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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ____
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COMMISSION FILE NUMBER 000-26671
ENGAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3281378
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 BRICKSTONE SQUARE, ANDOVER, MASSACHUSETTS 01810
(Address of Principal Executive Offices, Including Zip Code)
(978) 684-3884
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the registrant's Common Stock as of March 9,
2001 was 196,714,396.
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ENGAGE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2001
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of July 31, 2000 and January
31, 2001 (unaudited)............................................. 3
b) Consolidated Statements of Operations (unaudited) for the
three and six months ended January 31, 2000 and 2001............. 4
c) Consolidated Statements of Cash Flows (unaudited) for the six
months ended January 31, 2000 and 2001........................... 5
d) Notes to Interim Unaudited Consolidated Financial
Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................ 23
Item 6. Exhibits and Report on Form 8-K.................................... 23
SIGNATURES
EXHIBIT INDEX
2
3
ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
JULY 31, JANUARY 31,
2000 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 119,809 $ 77,072
Available-for-sale securities ....................................................... 16,147 -
Accounts receivable, less allowance for doubtful accounts of $11,703 and $16,912 at
July 31, 2000 and January 31, 2001, respectively .................................. 79,799 37,072
Prepaid expenses .................................................................... 2,570 5,892
----------- -----------
Total current assets .............................................................. 218,325 120,036
----------- -----------
Property and equipment, net ........................................................... 31,334 30,102
Intangible assets, net of accumulated amortization of $217,454 and $425,182 at July 31,
2000 and January 31, 2001, respectively ............................................. 873,323 390,068
Other assets .......................................................................... 9,915 9,113
----------- -----------
Total assets ...................................................................... $ 1,132,897 $ 549,319
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligation under capital lease ................................... $ 4,650 4,331
Current portion of long-term debt ................................................... 2,010 1,781
Accounts payable .................................................................... 33,365 13,882
Due to CMGI and affiliates .......................................................... 27,287 34,519
Accrued expenses .................................................................... 24,599 31,921
Accrued restructuring costs ......................................................... -- 14,731
Deferred revenue .................................................................... 7,604 12,076
----------- -----------
Total current liabilities ......................................................... 99,515 113,241
----------- -----------
Deferred revenue ...................................................................... 651 103
Obligation under capital lease, less current portion .................................. 2,905 2,045
Long-term debt, less current portion .................................................. 1,843 1,031
Other long-term liabilities ........................................................... 843 969
----------- -----------
Total liabilities ................................................................. 105,757 117,389
----------- -----------
Minority interest ..................................................................... 8,812 7,677
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock, $.01 par value, 1,500 shares authorized, 0 shares
issued and outstanding at July 31, 2000 and January 31, 2001 ...................... -- --
Series B Preferred Stock, $.01 par value, 239 shares authorized, 0 shares issued and
outstanding at July 31, 2000 and January 31, 2001 ................................. -- --
Series C Preferred Stock, $.01 par value, 2,000 shares authorized, 0 shares issued
and outstanding at July 31, 2000 and January 31, 2001 ............................. -- --
Common Stock, $.01 par value, 350,000 shares authorized, 178,860 and 196,695 shares
issued and outstanding at July 31, 2000 and January 31, 2001, respectively ........ 1,789 1,967
Additional paid-in capital .......................................................... 3,650,059 3,840,126
Deferred compensation ............................................................... (1,234) (15,644)
Accumulated other comprehensive loss ................................................ (260) (408)
Accumulated deficit ................................................................. (2,632,026) (3,401,788)
----------- -----------
Total stockholders' equity ........................................................ 1,018,328 424,253
----------- -----------
Total liabilities and stockholders' equity ........................................ $ 1,132,897 $ 549,319
=========== ===========
See accompanying notes to interim unaudited consolidated financial statements.
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ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2000 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Revenue:
Revenue ......................................... $ 30,636 $ 26,519 $ 48,799 $ 66,181
Revenue, related parties ........................ 783 1,602 2,637 2,962
--------- --------- --------- ---------
Total revenue ............................... 31,419 28,121 51,436 69,143
--------- --------- --------- ---------
Cost of revenue:
Cost of revenue ................................. 24,392 23,515 40,615 53,273
Amortization of developed technology ............ - 1,458 - 2,242
--------- --------- --------- ---------
Total cost of revenue ....................... 24,392 24,973 40,615 55,515
--------- --------- --------- ---------
Gross profit ................................ 7,027 3,148 10,821 13,628
--------- --------- --------- ---------
Operating expenses:
In-process research and development ............. 2,317 - 2,317 700
Research and development ........................ 5,124 10,153 8,417 21,634
Selling and marketing ........................... 18,328 26,302 30,275 58,666
General and administrative ...................... 5,033 11,623 7,806 29,362
Amortization and impairment of goodwill and other
intangibles ................................... 27,566 628,251 31,805 744,153
Restructuring costs ............................. - 16,791 - 20,921
Stock compensation .............................. 224 5,718 326 9,294
--------- --------- --------- ---------
Total operating expenses .................... 58,592 698,838 80,946 884,730
--------- --------- --------- ---------
Loss from operations ................................. (51,565) (695,690) (70,125) (871,102)
Other income (expense):
Interest income ................................. 1,430 1,594 2,786 3,615
Interest expense ................................ (685) (278) (1,045) (627)
Equity in loss of joint venture ................. (374) - (700) -
Minority interest ............................... - 312 - 655
Other expense, net............................... (33) (1,501) (25) (1,921)
--------- --------- --------- ---------
Net loss ............................................. $ (51,227) $(695,563) $ (69,109) $(869,380)
========= ========= ========= =========
Basic and diluted net loss per share ................. $ (3.53) $ (4.51)
========= =========
Weighted average number of basic and diluted
shares outstanding ................................. 196,774 192,756
========= =========
Pro forma basic and diluted net loss per share ....... $ (0.41) $ (0.60)
========= =========
Pro forma weighted average number of basic and
diluted shares outstanding ......................... 125,188 116,074
========= =========
See accompanying notes to interim unaudited consolidated financial statements.
