<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
Date of Report (Date of earliest event reported): April 28, 2000
ENGAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-26671 04-3281378
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
100 BRICKSTONE SQUARE
ANDOVER, MASSACHUSETTS 01810
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 684-3884
--------------
Engage Technologies, Inc.
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On April 28, 2000, Engage, Inc., a Delaware corporation (the "Registrant"),
completed its acquisition of Adsmart Corporation, a Delaware corporation
("Adsmart"), an online advertising network for the business-to-consumer and
business-to-business markets, and Flycast Communications Corporation
("Flycast"), a leading provider of Internet direct response advertising
solutions. The acquisitions were completed pursuant to an Agreement and Plan of
Merger and Contribution, dated as of January 19, 2000 (the "Merger Agreement")
by and among the Registrant, FCET Corp., a Delaware corporation and a
wholly-owned subsidiary of Registrant ("Transitory Subsidiary"), CMGI, Inc., a
Delaware corporation and the majority stockholder of Registrant ("CMGI"),
Adsmart and Flycast.
Prior to completion of the transactions contemplated by the Merger
Agreement, Adsmart was a subsidiary, and Flycast was a wholly-owned subsidiary
of CMGI. David S. Wetherell, a director of the Registrant, is President, Chief
Executive Officer and a director of CMGI. Prior to the completion of the
transactions contemplated by the Merger Agreement, Mr.Wetherell was a director
of Adsmart and President of Flycast. Andrew J. Hajducky III, a director of the
Registrant, is Executive Vice President, Chief Financial Officer and Treasurer
of CMGI. Prior to the completion of the transactions contemplated by the Merger
Agreement, Mr. Hajducky was a director of Adsmart and a director and Vice
President and Treasurer of Flycast. Craig Goldman, a director of the Registrant,
is a director of CMGI.
Upon the completion of the transactions contemplated by the Merger
Agreement, Adsmart and Flycast each became a wholly-owned subsidiary of
Registrant. Under the terms of the Merger Agreement:
First, all of the convertible promissory notes of Adsmart held by CMGI
were converted into shares of Series B Convertible Preferred Stock of
Adsmart and all of Adsmart's Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock converted into shares of common stock
of Adsmart.
Second, all the holders of Adsmart common stock received common stock
of Registrant in exchange for their respective shares of Adsmart common
stock based on a conversion ratio determined by dividing 11,223,704 by the
sum of the number of shares of Adsmart common stock outstanding as of April
28, 2000 and the number of shares of Adsmart common stock subject to
outstanding options to purchase shares of Adsmart common stock issued by
Adsmart pursuant to its stock option plans or otherwise as of April 28,
2000.
Third, Transitory Subsidiary was merged with and into Adsmart, with
Adsmart being the surviving corporation (the "Surviving Corporation") (the
"Merger"). Concurrently with the Merger, CMGI contributed its holdings of
capital stock of Flycast to Registrant in exchange for 53,413,213 shares of
Registrant's common stock (the "Contribution"). Upon completion of these
transactions, CMGI owned approximately 87% of Registrant's common stock.
Total consideration for the Contribution and the Merger is valued at
approximately $3.2 billion (based on the closing average per share price of
Registrant's common stock for the five days before and after January 20, 2000,
the date the Registrant publicly announced that it had entered into the Merger
Agreement). In connection with the Merger, the Registrant issued 10,877,468
shares of its common stock (valued at $545.1 million), of which 10.8 million
shares were issued to CMGI (valued at $541.8 million) for its 96% interest in
the capital stock of Adsmart and 65,941 shares to the other holders of Adsmart
capital stock. Additionally, the Registrant has reserved approximately 346,000
shares of Registrant's common stock (valued at approximately $16.8 million) for
issuance upon exercise of stock options to purchase shares of the Registrant's
common stock (which stock options option holders received in the initial Merger
in exchange for stock options to purchase Adsmart common stock).
In connection with the Contribution, Registrant issued approximately 53.4
million shares of its common stock to CMGI for CMGI's 100% interest in Flycast,
valued at approximately $2.7 billion. Additionally, the Registrant has reserved
approximately 360,000 shares of Registrant's common stock (valued at
approximately $7.6 million) for issuance upon exercise of stock options to
purchase shares of the Registrant's common stock (Registrant stock options were
exchanged for stock options to purchase CMGI common stock that were held by
Flycast option holders prior to the Contribution closing).
2
<PAGE> 3
The transactions are intended to be tax free under Section 368(a) and
Section 351 of the Internal Revenue Code of 1986, as amended, and to be
accounted for as a combination of entities under common control (i.e., an "as if
pooling").
On May 1, 2000, Registrant announced the closing of the Merger and the
Contribution.
Item 5. Other Events
On April 28, 2000, Registrant changed its name to Engage, Inc.
Item 7. Financial Statements and Exhibits.
Item 7 to the Registrant's Current Report on Form 8-K filed on May 11, 2000
is amended to read in its entirety as follows:
(A) Financial Statements of Businesses Acquired
1. Audited supplemental consolidated financial statements of Engage,
Inc. which include the following:
(a) Independent Auditors' Report.
(b) Supplemental Consolidated Balance Sheets as of July 31, 1998 and
1999 and April 30, 2000 (unaudited)
(c) Supplemental Consolidated Statements of Operations for the
three years ended July 31, 1999 and for the nine months ended
April 30, 1999 and 2000 (unaudited)
(d) Supplemental Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the three years ended
July 31, 1999 and for the nine months ended April 30, 2000
(unaudited)
(e) Supplemental Consolidated Statements of Cash Flows for the three
years ended July 31, 1999 and for the nine months ended
April 30, 1999 and 2000 (unaudited)
(f) Notes to Supplemental Consolidated Financial Statements
2. Audited financial statements of Adsmart, Flycast, Eisenberg
Communications Group and 2Can Media Inc. and the notes thereto, are
incorporated by reference to the Registrant's definitive proxy
statement filed with the Securities and Exchange Commission on
April 7, 2000.
(B) Pro Forma Financial Information
(1) Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended April 30, 2000
(2) Notes to Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended April 30, 2000
(3) Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended July 31, 1999
(4) Notes to Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended July 31, 1999
(C) Exhibits.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
23.4 Consent of KPMG LLP
99.1 Agreement and Plan of Merger and Contribution, dated January 19, 2000,
by and among the Registrant, CMGI, Inc., Adsmart Corporation, Flycast
Communications Corporation and FCET Corp., incorporated by reference
from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on March 16, 2000.
99.2 Press release of the Registrant (incorporated by reference from Exhibit
99.2 to the Registrant's Form 8-K filed with Securities and Exchange
Commission on May 11, 2000.)
3
<PAGE> 4
INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
ENGAGE, INC.
<S> <C>
Independent Auditors' Report........................................................................... F-2
Supplemental Consolidated Balance Sheets as of July 31, 1998 and 1999 and April 30, 2000 (unaudited)... F-3
Supplemental Consolidated Statements of Operations for the three years ended July 31, 1999 and
for the nine months ended April 30, 1999 and 2000 (unaudited)....................................... F-4
Supplemental Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
three years ended July 31, 1999 and for the nine months ended April 30, 2000 (unaudited)............ F-5
Supplemental Consolidated Statements of Cash Flows for the three years ended July 31, 1999 and
for the nine months ended April 30, 1999 and 2000 (unaudited)....................................... F-6
Notes to Supplemental Consolidated Financial Statements................................................ F-7
PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
April 30, 2000...................................................................................... F-33
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended April 30, 2000......................................................................... F-34
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended July
31, 1999............................................................................................ F-35
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended July 31, 1999................................................................................. F-36
</TABLE>
F-1
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Engage, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Engage, Inc. and subsidiaries as of July 31, 1999 and 1998, and the related
supplemental consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended July
31, 1999. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Engage, Inc., Flycast Communications Corporation and Adsmart
Corporation on April 28, 2000, which has been accounted for as a combination of
entities under common control in a manner similar to a pooling of interests as
described in Note 2 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Engage, Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Engage, Inc. and subsidiaries as of July 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 1999, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
Boston, Massachusetts
June 18, 2000
F-2
<PAGE> 6
ENGAGE, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
------------------------- APRIL 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 96 $ 112,034 $ 48,493
Available-for-sale securities ............................................... 567 1,067 41,772
Accounts receivable, less allowance for doubtful accounts
of $430, $1,790 and $8,175 at July 31, 1998 and 1999 and
April 30, 2000, respectively .............................................. 2,172 16,463 69,947
Prepaid expenses ............................................................ 272 727 3,571
----------- ----------- -----------
Total current assets .................................................. 3,107 130,291 163,783
----------- ----------- -----------
Property and equipment, net ................................................... 805 1,997 24,654
Investment in joint venture ................................................... -- 1,047 95
Intangible assets, net of accumulated amortization of
$1,498, $10,492 and $129,300 at July 31, 1998 and 1999 and
April 30, 2000, respectively ................................................ 20,540 73,335 958,764
Restricted cash ............................................................... -- -- 5,020
Other assets .................................................................. -- 371 3,728
----------- ----------- -----------
Total assets .......................................................... $ 24,452 $ 207,041 $ 1,156,044
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ -- $ -- $ 2,046
Obligation under capital lease .............................................. 11 327 4,071
Debt to CMGI ................................................................ 12,317 44,829 --
Due to CMGI and affiliates .................................................. -- -- 3,548
Accounts payable ............................................................ 891 12,614 38,904
Accrued expenses and other current liabilities .............................. 2,571 15,251 21,465
Investment banker fees payable .............................................. -- -- 25,576
Deferred revenue ............................................................ 1,460 4,293 5,755
----------- ----------- -----------
Total current liabilities ............................................. 17,250 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 ........................ 12 436 3,409
Other long-term liabilities ................................................... -- -- 604
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock - Engage, $.01 par value, 1,500 shares authorized,
1,500, 0 and 0 shares issued and outstanding
at July 31, 1998 and 1999 and April 30, 2000, respectively
(liquidating preference of $16,340 at July 31, 1998) ...................... 15 -- --
Series A Preferred Stock - Adsmart, $.01 par value, 69 shares
authorized, 69, 69 and 0 shares issued and outstanding at July 31, 1998 and
1999 and April 30, 2000, respectively
(liquidating preference of $925 at July 31, 1998) ......................... 1 1 --
Series B Preferred Stock, $.01 par value, 239 shares
authorized, 0 shares issued and outstanding at July 31,
1998 and 1999 and April 30, 2000 .......................................... -- -- --
Series C Preferred Stock, $.01 par value, 2,000 shares
authorized, 0 shares issued and outstanding at July 31,
1998 and 1999 and April 30, 2000 .......................................... -- -- --
Common Stock, $.01 par value, 350,000 shares authorized,
384, 97,353 and 173,055 shares issued and outstanding at
July 31, 1998 and 1999 and April 30, 2000, respectively ................... 4 973 1,731
Additional paid-in capital .................................................. 47,756 215,901 3,646,875
Deferred compensation ....................................................... (1,305) (4,024) (1,544)
Accumulated other comprehensive income (loss) ............................... (1,193) (353) 400
Accumulated deficit ......................................................... (38,088) (84,715) (2,599,925)
----------- ----------- -----------
Total stockholders' equity ............................................ 7,190 127,783 1,047,537
----------- ----------- -----------
Total liabilities and stockholders' equity ............................ $ 24,452 $ 207,041 $ 1,156,044
=========== =========== ===========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-3
<PAGE> 7
ENGAGE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JULY 31, APRIL 30,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue ........................................ $ 40 $ 2,571 $ 26,833 $ 10,308 $ 110,118
