ENGAGE INC, 10-Q, 2000-06-14

ENGAGE INC
10-Q, 2000-06-14
BUSINESS SERVICES, NEC

Previous: KIDSTOYSPLUS COM INC, 10QSB, EX-27, 2000-06-14

Next: ENGAGE INC, 10-Q, EX-3.1, 2000-06-14

<PAGE> 1

================================================================================

UNITED STATES
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 APRIL 30, 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 Identification No.)
incorporation or organization)

100 BRICKSTONE SQUARE, ANDOVER, MASSACHUSETTS 01810
(Address of principal executive offices) (Zip Code)

(978) 684-3884
(Registrant's telephone number, including area code)

Engage Technologies, Inc.
(former name, if changed since last report)

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 June 6,
2000 was 173,272,589.

================================================================================

<PAGE> 2

ENGAGE, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2000

INDEX PAGE

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

a) Consolidated Balance Sheets as of July 31, 1999 and April
30, 2000 (unaudited)..... ................................ 3

b) Consolidated Statements of Operations (unaudited) for the
three and nine months ended April 30, 1999 and 2000...... 4

c) Consolidated Statements of Cash Flows (unaudited) for the
nine months ended April 30, 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....... ......................... 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 24

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds................... 25

Item 4. Submission of Matters to a Vote of Security Holders......... 26

Item 5. Other Information........................................... 27

Item 6. Exhibits and Reports on Form 8-K............................ 27

SIGNATURES

EXHIBIT INDEX

<PAGE> 3
ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PAR VALUE)

<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 2000
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 112,034 $ 48,493
Available-for-sale securities ............................................... 1,067 41,772
Accounts receivable, less allowance for doubtful accounts of $1,790 and
$8,175 at July 31, 1999 and April 30, 2000, respectively .................. 16,463 69,947
Prepaid expenses ............................................................ 727 3,571
--------- -----------
Total current assets ...................................................... 130,291 163,783
--------- -----------

Property and equipment, net ................................................... 1,997 24,654
Investment in joint venture ................................................... 1,047 95
Intangible assets, net of accumulated amortization of $10,492 and $129,300 at
July 31, 1999 and April 30, 2000, respectively ............................. 73,335 958,764
Restricted cash ............................................................... -- 5,020
Other assets .................................................................. 371 3,728
--------- -----------
Total assets .............................................................. $ 207,041 $ 1,156,044
========= ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ -- $ 2,046
Obligation under capital lease .............................................. 327 4,071
Due to CMGI and affiliates .................................................. 44,829 3,548
Accounts payable ............................................................ 12,614 38,904
Accrued expenses and other current liabilities .............................. 15,251 21,465
Investment banker fees payable .............................................. -- 25,576
Deferred revenue ............................................................ 4,293 5,755
--------- -----------
Total current liabilities ................................................. 77,314 101,365
--------- -----------

Deferred revenue .............................................................. 1,508 804
Long-term debt, net of current portion ........................................ -- 2,325
Obligation under capital lease, net of current portion ........................ 436 3,409
Other long-term liabilities ................................................... -- 604

Commitments and contingencies

Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares authorized,
0 issued and outstanding ................................................. -- --
Common Stock, $.01 par value, 350,000 shares authorized, 98,047
and 173,055 shares issued and outstanding at July 31, 1999
and April 30, 2000, respectively ......................................... 980 1,731
Additional paid-in capital .................................................. 215,895 3,646,875
Deferred compensation ....................................................... (4,024) (1,544)
Accumulated other comprehensive (loss) income ............................... (353) 400
Accumulated deficit ......................................................... (84,715) (2,599,925)
--------- -----------
Total stockholders' equity ................................................ 127,783 1,047,537
--------- -----------
Total liabilities and stockholders' equity ................................ $ 207,041 $ 1,156,044
========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE> 4

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- ------------------------
1999 2000 1999 2000
-------- --------- -------- ---------

<S> <C> <C> <C> <C>
Revenue ........................................... $ 5,177 $ 58,682 $ 10,308 $ 110,118
Cost of revenue ................................... 3,510 45,221 7,613 85,836
-------- --------- -------- ---------

Gross profit ............................. 1,667 13,461 2,695 24,282
-------- --------- -------- ---------

Operating expenses:
In-process research and development .......... 4,500 29,300 4,500 31,617
Research and development ..................... 2,028 8,613 5,816 17,029
Selling and marketing ........................ 4,757 32,837 9,454 63,113
General and administrative ................... 1,447 10,189 2,918 17,995
Amortization of goodwill and other intangibles 2,400 87,003 4,696 118,808
Acquisition costs ............................ -- 4,951 -- 4,951
Stock compensation ........................... 266 36,948 657 37,274
-------- --------- -------- ---------

Total operating expenses ................. 15,398 209,841 28,041 290,787
-------- --------- -------- ---------

Loss from operations .............................. (13,731) (196,380) (25,346) (266,505)

Other income (expense):
Equity in loss of joint venture .............. (257) (315) (417) (1,016)
Other expense ................................ (174) (73) (174) (96)
Interest income .............................. -- 1,498 -- 4,284
Interest expense ............................. (220) (1,235) (751) (2,282)
-------- --------- -------- ---------

Net loss .......................................... $(14,382) $(196,505) $(26,688) $(265,615)
======== ========= ======== =========

Pro forma basic and diluted net loss per share .... $ (.19) $ (1.14) $ (.37) $ (1.97)
======== ========= ======== =========

Pro forma weighted average number of basic and
diluted shares outstanding ..................... 76,206 172,408 71,497 134,578
======== ========= ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE> 5

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
---------------------------
1999 2000
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $(26,688) $(265,615)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization ............................................. 5,289 122,709
Equity in loss of joint venture ........................................... 417 1,041
Provision for bad debts ................................................... 175 2,843
Stock compensation ........................................................ 657 37,274
Amortization of discount on available-for-sales securities ................ -- (1,176)
Gain on sale of available-for-sale securities ............................. -- (40)
Loss on disposal of fixed assets .......................................... 174 --
In-process research and development ....................................... 4,500 31,617
Changes in operating assets and liabilities, net of impact of acquisitions:
Accounts receivable ................................................... (4,774) (32,882)
Prepaid expenses and other assets ..................................... (323) (5,729)
Net change in due to CMGI and affiliates .............................. -- 1,782
Accounts payable ...................................................... 2,329 10,834
Accrued expenses and investment banker fees payable ................... 2,690 (7,921)
Deferred revenue ...................................................... 3,207 (592)
-------- ---------

Net cash used for operating activities .............................. (12,347) (105,855)
-------- ---------

Cash flows from investing activities:
Investment in joint venture ................................................. (1,424) --
Purchase of available-for-sale securities ................................... -- (54,263)
Proceeds from redemption of available-for-sale securities ................... -- 61,562
Net cash acquired on acquisition of subsidiary .............................. 707 15,936
Long-term investment at cost ................................................ -- (2,000)
Purchases of property and equipment ......................................... (207) (10,370)
Proceeds from sale of property and equipment ................................ -- 8
-------- ---------

Net cash (used for) provided by investing activities ................ (924) 10,873
-------- ---------

Cash flows from financing activities:
Net change in debt to CMGI and affiliates ................................... 14,746 31,963
Net proceeds from issuance of common stock .................................. 9 1,634
Issuance of preferred stock, net of issuance costs .......................... 1,934 --
Repayment of capital lease obligations ...................................... (72) (719)
Repayment of long-term borrowings ........................................... (2,787) (1,413)
-------- ---------
Net cash provided by financing activities ........................... 13,830 31,465
-------- ---------

Effect of exchange rate changes on cash and cash equivalents ................... 6 (24)
-------- ---------

Net increase (decrease) in cash and cash equivalents ........................... 565 (63,541)

Cash and cash equivalents, beginning of period ................................. 96 112,034
-------- ---------

Cash and cash equivalents, end of period ....................................... $ 661 $ 48,493
======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

5
<PAGE> 6

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by Engage, Inc. ("Engage" or the "Company") 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 management, the
accompanying consolidated financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the Company believes
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, 1999 which are contained in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission (the "SEC") on October
29, 1999. The results for the three and nine-month periods ended April 30, 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 with current year presentation.