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ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 2000 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2000 2001
--------- ---------
Cash flows from operating activities:
Net loss ...................................................................... $ (69,109) $(869,380)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation, amortization and impairment charges ......................... 33,309 755,064
Equity in loss of joint venture ........................................... 721 --
Provision for bad debts ................................................... 748 15,033
Stock compensation ........................................................ 326 9,294
Amortization of discount on available-for-sale securities ................. (768) (6)
Gain on sale of available-for-sale securities ............................. (40) --
(Gain) loss on disposal of property and equipment ......................... (8) 2,798
Minority interest ......................................................... -- (1,135)
In-process research and development ....................................... 2,317 700
Changes in operating assets and liabilities, net of impact of acquisitions:
Accounts receivable .................................................. (19,901) 34,342
Prepaid expenses and other assets .................................... (2,840) (3,073)
Due to CMGI and affiliates ........................................... 1,782 8,190
Accounts payable ..................................................... 2,956 (23,235)
Accrued expenses and accrued restructuring costs ..................... (6,563) 13,182
Deferred revenue ..................................................... (37) (212)
--------- ---------
Net cash used for operating activities .......................... (57,107) (58,438)
--------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities ..................................... (54,016) --
Proceeds from redemption of available-for-sale securities ..................... 16,808 16,400
Net cash acquired on acquisition of subsidiaries .............................. 15,936 2,706
Purchases of property and equipment ........................................... (2,902) (6,050)
Other ......................................................................... (1,992) --
--------- ---------
Net cash (used for) provided by investing activities ............ (26,166) 13,056
--------- ---------
Cash flows from financing activities:
Net change in debt to CMGI and affiliates ..................................... 21,721 --
Proceeds from issuance of common stock, net of issuance costs and
repurchases ................................................................. 682 5,529
Repayment of capital lease obligations ........................................ (263) (2,211)
Repayment of long-term debt ................................................... (469) (1,042)
--------- ---------
Net cash provided by financing activities ....................... 21,671 2,276
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ....................... 2 369
--------- ---------
Net decrease in cash and cash equivalents .......................................... (61,600) (42,737)
Cash and cash equivalents, beginning of period ..................................... 112,034 119,809
--------- ---------
Cash and cash equivalents, end of period ........................................... $ 50,434 $ 77,072
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................................ $ 1,045 $ 627
See accompanying notes to interim unaudited consolidated financial statements.
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
We have prepared the accompanying unaudited interim consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, our unaudited consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of our management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of our financial position,
results of operations and cash flows at the dates and for the periods indicated.
While we believe that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 2000 which are contained in our Annual Report on Form
10-K filed with the Securities and Exchange Commission (the "SEC") on October
30, 2000. The results for the three and six-month periods ended January 31, 2001
are not necessarily indicative of the results to be expected for the full fiscal
year. Certain prior year amounts in the unaudited consolidated financial
statements have been reclassified to conform to the current year presentation.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Effective August 1, 1998, we adopted the provisions of SOP 97-2, Software
Revenue Recognition. For transactions after August 1, 1998, revenue from
software product licenses, Engage Knowledge database services and web-site
traffic audit reports are generally recognized when (i) a signed noncancelable
software license exists, (ii) delivery has occurred, (iii) our fee is fixed or
determinable, and (iv) collectibility is probable. There was no material change
to our accounting for revenue as a result of the adoption of SOP 97-2.
For multiple element arrangements involving products, services and support
elements from MediaBridge Technologies, Inc. ("MediaBridge"), a recent
acquisition, we recognize revenue in accordance with SOP 98-9, Software Revenue
Recognition with Respect to Certain Arrangements, when vendor-specific objective
evidence of fair value does not exist for the delivered element. As required by
SOP 98-9, under the residual method, the fair value of the undelivered elements
are deferred and subsequently recognized. We have established sufficient
vendor-specific objective evidence of fair value for MediaBridge's services and
support elements based on the price charged when these elements are sold
separately. Accordingly, software license revenue for products developed by
MediaBridge is recognized under the residual method in arrangements in which the
software is sold with one or both of the other elements. Revenue from license
agreements that require significant customizations and modifications to the
software product is deferred and recognized using the percentage of completion
method. For license arrangements involving customizations for which the amount
of customization effort can not be reasonably estimated or when license
arrangements provide for customer acceptance, we recognize revenue under the
completed contract method of accounting.