Cost of revenue ................................ 970 4,668 23,503 7,613 85,836
--------- --------- --------- --------- ---------
Gross (loss) profit ................... (930) (2,097) 3,330 2,695 24,282
--------- --------- --------- --------- ---------
Operating expenses:
In-process research and development .......... -- 9,200 4,500 4,500 31,617
Research and development ..................... 8,620 6,819 8,699 5,816 17,029
Selling and marketing ........................ 3,276 6,333 19,369 9,454 63,113
General and administrative ................... 2,087 3,124 5,219 2,918 17,995
Amortization of goodwill and other intangibles -- 1,498 8,939 4,696 118,808
Acquisition costs ............................ -- -- -- -- 4,951
Stock compensation ........................... -- 426 1,455 657 37,274
--------- --------- --------- --------- ---------
Total operating expenses .............. 13,983 27,400 48,181 28,041 290,787
--------- --------- --------- --------- ---------
Loss from operations ........................... (14,913) (29,497) (44,851) (25,346) (266,505)
Other income (expense):
Gain on sale of product rights ............... -- 9,240 -- -- --
Equity in loss of joint venture .............. -- -- (723) (417) (1,016)
Loss on disposal of property and
equipment .................................. -- -- (165) -- --
Other expense ................................ -- -- -- (174) (96)
Interest income .............................. -- -- 134 -- 4,284
Interest expense ............................. -- (267) (1,022) (751) (2,282)
--------- --------- --------- --------- ---------
Net loss ....................................... $ (14,913) $ (20,524) $ (46,627) $ (26,688) $(265,615)
========= ========= ========= ========= =========
Pro forma basic and diluted net loss per share . $ (0.60) $ (0.61) $ (0.37) $ (1.97)
========= ========= ========= =========
Pro forma weighted average number of basic
and diluted shares outstanding ............... 34,336 76,399 71,497 134,578
========= ========= ========= =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE> 8
ENGAGE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- --------------- ------------------ ADDITIONAL
PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------ ------ ------ ------ -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996 .......... -- $ -- -- $-- -- $-- 32,694 $ 327 $ (167) $ --
Exercise of stock options ....... -- -- -- -- -- -- 376 4 18 --
Net loss ........................ -- -- -- -- -- -- -- -- -- --
------ ---- ---- --- ---- --- -------- ------- ----------- -------
Balance at July 31, 1997 .......... -- -- -- -- -- -- 33,070 331 (149) --
Reorganization .................. 869 9 -- -- -- -- (32,694) (327) 14,238 --
Acquisition of Accipiter ........ 700 7 -- -- -- -- -- -- 33,667 (1,731)
Amortization of deferred
compensation .................. -- -- -- -- -- -- -- -- -- 426
Exercise of stock options ....... -- -- -- -- -- -- 8 -- -- --
Unrealized loss on
available-for-sale securities . -- -- -- -- -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- -- -- -- -- --
------ ---- ---- --- ---- --- -------- ------- ----------- -------
Balance at July 31, 1998 .......... 1,569 16 -- -- -- -- 384 4 47,756 (1,305)
Issuance of preferred stock, net
of issuance costs of $66 ...... -- -- 239 2 -- -- -- -- 1,932 --
Acquisition of I/PRO ............ -- -- -- -- -- -- 2,020 20 10,161 --
Deferred compensation on stock
option issuances .............. -- -- -- -- -- -- -- -- 4,174 (4,174)
Issuance of stock options ....... -- -- -- -- -- -- -- -- 1,639 --
Conversion of debt to CMGI ...... -- -- -- -- 414 4 711 7 42,765 --
Issuance of common stock, net of
issuance costs of $50 ......... -- -- -- -- -- -- 1,876 19 13,063 --
Initial public offering, net of
issuance costs of $1,500, and
conversion of preferred stock . (1,500) (15) (239) (2) (414) (4) 91,296 913 93,863 --
Foreign currency translation
adjustment .................... -- -- -- -- -- -- -- -- -- --
Amortization of deferred
compensation .................. -- -- -- -- -- -- -- -- -- 1,455
Exercise of stock options ....... -- -- -- -- -- -- 1,066 10 548 --
Unrealized gain on
available-for-sale securities . -- -- -- -- -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- -- -- -- -- --
------ ---- ---- --- ---- --- -------- ------- ----------- -------
Balance at July 31, 1999 .......... 69 1 -- -- -- -- 97,353 973 215,901 (4,024)
Acquisition of AdKnowledge ...... -- -- -- -- -- -- 10,336 104 160,176 --
Conversion of Adsmart
preferred stock ............... (69) (1) -- -- -- -- 694 7 (6) --
Acquisition of Flycast .......... -- -- -- -- -- -- 53,413 534 904,733 --
Conversion of debt to CMGI ...... -- -- -- -- -- -- 10,179 102 74,827 --
Foreign currency translation
adjustment .................... -- -- -- -- -- -- -- -- -- --
Amortization of deferred
compensation .................. -- -- -- -- -- -- -- -- -- 510
Exercise of stock options ....... -- -- -- -- -- -- 1,028 10 1,065 --
Sale of common stock under
Employee Stock Purchase Plan .. -- -- -- -- -- -- 60 1 563 --
Reversal of deferred compensation
on forfeited stock options ... -- -- -- -- -- -- -- -- (1,970) 1,970
Unrealized gain on
available-for-sale securities . -- -- -- -- -- -- -- -- -- --
Contingent consideration from
2Can acquisition .............. -- -- -- -- -- -- -- -- 5,232 --
Repurchase of unvested stock
options ....................... -- -- -- -- -- -- (8) -- (5) --
Acceleration of unvested stock
options ....................... -- -- -- -- -- -- -- -- 36,764 --
Dividend to CMGI ................ -- -- -- -- -- -- -- -- 2,249,595 --
Net loss ........................ -- -- -- -- -- -- -- -- -- --
------ ---- ---- --- ---- --- -------- ------- ----------- -------
Balance at April 30, 2000
(unaudited) ..................... -- $ -- -- $-- -- $-- 173,055 $ 1,731 $ 3,646,875 $(1,544)
====== ==== ==== === ==== === ======== ======= =========== =======
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY
INCOME (LOSS) DEFICIT (DEFICIT)
------------- ----------- -------------
Balance at July 31, 1996 .......... $ -- $ (2,651) $ (2,491)
Exercise of stock options ....... -- -- 22
Net loss ........................ -- (14,913) (14,913)
------- ----------- -----------
Balance at July 31, 1997 .......... -- (17,564) (17,382)
Reorganization .................. -- -- 13,920
Acquisition of Accipiter ........ -- -- 31,943
Amortization of deferred
compensation .................. -- -- 426
Exercise of stock options ....... -- -- --
Unrealized loss on
available-for-sale securities . (1,193) -- (1,193)
Net loss ........................ -- (20,524) (20,524)
------- ----------- -----------
Balance at July 31, 1998 .......... (1,193) (38,088) 7,190
Issuance of preferred stock, net
of issuance costs of $66 ...... -- -- 1,934
Acquisition of I/PRO ............ -- -- 10,181
Deferred compensation on stock
option issuances .............. -- -- --
Issuance of stock options ....... -- -- 1,639
Conversion of debt to CMGI ...... -- -- 42,776
Issuance of common stock, net of
issuance costs of $50 ......... -- -- 13,082
Initial public offering, net of
issuance costs of $1,500, and
conversion of preferred stock . -- -- 94,755
Foreign currency translation
adjustment .................... 340 -- 340
Amortization of deferred
compensation .................. -- -- 1,455
Exercise of stock options ....... -- -- 558
Unrealized gain on
available-for-sale securities . 500 -- 500
Net loss ........................ -- (46,627) (46,627)
------- ----------- -----------
Balance at July 31, 1999 .......... (353) (84,715) 127,783
Acquisition of AdKnowledge ...... -- -- 160,280
Conversion of Adsmart
preferred stock ............... -- -- --
Acquisition of Flycast .......... -- -- 905,267
Conversion of debt to CMGI ...... -- -- 74,929
Foreign currency translation
adjustment .................... 65 -- 65
Amortization of deferred
compensation .................. -- -- 510
Exercise of stock options ....... -- -- 1,075
Sale of common stock under
Employee Stock Purchase Plan .. -- -- 564
Reversal of deferred compensation
on forfeited stock options ... -- -- --
Unrealized gain on
available-for-sale securities . 688 -- 688
Contingent consideration from
2Can acquisition .............. -- -- 5,232
Repurchase of unvested stock
options ....................... -- -- (5)
Acceleration of unvested stock
options ....................... -- -- 36,764
Dividend to CMGI ................ -- (2,249,595) --
Net loss ........................ -- (265,615) (265,615)
------- ----------- -----------
Balance at April 30, 2000
(unaudited) ..................... $ 400 $(2,599,925) $ 1,047,537
======= =========== ===========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE> 9
ENGAGE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JULY 31, APRIL 30,
------------------------------- --------------------
1997 1998 1999 1999 2000
-------- -------- --------- -------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(14,913) $(20,524) $ (46,627) $(26,688) $(265,615)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ........................... 1,097 2,344 9,780 5,289 122,709
Equity in loss of joint venture ......................... -- -- 723 417 1,041
Provision for bad debts ................................. -- 240 343 175 2,843
Stock compensation ...................................... -- 426 1,455 657 37,274
Amortization of discount on available-for-sale securities -- -- -- -- (1,176)
Gain on sale of available-for-sale securities ........... -- -- -- -- (40)
Gain on sale of product rights .......................... -- (9,240) -- -- --
Loss on disposal of property and equipment .............. -- -- 165 174 --
In-process research and development ..................... -- 9,200 4,500 4,500 31,617
Changes in operating assets and liabilities, net of
Impact of acquisitions:
Accounts receivable ................................... (55) (1,761) (11,490) (4,774) (32,882)
Prepaid expenses and other assets ..................... 175 (170) (213) (323) (5,729)
Net change in due to CMGI and affiliates .............. -- -- -- -- 1,782
Accounts payable ...................................... 221 646 7,376 2,329 10,834
Accrued expenses and other current liabilities and
investment banker fees payable ....................... 428 1,450 9,643 2,690 (7,921)
Deferred revenue ...................................... 15 1,117 4,324 3,207 (592)
-------- -------- --------- -------- ---------
Net cash used for operating activities .............. (13,032) (16,272) (20,021) (12,347) (105,855)
-------- -------- --------- -------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities .................. -- -- -- -- (54,263)
Proceeds from redemption of available-for-sale securities .. -- -- -- -- 61,562
Net cash acquired on acquisition of subsidiaries ........... -- 689 707 707 15,936
Investment in joint venture ................................ -- -- (1,424) (1,424) --
Long-term investment at cost ............................... -- -- -- -- (2,000)
Purchases of property and equipment ........................ (854) (402) (388) (207) (10,370)
Proceeds from sale of property and equipment ............... -- -- 8 -- 8
-------- -------- --------- -------- ---------
Net cash (used for) provided by investing activities (854) 287 (1,097) (924) 10,873
-------- -------- --------- -------- ---------
Cash flows from financing activities:
Net change in debt to CMGI and affiliates .................. 14,912 16,091 24,230 13,246 31,963
Proceeds from issuance of common stock, net of
issuance costs and repurchases .......................... 22 1 108,395 9 1,634
Issuance of preferred stock, net of issuance costs ......... -- -- 1,934 1,934 --
Repayment of capital lease obligations ..................... (4) (11) (210) (72) (719)
Repayment of long-term borrowings .......................... -- -- (1,287) (1,287) (1,413)
Principal payments on notes ................................ (1,044) -- -- -- --
-------- -------- --------- -------- ---------
Net cash provided by financing activities ........... 13,886 16,081 133,062 13,830 31,465
-------- -------- --------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents .. -- -- (6) 6 (24)
-------- -------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents .......... -- 96 111,938 565 (63,541)
Cash and cash equivalents, beginning of period ................ -- -- 96 96 112,034
-------- -------- --------- -------- ---------
Cash and cash equivalents, end of period ...................... $ -- $ 96 $ 112,034 $ 661 $ 48,493
======== ======== ========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................... $ $ -- $ 41 $ -- $ 458
======== ======== ========= ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements
F-6
<PAGE> 10
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Engage provides Web-based advertising solutions that enable advertisers and
agencies to effectively plan, manage and analyze Web advertising in order to
optimize Web-based campaign spending. In addition, the Company sells software
that enables Web publishers, advertisers and merchants to target and deliver
advertisements, content and e-commerce offerings to their audiences.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI"). The
accompanying supplemental consolidated financial statements, which have been
prepared as if the Company had operated as a separate stand-alone entity for all
periods presented, include only revenue and expenses attributable to the Company
since it commenced operations in September 1995.
On April 28, 2000, Engage, a majority owned subsidiary of CMGI, completed
the acquisition of Adsmart Corporation ("Adsmart"), also a majority owned
subsidiary of CMGI, and Flycast Communications Corporation ("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 supplemental 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 supplemental
consolidated balance sheets as of July 31, 1998 and 1999 and the supplemental
consolidated statements of operations for the three years ended July 31, 1999
and the nine months ended April 30, 1999 and 2000 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 supplemental consolidated balance sheet as of April 30,
2000 and the supplemental consolidated statements of operations for the nine
months ended April 30, 2000 also reflect the combined financial position and
results of operations of Flycast at April 30, 2000 and since January 13, 2000.
The supplemental consolidated financial statements include certain
allocations based on headcount from CMGI for certain general and administrative
expenses such as rent, legal services, insurance and employee benefits.