On April 28, 2000, Engage, a majority owned subsidiary of CMGI, completed
the acquisition of Adsmart, also a majority owned subsidiary of CMGI, and
Flycast, a wholly owned subsidiary of CMGI, pursuant to an Agreement and Plan of
Merger and Contribution, dated as of January 19, 2000. This transaction has been
accounted for as a combination of entities under common control (i.e, "as-if
pooling"). Accordingly, the Company's consolidated financial statements have
been restated for all periods prior to the business combination to include the
financial results back to the date on which CMGI founded Adsmart (April 1, 1996)
and the date on which CMGI acquired Flycast (January 13, 2000). The consolidated
balance sheet as of July 31, 1999 and the consolidated statements of operations
for the three and nine months ended April 30, 1999 reflect the combined
consolidated financial position and results of operations of Engage and Adsmart
for those periods, respectively. All financial information has been accounted
for using CMGI's historical basis in Adsmart and Flycast, including CMGI's
application of purchase accounting to the assets acquired and liabilities
assumed of Flycast. The consolidated balance sheet as of April 30, 2000 and the
consolidated statements of operations for the three and nine months ended April
30, 2000 reflect the combined financial position of Engage, Adsmart and Flycast.

B. CASH AND SHORT-TERM INVESTMENTS

Engage's cash is invested in debt instruments of financial institutions,
government agencies and corporations, and in a money market mutual fund. Engage
has established guidelines relative to credit ratings, diversification, and
maturities that it believes help maintain safety and liquidity. Cash equivalents
include highly liquid investments with maturity periods of three months or less
when purchased. Short-term investments include those investments not qualifying
as cash equivalents. Short-term investments and marketable equity securities are
classified as available for sale and reported at fair value with unrealized
gains and losses included within stockholders' equity as a component of
comprehensive income. Engage has not had any significant realized or unrealized
losses related to its investments.

6
<PAGE> 7

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

C. EARNINGS PER SHARE

The Company calculates 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. 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 issuance of shares
in the Flycast acquisition on January 13, 2000 and the impact of the conversion
of debt to CMGI and preferred stock for both Engage and 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".

Conversion of all preferred stock and debt to CMGI occurred upon the
completion of the Company's initial public offering in July 1999. 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 Engage common stock occurred
upon the completion of Engage's acquisition of Adsmart (see Note D). The pro
forma basic and diluted net loss per share information included in the
accompanying statements of operations for the three and nine months ended April
30, 1999 and 2000 reflect the impact on pro forma basic and diluted net loss per
share of such conversions 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 has not been presented for the three and nine-month periods
ended April 30, 1999 and 2000 because it is irrelevant due to the change in the
Company's 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 pro forma
basic and pro forma diluted loss per share computation for the Company's
reported net loss is as follows:

PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE

DENOMINATOR
Weighted average shares outstanding ................. 957 162,681 596 125,235
Assumed conversion of preferred stock ............... 61,648 -- 61,582 --
Assumed conversion of debt to CMGI .................. 13,601 9,727 9,319 9,343
-------- --------- -------- ---------

Weighted average number of diluted shares outstanding 76,206 172,408 71,497 134,578
-------- --------- -------- ---------

Pro forma basic and diluted net loss per share ...... $ (.19) $ (1.14) $ (.37) $ (1.97)
======== ========= ======== =========
</TABLE>

Had the Company 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:

HISTORICAL BASIC AND DILUTED NET LOSS PER SHARE

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- --------------------
1999 2000 1999 2000
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR
Net loss........................................ $(14,382) $(196,505) $(26,688) $(265,615)
-------- --------- -------- ---------
DENOMINATOR
Weighted average shares outstanding............. 957 162,681 596 125,235
-------- --------- -------- ---------

Basic and diluted net loss per share............ $ (15.03) $ (1.21) $ (44.78) $ (2.12)
======== ========= ======== =========
</TABLE>

7
<PAGE> 8

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

At April 30, 1999, the Company had outstanding stock options to purchase
24,322,974 shares of common stock at a weighted average exercise price of $14.66
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.

D. ACQUISITIONS

Summary

On April 28, 2000, Engage completed its acquisitions of Adsmart Corporation
("Adsmart") and Flycast Communications Corporation ("Flycast"). As described in
Note A, this transaction has been accounted for as a combination of entities
under common control (i.e., "as-if pooling"). Previously, on January 19, 2000,
Engage, CMGI, FCET Corp., a wholly owned subsidiary of Engage (the "Transitory
Subsidiary"), Adsmart and Flycast executed an Agreement and Plan of Merger and
Contribution (the "Merger Agreement"). Upon the completion of the transactions
contemplated by the Merger Agreement, Adsmart and Flycast each became
wholly-owned subsidiaries of Engage. Specifically, the Merger Agreement
contemplated:

First, a merger of the Transitory Subsidiary with and into Adsmart, with
Adsmart being the surviving corporation. In this merger, all the Adsmart
stockholders received Engage common stock in exchange for their respective
shares of Adsmart common stock. All outstanding Adsmart stock options were
converted into options to acquire Engage common stock.

Second, CMGI contributed all of the outstanding shares of common stock of
Flycast in exchange for shares of Engage common stock. Former employees of
Flycast had the option to convert CMGI options into options to acquire Engage
common stock. Approximately 361,000 Engage stock options were granted as a
result of the former Flycast employees' electing to convert certain CMGI
options. Under the terms of the Merger Agreement, Engage reduced the number of
Engage common shares payable to CMGI for the 361,000 converted Engage stock
options that were granted to Flycast employees.

Total purchase consideration was valued at $3.24 billion (based on the
closing average per share price of the Company's common stock for the five days
before and after January 20, 2000, the date the Company publicly announced that
it had entered into the Merger Agreement), net of cash acquired of $7.6 million.
In connection with the merger and contribution, Engage issued approximately 10.9
million shares of its common stock for all of the outstanding capital stock of
Adsmart, of which approximately 10.8 million shares were issued directly to CMGI
for CMGI's 96% interest in Adsmart, and approximately 53.4 million shares of its
common stock directly to CMGI for CMGI's 100% interest in Flycast, valued at
approximately $3.22 billion in the aggregate. Additionally, included in the
purchase consideration were approximately 707,000 stock options to acquire
Engage common stock exchanged in the merger and contribution and valued at
approximately $24.4 million. A non-cash dividend was distributed to CMGI for the
excess fair value of the Engage common shares issued to CMGI and Engage stock
options exchanged for Adsmart and Flycast stock options in excess of CMGI's
historical cost basis in Adsmart and Flycast. Direct acquisition costs
consisting primarily of legal, accounting and banker fees approximated $5.0
million as a result of these acquisitions and were expensed during the quarter
ended April 30, 2000.