We recognize revenue from periodic subscriptions ratably over the
subscription term, typically twelve months. We recognize revenue from
usage-based subscriptions monthly based on actual usage.
Our service and support revenue includes revenue from software maintenance
and other professional services, primarily from consulting, implementation and
training. We defer revenue from software maintenance and recognize it ratably
over the term of each maintenance agreement, which is typically twelve months.
We recognize revenue from professional services as the services are performed,
collectibility is probable and such revenues are contractually non-refundable.
Substantially all of the revenue from our Media segment is recognized on a
gross basis and amounts paid to web sites are recorded as cost of revenue. We
generally recognize revenue on a gross basis in arrangements in which we act
as principal in the transaction. We recognize revenue on a net basis of the
related web site expense in arrangements in which we act primarily as a sales
agent.
Amounts collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenue.
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Net Loss per Share
We calculate earnings per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic earnings per
share is computed based on the weighted average number of common shares
outstanding during the period. The dilutive effect of common stock equivalents
are included in the calculation of diluted earnings per share only when the
effect of their inclusion would be dilutive.
Pro forma basic and diluted loss per share for the periods in fiscal 2000
reflects the impact of the conversion of debt to CMGI, Inc. ("CMGI") and
preferred stock for Adsmart Corporation ("Adsmart"), after adjustment for the
Engage exchange ratio, as of the date of the beginning of each period, or date
of issuance, if later, using the "if-converted method".
Adsmart had a formal borrowing arrangement with CMGI under which advances
made by CMGI to Adsmart, and the related accrued interest, may be converted into
shares of convertible preferred stock of Adsmart at the option of CMGI. CMGI
elected to convert all advances and accrued interest outstanding into shares of
Adsmart convertible preferred stock on April 28, 2000. CMGI then elected to
convert all shares of Adsmart convertible preferred stock into shares of Adsmart
common stock. Conversion of all of Adsmart's common stock into our common stock
occurred upon the completion of our acquisition of Adsmart (see Notes C and D).
The pro forma basic and diluted net loss per share information included in the
accompanying statements of operations for the three and six months ended January
31, 2000 reflect the impact on pro forma basic and diluted net loss per share of
such conversions as of the beginning of the period or date of issuance, if
later, using the if-converted method. Historical basic and diluted net loss per
share has not been presented on the face of the consolidated statements of
operations for the three and six month periods ended January 31, 2000 because it
is irrelevant due to the change in our capital structure and resultant basic and
diluted loss per share that resulted upon conversions of the convertible
preferred stock and debt to CMGI. Pro forma basic and diluted net loss per share
has been presented for comparative purposes.
The reconciliation of the numerators and denominators of the basic and
diluted loss per share computation for our reported net loss is as follows:
BASIC AND DILUTED NET LOSS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2001 JANUARY 31, 2001
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMERATOR:
Net loss ............................... $(695,563) $(869,380)
--------- ---------
DENOMINATOR:
Weighted average shares outstanding .... 196,774 192,756
--------- ---------
Basic and diluted net loss per share ... $ (3.53) $ (4.51)
========= =========
The reconciliation of the numerators and denominators of the pro forma
basic and pro forma diluted loss per share computation for our reported net loss
is as follows:
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2000 JANUARY 31, 2000
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMERATOR:
Net loss ................................................ $ (51,227) $ (69,109)
--------- ---------
DENOMINATOR:
Weighted average shares outstanding ..................... 115,004 106,224
Assumed conversion of preferred stock ................... 694 694
Assumed conversion of debt to CMGI ...................... 9,490 9,156
--------- ---------
Weighted average number of diluted shares outstanding ... 125,188 116,074
--------- ---------
Pro forma basic and diluted net loss per share .......... $ (0.41) $ (0.60)
========= =========
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Had we presented the historical basic and diluted net loss per share, the
reconciliation of the numerators and denominators of the historical basic and
diluted net loss per share would have been as follows:
HISTORICAL BASIC AND DILUTED NET LOSS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2000 JANUARY 31, 2000
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMERATOR:
Net loss ............................... $ (51,227) $ (69,109)
--------- ---------
DENOMINATOR:
Weighted average shares outstanding .... 115,004 106,224
--------- ---------
Basic and diluted net loss per share ... $ (0.45) $ (0.65)
========= =========
At January 31, 2001, we had outstanding stock options to purchase
27,274,248 shares of common stock at a weighted average exercise price of $9.01
that could potentially dilute earnings per share. The dilutive effect of the
exercise of these options has been excluded from the computation of diluted net
loss per share, as the effect would have been antidilutive for the periods
presented.