Management believes that the method used to allocate the costs and expenses is
reasonable; however, such allocated amounts may or may not necessarily be
indicative of what actual expenses would have been incurred had the Company
operated independently of CMGI.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries, Internet Profiles Corporations ("I/PRO"),
AdKnowledge Inc. ("AdKnowledge"), Adsmart, Flycast, Engage Technologies Limited,
Engage Technologies GmbH, Engage Australia Pty Limited and Engage Italia srl
after elimination of all significant intercompany balances and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Prior to August 1, 1998, revenue from sales of product licenses to
customers were generally recognized when the product was shipped, provided no
significant obligations remain and collectibility is probable, in accordance
F-7
<PAGE> 11
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
with Statement of Position ("SOP") 91-1, Software Revenue Recognition. Effective
August 1, 1998, the Company adopted the provisions of SOP 97-2, Software Revenue
Recognition. For transactions after August 1, 1998, revenues from software
product licenses, Engage AudienceNet campaigns, Engage Knowledge database
services and web-site traffic audit reports are generally recognized when (i) a
signed noncancelable software license or contract exists, (ii) delivery has
occurred, (iii) the Company's fee is fixed or determinable, and (iv)
collectibility is probable. Revenue from license agreements that have
significant customizations and modifications of the software product is deferred
and recognized using the percentage of completion method. There was no material
change to the Company's accounting for revenue as a result of the adoption of
SOP 97-2.
Revenue from periodic subscriptions is recognized ratably over the
subscription term, typically twelve months. Revenue from usage based
subscriptions is recognized monthly based on actual usage.
The Company recognizes revenue from ad delivery and associated management
services based on the number of advertisements delivered as well as from monthly
usage fees for the Company's web-based advertising management system.
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 revenue is contractually non-refundable.
The Company is obligated to make payments to web sites, which have
contracted with the Company to be part of the Adsmart Network, in the period the
advertising impressions are delivered. From inception through July 31, 1998 the
Company did not make payments to web sites unless cash had been received from
the advertiser and, consequently, recognized revenue "net" of payments paid to
web sites. Effective August 1, 1998 certain provisions of the web site contracts
were amended to require payment to the web sites regardless of whether amounts
were received from advertisers and, consequently, the Company recognized revenue
"gross" of amounts paid to web sites.
Amounts collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenue.
The Company has entered into certain contracts with web sites in which it
has guaranteed that the web site's inventory will be sold for a minimum cost per
thousand impressions. To the extent the Company cannot sell the related
inventory or cannot sell such inventory for an amount greater than the minimum
guarantee, the Company incurs a loss under the contract. Management assesses the
need to record a loss accrual when indicators of continuing losses are present.
Management reviews a number of factors, including the level of inventory
expected to be available in the future, the anticipated market value of the
inventory and other relevant market factors. During fiscal 1999, the Company
accrued $2,962,000 for possible losses related to such contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less from the date of purchase.
Short-term investments include those investments not qualifying as cash
equivalents. At July 31, 1999, cash equivalents consist of an investment in a
money market mutual fund.
Prior to the Company's initial public offering, under an arrangement with
CMGI, the Company maintained a zero balance cash account. Cash required by the
Company for the funding of its operations was provided as needed with a
corresponding increase in the "Debt to CMGI" account. Customer receipts and
other cash receipts of the Company were remitted to CMGI upon receipt by the
Company and serve to reduce the "Debt to CMGI" account. Cash on hand at July 31,
1998 is held by the Company's subsidiaries.
NON-CASH TRANSACTIONS
During fiscal 1997, the Company incurred a capital lease obligation of
$38,000 upon entering into a lease of new equipment.
F-8
<PAGE> 12
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal 1998, non-cash investing activities included the sale of data
warehouse product rights in exchange for available-for-sale securities and the
reduction of approximately $8,400,000 of debt due to CMGI. In addition, non-cash
investing activities also include the Company's acquisition of Accipiter (see
note 8) in exchange for 700,000 shares of the Company's Series A Convertible
Preferred Stock.
During fiscal 1998, non-cash financing activities included the issuance of
869,382 shares of the Company's Series A Convertible Preferred Stock in exchange
for 32,693,816 shares of the Company's common stock and a $14,000,000 reduction
in the debt to CMGI (see note 13).
During fiscal 1999, non-cash investing activities include the acquisition
of I/PRO (see note 8) in exchange for 2,020,368 shares of the Company's common
stock, and additional debt to CMGI totaling $22,086,000, as well as the
acquisition of 2Can Media, Inc. ("2Can") (see note 8) in exchange for additional
debt to CMGI totaling $28,483,000.
During fiscal 1999, non-cash financing activities included the issuance of
413,564 shares of the Company's Series C Preferred Stock as repayment of
approximately $37,447,000 of debt to CMGI. In addition, non-cash financing
activities included the issuance of 710,524 shares of the Company's Common Stock
as repayment of approximately $5,329,000 of debt to CMGI.
UNAUDITED
During the nine months ended April 30, 2000, non-cash investing activities
include additional purchase price in the 2Can acquisition of $5,232,000
resulting from contingent consideration (see note 8). The contingent
consideration was paid by CMGI and recorded as a capital contribution by the
Company.
During the nine months ended April 30, 2000, non-cash financing activities
included the issuance of 10,117,712 shares of the Company's Common Stock as
repayment of approximately $74,929,000 of debt to CMGI.
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 $1,970,000 in both
deferred compensation and additional paid-in capital.
During the nine months ended April 30, 2000, the Company acquired
AdKnowledge and Flycast through the issuance of common stock (see note 8).
MARKETABLE SECURITIES
The appropriate classification of marketable securities is determined at
the time of acquisition and reevaluated at each balance sheet date. Marketable
securities have been classified as available-for-sale and are carried at fair
value, based on quoted market prices, with unrealized gains and losses included
in accumulated other comprehensive income (loss) on the supplemental
consolidated balance sheets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets under capital leases are amortized using the
straight-line method over the shorter of the lease term or estimated useful life
of the asset. Expenditures for maintenance and repairs are charged to expense as
incurred.
INVESTMENT IN JOINT VENTURE
The Company's investment in the common stock of a Japanese joint venture is
accounted for by the equity method.
F-9
<PAGE> 13
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INTANGIBLES
Intangibles relate to the Company's purchase of Accipiter, Inc. in April
1998, 2Can in March 1999, I/PRO in April 1999, AdKnowledge in December 1999 and
Flycast in April 2000 (see note 8). Such costs are being amortized on a
straight-line basis over two to five years, depending on the periods expected to
be benefited.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an
on-going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including costs in excess of net assets of
companies acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although the
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets by comparing future estimated undiscounted cash flows
to the asset's carrying value. If the carrying value of the assets exceeds the
estimated future undiscounted cash flows of the asset, a loss is recorded for
the excess of the asset's carrying value over fair value.
RESEARCH AND DEVELOPMENT COSTS AND SOFTWARE COSTS
Expenditures related to the development of new products and processes,
including significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
detailed program design or working model of the product, and ending when a
product is available for general release to customers. To date, the
establishment of technological feasibility and general release have
substantially coincided. As a result, there have been no capitalized software
development costs to date. Additionally, at the date of acquisition or
investment, the components of the purchase price of each acquisition or
investment are evaluated to identify amounts allocated to in-process research
and development. Upon completion of acquisition accounting and valuation, such
amounts are charged to expense if technological feasibility had not been reached
at the acquisition date.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign subsidiaries and its
investment in a joint venture are the local currencies. The financial statements
of these subsidiaries and the joint venture are translated into United States
dollars using period-end exchange rates for assets and liabilities and average
exchange rates during the period for revenues and expenses. The resulting
translation adjustments are included in accumulated other comprehensive income
(loss) on the supplemental consolidated balance sheets. Net gains and losses
resulting from foreign currency transactions arising from exchange rate
fluctuations on transactions denominated in currencies other than the functional
currencies are included in the supplemental consolidated statements of
operations and were immaterial for all periods presented.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company was greater than 80% owned by CMGI up through the
date of the initial public offering, and as such, CMGI realized the full benefit
of all federal and part of the state net operating losses that had been incurred
by the Company up through the initial public offering. Therefore, such net
operating losses incurred by the Company prior to the initial public offering
will have no future benefit to the Company. Subsequent to the initial public
offering, CMGI owned approximately 79% of the Company and thus the Company will
have available to it the full benefit of all Federal and state net operating
losses incurred subsequent to the date of the initial public offering, although
CMGI will continue to realize the benefits of the federal and state losses
incurred by Adsmart.
F-10
<PAGE> 14
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED
As a result of Company common stock issued to CMGI in the AdKnowledge
acquisition, CMGI's ownership interest increased to more than 80%. As a result,
beginning December 22, 1999, CMGI will again realize the full benefit of the
Company's Federal and part of the state net operating losses until such time as
CMGI's ownership interest falls below 80%. The tax sharing agreement between the
Company and CMGI requires the Company to reimburse CMGI to the extent it
contributes to the consolidated tax liability of the CMGI group; however, under
the policy, CMGI is not obligated to reimburse the Company for any losses
utilized in the consolidated CMGI group.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $174,000, $213,000 and $1,626,000 for the fiscal years ended July
31, 1997, 1998 and 1999, respectively.
STOCK-BASED COMPENSATION PLANS
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Compensation cost for stock options granted with exercise prices below estimated
fair market value is recognized over the vesting period, typically four years.
The adoption of SFAS 123 was not material to the Company's financial condition
or results of operations; however, the pro forma impact on earnings has been
disclosed in the notes to the supplemental consolidated financial statements as
required by SFAS 123 (see note 14).
The Company accounts for non-employee stock-based compensation awards in
which goods or services are the consideration received for the equity
instruments issued based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report selected information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 requires the use of the
"management approach" in disclosing segment information, based largely on how
senior management generally analyzes the business operations. SFAS 131 has been
adopted effective August 1, 1998. The Company currently operates in three
segments (See note 18).
NET LOSS 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 is included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive.
Pro 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."
F-11
<PAGE> 15
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 8). The pro
forma basic and diluted net loss per share information included in the
accompanying statements of operations for the years ended July 31, 1998 and 1999
and the 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 any period 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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JULY 31, APRIL 30,
------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Loss ..................................... $(20,524) $(46,627) $(26,688) $(265,615)
-------- -------- -------- ---------
DENOMINATOR:
Weighted average shares outstanding ...... 31,266 3,941 596 124,549
Assumed conversion of preferred stock .... 1,804 59,762 61,582 686
Assumed conversion of debt to CMGI ....... 1,266 12,696 9,319 9,343
-------- -------- -------- ---------
Weighted average number of diluted shares
outstanding ............................ 34,336 76,399 71,497 134,578
-------- -------- -------- ---------
Pro forma basic and diluted loss per share $ (0.60) $ (0.61) $ (0.37) $ (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
NINE MONTHS ENDED
YEAR ENDED JULY 31, APRIL 30,
------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NUMERATOR:
Loss .............................. $(20,524) $(46,627) $(26,688) $(265,615)
-------- -------- -------- ---------
DENOMINATOR:
Weighted average shares outstanding 31,266 3,941 596 124,549
-------- -------- -------- ---------
Basic and diluted loss per share .. $ (0.65) $ (11.83) $ (44.78) $ (2.13)
======== ======== ======== =========
At April 30, 2000, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of
certain internal costs related to the implementation of computer software
obtained for internal use. The Company adopted this standard in August 1999, and
the adoption of SOP 98-1 did not have a material impact on its financial
position or its results of operations.
In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting
Costs of Start-Up Activities" ("SOP 98-5"). Under SOP 98-5, the cost of start-up
activities should be expensed as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service,
F-12
<PAGE> 16
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
conducting business in a new territory, conducting business with a new class of
customer, commencing some new operation or organizing a new entity. The Company
adopted SOP 98-5 in August 1999. The adoption of SOP 98-5 did not have a
material impact on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"("SFAS 133"). SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. Engage is required to adopt this standard in the first quarter of
fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. Engage expects that the adoption of
SFAS 133 will not have a material impact on the its financial position or its
results of operations.
In December 1999, the SEC issued SAB No. 101 "Revenue Recognition in
Financial Statements" ("SAB No. 101"). 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 the process of analyzing
the impact of SAB No. 101, 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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The supplemental consolidated financial statements and notes thereto as of
April 30, 2000 and for the nine months ended April 30, 1999 and 2000 and related
notes are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial statements for the interim period have been included. Results
of operations for the interim periods presented are not necessarily indicative
of the results that may be expected for the full fiscal year or any future
period.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
(3) 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 supplemental consolidated
financial statements are presented below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JULY 31, APRIL 30,
1997 1998 1999 1999 2000
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenue
Engage......................... $ 25 $ 2,217 $ 16,023 $ 8,997 $ 37,297
Flycast........................ 15 -- -- -- 29,132
Adsmart........................ -- 354 11,069 1,311 45,291
Eliminations................... -- -- (259) -- (1,602)
--------- --------- --------- --------- ----------
Total.......................... $ 40 $ 2,571 $ 26,833 $ 10,308 $ 110,118
========= ========= ========= ========= ==========
Net loss
Engage......................... $ (10,262) $ (13,837) $ (32,003) $ (21,170) $ (117,761)
Flycast........................ -- -- -- -- (123,797)
Adsmart........................ (4,651) (6,687) (14,624) (5,518) (24,057)
--------- --------- --------- --------- ----------
Total.......................... $ (14,913) $ (20,524) $ (46,627) $ (26,688) $ (265,615)
========= ========= ========= ========= ==========
</TABLE>
All transactions amongst the Company, Flycast and Adsmart within the
periods for which consolidated results of operations have been pooled have been
eliminated.
