue
generated by advertisements run on its site as well as both internal and
external ad serving costs.
Revenue for the Media segment increased from $11.8 million for the three
months ended October 31, 1999 to $21.3 million for the three months ended
October 31, 2000, an 81% increase. Gross margin for the Media segment increased
from a deficit of (15%) for the three months ended October 31, 1999 to 9% for
the three months ended October 31, 2000. The increase in revenue is primarily
due to the Flycast acquisition, and to a lesser extent an increase in both the
number of advertisers purchasing advertisements and the number of ad impressions
delivered on the network. The increase in the gross margin percentage for the
three months ended October 31, 2000 versus the three months ended October 31,
1999 was primarily due to a reduction in the number of low or negative margin
guaranteed contracts in the three months ended October 31, 2000.
We expect that revenue for our Media segment will continue to be weak
throughout much of the current fiscal year due to excess media inventory in the
market and a continued slow down in spending by "dot com" companies. We believe
that traditional marketers will eventually increase their online advertising
spending and Media revenue will begin to grow at a modest rate in the fourth
quarter of this fiscal year. In an effort to improve our profitability, we are
in the process of 1.) renegotiating agreements with certain of the Web sites in
our network to increase the percentage of revenue retained by Engage, as well as
to require in certain situations that Engage recuperate certain costs associated
with its ad technology prior to sharing net revenue with the Web sites and 2.)
terminating certain Web site contracts that are no longer economically
beneficial to us. While we expect that these efforts may reduce the number of
Web sites in our network, we believe that such efforts will improve our results
of operations and financial condition.
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<PAGE> 15
MEDIA MANAGEMENT. Revenue from our Media Management segment is derived
primarily from services that enable marketers to run and evaluate the
effectiveness of marketing programs both within and outside our advertising
network. Additionally, this segment also provides Web site traffic measurement
and analysis data and verification of site traffic and advertising results.
Revenue for the Media Management segment increased from $2.4 million for
the three months ended October 31, 1999 to $6.3 million for the three months
ended October 31, 2000, a 164% increase. Gross margin for the Media Management
segment decreased from 39% for the three months ended October 31, 1999 to 23%
for the three months ended October 31, 2000. The increase in revenue was
primarily due to the AdKnowledge acquisition, and to a lesser extent, an
increase in I/PRO's revenue in the three months ended October 31, 2000 as
compared to the three months ended October 31, 1999. The decrease in the gross
margin for the quarter ended October 31, 2000 versus the quarter ended October
31, 1999 was a result of increased infrastructure costs at I/PRO and the
inclusion of AdKnowledge's results in the quarter ended October 31, 2000.
We expect that revenue from our Media Management segment will remain flat
for the next two to three quarters. As advertisers and marketers reduce their
spending on media, we anticipate that they will also reduce their spending on
related analytical and measurement services that our Media Management segment
provides. For the year ended July 31, 2001, as compared to the year ended July
31, 2000, we expect that Media Management revenue from current operations may
increase due to the fact that our fiscal 2001 results will include a full twelve
months of AdKnowledge revenue as compared to only nine months of AdKnowledge
revenue in the year ended July 31, 2000.
SOFTWARE AND CONSULTING. Software and Consulting revenue is derived
primarily through the sale of software licenses, outsourced advertising
management solutions utilizing our software and consulting services. Consulting
services include fees charged for training, installation, software support and
maintenance and actual consulting for customer specific requirements. Cost of
revenue consists primarily of fees paid for outsourced data center operations
needed to support the AdBureau product as well as payroll, benefits and
allocated overhead of our support and consulting groups.
Revenue from our Software and Consulting segment increased from $5.9
million for the three months ended October 31, 1999 to $13.4 million for the
three months ended October 31, 2000, a 129% increase. Gross margin for the
Software and Consulting segment decreased from 79% for the three months ended
October 31, 1999 to 54% for the three months ended October 31, 2000.
Approximately 42% of the increase in revenue for the three months ended October
31, 2000 was due to the MediaBridge acquisition that occurred on September 11,
2000. The decrease in Software and Consulting gross margin was due to the
inclusion of MediaBridge's results in the quarter ended October 31, 2000, which
includes payroll and related costs for its consulting groups, the inclusion of
non-cash amortization of developed technology intangible assets recorded as part
of the MediaBridge acquisition, and to a lesser extent an increased number of
employees.