C. ACQUISITIONS
On August 31, 2000, we completed our acquisition of Space Media Holdings
Limited ("Space"), a leading independent Internet marketing network in Asia, in
an all-stock transaction for approximately $35.8 million including acquisition
costs of $425,000 and net of cash acquired of $70,000. The purchase price
consisted of approximately 3,174,000 common shares at a per share value of
$11.17. We also recorded approximately $18.9 million in deferred compensation
related to approximately 1,525,000 common shares issuable to the employee
shareholders of Space contingent upon the employees' remaining with us for one
year after the date of acquisition. Contingent consideration, consisting of
approximately 1,404,000 common shares, has been placed in escrow to secure
certain performance obligations by Space. The value of the escrow shares will be
recorded as additional purchase price at the then-fair value upon the attainment
of the performance goals measured through December 31, 2000. We are currently
assessing attainment of these performance goals. At January 31, 2001, the
probability that the performance goals will be attained is remote, and therefore
it is unlikely that additional purchase price will be recorded. The shares we
issued in connection with the Space acquisition are not registered under the
Securities Act of 1933 and are subject to certain restrictions on
transferability. The value of our shares included in the purchase price was
recorded net of a weighted average 10% market discount to reflect restrictions
on transferability on some of these shares.
On September 11, 2000, we completed our acquisition of MediaBridge, a
leading software provider of cross-media, closed loop targeted marketing
systems, for approximately $219.1 million including acquisition costs of
approximately $482,000 and net of cash acquired of $2.6 million. The purchase
price consisted of approximately 11,741,000 common shares at a weighted average
per share value of $16.20 and stock options to acquire our common stock valued
at approximately $31.1 million. We also recorded approximately $7.0 million in
deferred compensation related to the intrinsic value of stock options issued to
MediaBridge employees. Approximately twelve percent of the shares issued are
subject to an escrow period of one year to secure certain indemnification
obligations of the former stockholders of MediaBridge. The value of our shares
included in the purchase price was recorded net of a weighted average 6.25%
market discount to reflect restrictions on transferability on some of these
shares.
The Space and MediaBridge acquisitions have been accounted for using the
purchase method, and, accordingly, the purchase prices have been allocated to
the assets purchased and liabilities assumed based upon their fair values at the
dates of acquisition. The amounts of the purchase prices allocated to goodwill
and other identifiable intangible assets are being amortized on a straight-line
basis over three years. Amortization of goodwill and other identifiable
intangible assets, excluding developed technology amortization, is reflected as
a separate component within operating expenses. Amortization of developed
technology is reflected as a separate component within cost of revenue. The
acquired companies are included in our consolidated financial statements from
the dates of acquisition.
The purchase prices for the acquisitions were allocated as follows:
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
MEDIABRIDGE SPACE
----------- ---------
(IN THOUSANDS)
Working deficit, net of cash acquired of $2,636
for MediaBridge and $70 for Space ............... $ (7,257) $ (1,042)
Property and equipment, net ....................... 2,034 434
Other assets ...................................... 286 -
In-process research and development ............... 700 -
Long-term obligations ............................. (690) -
Goodwill .......................................... 199,692 36,416
Other identifiable intangible assets .............. 24,300 -
--------- --------
Purchase price, net of cash acquired .............. $ 219,065 $ 35,808
========= ========
In December 2000, in accordance with the Agreement and Plan of Merger with
AdKnowledge, we recorded additional purchase consideration in the AdKnowledge
acquisition of $3.0 million resulting from contingent consideration due based on
certain performance goals being met. This additional consideration was paid
directly by CMGI based on the provisions of the AdKnowledge merger agreement. We
have recorded this as an increase in goodwill and additional paid-in capital.
The following table represents our unaudited pro forma results of
operations for the six months ended January 31, 2000 and 2001, as if the
AdKnowledge, Flycast, Virtual Billboard Network ("VBN"), Interactive Solutions
Inc. ("ISI"), MediaBridge and Space acquisitions had all occurred on August 1,
1999 and as if we owned 66.6% of Engage Technologies Japan on August 1, 1999.