F-13
<PAGE> 17
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) SALE OF PRODUCT RIGHTS
In August 1997, the Company sold rights to some of its data warehouse
software products to Red Brick Systems, Inc. ("Red Brick") for $9,500,000 in
cash and 238,160 shares of Red Brick common stock, recording a pretax gain of
$9,240,000 on the sale. The cash component was received directly by CMGI and
debt to CMGI was reduced by a corresponding amount. In January 1999, the Red
Brick shares were exchanged for 142,896 shares of Informix Corp. due to
Informix's acquisition of Red Brick. The Informix shares were sold during the
nine months ended April 30, 2000 at an insignificant gain to the Company.
(5) AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities at July 31, 1998 consists of 238,160 shares
of Red Brick common stock received as part of the Company's sale of product
rights to Red Brick. Available-for-sale securities at July 31, 1999 consists of
142,896 shares of Informix Corp. (see note 4). These securities are carried at
fair value based on quoted market prices. A $1,193,000 unrealized holding loss
and $500,000 unrealized holding gain was recorded on the Red Brick shares at
July 31, 1998 and 1999, respectively, based on the change in market value since
the date of acquisition. The unrealized holding loss is presented in the equity
section of the Company's supplemental consolidated balance sheet as a component
of accumulated other comprehensive loss.
(6) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JULY 31,
------------------
ESTIMATED USEFUL LIFE 1998 1999
--------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Office furniture and computer equipment.................. 3-5 years $ 1,300 $ 3,006
Software licenses........................................ 3 years 528 584
Leasehold improvements................................... 4 years or 105 251
life-of-lease ------- --------
1,933 3,841
Less: Accumulated depreciation and amortization.......... (1,128) (1,844)
------- --------
$ 805 $ 1,997
======= ========
</TABLE>
Property and equipment recorded under capital leases amounted to
approximately $38,000 and $793,000 at July 31, 1998 and 1999, respectively.
Total accumulated amortization related to these assets amounted to approximately
$16,000 and $212,000 at July 31, 1998 and 1999, respectively.
(7) INVESTMENT IN JOINT VENTURE
In August 1998, the Company acquired for $1.4 million in cash, 49% of the
shares of Engage Technologies Japan (the "Joint Venture"), a joint venture with
Sumitomo Corporation in Japan. The Company's ownership interest was reduced to
46.3% in March 1999 as a result of the Joint Venture's selling an ownership
interest to an additional investor. The Joint Venture was established to sell
the Company's products and services in Japan. The Joint Venture is authorized to
solicit additional investors so long as the new investors' ownership interests
do not exceed 30% on a fully diluted, aggregate ownership basis. If the Joint
Venture requires funds in excess of $4 million (excluding the parties' initial
capital contributions) for its operations, the Company is required to provide a
bank guarantee in an amount proportionate to its ownership interest. This
investment is being accounted for under the equity method of accounting. The
Company's share of the Joint Venture's foreign currency translation adjustments
is reflected in both the investment account and shareholders' equity on the
supplemental consolidated balance sheet as a component of accumulated other
comprehensive income (loss).
Under a separate license agreement, the Company licensed its Engage
Knowledge technology to the Joint Venture in consideration for a non-refundable
$3 million prepaid royalty and royalties of 11.11% of all future revenues. The
initial prepaid royalty has been recorded as deferred revenue and is being
recognized as income over three years, the estimated period over which the
Company expects to provide maintenance and support. In addition, the Company and
the Joint Venture entered into a reseller agreement under which the Company
granted the Joint Venture an exclusive right to resell its products to end users
in Japan, excluding certain Japanese distribution rights granted to Red Brick
(see note 4).
F-14
<PAGE> 18
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) ACQUISITIONS
ACCIPITER
In April 1998, CMGI acquired Accipiter, Inc. ("Accipiter"), a company
specializing in Internet advertising management solutions, in exchange for
10,109,536 shares of CMGI Common Stock (which number reflects four CMGI
two-for-one stock splits between April 1998 and the date of these financial
statements). In August 1998, Accipiter was legally merged with the Company in a
stock-for-stock merger in which consideration of 700,000 shares of the Company's
Series A Convertible Preferred Stock was issued to CMGI. The Company has
reflected in its consolidated financial statements the acquisition of Accipiter
as if it occurred in April 1998. The total purchase price for Accipiter was
valued at $31,253,000, including acquisition costs of $198,000. The value of the
CMGI shares included in the purchase price was recorded net of a weighted
average 10% market value discount to reflect the restrictions on
transferability.
Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the purchase price
allocated to in-process research and development was $9,200,000, or
approximately 29% of the total purchase price. At the acquisition date,
Accipiter's major in-process project was the development of AdManager version
4.0, which was intended to provide the ad serving functionality that customers
were requiring as the use of the Internet rapidly increased and customer Web
sites became more complex. In general, previous AdManager releases did not
provide for the fault tolerance, redundancy and scalability that customers began
to seek after AdManager versions 1.0 and 2.0 were released. Accordingly,
customers' long-term product needs required Accipiter to substantially redesign
the AdManager architecture (later released as version 4.0) to develop new
technologies in the areas of: (1) fault tolerance and scalability, (2) an
object-oriented user interface, (3) application programming interfaces and (4) a
new report engine.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. Engage
began testing AdManager version 4.0 at a customer's site (beta testing) in June
1998 and commercially released the product in August 1998. The initial
development effort had commenced in late 1997. At the acquisition date, the new
AdManager technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the Accipiter purchase, the
AdManager version 4.0 project was approximately 71% complete. The AdManager
version 4.0 project was substantially completed within the time originally
estimated.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including developed technology, assembled
workforce, working capital and fixed assets. The cash flows are then discounted
to present value at an appropriate rate. Discount rates are determined by an
analysis of the risks associated with each of the identified intangible assets.
The discount rate used for in-process research and development was 24.5%, a
slight premium over the estimated weighted-average cost of capital of 24%, and
the discount rate used for developed technology was 21%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are based
on the assumptions set forth below.
Accipiter recorded revenue in 1997 of less than $1,000,000. Because of the
absence of meaningful historical revenue of Accipiter, management projected
revenue for the initial year of the forecast period based on its assessment of
future market potential and the ability of Accipiter to successfully launch its
new product offering. After the initial year of the forecast period, revenue was
predicted to grow at rates comparable to the growth of Internet users and online
activity and the impact such growth would have on Internet advertising.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce (which is
supported by independent market data), the need for e-commerce companies to
serve ads over the Internet, expected trends in technology (such as increased
speed of the Internet,
F-15
<PAGE> 19
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
reduced hardware costs and the resulting increase in new Internet users to whom
ads will be served) and the nature and expected timing of new product
introductions by Engage and its competitors. These estimates also include growth
related to the use of certain Accipiter technologies in conjunction with
Engage's products, the marketing and distribution of the resulting products
through Engage's sales force and the benefits of Engage's incremental financial
support and stability.
Engage's estimated cost of sales as a percentage of revenue is expected to
be slightly lower than Accipiter's (classified as support and royalties by
Accipiter) on a stand-alone basis (16% in 1997), as certain fixed costs included
in cost of sales are spread over a larger revenue base and provide for the
realization of efficiencies due to economies of scale through combined
operations. Due to these savings, the estimated cost of sales as a percentage of
revenue is expected to decrease by 1% each year from Accipiter's historical
percentage, to a low of 11% in the fifth forecast year.
Engage's selling, general and administrative costs are expected to be
higher than Accipiter's on an absolute basis, but lower as a percentage of
revenue. Due to the small revenue base in 1997 and the impact of significant
costs associated with building a corporate infrastructure and building a
workforce for future operations, Accipiter's selling, general and administrative
costs in 1997, as a percent of revenue, are not representative of the expected
costs for the combined operations of Engage and Accipiter. Efficiencies due to
economies of scale through combined operations, such as consolidated marketing
and advertising programs, are expected to be realized immediately.
Approximately $1,700,000 of deferred compensation was recorded during
fiscal 1998 relating to approximately 346,160 shares of CMGI common stock issued
to the then employee stockholders of Accipiter, which are being held in escrow.
These shares are subject to forfeiture upon termination of employment over a
two-year period. Compensation expense is being recognized over the two-year
service period beginning April 1, 1998.
2CAN
In March 1999, CMGI acquired 2Can, an on-line advertising representation
firm in exchange for purchase consideration valued at $28,483,000, including
bridge notes receivable of $1,500,000. 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. Concurrent with CMGI's closing of the
2Can acquisition, CMGI contributed 2Can to the Company in exchange for
additional debt to CMGI of $28,483,000. This transaction was accounted for as a
transfer of entities under common control where the Company recorded the assets
and liabilities of 2Can at CMGI's recorded basis. As discussed in Note 2, the
Company acquired Adsmart on April 28, 2000 in a merger treated as a pooling of
interests. The results of operations of 2Can have been included in the Company's
consolidated financial statements since March 11, 1999.
Under the Agreement and Plan of Merger with 2Can, CMGI is obligated to pay
contingent consideration to 2Can based upon future earnings targets. This
additional consideration is payable based on the provisions of the merger
agreement and will be paid directly by CMGI. The Company will record additional
purchase price with the Debt to CMGI account being increased by a corresponding
amount.
UNAUDITED
In April 2000, the Company recorded additional purchase price in the 2Can
acquisition of $5,232,000 resulting from the contingent consideration mentioned
above. This amount was recorded as an increase in additional paid-in capital.
I/PRO
In April 1999, Engage acquired I/PRO, a provider of Web-site traffic
measurement and audit services, for approximately $32,651,000, including
acquisition costs of $244,000. The purchase price consisted of $1,563,000 in net
cash, $20,907,000 in CMGI common shares and $10,181,000 in Engage common shares
and options. The per share value of the CMGI shares included in the purchase
price was $28.99, net of a 9% weighted average market
F-16
<PAGE> 20
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
value discount to reflect the restriction on transferability. The per share
value of the Engage shares included in the purchase price was $3.29 per share.
In addition, CMGI must pay up to $3,000,000 to the former I/PRO stockholders if
stated performance goals are met by I/PRO one year after the closing. Engage
must reimburse CMGI for any payments, due under stated performance goals, in
cash or by issuance of shares of Engage's Series C convertible preferred stock
at its then fair market value, at CMGI's election. Any additional payments will
be treated as additional purchase price.
I/PRO's major in-process project was the development of a new data
processing system, project name Normandy, which is intended to provide the
improved functionality required as the use of the Internet rapidly increases and
customer Web site activity increases in volume and complexity. In general, the
existing data processing system does not provide sufficient fault tolerance,
scalability, and data processing efficiency that will be required to meet future
customer needs. Accordingly, customers' long-term product needs required I/PRO
to substantially redesign the data processing system to develop new technologies
in the areas of: (1) fault tolerance and scalability, (2) system management, (3)
data capture and (4) path analysis functionality.
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta testing
had not yet commenced. At the time of the I/PRO purchase, the Normandy project
was approximately 64% complete. The Normandy project was substantially completed
within the time originally estimated.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of returns on contributory assets, including core developed technology,
assembled workforce, working capital and fixed assets. The cash flows are then
discounted to present value at an appropriate rate. Discount rates are
determined by an analysis of the risks associated with each of the identified
intangible assets. The discount rate used for in-process research and
development was 30%, a premium over the estimated weighted-average cost of
capital of 25%, and the discount rate used for core developed technology was
22%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are based
on the assumptions set forth below.
Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenue
related to the Normandy project was identified.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce, the need
for e-commerce companies to utilize independent audit, verification and analysis
services, expected trends in technology (such as increased speed of the
Internet, reduced hardware costs and the resulting increase in new Internet
users) and the nature and expected timing of new product introductions by Engage
and its competitors. These estimates also include growth related to the use of
certain I/PRO technologies in conjunction with Engage's products and the
benefits of Engage's incremental financial support and stability.
I/PRO's estimated cost of sales as a percentage of revenue is expected to
significantly decrease on a stand-alone basis (85% in 1998), as certain fixed
costs included in cost of sales are spread over a larger revenue base and
provide for the realization of efficiencies due to economies of scale. Normandy
technology is expected to greatly increase the automation of data processing
allowing significant labor cost savings per revenue dollar. Increases in
hardware utilization are also expected.
Due to these savings, the estimated cost of sales as a percentage of
revenue is expected to decrease to a low of 20% in the fifth forecast year.