The Company has accrued approximately $25.6 million in fees payable to
investment bankers as of April 30, 2000 comprised of approximately $23.2 million
of investment banker fees payable by Flycast in connection with CMGI's
acquisition of Flycast and approximately $2.4 million of remaining banker fees
payable in connection with the Company's purchase of Flycast and Adsmart from
CMGI.

8
<PAGE> 9

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

In-process research and development ("IPRD")

Management is primarily responsible for estimating the fair value of
purchased IPRD. The portion of the purchase price allocated to IPRD in the
Flycast acquisition was $29.3 million, or approximately 3.2% of CMGI's original
total purchase price. The value allocated to projects identified as IPRD was
charged to expense in the quarter ended April 30, 2000.

As of the acquisition date, Flycast was in the process of developing
technology which would add functionality and features and was also in the
process of developing a new platform for its product. This technology had not
yet reached technological feasibility and had no alternative uses. This
technology under development may not achieve commercial viability. The
technological feasibility of the in-process product is established when the
enterprise has completed all planning, designing, coding, and testing activities
that are necessary to establish that the product can be produced to meet its
design specifications including functions, features, and technical performance
requirements.

The value of Flycast's identifiable intangible assets consisted of IPRD,
assembled work force, developed or core technology, trade name, and customer
base.

The value of Flycast's work force was determined using the cost approach,
which gives consideration to the various costs associated with replacing the
employees of Flycast by estimating costs such as salaries, benefits, recruitment
and training.

The value of the developed technology and customer base was determined by
estimating the expected future earnings attributed to the customer base and
discounting these earnings using an appropriate discount factor. The discount
rate is determined by analysis of the risks associated with the investment in
each of the identified intangible assets and comparative equity risks.

At the date of the acquisition, management estimated that completion of the
Flycast IPRD would be accomplished in May 2000 while the initial development
effort had commenced in late April through November 1999. At the valuation date,
the new technology had not reached a completed prototype stage, although some
beta testing on portions of the technology had begun. At the time of the
valuation date, the IPRD was approximately 65% complete, based on development
costs incurred through the acquisition date versus the total costs estimated to
complete the project.

The value of IPRD 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 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 24%.

The resulting net cash flows to which the discount rate was applied are
based on management's estimates of revenues, operating expenses and income taxes
from such acquired technology. Management anticipated completing its in-process
technology in May 2000. As of June 2000 the IPRD has been substantially
completed.

The original acquisition of Flycast by CMGI 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 amount of the purchase price allocated to goodwill,
developed technology and other identifiable intangible assets is being amortized
on a straight line basis over three years.

9
<PAGE> 10

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

CMGI's purchase price of the Flycast acquisition was allocated as follows:

(IN THOUSANDS)

Working capital, net of cash acquired of
$12,893 ........................... $ 21,484
Property and equipment, net ............ 11,751
Other assets ........................... 316
In-process research and development .... 29,300
Long-term obligations .................. (2,834)
Goodwill ............................... 738,537
Other identifiable intangible assets ... 93,820
---------

Purchase price, net of cash acquired ... $ 892,374
=========

The following table represents the unaudited pro forma results of
operations of the Company for the nine months ended April 30, 1999 and 2000 as
if the AdKnowledge (completed on December 20, 1999, as more fully disclosed in
the Company's Quarterly Report on Form 10Q for the quarter ended January 31,
2000), and Flycast acquisitions had occurred on August 1, 1998. These pro forma
results include adjustments for the amortization of goodwill and other
intangibles, and acquisition related costs expensed by Flycast prior to the date
of acquisition, the elimination of amounts expensed for in-process research and
development and the elimination of intercompany revenues and cost of revenues.
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.

1999 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)

Net revenue ...... $ 28,864 $ 146,771
Net loss ......... (300,440) (403,071)
Net loss per share (1.96) (2.34)

10
<PAGE> 11

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

E. COMBINING FINANCIAL INFORMATION

The acquisitions of Flycast and Adsmart have been accounted for as an
"as-if pooling" and accordingly, the Company's historical consolidated financial
statements have been restated to include the accounts and results of operations
of Flycast back to January 13, 2000, the date CMGI completed its acquisition of
Flycast and of Adsmart back to April 1, 1996, the date CMGI founded Adsmart. The
results of operations previously reported by the separate businesses and the
combined amounts presented in the accompanying consolidated financial statements
are presented below.

NINE MONTHS ENDED APRIL 30,
-------------------------------
1999 2000
-------------- --------------
(IN THOUSANDS)
Revenue
Engage ...... $ 8,997 $ 37,297
Flycast ..... -- 29,132
Adsmart ..... 1,311 45,291
Eliminations -- (1,602)
-------- ---------
Total .. $ 10,308 $ 110,118
======== =========

Net loss
Engage ... $(21,170) $(117,761)
Flycast .. -- (123,797)
Adsmart .. (5,518) (24,057)
-------- ---------
Total $(26,688) $(265,615)
======== =========

All transactions amongst the Company, Flycast and Adsmart within the
periods for which consolidated results of operations have been pooled have been
eliminated.

F. COMPREHENSIVE LOSS

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 components of comprehensive loss, net of income taxes, are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss ............................................ $(14,382) $(196,505) $(26,688) $(265,615)
Foreign currency adjustments ........................ (43) (25) 302 66
Net unrealized holding gain arising during the period (527) (16) 469 687
-------- --------- -------- ---------
Comprehensive loss ............................. $(14,952) $(196,546) $(25,917) $(264,861)
======== ========= ======== =========
</TABLE>

11
<PAGE> 12

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

G. INVESTMENTS

The fair value of investments has been determined through information
obtained from market sources. Engage uses a specific identification cost method
to determine the gross realized gains and losses on the sale of securities. The
Company's cash and cash equivalents and available-for-sale securities at April
30, 2000 approximated their fair values, which are as follows:

Cash and money market mutual fund....................... $21,672
Commercial paper........................................ 31,758
Corporate bonds......................................... 18,449
Certificate of deposit.................................. 5,443
Government securities................................... 12,943
-------
Total cash and cash equivalents and available for
sale securities............................... $90,265
=======

H. NON-CASH TRANSACTIONS

During the nine months ended April 30, 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, the Company has recorded a reduction of $2.0 million in both
deferred compensation and additional paid-in capital.

During the nine months ended April 30, 2000, the Company acquired
AdKnowledge, Adsmart and Flycast through the issuance of common stock. See Note
D and K.