These pro forma results include adjustments for the amortization of goodwill and
other intangibles and deferred compensation, acquisition related costs expensed
by Flycast and MediaBridge prior to the date of acquisition, the elimination of
amounts expensed for in-process research and development and for the issuance of
shares used in the acquisition, and the elimination of intercompany
transactions. The following has been prepared for comparative purposes only and
does 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:
SIX MONTHS ENDED JANUARY 31,
-------------------------------------
2000 2001
-------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue .............................. $ 98,726 $ 70,440
Net loss ................................. (297,125) (889,577)
Pro forma net loss per share ............. (1.57) (4.53)
Under the terms of the Flycast Merger Agreement, upon the exercise of CMGI
options by former Flycast employees, CMGI is obligated to pay us the exercise
price of the related CMGI options issued to the former Flycast employees as part
of CMGI's acquisition of Flycast. Additionally, in the event that former Flycast
employees terminate their employment with us, their unexercised CMGI options are
cancelled and CMGI is obligated to return Engage common shares to us based on
the number of CMGI options cancelled multiplied by the exchange ratio as defined
in the Flycast merger agreement. Engage common shares returned to us are valued
based upon the per share value originally used to record the non-cash dividend
to CMGI. Any cash or Engage common shares returned to us are treated as a
reduction to the previously recorded dividend to CMGI. A reconciliation of the
net dividend to CMGI recorded as a component of accumulated deficit for the six
months ended January 31, 2001 is as follows:
(IN THOUSANDS)
Net dividend to CMGI recorded as of
July 31, 2000................................................ $2,169,441
Value of Engage common shares due from CMGI for option
cancellations for the period August 1, 2000 through
January 31, 2001............................................. (98,822)
Cash consideration for exercise price of CMGI
stock options exercised from August 1, 2000 through
January 31, 2001............................................. (796)
----------
Cumulative net dividend to CMGI as of January 31, 2001.... $2,069,823
==========
D. COMBINING FINANCIAL INFORMATION
The acquisitions of Adsmart and Flycast have been accounted for as an
"as-if pooling" and accordingly, our historical consolidated financial
statements have been restated to include the accounts and results of operations
of Adsmart back to April 1, 1996, the date CMGI founded Adsmart and of Flycast
back to January 13, 2000, the date CMGI completed its acquisition of Flycast.
9
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The results of operations previously reported by Adsmart and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2000 JANUARY 31, 2000
------------------ ----------------
(IN THOUSANDS)
Revenue:
Engage ............................ $ 12,769 $ 21,071
Adsmart ........................... 15,768 27,589
Flycast ........................... 3,605 3,605
Eliminations ...................... (723) (829)
-------- --------
Total revenue ................. $ 31,419 $ 51,436
======== ========
Net loss:
Engage ............................ $(27,355) $(37,901)
Adsmart ........................... (7,051) (14,387)
Flycast ........................... (16,821) (16,821)
-------- --------
Total net loss ................ $(51,227) $(69,109)
======== ========
All significant transactions among Engage, Flycast and Adsmart within the
periods for which consolidated results of operations have been pooled have been
eliminated.
E. IMPAIRMENT
During the three and six months ended January 31, 2001, we recorded
impairment charges totaling approximately $521.8 million and $538.6 million,
respectively, as a result of management's business review and impairment
analysis performed during the six month period, under its existing policy
regarding impairment of long-lived assets. Where impairment indicators were
identified, management determined the amount of the impairment charge by
comparing the carrying value of goodwill and certain other intangible assets to
their fair value. This assessment is conducted at a segment level, as the
individual acquisitions have been integrated to form seamless operating segments
whose value is better determined by assessing the value of the segments as
opposed to the value of the individual acquisitions within the segments.
Management determines fair value utilizing a combination of the discounted cash
flow methodology, which is based upon converting expected future cash flows to
present value, and the market approach, which includes an analysis of market
price multiples of companies engaged in lines of business similar to our
business. The market price multiples are selected and applied to us based on the
relative performance, future prospects and risk profile of Engage in comparison
to the guideline companies.
We continued to experience sequential declines in operating results for our
media business during the second quarter of fiscal 2001, primarily as a result
of the continued weak overall demand in the Internet advertising market. As a
result, during management's quarterly review of the value and periods of
amortization of both goodwill and other intangible assets, it was determined
that the carrying value of goodwill and certain other intangible assets within
our Media segment were not fully recoverable. Accordingly, we have recorded an
impairment charge totaling approximately $521.8 million related to goodwill and
certain other intangible assets within our Media segment during the second
quarter of fiscal 2001, primarily related to our prior acquisitions of Internet
Profiles Corporation, Adsmart, AdKnowledge and Flycast.
Each of the companies for which impairment charges were recorded in the
second quarter have experienced declines in operating and financial metrics over
the past several quarters in comparison to the metrics forecasted at the time of
their respective acquisitions. The impairment analysis considered that these
companies were recently acquired during the time period from March 1999 to
August 2000. However, sufficient monitoring was performed over the course of the
past several quarters and the companies' have each completed an operating cycle
since acquisition. This monitoring process culminated with impairment charges
for these companies in the six months ended January 31, 2001.
The discounted cash flow analysis discounts cash flows to present value at
appropriate discount rates. The valuation study performed as of January 31, 2001
utilized a discount rate of 20%. This discount rate was determined by an
analysis of the risks associated with certain goodwill and other intangible
assets. The resulting net cash flows to which the discount rate was applied were
based on management's estimates of revenues, operating expenses and income taxes
from the assets with identified impairment indicators.
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
F. COMPREHENSIVE LOSS
The components of our comprehensive loss include net loss, the net change
in foreign currency translation adjustments and unrealized holding gains and
losses on available-for-sale securities.