F-17
<PAGE> 21
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ADKNOWLEDGE (UNAUDITED)
On December 22, 1999, Engage completed its acquisition of 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. Previously, on September 23, 1999, Engage, CMGI, AK Acquisition
Corp., a wholly-owned subsidiary of CMGI, AdKnowledge, and Steve Findley, John
Mracek and Kevin Wandryk (collectively, the "Shareholder Representative")
executed an Agreement and Plan of Merger and Contribution (the "Merger
Agreement"). Upon the completion of the transactions contemplated by the Merger
Agreement, AdKnowledge became a wholly-owned subsidiary of Engage. Specifically,
the Merger Agreement contemplated:
First, a merger of Transitory Sub with and into AdKnowledge, with
AdKnowledge being the surviving corporation (the "Surviving Corporation"). In
this merger, all the AdKnowledge preferred shareholders received CMGI common
stock and a new class of AdKnowledge common stock ("Surviving Corporation Common
Stock"), and all common shareholders of AdKnowledge received shares of Surviving
Corporation Common Stock. Upon completion of this merger on November 30, 1999,
CMGI owned approximately 88% of the Surviving Corporation Common Stock.
Second, CMGI and other shareholders of Surviving Corporation contributed
their Surviving Corporation Common Stock to Engage in exchange for approximately
10,300,000 shares of Engage common stock (the "Contribution"). Engage issued
common stock from its authorized but unissued capital stock.
Third, Engage consummated a California short-form merger (the "Short-Form
Merger") between Surviving Corporation and a wholly-owned subsidiary of Engage
("Engage Sub"), pursuant to which Engage Sub merged with and into Surviving
Corporation, with Surviving Corporation being the surviving corporation in such
merger. Any remaining holders of Surviving Corporation Common Stock received
Engage common stock in this merger.
Total purchase consideration was valued at approximately $161,000,000, net
of cash acquired of $3,000,000. Included in the purchase consideration was
$3,800,000 in direct acquisition costs. In connection with the contribution and
the Short-Form Merger, Engage issued approximately 9,800,000 shares of its
common stock to CMGI for CMGI's 88% interest in Surviving Corporation and
approximately 506,000 shares of its common stock directly to shareholders of
Surviving Corporation, valued at approximately $142,400,000 in the aggregate.
Additionally, stock options to acquire Registrant's common stock issued in the
contribution, valued at approximately $18,000,000, have been included in the
purchase consideration.
Contingent consideration, comprised of approximately 414,000 shares of CMGI
common stock (adjusted for stock splits), has been placed in escrow (the "Escrow
Shares") to satisfy certain performance goals and indemnifications. The value of
the Escrow Shares has not been reflected in the aggregate purchase consideration
and will be recorded as additional purchase price at the then-fair value upon
the attainment of certain performance goals measured through November 30, 2000.
Engage issued approximately 1,116,000 of its common shares to CMGI in
consideration for the Escrow Shares. No value has been ascribed to the value of
these shares. If the performance goals are met and the Escrow Shares are
released to the AdKnowledge shareholders, Engage will record the fair value of
the CMGI shares issued to AdKnowledge shareholders on the release date as
additional purchase price. Any difference in the fair value of Engage shares at
the release date compared to the value of the Escrow Shares will be recorded as
a capital transaction between entities under common control. Under the terms of
an Intercompany Agreement between Engage and CMGI, in the event that any Escrow
Shares are returned to CMGI, CMGI shall pay Engage, in cash or other property, a
sum equal to the value of the returned Escrow Shares.
Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the purchase price
allocated to in-process research and development was $2,317,000, or
approximately 1.2% of the total purchase price. At the acquisition date,
AdKnowledge's major in-process projects were: (1) the development of the
AdKnowledge System Architecture Upgrade, which was intended to scale its
software to handle more customers, internationalize the AdKnowledge System, and
help AdKnowledge deploy new features more rapidly; (2) the development of the
AdServer Network Capacity Upgrade, which was intended to allow the AdKnowledge
System to handle more volume; (3) the AdServer Network Operating System Change,
which was intended to improve the managing of AdKnowledge's advertising
campaigns; (4) the development of the
F-18
<PAGE> 22
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Optimal Global Domain Name Service, which was intended to optimize traffic flow,
deliver advertisements faster, and improve the performance of the AdKnowledge
System; and (5) the development of QA Automation Procedures, which was intended
to allow AdKnowledge to release features on the AdKnowledge System more quickly
and with better quality.
At the date of the acquisition, management estimated that completion of the
Architecture Upgrade technology would be accomplished by August 2000. The
initial development effort had commenced in November 1998. At the acquisition
date, technological feasibility of the Architecture Upgrade had not been
reached. At the time of the AdKnowledge purchase, the Architecture Upgrade
project was approximately 57% complete.
At the date of the acquisition, management estimated that completion of the
Capacity Upgrade technology would be accomplished by January 2000. The initial
development effort had commenced in October 1999. At the acquisition date,
technological feasibilty of the Capacity Upgrade had not been reached. At the
time of the AdKnowledge purchase, the Capacity Upgrade project was approximately
65% complete.
At the date of the acquisition, management estimated that completion of the
Operating System technology would be accomplished by March 2000. The initial
development effort had commenced in October 1999. At the acquisition date,
technological feasibility of the Operating System Change had not been reached.
At the time of the AdKnowledge purchase, the Operating System Change project was
approximately 28% complete.
At the date of the acquisition, management estimated that completion of the
Optimal Global Domain Name Service technology would be accomplished by June
2000. The initial development effort had commenced in September 1999. At the
acquisition date, technological feasibility of the Optimal Global Domain Name
Service had not been reached. At the time of the AdKnowledge purchase, the
Optimal Global Domain Name Service project was approximately 23% complete.
At the date of the acquisition, management estimated that completion of the
QA Automation Procedures technology would be accomplished by June 2000. The
initial development effort had commenced in June 1999. At the acquisition date,
technological feasibilty of the QA Automation Procedures had not been reached.
At the time of the AdKnowledge purchase, the QA Automation Procedures project
was approximately 75% complete.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including developed technology, assembled
workforce, trade names/trademarks, database, 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 rates used for in-process
research and development range from 25% to 30%, reflecting a 10% to 15% premium
over the estimated weighted-average cost of capital of 15%. These different
discount rates reflect the relative risk of the technologies, and their stage of
completion.
The resulting net cash flows to which the discount rates were applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technologies. These estimates are
based on the assumptions set forth below.
Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
AdKnowledge to successfully implement its in-process research and development
projects. These growth rates were based on the expected growth of Internet users
and online activity and the impact such growth would have on Internet
advertising. Revenues related to each of the in-process research and development
projects were identified.
AdKnowledge's estimated cost of sales as a percentage of revenue is
expected to decrease on a stand-alone basis, as efficiencies due to economies of
scale are realized. The estimated cost of sales as a percentage of revenue is
expected to decrease to a low of 30% in the third forecast year.
F-19
<PAGE> 23
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AdKnowledge's estimated selling and marketing expenses are expected to be
30% as a percentage of revenues for the entire forecast period. Similarly,
general and administrative expenses remained constant at 10%, as a percentage of
revenues, for the entire forecast period.
FLYCAST AND ADSMART (UNAUDITED)
On April 28, 2000, Engage completed its acquisitions of Adsmart and
Flycast. 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 to CMGI was recorded 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.
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.
F-20
<PAGE> 24
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 acquisitions of Accipiter, 2Can, I/PRO, AdKnowledge and CMGI's original
acquisition of Flycast have been accounted for using the purchase method, and,
accordingly, the purchase prices have been allocated to the assets purchased and
liabilities assumed based upon their fair values at the dates of acquisition.
The amount of the purchase prices allocated to goodwill and developed technology
is being amortized on a straight-line basis over three to five years. The amount
of the purchase price allocated to other identifiable intangible assets is being
amortized on a straight line basis over the following periods; Accipiter and
I/PRO work force over two years, Accipiter trade name over two years, I/PRO
tradename over five years, and AdKnowledge and Flycast other intangibles over
three years. Amortization of goodwill and other identifiable intangible assets
is reflected as a separate component within operating expenses.
The purchase price of the Accipiter, 2Can, I/PRO, AdKnowledge and Flycast
acquisitions was allocated as follows:
<TABLE>
<CAPTION>
ACCIPITER 2CAN I/PRO ADKNOWLEDGE FLYCAST
--------- -------- --------- ----------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Working capital (deficit), net of cash
acquired of $689 for Accipiter, $360
for 2Can, $347 for I/PRO, $3,044 for
AdKnowledge and $12,893 for Flycast... $ (249) $ (6,168) $ (498) $ (7,954) $ 21,484
Property and equipment.................... 262 141 1,676 4,311 11,751
Other assets.............................. 2 32 230 515 316
In-process research and development....... 9,200 -- 4,500 2,317 29,300
Long-term obligations..................... -- (46) (465) (4,809) (2,834)
Goodwill.................................. 20,158 34,524 22,288 160,144 738,537
Other identifiable intangible assets...... 1,880 4,920 6,508 93,820
-------- -------- -------- --------- --------
Purchase price, net of cash acquired...... $ 31,253 $ 28,483 $ 32,651 $ 161,032 $892,374
======== ======== ======== ========= ========
</TABLE>
F-21
<PAGE> 25
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table represents the unaudited pro forma results of
operations of the Company for the years ended July 31, 1997, 1998 and 1999 and
the nine months ended April 30, 2000, as if the Accipiter acquisition had
occurred on August 1, 1996, the 2Can and I/PRO acquisitions had occurred on
August 1, 1997, and the AdKnowledge and Flycast acquisitions had occurred on
August 1, 1998. These pro forma results include adjustments for the amortization
of goodwill and other intangibles and deferred compensation, acquisition related
costs expensed by Flycast 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 revenue and
cost of revenue. They have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisitions
been made at the beginning of the periods noted or of results that may occur in
the future.
<TABLE>
<CAPTION>
JULY 31,
--------------------------------- APRIL 30,
1997 1998 1999 2000
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues................................. $ 443 $ 9,208 $ 53,183 $ 146,771
Net loss..................................... (21,476) (37,730) (423,197) (403,071)
Pro forma net loss per share................. (0.35) (0.48) (2.75) (2.34)
</TABLE>
(9) DEBT TO CMGI
ENGAGE
In May 1999, Engage formalized its borrowing arrangement with CMGI and
executed a secured convertible demand note with CMGI dated February 1, 1999.
Advances accrue interest at the annual rate of 7%, and advances and accrued
interest may be prepaid without penalty. Advances outstanding under this note
are secured by substantially all assets and intellectual property of the Company
and principal, and accrued interest may be converted at the option of CMGI into
shares of Series C Preferred Stock or common stock. The number of Series C
Preferred shares or common shares to be issued upon conversion of each borrowing
represented by the note is based on the estimated fair value of the Company at
the end of the period in which such borrowing was made.
In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding in the amount of $37,447,000 into 413,564 shares of
Series C Preferred Stock. An additional $5,329,000 was converted into 710,524
shares of common stock at the initial public offering price per common share.
ADSMART
Commencing in February 1998, advances made by CMGI to Adsmart accrued
interest at the annual rate of 7%. In April 1998, advances of $6,000,000 from
CMGI, including accrued interest thereon, and 693,816 shares of the Company's
common stock were converted into 69,382 shares of Series A Preferred Stock.
These advances were made by CMGI to Adsmart from April 1996 through January
1998. The Company intends to formalize its borrowing arrangement with CMGI and
execute a secured convertible demand note with CMGI (the "Secured Convertible
Demand Note"). The Secured Convertible Demand Note covers advances made by CMGI
to the Company for periods commencing in May 1998. Under the Secured Convertible
Demand Note, advances and accrued interest may be prepaid without penalty.
Advances outstanding under this note are secured by substantially all assets and
intellectual property of the Company, and principal and accrued interest may be
converted at the option of CMGI into shares of Series B Convertible Preferred
Stock ("Series B Preferred Stock"). The number of Series B Preferred shares to
be issued upon conversion of each borrowing represented by the note is based on
the estimated fair value of the Company at the end of the quarter in which such
borrowing is made.
UNAUDITED
In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding in the amount of $74,929,000 into 10,117,712 shares
of Engage common stock upon the closing of Engage's acquisition of Adsmart on
April 28, 2000.
(10) ACCRUED LEASE LIABILITY
The Company acquired fixed assets and entered into an agreement to lease
certain equipment in connection with developing ad serving technology both with
an affiliate of CMGI. In January 1998, the Company made the decision to no
longer pursue the development of the related technology. As a result of this
decision, certain equipment became idle. The Company accrued $626,000 in July
1998 related to the present value of the future minimum lease
F-22
<PAGE> 26
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
payments, less any amounts recoverable from the sale of the equipment, under
these leases. The company also recorded a write-down of fixed assets of $338,000
during fiscal 1998 related to the idle equipment owned by the Company.