I. STOCK COMPENSATION

Had the Company recorded stock compensation expense within the functional
departments of the employee or director, stock compensation would have been
allocated as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -----------------
1999 2000 1999 2000
---- ------- ---- --------
(IN THOUSANDS)

Cost of revenue .......... $ 15 $ 10 $ 19 $ 81
Research and development . 53 60 143 225
Selling and marketing .... 43 5,650 71 5,821
General and Administrative 155 31,228 424 31,147
---- ------- ---- -------

Total ........ $266 $36,948 $657 $37,274
==== ======= ==== =======

12
<PAGE> 13

J. SEGMENT REPORTING

Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information", (SFAS No. 131). SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. During April 2000, as a result of closing
the Flycast and Adsmart acquisitions, the Company's operations and corresponding
organizational structures were realigned into three segments: Media, Media
Management and Software and Consulting based on the type of products and
services offered. As a result of the realignment, the prior period segment
information has been restated. 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
enables 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 by segment are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- ----------------------
1999 2000 1999 2000
------- ------- -------- --------
(IN THOUSANDS)
MEDIA
Revenue .............. $ 445 $43,278 $ 1,311 $ 74,019
Gross profit ......... (579) 4,912 (966) 3,438

MEDIA MANAGEMENT
Revenue .............. 640 8,462 640 16,526
Gross profit ......... 242 4,342 242 7,574

SOFTWARE AND CONSULTING
Revenue .............. 4,092 6,942 8,357 19,573
Gross profit ......... 2,004 4,207 3,419 13,270

CONSOLIDATED SEGMENT TOTALS
Revenue .............. 5,177 58,682 10,308 110,118
Gross profit ......... 1,667 13,461 2,695 24,282

Assets information by operating segment is not reported since the Company
does not identify assets by segment.

13
<PAGE> 14

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

K. RELATED PARTY TRANSACTIONS

Related Party Revenue and Cost of Revenue

The Company sells its products and services to companies in which CMGI has
an investment or significant ownership interest. Total revenue recognized from
the sales to related parties for the three months ended April 30, 1999 and 2000
were $526,000 and $2.1 million, respectively. Total revenue recognized from
sales to related parties for the nine months ended April 30, 1999 and 2000 were
$1.4 million and $4.7 million, respectively. The related cost of revenue is
consistent with the costs incurred on similar transactions with unrelated
parties.

In addition, the Company outsources 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 April 30, 1999 and 2000 was $1.1 million and $4.7 million,
respectively. Total cost of revenue related to outsourcing from related parties
for the nine months ended April 30, 1999 and 2000 was $2.0 million and $10.6
million, respectively.

Dividend to CMGI

The Company has recorded the difference between CMGI's historical carrying
value and the combined purchase price paid for Flycast and Adsmart as a dividend
to CMGI. This dividend has been included in the accumulated deficit balance as
of April 30, 2000 as follows:

(IN THOUSANDS)

Accumulated deficit at July 31, 1999 $ (84,715)
Net loss for the nine months ended April 30, 2000 (265,615)
Dividend to CMGI (2,249,595)
-----------
Accumulated deficit at April 30, 2000 $(2,599,925)
===========

L. LITIGATION

On March 16, 2000, a derivative action was filed in the Court of Chancery
of the State of Delaware against Edward A. Bennett, Christopher A. Evans, Craig
D. Goldman, Andrew J. Hajducky, III, Frederic D. Rosen, Paul L. Schaut, David S.
Wetherell, members of the Company's Board of Directors, CMGI, Inc., the majority
stockholder of the Company and the Company, as nominal defendant. The complaint
alleges that, in connection with the proposed sale by CMGI of Flycast
Communications Corporation and Adsmart Corporation to the Company, CMGI and the
individual defendants have violated their fiduciary duties. The Company believes
that the complaint is without merit and expects that the Company's Board of
Directors will contest the claims vigorously.

M. NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. The Company is required to adopt this standard in the first quarter
of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. The Company expects that the adoption
of SFAS 133 will not have a material impact on its financial position or its
results of operations.

In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 expresses the view of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. Although the Company is still in process of analyzing the impact of SAB
No. 101, if any, in its consolidated statements and related disclosures, the
Company expects that there will be not material impact on its financial position
or its results of operations.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). FIN 44 applies
prospectively to new stock option awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after July 1, 2000. In addition, certain provisions of FIN 44
related to option repricing are applied retroactively to December 15, 1998.
Although the Company is still in process of analyzing the impact of FIN 44, if
any, on its consolidated statements and related disclosures, the Company expects
that there will be no material impact on its financial position or its results
of operations.

14
<PAGE> 15

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

N. SUBSEQUENT EVENTS

On May 26, 2000, the Company entered into an asset purchase agreement by
and among the Company, Engage Canada Company, an unlimited liability company
existing under the laws of Nova Scotia, Gallop & Gallop Advertising Inc., a
corporation organized under the laws of Canada ("G&G"), 1261094 Ontario Limited,
a corporation organized under the laws of Ontario, and certain individual
stockholders (the "Asset Purchase Agreement"). Pursuant to the Asset Purchase
Agreement, Engage Canada Company purchased substantially all of the assets of
G&G's online advertising solutions business in Canada known as the Virtual
Billboard Network ("VBN"). The Company agreed to pay $5.0 million in Engage
common stock. The Company expects to record goodwill for substantially all of
the purchase price of VBN. The transaction was completed on June 9, 2000. Engage
Canada Company is owned by two United States holding companies each of which is
a wholly-owned subsidiary of the Company.

On June 11, 2000, the Company signed an Agreement and Plan of Merger
pursuant to which it will acquire MediaBridge Technologies, Inc., a leading
provider of cross-media closed loop targeted marketing systems. Under the terms
of the merger agreement, the Company will issue to the shareholders of
MediaBridge approximately 14.5 million shares of common stock, subject to
adjustment. The number of shares of common stock will be reduced by the value of
expenses incurred by MediaBridge in the transaction. In addition, if the average
of the last reported per share sales prices of common stock on the Nasdaq
National Market for the 15 consecutive trading days ending three days prior to
closing (the "Average Closing Price") is greater than $24.14 but less than
$30.00, the number of shares issued will be reduced to a number equal to $350
million divided by the Average Closing Price. If the Average Closing Price is
greater than $30.00, the number of shares issued in the merger will equal
11,666,667. Ten percent of the shares to be issued in the merger will be subject
to an escrow for a period of one year to secure certain indemnification
obligations of the MediaBridge shareholders.

By virtue of the merger of MediaBridge and a wholly-owned subsidiary of the
Company, MediaBridge will become a wholly-owned subsidiary of the Company. The
transaction is intended to be tax-free under Section 368(a) of the Internal
Revenue Code of 1986, as amended. The transaction, which will be accounted for
as a purchase, is subject to certain conditions, regulatory approval and the
shareholder approval of MediaBridge.

O. RECLASSIFICATIONS

Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.

15
<PAGE> 16

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,
including information with respect to the Company's future business plans, the
Company's expectation that expenditures will continue to increase for the
foreseeable future, the Company's liquidity and the Company's disclosure about
market risk, 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 "believes," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements. These
factors include those set forth in this section, the "Risk Factors" section
included in the Company's Annual Report on Form 10-K filed with the SEC on
October 29, 1999, and the risk factors discussed in the Company's other filings
with the SEC.