The components of comprehensive loss, net of income taxes, are as follows:
THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ ----------------------------
2000 2001 2000 2001
-------- --------- -------- ---------
(IN THOUSANDS)
Net loss .............................................. $(51,227) $(695,563) $(69,109) $(869,380)
Foreign currency adjustments .......................... (18) (307) 91 (182)
Net unrealized holding gain arising during the period.. 698 - 704 34
-------- --------- -------- ---------
Comprehensive loss ............................... $(50,547) $(695,870) $(68,314) $(869,528)
======== ========= ======== =========
G. NON-CASH TRANSACTIONS
During the three and six months ended January 31, 2000 and 2001, as the
result of the termination of employment of certain employees prior to the
vesting of their stock options, unvested stock options for which deferred
compensation costs had been recorded in a prior period were cancelled. As a
result of these cancellations, we have recorded a reduction of $1,673,000 and
$2,829,000 in both deferred compensation and additional paid-in capital in the
six months ended January 31, 2000 and 2001, respectively.
During the six months ended January 31, 2000, we acquired AdKnowledge and
Flycast through the issuance of common stock.
During the six months ended January 31, 2001, we acquired MediaBridge and
Space through the issuance of common stock. See Note C.
During the six months ended January 31, 2001, as a result of the
termination of employment of former Flycast employees, non-cash financing
activities included the return of Engage Common Shares previously issued to CMGI
as part of the Flycast acquisition (See Note C). As a result, we have recorded a
reduction of additional paid-in capital and dividend to CMGI (included within
accumulated deficit) of approximately $98.8 million for the six months ended
January 31, 2001.
H. STOCK COMPENSATION
Had we recorded stock compensation expense within the functional
departments of the employee or director, stock compensation would have been
allocated as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------- ----------------------
2000 2001 2000 2001
------- ------- -------- --------
(IN THOUSANDS)
Cost of revenue ............. $ 37 $ 593 $ 47 $ 997
Research and development .... 82 114 164 200
Selling and marketing ....... 88 3,153 171 5,078
General and administrative .. 17 1,858 (56) 3,019
---- ------ ----- ------
Total .................... $224 $5,718 $ 326 $9,294
==== ====== ===== ======
I. SEGMENT REPORTING
Our operations and corresponding organizational structure is currently
aligned into two segments: (i) Software and Services and (ii) Media based on the
type of products and services offered. Prior to January 31, 2001, our
organizational structure was aligned into three segments; Media, Software and
Services, and Media Management. As part of a corporate restructuring announced
during the quarter ended January 31, 2001, we combined our Media and Media
Management segments into one operating segment. Accordingly, for all periods
presented, our segment information has been reclassified to combine the Media
and Media Management segment information that had previously been separately
reported. Software and Services is primarily engaged in the development and sale
of software that provides a scalable, enterprise-wide set of software
applications to facilitate the development of integrated promotional campaigns
and enable Web publishers, advertisers and merchants to target and deliver
advertisements, content and e-commerce offerings to their audiences. Our
Software and Services segment also provides customers with consulting services,
which include traditional consulting as well as installation, training, and
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
software support. Our Media segment provides a comprehensive system for
planning, buying, selling, and managing Web advertising to advertisers and
agencies in addition to delivering solutions to help advertisers execute,
measure, analyze and optimize their Internet marketing campaigns.
Revenue and gross profit by segment is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------- -------------------
2000 2001 2000 2001
------- ------- ------- -------
(In thousands)
SOFTWARE AND SERVICES
Revenue ................. $ 6,851 $ 8,308 $12,713 $21,718
Gross profit ............ 4,486 1,025 9,145 8,256
MEDIA
Revenue ................. $24,568 $19,813 $38,723 $47,425
Gross profit ............ 2,541 2,123 1,676 5,372
CONSOLIDATED SEGMENT TOTALS
Revenue ................. $31,419 $28,121 $51,436 $69,143
Gross profit ............ 7,027 3,148 10,821 13,628
Assets information by operating segment is not reported since we do not
identify assets by segment.
Revenue and related costs within our Software and Services segment are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ -----------------
2000 2001 2000 2001
------ ------- ------ -------
(In thousands)
PRODUCT
Revenue ............................... $4,516 $2,119 $8,344 $10,643
Cost of revenue ....................... 54 68 59 192
Amortization of developed technology .. - 1,458 - 2,242
SERVICES
Revenue ............................... $2,335 $6,189 $4,369 $11,075
Cost of revenue ....................... 2,311 5,757 3,509 11,028
J. RELATED PARTY TRANSACTIONS
We outsource data center operations and ad serving services from companies
in which CMGI has a significant ownership interest. Total cost of revenue
related to outsourcing from related parties for the three months ended January
31, 2000 and 2001 and the six months ended January 31, 2000 and 2001 was
approximately $3.4 million, $3.1 million, $5.8 million and $6.3 million,
respectively.