(11) LEASES
The Company leases certain computer equipment under capital leases which
expire at various dates through November 2002.
In addition to leasing computer equipment under various capital leases, the
Company has entered into noncancelable operating leases covering certain of its
office facilities and equipment which expire through 2004. In addition, the
Company pays CMGI for office facilities used as the Company's headquarters for
which it is charged based upon an allocation of the total costs for the
facilities at market rates.
The Company leases certain property and equipment from a subsidiary of
CMGI. Under the arrangement, the related party negotiates the terms and
conditions of the lease and obtains the assets to be leased. The related party
bears all liability for payment, and the Company is not financially obligated
under the leases. The Company is charged the actual lease fees paid by the
related party, plus an additional administrative charge that approximates the
fair value of the services received.
Total rent expense amounted to $492,000, $1,182,000 and $2,096,000 for the
years ended July 31, 1997, 1998 and 1999, respectively. Rent expense for office
facilities paid to CMGI amounted to approximately $359,000, $363,000 and
$415,000 for the years ended July 31, 1997, 1998 and 1999, respectively. Rent
expense for equipment paid to a subsidiary of CMGI amounted to approximately
$31,000, $534,000 and $735,000 for the years ended July 31, 1997, 1998 and 1999,
respectively.
Minimum annual rental commitments are as follows at July 31, 1999:
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
2000............................................... $1,928 $ 414
2001............................................... 1,344 342
2002............................................... 704 78
2003............................................... 206 4
2004............................................... 154 --
------ -----
$4,336 838
======
Less: amount representing interest................. 75
-----
Present value of capital lease obligations......... $ 763
=====
Comprised of:
Current portion.................................. $ 327
Non-current portion.............................. 436
-----
$ 763
=====
(12) INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At July 31,
1999, the Company had no significant net operating loss carryforwards available
to offset future federal taxable income as the Company's parent, CMGI, has
utilized substantially all of the Company's net operating losses through July
31, 1999. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after considering all the
available objective evidence, both positive and negative, historical and
prospective, with greater weight given to historical evidence, it is not more
likely than not that these assets will be realized. No income tax benefit has
been recorded for all periods presented because of the valuation allowance.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following:
F-23
<PAGE> 27
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31,
------------------
1998 1999
------- --------
(IN THOUSANDS)
Deferred tax assets:
Research credits ................................ $ 72 $ 72
Deferred stock-based compensation ............... -- 669
Deferred revenue ................................ 288 2,337
Accruals and other reserves ..................... 668 4,624
Loss carryforwards .............................. 1,992 13,981
Depreciation and amortization ................... 440 --
Basis difference in available for sale securities 821 615
------- --------
Total gross deferred tax assets ................. 4,281 22,298
Less: Valuation allowance ......................... (4,281) (21,111)
------- --------
Net deferred tax assets ........................... -- 1,187
------- --------
Deferred tax liabilities:
Depreciation and amortization ................... -- (1,187)
------- --------
Net deferred taxes ................................ $ -- $ --
======= ========
Valuation allowance increased by $3,003,000 and $16,830,000 during the
years ended July 31, 1998 and 1999, respectively. Approximately $14,075,000 of
the valuation allowance as of July 31, 1999 is related to acquired deferred tax
assets of Accipiter, Inc., I/PRO and 2Can, the tax benefits of which, when
realized, will be recorded as a decrease to goodwill and other non-current
intangible assets. In addition, approximately $285,000 of the valuation
allowance is related basis differences in available-for-sale securities, the tax
benefits of which, when realized, will be allocated to accumulated other
comprehensive income.
The Company has net operating loss carryforwards for Massachusetts tax
purposes of approximately $12,800,000 and $13,100,000 as of July 31, 1998 and
July 31, 1999, respectively. The net operating loss carryforwards will expire
from 2001 through 2003. In addition, the Company has net operating loss
carryforwards for North Carolina tax purposes of approximately $4,400,000 and
$8,300,000 as of July 31, 1998 and July 31, 1999, respectively, which will
expire from 2001 through 2014, of which $2,700,000 is related to losses incurred
by Accipiter, Inc. prior to its acquisition by the Company. The Company also has
net operating loss carryforwards for California tax purposes of $19,300,000 as
of July 31, 1999, of which, $15,000,000 is related to the pre-acquisition period
of I/PRO. The California net operating losses will expire from 2002 through
2004. The Company also has $33,300,000 of federal net operating loss
carryforwards, which will expire from 2009 through 2018, of which $32,900,000 is
related to the pre-acquisition periods of Accipiter, I/PRO and 2Can. The tax
benefits related to net operating loss carryforwards from the pre-acquisition
periods of acquired subsidiaries, when realized, will be recorded as a decrease
in goodwill and other non-current intangible assets. The utilization of these
net operating losses may be limited pursuant to Internal Revenue Code Section
382 as a result of prior and future ownership changes.
(13) STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK TO COMPAQ COMPUTER
Immediately prior to the effectiveness of the Company's initial public
offering, the Company sold 1,876,000 shares of common stock to Compaq Computer
Corporation for net proceeds of approximately $13,082,000.
PUBLIC OFFERING OF COMMON STOCK
In July 1999, the Company completed its initial public offering for the
sale of 13,800,000 shares of common stock. The Company received proceeds of
approximately $94,755,000, net of underwriting discounts and expenses associated
with the offering.
F-24
<PAGE> 28
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUTHORIZED SHARE INCREASE AND STOCK SPLIT
In June 1999, the Board of Directors approved an increase in the number of
authorized common shares from 30,000,000 to 150,000,000. Upon approval of the
share increase, a two-for-one stock split was declared.
UNAUDITED
In February 2000, the Company's Board of Directors approved a two-for-one
stock split of the Company's common stock, effected in the form of a stock
dividend of one share of common stock for each share of common stock
outstanding. The stock dividend is payable on April 3, 2000 to stockholders of
record at the close of business on March 20, 2000. Accordingly, the supplemental
consolidated financial statements have been retroactively adjusted for all
periods presented to reflect the stock split. In addition, the Board of
Directors approved an increase in the number of authorized common shares from
150,000,000 to 350,000,000.
DEFERRED COMPENSATION
Engage recorded deferred compensation of $1,700,000 in 1998 related to the
Accipiter acquisition and $4,200,000 in 1999, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The difference
is recorded as a reduction of stockholders' equity and is being amortized over
the vesting period of applicable options, typically four years. Of the total
deferred compensation amount, $1,900,000 had been amortized as of July 31, 1999
and $1,700,000 has been reversed due to forfeiture of unvested common shares and
stock options. The amortization of deferred compensation is recorded as an
operating expense.
PREFERRED STOCK - ENGAGE
In July 1998, the Company's shareholders authorized 5,000,000 shares of
preferred stock, of which 1,500,000 have been designated as Series A convertible
preferred stock ("Series A Preferred Stock"), 238,597 shares have been
designated as Series B convertible preferred stock ("Series B Preferred Stock"),
and 2,000,000 shares have been designated as Series C Convertible Preferred
Stock ("Series C Preferred Stock").
SERIES A PREFERRED STOCK - ENGAGE
In July 1998, the Board of Directors authorized and issued 800,000 shares
of Series A Preferred Stock in exchange for 32,000,000 shares of the Company's
common stock and $8,000,000 in principal amount of debt to CMGI. The Series A
Preferred Stock is entitled to receive annual dividends at 7%, as and if
declared. As of and prior to July 31, 1999, no dividends had been declared or
paid by the Company. Each share of Series A Convertible Preferred Stock votes on
an as-converted basis and is convertible into forty shares of common stock under
certain conditions and subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series A Preferred
Stock has a liquidation preference of $5 per share, plus cumulative dividends of
7% compounded annually beginning on February 1, 1998. The Series A Preferred
Stock is convertible into common stock immediately at the option of the holder.
In July 1998, the Board of Directors authorized the issuance of an
additional 700,000 shares of Series A Preferred Stock to CMGI in connection with
the Company's acquisition of Accipiter, Inc.
All outstanding shares of Series A Preferred Stock converted to 60,000,000
shares of common stock upon the completion of the Company's initial public
offering.
SERIES B PREFERRED STOCK - ENGAGE
In August 1998, the Board of Directors designated and issued 238,597 shares
of Series B Preferred Stock. Proceeds from the sale were $1,934,000, net of
issuance costs of $6,000. Each share of Series B Preferred Stock votes on an
as-converted basis and is convertible into four shares of common stock under
certain conditions and subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series
F-25
<PAGE> 29
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
B Preferred Stock has a liquidation preference of $8.38 per share, subject to
the prior payment of the liquidation preference on Series A Preferred Stock. The
Series B Preferred Stock is convertible into common stock immediately at the
option of the holder.
All outstanding shares of Series B Preferred Stock converted to 954,388
shares of common stock upon the completion of the Company's initial public
offering.
SERIES C CONVERTIBLE PREFERRED STOCK - ENGAGE
In May 1999, the Board of Directors approved the designation of 2,000,000
shares of the Company's preferred stock as Series C Convertible Preferred Stock
("Series C Preferred Stock"). The Series C Preferred Stock is entitled to
receive noncumulative annual dividends, payable when, as and if declared at the
rate of 7% per annum. In the event of any liquidation, dissolution or winding up
of the Company, the Series C Preferred Stock ranks senior to the Series B
Preferred Stock and pari passu with the Series A Preferred Stock, and has a
liquidation preference equal to its purchase price plus dividends computed at 7%
per share per annum. Each share of Series C Preferred Stock votes on an
as-converted basis and is convertible at the option of the holder into forty
shares of common stock, subject to certain adjustments. During fiscal 1999, the
Company issued 413,564 shares of Series C Preferred Stock in connection with its
borrowing agreement with CMGI (see note 9).
All outstanding shares of Series C Preferred Stock converted to 16,542,560
shares of common stock upon the completion of the Company's initial public
offering.
SERIES A PREFERRED STOCK - ADSMART
In April 1998, the Board of Directors authorized and issued 69,382 shares
of Series A Preferred Stock in exchange for 693,816 shares of common stock and
$6,000,000 in principal amount of Debt to CMGI. The Series A Preferred Stock is
entitled to receive non-cumulative annual dividends at 7% commencing February 1,
1998, payable when, as and if declared by the Board of Directors of the Company.
No dividends have been declared or paid by the Company. The Series A Preferred
Stock is voting and is convertible into 10 shares of common stock subject to
certain adjustments. In the event of any liquidation, dissolution or winding up
of the Company, the Series A Preferred Stock has a liquidation preference of
$13.3333 per share plus dividends of 7% compounded annually beginning on
February 1, 1998. The Series A Preferred Stock is convertible into common stock
immediately at the option of the holder and automatically converted into common
stock upon the completion of the merger with Engage.
SERIES B PREFERRED STOCK - ADSMART
In December 1999, the Board of Directors approved the designation of
1,231,523 shares of the Company's preferred stock as Series B Preferred Stock.
The Series B Preferred Stock is entitled to receive noncumulative annual
dividends at 7%, as and if declared. No dividends have been declared or paid by
the Company. The Series B Preferred Stock is fully participating, voting and
convertible into 10 shares of common stock, subject to certain adjustments. In
the event of any liquidation, dissolution or winding up of the Company, the
Series B Preferred Stock ranks pari passu with the Series A Preferred Stock, and
has a liquidation preference equal to its purchase price plus dividends computed
at 7% annually. The Series B Preferred Stock is convertible into common stock
immediately at the option of the holder and automatically converted into common
stock upon the completion of the merger with Engage.
(14) STOCK OPTION PLANS
ENGAGE 1995 EQUITY INCENTIVE PLAN
In August 1995, the Company's board of directors and stockholders approved
the 1995 Equity Incentive Plan (the "1995 Plan"). Under the 1995 Plan, up to
30,000,000 non-qualified stock options or incentive stock options may be granted
to the Company's or its affiliates' employees, as defined. The Board of
Directors administers this plan, selects the individuals to whom options will be
granted, and determines the number of shares and exercise price of each option.
Options granted under the 1995 Plan typically vest over a four year period, with
25% of options granted
F-26
<PAGE> 30
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
becoming exercisable one year from the date of grant and the remaining 75%
vesting monthly for the next thirty-six (36) months.
1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1999 Stock Option Plan for Non-Employee Directors (the "1999 Directors
Plan") was adopted by the board of directors in June 1999. Under the terms of
the 1999 Directors Plan, directors who are not employees of Engage or any
subsidiary of Engage and not affiliates of an institutional investor that owns
shares of Engage's common stock receive nonstatutory options to purchase shares
of Engage's common stock. A total of 500,000 shares of common stock may be
issued upon exercise of options granted under the plan. The board of directors
has discretion to establish the terms of options granted under the plan. All
options must have an exercise price equal to the fair market value of the common
stock on the date of grant.