OVERVIEW

Engage is a leading provider of profile-based Internet marketing and media
solutions. At April 30, 2000, Engage was an approximately 87% owned subsidiary
of CMGI, Inc. ("CMGI"). The Company offers a range of products and services that
enable Web publishers, advertisers and merchants to target the delivery of
advertisements, content and e-commerce offerings to their audiences and to
measure their effectiveness. After its recently completed acquisitions, Engage
has generated most of its revenue to date through sales of advertising
management software and outsourced services and sales of media and media
management services. In July 1999, Engage commercially introduced its Engage
Knowledge data service to customers. Engage Knowledge provides real-time access
to Engage's database of more than 70 million anonymous profiles of Web users for
more effective targeting of online advertising, promotions and content. In
October 1999, Engage introduced Engage AudienceNet, the first Web-wide profile
driven advertising and marketing network that uses Engage's anonymous, behavior
based profiles to deliver substantial benefits to media buyers, Web sites and ad
networks. As a result of our recent acquisitions, our services and products are
grouped into three segments: Media, Media Management and Software and
Consulting.

In February 2000, the Company's 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 March 1999, Adsmart acquired 2Can Media, an on-line advertising
representation firm. 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, Engage acquired Internet Profiles Corporation ("I/PRO"),
which provides Web site traffic measurement and audit services. 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 December 1999, Engage acquired AdKnowledge Inc. ("AdKnowledge"), a
provider of products and services which allow online marketers and ad agencies
to plan, target, serve, track and analyze advertising campaigns. 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, Engage acquired Adsmart Corporation ("Adsmart"), an online
advertising network, and Flycast Communications Corporation ("Flycast"), a
leading provider of Internet direct response advertising solutions.. The
acquisitions have been accounted for as a combination of entities under common
control (i.e., "as if pooling").

16
<PAGE> 17

COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 1999 AND APRIL 30, 2000

REVENUE, COST OF REVENUE AND GROSS MARGIN

MEDIA. Media revenue is derived primarily from the delivery of
advertisements across a network of over 4,300 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 $445,000 for the three months
ended April 30, 1999 to $43.3 million for the three months ended April 30, 2000,
a 9,625% increase. Gross margin for the Media segment increased from a deficit
of (130%) for the three months ended April 30, 1999 to 11% for the three months
ended April 30, 2000. The increase in revenue is primarily due to the Flycast
acquisition, as well as 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 quarter ended April 30, 2000
versus the quarter ended April 30, 1999 was primarily due to lower average Web
site payments and ad serving costs.

MEDIA MANAGEMENT. Media Management revenue is derived primarily through
fees charged to customers for services provided by the Company's I/PRO and
AdKnowledge divisions. The Media Management segment provides solutions to enable
marketers to run and evaluate marketing programs both within and outside the
Company's advertising networks. Additionally, the Media Management segment
provides web site traffic measurement and analysis data and verification of site
traffic and advertising results.

Revenue for the Media Management segment increased from $640,000 for the
three months ended April 30, 1999 to $8.5 million for the three months ended
April 30, 2000, a 1,222% increase. Gross margin for the Media Management segment
increased from 38% for the three months ended April 30, 1999 to 51% for the
three months ended April 30, 2000. The increase in revenue was primarily due to
the I/PRO and AdKnowledge acquisitions and to a lesser extent, an increase in
I/PRO's customer base. The increase in the gross margins for the quarter ended
April 30, 2000 versus the quarter ended April 30, 1999 was a result of the
significant increase in revenue without a related increase in cost of revenue as
a large portion of the Media Management segment's cost of revenue are fixed,
infrastructure related costs.

SOFTWARE AND CONSULTING. Software and Consulting revenue is derived
primarily through the sale of software licenses, outsourced advertising
management solutions utilizing the Company's 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 the Company's support and consulting
groups.

Revenue for the Software and Consulting segment increased from $4.1 million
for the three months ended April 30, 1999 to $6.9 million for the three months
ended April 30, 2000, a 70% increase. Gross margin for the Software and
Consulting segment increased from 49% for the three months ended April 30, 1999
to 61% for the three months ended April 30, 2000. The increase in Software and
Consulting revenue was due to an increase in the number of new customers in both
domestic and international markets and a larger quantity of medium and high
dollar license arrangements during the three months ended April 30, 2000. In
addition, as a result of a growing customer base, consulting and support revenue
has increased substantially in the three months ended April 30, 2000 as compared
to the three months ended April 30, 1999. In the quarter ended April 30, 2000,
the Company ceased commercial sale of its DecisionSupportServer product. In the
quarter ended April 30, 1999, DecisionSupportServer accounted for approximately
4% of the Software and Consulting segment's revenues. The increase in gross
margins is due to an increase in revenue that exceeded the increase in costs due
to an expanded customer base and larger software deals.

17
<PAGE> 18

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expense. Research and development expenses increased from $2.0
million for the three months ended April 30, 1999 to $8.6 million for the three
months ended April 30, 2000, a 325% increase. This increase was primarily due to
the I/PRO, AdKnowledge and Flycast acquisitions and the inclusion of their
operations for the quarter ended April 30, 2000, and to a lesser extent, the
expansion of the Company's research and development activities. Including
acquisitions, Engage's research and development staff increased 289% from April
30, 1999 to April 30, 2000. These increases were offset somewhat by a decrease
in spending on the translation of Engage's products into certain foreign
languages, projects which were substantially completed during fiscal 1999.
Research and development expenses were 39% of revenue for the three months ended
April 30, 1999, compared to 15% of revenue for the three months ended April 30,
2000. This decrease is the direct result of the increase in quarter over quarter
revenue.

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 $4.8 million for the three months ended April
30, 1999 to $32.8 million for the three months ended April 30, 2000, a 590%
increase. The increase in costs was primarily due to the I/PRO, AdKnowledge and
Flycast acquisitions, the continuing expansion of Engage's sales force and costs
incurred to brand the Engage name and build market awareness of the Company's
consolidated product offerings resulting from recent acquisitions. In addition,
a portion of the increase was related to increases in product advertising costs
resulting from the release of several new products subsequent to April 30, 1999.
Finally, a portion of the increase is due to continued expansion in
international markets and the costs of maintaining sales and marketing efforts
in foreign markets. Overall, including acquisitions, Engage's sales and
marketing staff increased 229% from April 30, 1999 to April 30, 2000. Sales and
marketing expenses were 92% of revenue for the three months ended April 30,
1999, compared to 56% for the three months ended April 30, 2000.

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 $1.4 million for the three months ended April 30, 1999
to $10.2 million for the three months ended April 30, 2000, a 604% increase. The
increase was primarily due to the inclusion of I/PRO's, AdKnowledge's, and
Flycast's operations for the quarter ended April 30, 2000 and, to a lesser
extent, an increase in payroll and related costs associated with developing an
administrative infrastructure to support growing operations. General and
administrative costs were 28% of revenue for the three months ended April 30,
1999, compared to 17% for the three months ended April 30, 2000, primarily due
to increased revenues.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of intangible
assets increased from $2.4 million for the three months ended April 30, 1999 to
$87.0 million for the three months ended April 30, 2000. The increase was due to
amortization expense resulting from Adsmart's acquisition of 2Can Media in March
1999, and Engage's acquisitions of I/PRO in April 1999, AdKnowledge in December
1999 and Flycast in January 2000. Intangible assets from the 2Can acquisition
are being amortized over five years. Intangible assets from the I/PRO
acquisition are being amortized over three to five years, while intangible
assets from the AdKnowledge and Flycast acquisitions are being amortized over
three years. All of the Company's intangible assets are being amortized under
the straight-line method.