K. RESTRUCTURING
In September of fiscal 2001, we implemented a restructuring plan (the "Q1
Restructuring") designed to bring costs in line with revenue and strengthen
our financial performance. The Q1 Restructuring included a reduction of our
workforce by approximately 170 persons or approximately 12% of our worldwide
headcount, and was completed prior to October 31, 2000. Employees affected by
the restructuring were notified both through direct personal contact and by
written notification. In addition to headcount reductions, we have undertaken
plans to close two office locations and consolidate operations. In connection
with the Q1 Restructuring, we incurred severance costs for terminated employees,
accrued future lease costs and wrote off unamortized leasehold improvements for
office locations being closed.
In January of fiscal 2001, we implemented a restructuring plan (the "Q2
Restructuring") designed to further increase operational efficiencies and bring
costs in line with revenue. The Q2 Restructuring, which was approved by our
Board of Directors on December 7, 2000, included a reduction in workforce by
approximately 275 persons or 26% of our worldwide headcount, with the employee
reduction scheduled for completion by April 30, 2001. Employees affected by the
restructuring were notified both through direct personal contact and by written
notification. In addition to headcount reductions, we have undertaken plans to
close various offices. In connection with the Q2 Restructuring, we incurred
severance costs for terminated employees, accrued future lease costs and wrote
off unamortized leasehold improvements and furniture and fixtures for office
locations being closed.
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ENGAGE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The following table sets forth a summary of these restructuring costs and
related charges for our Q1 and Q2 Restructurings and the balance of the
restructuring reserve established (in thousands):
FIXED ASSET FUTURE
SEVERANCE WRITE-OFF LEASE COSTS TOTAL
--------- ----------- ----------- --------
Q1 Restructuring ............ $ 1,852 $ 496 $ 1,782 $ 4,130
Q2 Restructuring ............ 2,493 6,820 7,478 16,791
Cash charges ................ (3,055) - (261) (3,316)
Non-cash charges ............ - (2,874) - (2,874)
------- ------- ------- --------
Reserve balance at
January 31, 2001........... $ 1,290 $ 4,442 $ 8,999 $ 14,731
======= ======= ======= ========
We anticipate that the remaining unpaid restructuring charges will be paid
through July 2001 and April 2002 for the Q1 and Q2 Restructurings, respectively.
L. STOCK OPTION PLAN
In August 2000, our Board of Directors approved the 2000 Equity Incentive
Plan (the "2000 Plan"). Under the 2000 Plan up to 10,000,000 non-qualified stock
options may be granted to employees or consultants of Engage or any affiliate,
except to individuals who are subject to the reporting obligations of Section 16
of the Securities Exchange Act of 1934. The Board of Directors administers this
plan, selects the individuals to whom options will be granted, and determines
the number of shares, vesting period and exercise price of each option.
M. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believe," "plan," "expect," "anticipate" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause our results to differ materially from those indicated
by such forward-looking statements. These factors include those set forth in
this section, the "Factors That May Affect Future Results and Market Price of
Stock" section included in our Annual Report on Form 10-K filed with the SEC on
October 30, 2000, and the risk factors discussed in our other filings with the
SEC.
OVERVIEW
We are a leading provider of enterprise marketing software and interactive
media. At January 31, 2001, we were an approximately 77% owned subsidiary of
CMGI, Inc. Our broad offering of products and services enable marketers, Web
sites and e-commerce merchants to use the Internet as well as other interactive
media to recruit and retain customers. Our products and services allow marketers
to get better results from their marketing campaigns and allow Web sites to
monetize their audiences more effectively. We have generated most of our revenue
to date through sales of advertising management software and outsourced services
and sales of media services.
Our operations and corresponding organizational structures are currently
aligned into two segments: (i) Software and Services and (ii) Media based on the
type of products and services offered. Prior to January 31, 2001, our
organizational structure was aligned into three segments; Media, Software and
Services, and Media Management. As part of a corporate restructuring announced
during the quarter ended January 31, 2001, we combined our Media and Media
Management segments into one operating segment. Accordingly, for all periods
presented, our segment information has been reclassified to combine the Media
and Media Management segment information that had previously been separately
reported. Our Software and Services segment offers customers a host of
enterprise marketing software and services, including software to automate
online advertising management, create and deliver web-site specific local
profiles of Web users and create, plan, deliver and refine integrated
promotional campaigns. Our Media segment offers a range of products and services
that enable Web marketers to target and deliver marketing campaigns to their
desired audience. In addition, the segment offers products and services that
allow Web marketers to execute, analyze, measure and optimize the effectiveness
of their online media campaigns as well as to measure web site traffic. This
segment is primarily made up of the former AudienceNet, Flycast and Adsmart
networks, and our recently launched business-to-business network, as well as
AdKnowledge, Inc. and Internet Profiles Corporation ("I/PRO").
In February 2000, our Board of Directors approved a two-for-one common
stock split, effected in the form of a 100% stock dividend. The stock dividend
was paid on April 3, 2000 to stockholders of record at the close of business on
March 20, 2000. Accordingly, our consolidated financial statements have been
retroactively adjusted for all periods presented to reflect this event. Unless
otherwise indicated, all share information in this Management's Discussion and
Analysis of Financial Condition and Results of Operations reflects the
two-for-one stock split.