The following table reflects activity and historical prices of stock
options under the Company's 1995 Plan and the 1999 Stock Option Plan for
Non-Employee Directors for the three years ended July 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of period 5,186,775 $ 0.08 4,843,338 $ 0.12 8,357,600 $ 0.55
Granted............................... 1,841,778 0.30 6,639,961 0.73 13,267,925 4.70
Exercised............................. (379,336) 0.06 (3,200) 0.22 (1,066,796) 0.52
Cancelled............................. (1,805,879) 0.19 (3,122,499) 0.28 (2,024,053) 1.97
---------- ------ ---------- ------ ---------- -------
Options outstanding, end of period.... 4,843,338 $ 0.12 8,357,600 $ 0.55 18,534,676 $ 3.37
========== ====== ========== ====== ========== =======
Options exercisable, end of period.... 1,221,254 $ 0.06 1,317,474 $ 0.16 3,298,151 $ 0.41
========== ====== ========== ====== ========== =======
Options available for grant, end of
period................................ 2,777,326 2,838,812 10,475,991
========== ========== ==========
</TABLE>
The following table summarizes information about stock options under the
Company's 1995 Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------------------- ------------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.21......................... 4,757,772 2.9 $ 0.11 2,327,640 $ 0.10
$0.22-$0.42......................... 193,790 1.9 0.34 142,906 0.33
$0.43-$0.84......................... 303,980 2.4 0.65 109,057 0.62
$0.85-$1.47......................... 2,871,090 3.8 1.19 650,426 1.19
$1.48-$2.10......................... 686,000 4.4 2.10 33,332 2.10
$2.11-$2.53......................... 1,330,076 4.6 2.47 651 2.19
$2.54-$7.46......................... 3,847,368 4.7 5.01 34,139 4.59
$7.47-$7.50......................... 4,544,000 4.9 7.50 -- --
$7.51-$15.50........................ 600 5.0 15.50 -- --
---------- ---------
18,534,676 4.1 $ 3.37 3,298,151 $ 0.41
========== =========
</TABLE>
CMGI 1986 STOCK OPTION PLAN
Certain Engage employees have been granted stock options under the CMGI
1986 Stock Option Plan (the "1986 Plan"). Options under the 1986 Plan are
granted at fair market value on the date of the grant and are generally
exercisable in equal cumulative installments over a four-to-ten year period
beginning one year after the date of grant. Outstanding options under the 1986
Plan expire through 2007. Under the 1986 Plan, non-qualified stock options or
incentive stock options may be granted to CMGI's or its subsidiaries' employees,
as defined. The board of directors of CMGI administers this plan, selects the
individuals to whom options will be granted, and determines the number of shares
and exercise price of each option. The following table reflects activity and
historical prices of
F-27
<PAGE> 31
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
stock options granted to Company employees under CMGI's 1986 Plan for the three
years ended July 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of period 320,640 $ 0.46 362,480 $ 0.62 281,560 $ 1.05
Granted................................ 97,600 0.97 160,000 1.16 871,200 5.31
Exercised.............................. (43,760) 0.07 (212,584) 0.42 (124,850) 1.02
Cancelled.............................. (12,000) 0.88 (28,336) 0.92 (8,000) 5.00
------- ------ ------- ------ --------- ------
Options outstanding, end of period..... 362,480 $ 0.62 281,560 $ 1.05 1,019,910 $ 4.66
======= ====== ======= ====== ========= ======
Options exercisable, end of period..... 167,196 $ 0.40 37,204 $ 0.88 33,828 $ 0.99
======= ====== ======= ====== ========= ======
</TABLE>
The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED WEIGHTED
NUMBER LIFE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
------------------------ ------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.81-$ 0.97 59,040 1.9 $ 0.91 27,494 $ 0.87
$ 1.16 93,334 3.2 1.16 3,332 1.16
$ 1.88 4,336 1.3 1.88 3,002 1.88
$ 5.00 767,200 5.1 5.00 -- --
$ 7.21-$10.53 96,000 9.2 7.77 -- --
--------- -----
1,019,910 5.1 $ 4.66 33,828 $ 0.99
========= ======
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), sets
forth a fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based compensation plans. Had compensation cost for
awards in fiscal 1997, 1998 and 1999 under the Company's stock-based
compensation plans been determined based on the fair value method set forth
under SFAS 123, the pro forma effect on the Company's net loss would have been
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1998 JULY 31, 1999
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss.............. $(14,913) $(15,037) $(20,524) $(20,899) $(46,627) $(50,945)
</TABLE>
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 1997, 1998 and 1999, respectively: volatility of
66.69%, 90.07% and 98.49%; risk-free interest rate of 6.19%, 5.48% and 5.42%;
expected life of options of 4.0, 3.4 and 2.4 years; and 0% dividend yield for
all years. The weighted average fair value per share of options granted during
fiscal 1997, 1998 and 1999 was $0.17, $0.43 and $2.69, respectively.
The fair value of each stock option granted under the CMGI 1986 Plan has
been estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for fiscal 1997, 1998 and 1999,
respectively: volatility of 66.69%, 90.07% and 100.00%; risk-free interest rate
of 6.19%, 5.50% and 5.16%; expected life of options of 6.2, 4.2 and 3.0 years;
and 0% dividend yield for all years. The weighted average fair value per share
of options granted during fiscal 1997, 1998 and 1999 was $0.65, $0.79 and $3.41,
respectively.
1999 EMPLOYEE STOCK PURCHASE PLAN
1999 Employee Stock Purchase Plan ("1999 ESPP") was adopted by the board of
directors in June 1999. The 1999 ESPP provides for the issuance of a maximum of
1,500,000 shares of common stock and will be administered by the compensation
committee. All employees of Engage whose customary employment is for more than
20 hours per week and for more than 6 months in any calendar year are eligible
to participate in the 1999 ESPP. As of July
F-28
<PAGE> 32
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
31, 1999, no shares have been issued under the 1999 ESPP.
(15) COMPREHENSIVE INCOME
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This statement requires that all components of comprehensive income be
reported in the financial statements in the period in which they are recognized.
The components of comprehensive loss for the Company include net loss, the net
change in foreign currency translation adjustments and unrealized holding gains
and losses on available-for-sale securities. The financial statements of prior
periods have been reclassified for comparative purposes.
The components of comprehensive loss, net of income taxes, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JULY 31, APRIL 30,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss.................................. $ (14,913) $ (20,524) $ (46,627) $ (26,688) $(265,615)
Foreign currency adjustments.............. -- -- 340 302 66
Net unrealized holding gain (loss) arising
during the period...................... -- (1,193) 500 469 687
--------- --------- --------- --------- ---------
Comprehensive loss........................ $ (14,913) $ (21,717) $ (45,787) $ (25,917) $(264,862)
========= ========= ========= ========= =========
</TABLE>
The components of accumulated comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
FOREIGN GAINS OTHER
CURRENCY (LOSSES) COMPREHENSIVE
ADJUSTMENTS ON SECURITIES INCOME (LOSS)
(IN THOUSANDS)
----------- -------------- -------------
<S> <C> <C> <C>
Balance, July 31, 1997.................................... $ -- $ -- $ --
Activity, fiscal 1998..................................... -- -- --
----- ------- -------
Balance, July 31, 1998.................................... -- (1,193) (1,193)
Activity, fiscal 1999..................................... 340 500 840
----- ------- -------
Balance, July 31, 1999.................................... 340 (693) (353)
Activity, nine months ended April 30, 2000 (unaudited).... 66 687 753
----- ------- -------
Balance, April 30, 2000................................... $ 406 $ (6) $ 400
===== ======= =======
</TABLE>
(16) CONCENTRATION OF CREDIT RISK
Amounts included in the supplemental consolidated balance sheets for
accounts receivable, debt to CMGI, accounts payable and accrued expenses
approximate their fair value due to their short maturities. Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and cash investments. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral or other security against trade receivable balances;
however, it does maintain reserves for potential credit losses and such losses
have been within management's expectations. At July 31, 1999, substantially all
of the Company's cash and cash equivalents are invested in one money market fund
with a major bank.
Sales to two customers accounted for 63% and 12% of total revenues for the
year ended July 31, 1997. Sales to two customers accounted for 18% and 10% of
total revenues for the year ended July 31, 1998. Sales to one customer accounted
for 10% of total revenues for the nine months ended April 30, 1999. Accounts
receivable due from three customers approximated 19%, 10% and 10% of total
accounts receivable at July 31, 1998. The Company's customer base consists of
geographically diverse customers across many industries.
(17) RELATED PARTY TRANSACTIONS
CMGI has provided the Company with systems and related services
("enterprise services") at amounts that approximated the fair value of services
received in each of the periods presented in these financial statements. The
Company also occupies facilities that are leased by CMGI, whereby CMGI charges
the Company for its share of rent and related facility costs through an
allocation based upon the company's headcount in relation to total
F-29
<PAGE> 33
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
headcount for all CMGI companies located in the premises. The Company has
also purchased certain employee benefits (including 401(k) plan participation by
employees of the Company) and insurance (including property and casualty
insurance) through CMGI. Amounts due CMGI are included in "Debt to CMGI" on the
supplemental consolidated balance sheets (see note 9). The following summarizes
the expenses allocated to the Company by CMGI for enterprise services, rent and
facilities and human resources:
YEAR ENDED JULY 31,
----------------------------
1997 1998 1999
------- ------- ------
Enterprise services.......................... $ 129 $ 217 $ 272
Rent and facilities.......................... $ 396 $ 490 $ 529
Human resources.............................. $ 11 $ 50 $ 213
In addition, beginning in fiscal 1997, the Company outsources data center
operations, management information services and ad serving services from
companies in which CMGI has a significant ownership interest. Fees were charged
at estimated fair value of $1,498,000, $1,437,000 and $3,812,000 during the
years ended July 31, 1997, 1998 and 1999, respectively.
The Company leases certain property and equipment from a subsidiary of
CMGI. Under the arrangement, the related party negotiates the terms and
conditions of the lease and obtains the assets to be leased. The related party
bears all liability for payment, and the Company is not financially obligated
under the leases. The Company is charged the actual lease fees paid by the
related party, plus an additional administrative charge that approximates the
fair value of the services received (see note 11).
The Company sells its products and services to companies that CMGI has an
investment interest or a significant ownership interest. The Company sold no
products to related parties in fiscal 1997. Total revenue realized from sales to
related parties were $235,000, $1,823,000, $1,364,000 and $4,711,000 for the
fiscal year ended July 31, 1998 and 1999 and the nine months ended April 30,
1999 and 2000, respectively. The related cost of revenue is consistent with the
costs incurred on similar transactions with unrelated parties.
The Company has contracted with companies that CMGI has an investment
interest or a significant ownership interest to represent them within its
advertising network. The related costs of these contracts are 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.
(18) 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:
F-30
<PAGE> 34
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NINE MONTHS
YEAR ENDED JULY 31, ENDED APRIL 30,
------------------------------------------------
1997 1998 1999 1999 2000
----- -------- --------- --------- --------
(UNAUDITED)
MEDIA
Revenue ............... $ 15 $ 354 $ 10,810 $ 1,311 $ 74,019
Gross profit .......... (924) (2,183) (3,762) (966) 3,438
MEDIA MANAGEMENT
Revenue ............... -- -- 2,627 640 16,526
Gross profit .......... -- -- 868 242 7,574
SOFTWARE AND CONSULTING
Revenue ............... 25 2,217 13,396 8,357 19,573
Gross profit .......... (6) 86 6,224 3,419 13,270
CONSOLIDATED SEGMENT TOTALS
Revenue ............... 40 2,571 26,833 10,308 110,118
Gross profit .......... (930) (2,097) 3,330 2,695 24,282
Assets information by operating segment is not reported since the Company
does not identify assets by segment.
Revenues related to operation in the United States and other foreign
countries for the years ended July 31, 1997, 1998 and 1999 were as follows:
YEAR ENDED JULY 31,
--------------------------------
1997 1998 1999
---- ------- --------
United States....................... $ 40 $ 1,938 $ 24,051
Other foreign countries............. -- 633 2,782
---- ------- --------
Total revenue.................. $ 40 $ 2,571 $ 26,833
==== ======= ========
The Company's assets located outside of the United States are immaterial to
the Company's financial statements.
(19) SUBSEQUENT EVENTS (UNAUDITED)
LAW SUIT
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 its Board of Directors will
contest the claims vigorously.
ACQUISITIONS
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, subject to certain adjustments. 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.
F-31
<PAGE> 35
ENGAGE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
PRIVATE PLACEMENT
On June 22, 2000, the Company closed follow-on investments from CMGI and
Compaq Computer Corporation, through its wholly owned subsidiary, CPQ Holdings,
Inc., for a combined $75 million. Under the terms of the arrangement Engage
issued a total of 4,995,835 shares of common stock to CMGI and Compaq in return
for investments of $50 million and $25 million, respectively. The per share
value of Engage common stock was based on a five-day average closing price of
Engage stock for the five trading days ending June 19, 2000.