18
<PAGE> 19

STOCK COMPENSATION. Stock compensation expense increased from $266,000 for
the three months ended April 30, 1999 to $36.9 million for the three months
ended April 30, 2000. Approximately $36.6 million of the increase in stock
compensation expense was related to stock compensation expense recorded for the
acceleration of the vesting of approximately 323,000 CMGI stock options
previously issued to four former executives of Flycast under pre-existing
severance agreements. Additionally, Engage began to recognize stock compensation
expense as a result of stock options granted during fiscal 1999 with exercise
prices below the estimated fair market value of the common stock at the date of
grant. Finally, during the three months ended April 30, 2000, as a result of the
termination of employment of certain employees prior to the vesting of their
stock options, the Company reversed $8,000 of stock compensation expense that
had been recorded in prior quarters and ceased monthly stock compensation
expense recognition related to the terminated employees.

EQUITY IN LOSS OF JOINT VENTURE

Equity in loss of Engage's 46% interest in a Japanese joint venture was
$257,000 for the three months ended April 30, 1999, compared to $315,000 for the
three months ended April 30, 2000. The increase in Engage's share of losses in
the joint venture represents the joint venture's increase in staff and its
continued investment in expanding its sales and marketing presence within its
market.

INTEREST INCOME

Interest income was $1.5 million for the three months ended April 30, 2000.
During the three months ended April 30, 2000, interest income was primarily
earned from investing the proceeds of the Company's initial public offering
completed in July 1999 and cash and investments acquired in the acquisition of
Flycast.

INTEREST EXPENSE

Interest expense was $220,000 for the three months ended April 30, 1999,
compared to $1.2 million for the three months ended April 30, 2000. During
fiscal 1998, Engage entered into an arrangement with CMGI which required Engage
to accrue interest on intercompany debt at a rate of 7% per annum. During the
three months ended April 30, 1999, interest expense was recorded on this debt,
all of which was converted into equity in connection with Engage's initial
public offering in July 1999. During 1998, Adsmart also entered into a similar
financing arrangement with CMGI. All of Adsmart's debt with CMGI was converted
into equity in connection with the closing of the acquisition of Adsmart by
Engage in April 2000. Interest expense related to long-term debt and capital
lease obligations increased in the three months ended April 30, 2000 over April
30, 1999 due to debt balances assumed as part of the I/PRO, Adknowledge, and
Flycast acquisitions Interest expense for the three months ended April 30, 2000
was primarily related to interest accrued by Adsmart on the intercompany debt
with CMGI and interest paid on long-term debt and capital lease obligations
maintained by AdKnowledge.

COMPARISON OF THE NINE MONTHS ENDED APRIL 30, 1999 AND APRIL 30, 2000

REVENUE AND COST OF REVENUE

MEDIA. Revenue for the Media segment increased from $1.3 million for the
nine months ended April 30, 1999 to $74.0 million for the nine months ended
April 30, 2000, a 5,546% increase. Gross margin (deficit) for the Media segment
increased from (74)% for the nine months ended April 30, 1999 to 5% for the nine
months ended April 30, 2000. The increase in revenues is primarily due to the
Flycast acquisition, the 2Can acquisition, as well as 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
nine months ended April 30, 2000 versus the nine months ended April 30, 1999 was
primarily due to lower average Web site payments resulting, in part, from the
elimination of some guaranteed minimum payments to Web sites from selected Web
site agreements, offset somewhat by an increase in ad serving costs.

19
<PAGE> 20

MEDIA MANAGEMENT. Revenue for the Media Management segment increased from
$640,000 for the nine months ended April 30, 1999 to $16.5 million for the nine
months ended April 30, 2000, a 2,482% increase. Gross margin for the Media
Management segment increased from 38% for the nine months ended April 30, 1999
to 46% for the nine months ended April 30, 2000. The increase in revenue was
primarily due to the I/PRO and AdKnowledge acquisitions and to a lesser extent,
an increase in I/PRO revenue as a result of a growing customer base.

SOFTWARE AND CONSULTING. Revenue for the Software and Consulting segment
increased from $8.4 million for the nine months ended April 30, 1999 to $19.6
million for the nine months ended April 30, 2000, a 134% increase. Gross margin
for the Software and Consulting segment increased from 41% for the nine months
ended April 30, 1999 to 68% for the nine months ended April 30, 2000. The
increase in Software and Consulting revenue was due to an increase in the number
of new customers in both domestic and international markets and a larger
quantity of medium and high dollar license arrangements during the nine months
ended April 30, 2000. In addition, as a result of a growing customer base,
consulting and support revenue has increased substantially in the three months
ended April 30, 2000 as compared to the nine months ended April 30, 1999. In the
quarter ended April 30, 2000, the Company ceased commercial sale of its
DecisionSupportServer product. In the nine months ended April 30, 1999,
DecisionSupportServer accounted for approximately 6% of the Software and
Consulting segment's revenues.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$5.8 million for the nine months ended April 30, 1999 to $17.0 million for the
nine months ended April 30, 2000, a 193% increase. This increase was due to the
I/PRO, AdKnowledge, and Flycast acquisitions and the inclusion of their
operations for the nine months ended April 30, 2000, and to a lesser extent, the
expansion of the Company's research and development activities. These increases
were offset somewhat by a decrease in spending on the translation of Engage's
products into certain foreign languages, projects which were substantially
completed during fiscal 1999. Research and development expenses were 56% of
revenue for the nine months ended April 30, 1999, compared to 15% of revenue for
the nine months ended April 30, 2000. This decrease is the direct result of the
increase in year to date revenue April 30, 1999 to April 30, 2000.

SELLING AND MARKETING. Selling and marketing expenses increased from $9.5
million for the nine months ended April 30, 1999 to $63.1 million for the nine
months ended April 30, 2000, a 568% increase. The increase was primarily due to
an increase in costs related to the acquisitions of I/PRO, AdKnowledge and
Flycast. Additionally, an increase in product advertising costs resulting from
the release of several new products subsequent to April 30, 1999 and the
continuing expansion of Engage's sales force contributed to the overall
increase. Finally, a portion of the increase is due to continued expansion in
international markets and the costs of maintaining sales and marketing efforts
in foreign markets. As of April 30, 2000, the Company has subsidiaries in six
foreign countries versus one foreign subsidiary that existed as of April 30,
1999. Overall, including the acquisitions of I/PRO, AdKnowledge and Flycast,
Engage's sales and marketing staff increased 229% from April 30, 1999 to April
30, 2000. Sales and marketing expenses were 92% of revenue for the nine months
ended April 30, 1999, compared to 57% for the nine months ended April 30, 2000.
The decrease as a percentage of revenue is the result of the increase in revenue
during the period, offset somewhat by costs incurred in the Company's efforts to
begin the re-branding of Engage.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $2.9 million for the nine months ended April 30, 1999 to $18.0 million for
the nine months ended April 30, 2000, a 517% increase. The increase was
primarily due to an increase in payroll and related costs associated with the
support of growing operations and from the inclusion of I/PRO's, AdKnowledge's
and Flycast's operations for the nine months ended April 30, 2000. General and
administrative costs were 28% of revenue for the nine months ended April 30,
1999, compared to 16% for the nine months ended April 30, 2000. The decrease as
a percentage ofrevenue is the result of spreading fixed costs over a larger
revenue base.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of intangible
assets increased from $4.7 million for the nine months ended April 30, 1999 to
$118.8 million for the nine months ended April 30, 2000. The increase was due to
the acquisitions of I/PRO in April 1999, AdKnowledge in December 1999 and
Flycast in January 2000. Intangible assets from the I/PRO acquisition are being
amortized over three to five years, while intangible assets from the AdKnowledge
and Flycast acquisitions are being amortized over three years. All of the
Company's intangible assets are being amortized under the straight line method.