We anticipate that revenue for our Software and Consulting segment may
increase over the next two to three quarters due primarily to expected sales
increases for products acquired through our MediaBridge acquisition. MediaBridge
products are typically sold to large, well-capitalized companies that we believe
may seek software solutions to improve their businesses.
OPERATING EXPENSES
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
expense was $700,000 for the three months ended October 31, 2000, resulting from
the MediaBridge 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 expense. Research and development expenses increased from $3.3
million for the three months ended October 31, 1999 to $11.5 million for the
three months ended October 31, 2000, a 249% increase. This increase was
primarily due to the inclusion of the results of operations of AdKnowledge,
Flycast and MediaBridge for the quarter ended October 31, 2000 and an increase
in our research and development staff. Including acquisitions, our research and
development staff increased 185% from October 31, 1999 to October 31, 2000.
Research and development expenses were 16% of revenue for the three months ended
October 31, 1999, compared to 28% of revenue for the three months ended October
31, 2000. This increase is largely due to the growth in the number of research
and development employees without the increase in revenue that we expected
during the quarter ended October 31, 2000.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees, advertising
expenses, costs of attending trade shows and depreciation expense. Selling and
marketing expenses increased from $11.9 million for the three months ended
October 31, 1999 to $32.4 million for the three months ended October 31, 2000, a
171% increase. The increase in costs was primarily due to the inclusion of the
results of operations of AdKnowledge, Flycast,
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<PAGE> 16
VBN, ISI, Space and MediaBridge for the quarter ended October 31, 2000.
Additionally, we increased our sales and marketing group in anticipation of
revenue growth and we significantly expanded our international sales operations.
Finally, approximately 33% of the increase in sales and marketing expense was
due to increased advertising spending in an effort to brand the Engage name and
build market awareness for our consolidated product offerings resulting from
recent acquisitions. Overall, including acquisitions, our sales and marketing
staff increased 145% from October 31, 1999 to October 31, 2000. Sales and
marketing expenses were 60% of revenue for the three months ended October 31,
1999, compared to 79% for the three months ended October 31, 2000. This increase
is largely due to the growth in the number of sales and marketing employees
without a related increase in revenue.
GENERAL AND ADMINISTRATIVE. General and administrative costs consist
principally of payroll and related costs, consulting and professional fees,
facility and related costs, bad debt expense and depreciation expense. General
and administrative expenses increased from $2.8 million for the three months
ended October 31, 1999 to $17.7 million for the three months ended October 31,
2000, a 540% increase. Approximately 71% of the increase in general and
administrative expense was due to additional bad debt expense recorded in the
quarter ended October 31, 2000, principally related to uncollectible accounts
receivable in the Media segment. The remainder of the increase in general and
administrative costs is due primarily to an increase in payroll and related
costs associated with developing an administrative infrastructure to support
operations and the inclusion of the results of operations of AdKnowledge,
Flycast, Space and MediaBridge for the quarter ended October 31, 2000. General
and administrative costs were 14% of revenue for the three months ended October
31, 1999, compared to 43% for the three months ended October 31, 2000, primarily
due to increased bad debt expense recorded in the three months ended October 31,
2000 and the shortfall in expected revenue we experienced in our most recent
quarter, without a corresponding decrease in general and administrative costs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of intangible
assets increased from $4.2 million for the three months ended October 31, 1999
to $115.9 million for the three months ended October 31, 2000. The increase in
amortization expense was due to amortization expense resulting from our
acquisitions of AdKnowledge in December 1999, Flycast in January 2000, VBN and
ISI in June 2000, Space in August 2000 and MediaBridge in September 2000.