F-32
<PAGE> 36
ENGAGE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(a) (b) PRO FORMA
-------------------------
ENGAGE ADKNOWLEDGE FLYCAST ADJUSTMENTS TOTAL
--------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................................ $ 110,118 $ 3,179 $ 33,974 $ (500)(c) $ 146,771
Cost of revenue.................................... 85,836 2,629 23,121 (48)(c) 111,538
--------- --------- -------- -------- ---------
Gross profit................................ 24,282 550 10,853 (452) 35,233
--------- --------- -------- -------- ---------
Operating expenses:
In-process research and development............ 31,617 -- -- (31,617)(d) --
Research and development....................... 17,029 3,109 4,836 -- 24,974
Selling and marketing.......................... 63,113 1,571 12,808 -- 77,492
General and administrative..................... 17,995 6,487 30,481 (23,998)(e) 30,965
Stock compensation............................. 37,274 531 662 -- 38,467
Acquisition costs.............................. 4,951 -- -- -- 4,951
Amortization of goodwill and other intangibles. 118,808 255 -- 143,364 (f) 262,427
--------- --------- -------- -------- ---------
Total operating expenses.................... 290,787 11,953 48,787 87,749 439,276
--------- --------- -------- -------- ---------
Loss from operations............................... (266,505) (11,403) (37,934) (88,201) (404,043)
Other income (expense):
Equity in loss of joint venture................ (1,016) -- -- -- (1,016)
Other income (expense), net.................... 1,906 (404) 486 -- 1,988
--------- --------- -------- -------- ---------
Net loss........................................... $(265,615) $ (11,807) $(37,448) $(88,201) $(403,071)
========= ========= ======== ======== =========
Pro forma basic and diluted net loss per share..... $ (1.97) $ (2.34)(g)
========= =========
Pro forma weighted average number of basic
and diluted shares outstanding................. 134,578 172,315 (g)
========= =========
</TABLE>
F-33
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 30, 2000
(a) Reflects the pre-acquisition results of AdKnowledge for the period August
1, 1999 through November 30, 1999, the pre-acquisition period for which
AdKnowledge results were not consolidated with Engage.
(b) Reflects the pre-acquisition results of Flycast for the period August 1,
1999 through January 12, 2000, the pre-acquisition period for which Flycast
results were not consolidated with Engage.
(c) Represents the elimination of intercompany revenue and cost of revenue.
$500 identified as revenue requiring elimination was capitalized by Flycast
in January 2000 and thus the associated expense elimination represents
depreciation expense recorded on the software purchased.
(d) Adjustment to in-process research and development ("IPRD") reflects the
elimination of $2.3 million expensed to IPRD for the acquisition of
AdKnowledge in December 1999 and $29.3 million expensed to IPRD for the
acquisition of Flycast in April 2000.
(e) Reflects the elimination of acquisition related expenses, comprised of
legal and investment banker fees, expensed by Flycast as a result of the
CMGI acquisition.
(f) Reflects additional goodwill and other intangible asset amortization
expense related to the acquisitions of AdKnowledge and Flycast, net of
amortization expense recorded in the pre-acquisition financial statements
of AdKnowledge, based on three year amortization periods for all intangible
assets recorded as a result of the following purchase price allocations (in
thousands):
ADKNOWLEDGE FLYCAST
-------------- ---------------
Working capital (deficit), net of cash
acquired of $3,044 for AdKnowledge
and $12,893 for Flycast..................... $ (7,954) $ 21,484
Property and equipment, net................... 4,311 11,751
Other assets.................................. 515 316
In-process research and development........... 2,317 29,300
Long-term obligations......................... (4,809) (2,834)
Goodwill...................................... 160,144 738,537
Other identifiable intangible assets.......... 6,508 93,820
-------------- ---------------
Purchase price, net of cash acquired.......... $161,032 $892,374
============== ===============
(g) Since the pro forma statement of operations results in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share is computed by dividing the pro forma net loss
from continuing operations available to common stockholders by the pro
forma weighted average number of common shares outstanding. The calculation
of the pro forma weighted average number of common shares outstanding
assumes that the 10,336,212 shares of Engage common stock issued in the
AdKnowledge acquisition and 53,413,213 shares of Engage common stock issued
in the Flycast acquisition were outstanding for the entire period
presented.
F-34
<PAGE> 38
ENGAGE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31 ,1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
(a) (a) (b) (a) ------------------------
ENGAGE I/PRO ADKNOWLEDGE 2CAN FLYCAST ADJUSTMENTS TOTAL
-------- ------- ----------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue .......................................... $ 26,833 $ 3,902 $ 2,986 $ 2,370 $ 18,596 $ (259)(c) $ 54,428
Cost of revenue .................................. 23,503 2,658 4,190 1,613 13,012 (259)(c) 44,717
-------- ------- -------- ------- -------- --------- ---------
Gross profit (loss) ....................... 3,330 1,244 (1,204) 757 5,584 -- 9,711
-------- ------- -------- ------- -------- --------- ---------
Operating expenses:
In-process research and development .......... 4,500 -- -- -- -- (4,500)(d) --
Research and development ..................... 8,699 1,775 4,531 -- 4,736 -- 19,741
Selling and marketing ........................ 19,369 2,499 3,797 1,494 12,347 -- 39,506
General and administrative ................... 5,219 2,323 2,149 4,027 3,149 -- 16,867
Stock compensation ........................... 1,455 -- 633 990 2,114 -- 5,192
Amortization of goodwill and other
intangibles................................. 8,939 -- 765 601 -- 339,664 (e) 349,969
-------- ------- -------- ------- -------- --------- ---------
Total operating expenses .................. 48,181 6,597 11,875 7,112 22,346 335,164 431,275
-------- ------- -------- ------- -------- --------- ---------
Loss from operations ............................. (44,851) (5,353) (13,079) (6,355) (16,762) (335,164) (421,564)
Other income (expense):
Equity in loss of joint venture .............. (723) -- -- -- -- -- (723)
Other income (expense), net .................. (1,053) 428 (228) (148) (38) 129 (f) (910)
-------- ------- -------- ------- -------- --------- ---------
Net loss ......................................... $(46,627) $(4,925) $(13,307) $(6,503) $(16,800) $(335,035) $(423,197)
======== ======= ======== ======= ======== ========= =========
Pro forma basic and diluted net loss per share ... $ (0.61) $ (2.75)(g)
======== =========
Pro forma weighted average number of basic
and diluted shares outstanding ............... 76,399 153,857 (g)
======== =========
</TABLE>
F-35
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1999
(a) Reflects the pre-acquisition results of I/PRO for the period August 1, 1998
through March 31, 1999, the pre-acquisition period for which I/PRO results
were not consolidated with Engage. Reflects the results of AdKnowledge and
Flycast for the twelve months ended June 30, 1999.
(b) On March 11, 1999, CMGI acquired 2Can for purchase consideration valued at
approximately $28.5 million, including bridge notes receivable of $1.5
million. CMGI accounted for the acquisition using the purchase method of
accounting. Concurrent with CMGI's closing of the 2Can acquisition, CMGI
contributed 2Can to Adsmart in exchange for additional debt to CMGI of
approximately $28.5 million. Prior to its acquisition by CMGI, 2Can
acquired in August 1998 all of the outstanding common stock of WebRep
L.L.C. ("WebRep") through a merger in which 2Can was the surviving
corporation. The members of WebRep received a majority of the voting
interest in the combined entity, and accordingly, WebRep was the acquiring
company for accounting purposes. The transaction was accounted for as a
reverse acquisition whereby the members' ownership interests of WebRep were
adjusted for the fair value of the acquired tangible net assets of 2Can,
and converted into shares of 2Can common stock in a recapitalization.
On September 29, 1998, 2Can acquired Eisenberg Communications Group Inc.
("ECG") for common stock valued at $6.3 million. The acquisition was
accounted for using the purchase method of accounting, resulting in
goodwill at the acquisition date of approximately $6.8 million. The
historical unaudited results of 2Can (including WebRep) for the period from
August 1, 1998 through March 10, 1999 (CMGI's acquisition date of 2Can) and
the historical unaudited results of ECG for the period from August 1, 1998
through September 29, 1998 (2Can's acquisition date of ECG) are presented
below:
ADSMART ACQUISITIONS
(FROM AUGUST 1, 1998 -
MARCH 10, 1999, THE PERIOD
PRIOR TO THE INCLUSION
WITHIN ADSMART RESULTS)
--------------------------
2CAN ECG TOTAL
------- ----- -------
(in thousands)
Revenue .......................................... $ 2,304 $ 66 $ 2,370
Cost of revenue .................................. 1,613 -- 1,613
------- ----- -------
Gross profit ................................. 691 66 757
------- ----- -------
Operating expenses:
Selling and marketing ........................ 1,396 98 1,494
General and administrative ................... 3,954 73 4,027
Stock compensation ........................... 990 -- 990
Amortization of goodwill and other intangibles 601 -- 601
------- ----- -------
Total operating expenses ..................... 6,941 171 7,112
------- ----- -------
Loss from operations ............................. (6,250) (105) (6,355)
Other expense .................................... (146) (2) (148)
------- ----- -------
Net loss ......................................... $(6,396) $(107) $(6,503)
======= ===== =======
(c) Represents the elimination of intercompany revenue and cost of revenue.
(d) Adjustment to in-process research and development reflects the elimination
of $4.5 million expensed to in-process research and development ("IPRD")
related to the acquisition of I/PRO in April 1999. The $2.3 million
expensed to IPRD for the AdKnowledge acquisition and the $29.3 million
expensed to IPRD for the Flycast acquisition have not been eliminated
herein as the IPRD charges are non-recurring and will be reflected in
Engage's Statement of Operations subsequent to July 31, 1999.
F-36
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1999
(e) Reflects additional goodwill and other intangible asset amortization
expense related to the acquisitions of I/PRO, AdKnowledge and Flycast, net
of amortization expense recorded in the pre-acquisition financial
statements of AdKnowledge based on the following amortization periods:
I/PRO ADKNOWLEDGE FLYCAST
-------------- ---------------- ------------------
Goodwill.................... 5 3 3
Workforce................... 2 3 3
Developed technology........ 5 3 3
Customer base............... n/a n/a 3
Tradename................... 5 3 3
Database of cookies......... n/a 3 n/a
Pro forma amortization expense is based on the following allocation of purchase
prices (in thousands):
I/PRO ADKNOWLEDGE FLYCAST
-------- ----------- ---------
Working capital (deficit), net of
cash acquired of $347 for I/PRO, $3,044
for AdKnowledge and $12,893 for Flycast.... $ (498) $ (7,954) $ 21,484
Property and equipment, net.................. 1,676 4,311 11,751
Other assets................................. 230 515 316
In-process research and development.......... 4,500 2,317 29,300
Long-term obligations........................ (465) (4,809) (2,834)
Goodwill..................................... 22,288 160,144 738,537
Other identifiable intangible assets......... 4,920 6,508 93,820
------- -------- --------
Purchase price, net of cash acquired......... $32,651 $161,032 $892,374
======= ======== ========
The pro forma adjustment to goodwill amortization expense also represents
$3,714 of additional goodwill amortization expense related to CMGI's
acquisition of 2Can, net of amortization expense recorded in the
pre-acquisition financial statements of 2Can
(f) Reflects a reduction in interest expense related to i) I/PRO borrowings
that would have been settled by I/PRO had the acquisition been consummated
at the beginning of the period presented and ii) interest expense recorded
by AdKnowledge related to the amortization of debt issuance costs.
(g) Since the pro forma statement of operations results in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share is computed by dividing the loss from
continuing operations available to common stockholders by the pro forma
weighted average number of common shares outstanding. The calculation of
the pro forma weighted average number of common shares outstanding assumes
that the 10,336,212 common shares of Engage common stock issued in the
AdKnowledge acquisition, 10,758,768 common shares issued in the I/PRO
acquisition and 53,413,213 shares of Engage common stock issued in the
Flycast acquisition were outstanding for the entire period presented.
F-37
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENGAGE, INC.
(Registrant)
Date: July 12, 2000 /s/ Paul L. Schaut
-----------------------------
PAUL L. SCHAUT
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
<PAGE> 42
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- ------------
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
23.4 Consent of KPMG LLP
99.1 Agreement and Plan of Merger and Contribution, dated January
19, 2000, by and among the Registrant, CMGI, Inc., Adsmart
Corporation, Flycast Communications Corporation and FCET
Corp., incorporated by reference from Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on March 16, 2000.
99.2 Press release of the Registrant (incorporated by reference
from Exhibit 99.2 to the Registrant's Form 8-K filed with
Securities and Exchange Commission on May 11, 2000.)