20
<PAGE> 21

STOCK COMPENSATION. Stock compensation expense increased from $657,000 for
the nine months ended April 30, 1999 to $37.3 million for the nine months ended
April 30, 2000. Approximately $36.6 million of the increase in stock
compensation expense was related to stock compensation expense recorded for the
acceleration of the vesting of approximately 323,000 CMGI stock options
previously issued to four former executives of Flycast under pre-existing
severance agreements. Additionally, during the nine months ended April 30, 2000,
as a result of the termination of employment of certain employees prior to the
vesting of their stock options, the Company reversed $130,000 of stock
compensation expense that had been recorded in prior quarters and ceased monthly
stock compensation expense recognition related to the terminated employees.

EQUITY IN LOSS OF JOINT VENTURE

Equity in loss of Engage's 46% interest in a Japanese joint venture was
$417,000 for the nine months ended April 30, 1999, compared to $1.0 million for
the nine months ended April 30, 2000. The increase in Engage's share of losses
in the joint venture represents the joint venture's increase in staff and its
continued investment in expanding its sales and marketing presence within its
market.

INTEREST INCOME

Interest income was $4.3 million for the nine months ended April 30, 2000.
During the nine months ended April 30, 2000, interest income was primarily
earned from investing the proceeds of the Company's initial public offering
completed in July 1999 and cash and investments acquired in the acquisition of
Flycast.

INTEREST EXPENSE

Interest expense was $751,000 million for the nine months ended April 30,
1999, compared to $2.3 million for the nine months ended April 30, 2000. During
fiscal 1998, Engage entered into an arrangement with CMGI which required Engage
to accrue interest on intercompany debt at a rate of 7% per annum. During the
nine months ended April 30, 1999, interest expense was recorded on this debt,
all of which was converted into equity in connection with Engage's initial
public offering in July 1999. During 1998, Adsmart also entered into a similar
financing arrangement with CMGI. All of Adsmart's debt with CMGI was converted
into Adsmart equity and then Engage common stock in connection with the closing
of the acquisition of Adsmart by Engage in April 2000.

During the nine months ended April 30, 2000, interest expense was recorded
on the Company's long-term debt and capital lease obligations. Interest expense
related to long-term debt and capital lease obligations increased in the nine
months ended April 30, 2000 over April 30, 1999 due to debt balances assumed as
part of the I/PRO, Adknowledge, and Flycast acquisitions. Interest expense for
the nine months ended April 30, 2000 was also comprised of interest accrued
by Adsmart on its intercompany debt with CMGI.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents decreased from $112.0 million at
July 31, 1999 to $48.5 million at April 30, 2000. Net cash used in operating
activities was $105.9 million for the nine months ended April 30, 2000. Cash
used in operating activities resulted primarily from net losses and increases in
accounts receivable, which were partially offset by increases in accounts
payable. Net cash used in investing activities was $10.9 million for the nine
months ended April 30, 2000. During the nine months ended April 30, 2000 we
purchased $54.3 million in marketable securities and continued to acquire
equipment to support growth and expansion. These uses were offset by $61.6
million in proceeds from the redemption of marketable securities and $15.9
million in cash acquired in acquisitions. Net cash provided by financing
activities was $31.5 million and consisted primarily of proceeds received from
CMGI to fund the operations of Adsmart prior to Engage acquiring Adsmart on
April 28, 2000.

As of April 30, 2000, we had $90.3 million of cash and cash equivalents and
marketable securities. Although we have no material commitments for capital
expenditures, we anticipate that expenditures will continue to increase for the
foreseeable future as the Company accelerates the growth of its business.
Additionally, the Company will continue to evaluate investment opportunities in
businesses that management believes will complement its marketing strategies.

21
<PAGE> 22

The Company currently anticipates that its available cash resources will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for approximately the next 2 quarters. The Company believes that
additional external financing will be available through strategic partnerships,
sales of additional equity or other debt instruments. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of the Company's stockholders will be reduced and its
stockholders may experience dilution of their interest in the Company. If
adequate funds are not available or are not available on acceptable terms, the
Company's ability to continue as a going concern, to fund its expansion, take
advantage of unanticipated opportunities, develop or enhance services or
products or otherwise respond to competitive pressures may be significantly
limited.

IN-PROCESS RESEARCH AND DEVELOPMENT ("IPRD")

Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the AdKnowledge
purchase price allocated to IPRD was $2.3 million and was expensed during the
quarter ended January 30, 2000. The portion of the Flycast purchase price
allocated to IPRD was $29.3 million and was expensed in the quarter ended April
30, 2000.

As of the acquisition date, AdKnowledge's major in-process projects were:
the development of the AdKnowledge System Architecture Upgrade, the AdServer
Network Capacity Upgrade, the Adserve Network Operating System Change, the
Optimal Global Domain Name Service and the QA Automation Procedures. The value
of this IPRD was determined using an income approach using appropriate discount
rates.

As of the acquisition date, Flycast was in the process of developing
technology which would add functionality and features and was also in the
process of developing a new platform for its product. The IPRD had not yet
reached technological feasibility and had no alternative uses. The IPRD under
development may not achieve commercial viability. The technological feasibility
of the in-process product is established when the enterprise has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements.

At the date of the acquisition, management estimated that completion of the
Flycast IPRD would be accomplished in May 2000 while the initial development
effort had commenced in late April through November 1999. At the valuation date,
the new technology had not reached a completed prototype stage, although some
beta testing on portions of the technology had begun. At the time of the
valuation date, the IPRD was approximately 65% complete, based on costs into the
product versus the total costs estimated to complete it.

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 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 24%.

The resulting net cash flows to which the discount rate was applied are based on
management's estimates of revenues, operating expenses and income taxes from
such acquired technology. Management anticipated completing its in-process
technology in May 2000. As of June 2000, the IPRD has been substantially
completed.

22
<PAGE> 23

FOREIGN OPERATIONS

The results of the Company's international operations are subject to
currency fluctuations. As of April 30, 2000, the Company had subsidiaries in the
United Kingdom, Germany, France, Sweden, Italy and Australia, and had a joint
venture in Japan. To date, the Company's 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 the Company's financial
condition and results of operations will not be adversely affected by exchange
rate fluctuations.

SUBSEQUENT EVENTS

On May 26, 2000, the Company entered into an asset purchase agreement by
and among the Company, Engage Canada Company, an unlimited liability company
existing under the laws of Nova Scotia, Gallop & Gallop Advertising Inc., a
corporation organized under the laws of Canada ("G&G"), 1261094 Ontario Limited,
a corporation organized under the laws of Ontario, and certain individual
stockholders (the "Asset Purchase Agreement"). Pursuant to the Asset Purchase
Agreement, Engage Canada Company purchased substantially all of the assets of
G&G's online advertising solutions business in Canada known as the Virtual
Billboard Network ("VBN"). The Company agreed to pay $5 million in Engage common
stock. The Company expects to record goodwill for substantially all of the
purchase price of VBN. The transaction was completed on June 9, 2000. Engage
Canada Company is owned by two United States holding companies each of which is
a wholly-owned subsidiary of the Company.