Intangible assets recorded for all of the aforementioned acquisitions are being
amortized over three years under the straight-line method. Additionally, during
the three months ended October 31, 2000, we conducted our ongoing business
review and impairment analysis under our existing policy. As part of this
review, we concluded that certain previously recorded intangible assets were
impaired as of October 31, 2000 and the related intangible assets were written
off or adjusted to their estimated fair value. The components of the impairment
charge included $15.2 million related to writing off the Flycast tradename that
is no longer being used in our business and $1.6 million related to writing down
Flycast and AdKnowledge workforce intangible assets as a result of higher
employee turnover than originally anticipated. Given that we operate in a
volatile environment, it is reasonably possible that the impairment factors we
evaluated will change in subsequent periods. This could result in material
impairment charges in future periods.
STOCK COMPENSATION. Stock compensation expense increased from $102,000 for
the three months ended October 31, 1999 to $3.6 million for the three months
ended October 31, 2000. Substantially all of the increase relates to
amortization of deferred compensation recorded as part of our acquisitions of
Space and MediaBridge. We recorded $18.9 million of deferred compensation
related to approximately 1,525,000 common shares issuable to the employee
shareholders of Space contingent upon the employees' remaining with us for one
year after the date of acquisition. The amount recorded as deferred compensation
for Space is being amortized to expense over the one-year employment
continuation period. We also recorded approximately $7.0 million of deferred
compensation related to the intrinsic value of stock options issued to
MediaBridge employees. The amount recorded as deferred compensation for
MediaBridge is being amortized to expense over three years, the remaining
vesting period of the related stock options. We expect that stock compensation
may increase next quarter due to the acceleration of stock options for several
executives that terminated their employment in our fiscal second quarter.
RESTRUCTURING. Restructuring expense of $4.1 million represents costs
associated with our plan designed to bring costs more in line with revenue and
strengthen our financial performance. Restructuring expense consisted of
severance costs for terminated employees, costs associated with the closing of
two office locations and the write-off of unamortized leasehold improvements for
the office locations being closed. We expect that we may incur additional
restructuring expense in the future as we continue to streamline operations,
evaluate cost savings and ensure our costs are in line with revenue.
EQUITY IN LOSS OF JOINT VENTURE
Equity in loss of joint venture for the three months ended October 31, 1999
represented our share of our Japanese joint venture's losses. Equity in loss of
joint venture was $326,000 in the three months ended October 31, 1999. In June
2000, we acquired a
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<PAGE> 17
majority ownership position of Engage Technologies Japan and accordingly, began
consolidating the results of operations of Engage Technologies Japan and ceased
recognizing equity in loss of joint venture expense.
INTEREST INCOME
Interest income increased from $1.4 million for the three months ended
October 31, 1999 to $2.0 million for the three months ended October 31, 2000, a
49% increase. The increase in interest income was due to an increase in our cash
and investment balances in the three months ended October 31, 2000 as compared
to the three months ended October 31, 1999 and an increase in the rates of
return on those investments during the three months ended October 31, 2000.
INTEREST EXPENSE
Interest expense decreased slightly from $360,000 for the three months
ended October 31, 2000 to $349,000 for the three months ended October 31, 2000,
a 3% decrease. During fiscal 1998, Adsmart entered into an arrangement with CMGI
which required Adsmart to accrue interest on Adsmart's intercompany debt with
CMGI at a rate of 7% per annum. During the three months ended October 31, 1999,
interest expense was recorded on this debt, all of which was converted into
equity in connection with the closing of our acquisition of Adsmart in April
2000. Interest expense recorded in the three months ended October 31, 2000
relates principally to capital lease obligations and notes payable assumed as
part of the AdKnowledge and Flycast acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and available-for-sale securities decreased
from $136.0 million at July 31, 2000 to $107.9 million at October 31, 2000. Net
cash used in operating activities was $29.6 million for the three months ended
October 31, 2000. Cash used in operating activities resulted primarily from net
losses and a decrease in accounts payable, which were partially offset by an
increase in accrued liabilities and a decrease in accounts receivable, due in
part to increased bad debt exposure. Net cash provided by investing activities
was $13.8 million for the three months ended October 31, 2000. During the three
months ended October 31, 2000, we continued to upgrade network infrastructure
equipment and incur costs to improve office space. These uses were offset by
$15.7 million in proceeds from the redemption of available-for-sale securities
and $2.7 million in cash acquired in acquisitions. Net cash provided by
financing activities was $3.0 million and consisted primarily of proceeds
received from the exercise of stock options.