23
<PAGE> 24

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.

The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may increase.
Therefore, in the future, the Company may consider utilizing derivative
instruments to mitigate such risks.

24
<PAGE> 25

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On April 28, 2000, in connection with the Company's acquisition of Flycast
Communications Corporation and Adsmart Corporation pursuant to an Agreement and
Plan of Merger and Contribution, dated as of January 19, 2000, (the "Merger
Agreement") by and among the Company, FCET Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company, CMGI, Inc., a Delaware corporation and
the majority stockholder of the Company, Adsmart and Flycast, the Company issued
(i) 10,877,468 shares of its common stock for all of the outstanding capital
stock of Adsmart (of which 10,811,527 million shares were issued to CMGI for its
96% interest in the capital stock of Adsmart and 65,941 shares to ten other
holders of Adsmart capital stock) and (ii) 53,413,213 shares of its common stock
to CMGI for CMGI's 100% interest in Flycast.

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 Section 4(2) thereof
relative to sales by an issuer not involving any public offering or the rules
and regulations thereunder.

In connection with the Company's initial public offering in July 1999, the
Company received net proceeds of approximately $94.8 million reflecting gross
proceeds of $103.5 million net of underwriter commissions of approximately $7.2
million and other estimated offering costs of approximately $1.5 million. On
July 19, 1999, the Securities and Exchange Commission declared the Company's
Registration Statement on Form S-1 (File No. 333-78015) effective.

The following table sets forth the Company's cumulative use of proceeds as
of April 30, 2000:

(IN THOUSANDS)

Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 9,563
Purchases of real estate -
Acquisition of other businesses -
Repayment of indebtedness -
Working capital 29,212
Temporary investments: cash and cash equivalents -
Temporary investments: available for sale securities 54,016
Temporary investments: other 2,000
All other purposes -

The foregoing use of net offering proceeds does not represent a material
change in the use of proceeds described in the Company's Registration Statement
on Form S-1.

25
<PAGE> 26

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held a Special Meeting of Stockholders on April 28, 2000, and
the following matters were voted on at that meeting:

1. To approve an amendment to the Company's Second Amended and Restated
Certificate of Incorporation increasing from 150,000,000 to 350,000,000 the
number of authorized shares of the Company's Common Stock. The following
chart shows the number of votes cast for or against the proposal, as well
as the number of abstentions and broker nonvotes:

BROKER
FOR AGAINST ABSTAIN NONVOTE

89,534,442 2,302 3,894 10,307,686

2. To approve an amendment to the Company's Second Amended and Restated
Certificate of Incorporation changing the name of the Company to Engage,
Inc. The following chart shows the number of votes cast for or against the
proposal, as well as the number of abstentions and broker nonvotes:

BROKER
FOR AGAINST ABSTAIN NONVOTE

99,843,954 800 3,548 N/A

3. To approve, (i) the continuance of the Company's 1995 Equity Incentive Plan
and (ii) an amendment to the Plan to increase from 30,000,000 to 36,000,000
the number of shares of the Company's Common Stock reserved for issuance
under the Plan. The following chart shows the number of votes cast for or
against the proposal, as well as the number of abstentions and broker
nonvotes:

BROKER
FOR AGAINST ABSTAIN NONVOTE

89,528,074 8,794 3,748 10,307,686

4. To approve the issuance of shares of the Company's Common Stock in two
concurrent interested party transactions between the Company and CMGI,
Inc., the majority stockholder of the Company, pursuant to which the
Company will acquire, in exchange for shares of the Company's Common Stock,
Adsmart Corporation, a subsidiary of CMGI, and Flycast Communications
Corporation, a wholly-owned subsidiary of CMGI The following chart shows
the number of votes cast for or against the proposal, as well as the number
of abstentions and broker nonvotes:

BROKER
FOR AGAINST ABSTAIN NONVOTE

89,530,556 6,512 3,548 10,307,686

26
<PAGE> 27

ITEM 5. OTHER INFORMATION

On June 11, 2000, the Company signed an Agreement and Plan of Merger
pursuant to which it will acquire MediaBridge Technologies, Inc., a leading
provider of cross-media closed loop target marketing systems. Under the terms of
the merger agreement, the Company will issue to the shareholders of MediaBridge
approximately 14.5 million shares of common stock, subject to adjustment. The
number of shares of common stock will be reduced by the value of expenses
incurred by MediaBridge in the transaction. In addition, if the average of the
last reported per share sales prices of common stock on the Nasdaq National
Market for the 15 consecutive trading days ending three days prior to closing
(the "Average Closing Price") is greater than $24.14 but less than $30.00, the
number of shares issued will be reduced to a number equal to $350 million
divided by the Average Closing Price. If the Average Closing Price is greater
than $30.00, the number of shares issued in the merger will equal 11,666,667.
Ten percent of the shares to be issued in the merger will be subject to an
escrow for a period of one year to secure certain indemnification obligations of
the MediaBridge shareholders.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Amendment to the Company's Second Amended and Restated
Certificate of Incorporation.

10.1(1) Amended and Restated 1995 Equity Incentive Plan.

10.2(2) 1996 Stock Option Plan of AdKnowledge Inc.

10.3(2) AdKnowledge Inc. 1998 Stock Option/Stock Issuance Plan

10.4 First Amendment to the Lease Agreement by and between TST
555/575 Market, L.L.C. as landlord and the Company as tenant,
dated March 20, 2000.

27.1 Financial Data Schedule

(1) Previously filed with the Company's definitive proxy statement
on April 7, 2000 and is incorporated herein by reference.

(2) Previously filed with the Company's Registration Statement on
Form S-8 (File No. 333-32202) on March 10, 2000 and is
incorporated herein by reference.

(b) Reports on Form 8-K

On March 3, 2000, the Company filed an amendment to its report on
Form 8-K in connection with the Company's completion of its acquisition
of AdKnowledge Inc.

27
<PAGE> 28

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 June
14, 2000.

By: /s/ Paul L. Schaut
-----------------------------------------
Paul L. Schaut
Chief Executive Officer and President

By: /s/ Stephen A. Royal
-----------------------------------------
Stephen A. Royal
Chief Financial Officer and Treasurer
(Principal Accounting and Financial
Officer of the Registrant)

28
<PAGE> 29

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT

3.1 Amendment to the Company's Second Amended and Restated
Certificate of Incorporation.

10.1(1) Amended and Restated 1995 Equity Incentive Plan.

10.2(2) 1996 Stock Option Plan of AdKnowledge Inc.

10.3(2) Adknowledge Inc. 1998 Stock Option/Stock Issuance Plan.

10.4 First Amendment to the Lease Agreement by and between TST
555/575 Market, L.L.C as landlord and the Company as tenant,
dated March 20, 2000.

27.1 Financial Data Schedule

(1) Previously filed with the Company's definitive proxy statement on April
7, 2000 and is incorporated herein by reference.

(2) Previously filed with the Company's Registration Statement on Form S-8
(File No. 333-32202) on March 10, 2000 and is incorporated herein by
reference.