As of October 31, 2000, we had $107.9 million of cash and cash equivalents
and available-for-sale securities. We anticipate that expenses will begin to
level-off and perhaps decline as we continue to evaluate our operating structure
in an effort to streamline costs to reduce operating expenses.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for the near-term future. Additionally, CMGI has committed to make
available to us up to $50.0 million in the form of debt, equity, or a
combination thereof to fund our working capital requirements, subject to
negotiation of mutually acceptable terms and conditions and approval of both
companies' respective Board of Directors. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced and our stockholders may experience dilution
of their interest in us. If adequate funds are not available or are not
available on acceptable terms, our ability to continue as a going concern, to
fund our expansion, take advantage of unanticipated opportunities, develop or
enhance services or products or otherwise respond to competitive pressures may
be significantly limited.
FOREIGN OPERATIONS
The results of our international operations are subject to currency
fluctuations. As of October 31, 2000, we had subsidiaries throughout Europe and
the Asia Pacific region. To date, our financial condition and results of
operations have not been materially affected by exchange rate fluctuations.
However, as these operations continue to grow, and operations are commenced in
additional countries, there can be no guarantee that our financial condition and
results of operations will not be adversely affected by exchange rate
fluctuations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying values of financial instruments including cash and cash
equivalents, available-for-sale securities, accounts receivable, accounts
payable and notes payable, approximate fair value because of the short maturity
of these instruments.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, has not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may increase. Therefore, in the
future, we may consider utilizing derivative instruments to mitigate such risks.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 31, 2000, in connection with our acquisition of all of the
outstanding capital stock of Space Media Holdings Limited ("Space") pursuant to
a stock purchase agreement by and between Engage Acquisition Corp., a
wholly-owned subsidiary of ours and the shareholders of Space (the "Stock
Purchase Agreement"), we issued 6,103,290 shares of our Common Stock to the
stockholders of Space as consideration for acquiring all of the capital stock of
Space Media. Of the 6,103,290 shares issued, 915,494 shares are being held in
escrow in order to secure the obligations of the former stockholders of Space to
indemnify us under the Stock Purchase Agreement and 1,403,759 shares are being
held in escrow to secure future performance objectives of Space. No underwriters
were involved in the foregoing offer and sale of securities. Such offer and sale
was made in compliance with Regulation S of the Securities Act of 1933.
On September 11, 2000, in connection with our acquisition of MediaBridge
Technologies, Inc. ("MediaBridge") pursuant to an Agreement and Plan of Merger
by and among the Company, Engage Subsidiary, Inc., a wholly-owned subsidiary of
ours, and MediaBridge (the "Merger Agreement") we issued approximately
11,741,100 shares of our Common Stock as consideration for acquiring all of the
capital stock of MediaBridge. Of the shares issued, approximately 1,450,000
shares are being held in escrow in order to secure the obligations of the former
stockholders of MediaBridge to indemnify us under the Merger Agreement. No
underwriters were involved in the foregoing offer and sale of securities. Such
offer and sale was made in reliance upon an exemption from the registration
provisions of the Securities Act, set forth in Rule 3(a)(10) under the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Bylaws
10.1 2000 Equity Incentive Plan
10.2 Stock Purchase Agreement, dated August 31, 2000, by and between
Engage Acquisition Corp., and the Shareholders of Space Media
Holdings Limited
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 26, 2000, the Company filed a report on Form 8-K in connection
with the Company's completion of its acquisition of MediaBridge
Technologies, Inc.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Andover, Massachusetts on
December 15, 2000.
By: /s/ Anthony G. Nuzzo
----------------------------------------
Anthony G. Nuzzo
Chief Executive Officer and President
By: /s/ Robert W. Bartlett
----------------------------------------
Robert W. Bartlett
Executive V.P., Chief Financial
Officer and Treasurer
(Principal Accounting and Financial
Officer of the Registrant)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
3.1 Amended and Restated Bylaws
10.1 2000 Equity Incentive Plan
10.2 Stock Purchase Agreement, dated August 31, 2000, by and between
Engage Acquisition Corp., and the Shareholders of Space Media
Holdings Limited
27 Financial Data Schedule
21