In the second fiscal quarter of fiscal 2001, we implemented a restructuring
plan designed to further increase operational efficiencies and bring costs more
in line with revenue. The restructuring included a reduction in workforce by
approximately 275 persons or 26% of our worldwide headcount. The scheduled
completion date of the employee reductions is April 30, 2001. As a result of the
headcount reductions, we have undertaken plans to close various offices. In
connection with the restructuring, we incurred severance costs for terminated
employees, accrued future lease costs and wrote off unamortized leasehold
improvements and furniture and fixtures for office locations being closed.
BUSINESS COMBINATIONS
In April 1998, CMGI acquired Accipiter, Inc., which sells Internet
advertising management solutions, for total purchase consideration of
approximately $31.3 million. In August 1998, Accipiter was merged with us in a
stock-for-stock merger in which shares of our Series A convertible preferred
stock were issued to CMGI. We have reflected the acquisition of Accipiter in our
consolidated financial statements as if it occurred in April 1998.
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In March 1999, Adsmart Corporation ("Adsmart") acquired 2Can Media
("2Can"), an online advertising representation firm, for total purchase
consideration of approximately $33.7 million, inclusive of contingent
consideration paid subsequent to the closing date. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets purchased and liabilities
assumed based upon their fair values at the date of acquisition.
In April 1999, we acquired I/PRO, which provides Web site traffic
measurement and audit services, for total purchase consideration of
approximately $32.7 million. The acquisition has been accounted for using the
purchase method, and accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
date of acquisition.
In December 1999, we acquired AdKnowledge, a provider of products and
services which allow online marketers and ad agencies to plan, target, serve,
track and analyze advertising campaigns, for total purchase consideration of
approximately $161.0 million. The acquisition has been accounted for using the
purchase method, and accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
date of acquisition.
In April 2000, we acquired Adsmart, an online advertising network, and
Flycast Communications Corporation ("Flycast"), a leading provider of Internet
direct response advertising solutions, for total purchase consideration of
approximately $3.24 billion. The acquisitions have been accounted for as a
combination of entities under common control (i.e., "as if pooling"). Our
results of operations reflect the results of operations of Adsmart beginning
April 1, 1996, 2Can beginning March 11, 1999 and Flycast beginning January 13,
2000.
In June 2000, we acquired substantially all of the assets of the Virtual
Billboard Network ("VBN") for total purchase consideration of approximately $4.7
million and ISI for total purchase consideration of approximately $4.8 million.
The acquisitions have been accounted for using the purchase method, and
accordingly, the purchase prices have been allocated to the assets purchased and
liabilities assumed based upon their fair values at the date of acquisition.
In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, KK ("ETJ"), our joint venture with Sumitomo Corporation.
Accordingly, our results of operations reflect the results of operations of ETJ
beginning in June 2000.
In August 2000, we acquired Space Media Holdings Limited ("Space"), a
leading independent Internet marketing network in Asia, in an all-stock
transaction for total purchase consideration of approximately $35.8 million. The
acquisition has been accounted for using the purchase method, and accordingly,
the purchase price has been allocated to the assets purchased and liabilities
assumed based upon their fair values at the date of acquisition.
In September 2000 we acquired MediaBridge Technologies, Inc.
("MediaBridge"), a leading provider of cross-media closed loop targeted
marketing systems, for total purchase consideration of approximately $219.1
million. The acquisition has been accounted for using the purchase method, and
accordingly, the purchase price has been allocated to the assets purchased and
liabilities assumed based upon their fair values at the date of acquisition.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2000 AND JANUARY 31, 2001
REVENUE, COST OF REVENUE AND GROSS MARGIN
SOFTWARE AND SERVICES. Software and Services revenue is derived through the
sale of software licenses and related services. Services include fees charged
for training, installation, software support and maintenance, our outsourced
advertising management solutions and actual consulting for customer specific
requirements. Cost of revenue consists primarily of fees paid for outsourced
data center operations needed to support our AdBureau product as well as
third-party contractor fees, payroll, benefits and allocated overhead of our
support and consulting groups.
Revenue from our Software and Services segment increased from $6.9 million
for the three months ended January 31, 2000 to $8.3 million for the three months
ended January 31, 2001, a 21% increase. Gross margin for the Software and
Services segment decreased from 65% for the three months ended January 31, 2000
to 12% for the three months ended January 31, 2001. The increase in revenue for
the three months ended January 31, 2001 was due to revenue attributed to
MediaBridge, which we acquired on September 11, 2000, partially offset by a 129%
decrease in revenue derived from existing Engage software products. The
decrease in Software and Services gross margin was due to the inclusion of
MediaBridge's results in the quarter ended January 31, 2001, which includes
payroll and related costs for its professional services group, the inclusion of
non-cash amortization of developed technology intangible assets recorded
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as part of the MediaBridge acquisition, and, to a lesser extent, an increased
number of employees within the Software and Services segment. The acquisition of
MediaBridge has changed the revenue mix between products and services, resulting
in an increase in the percentage of segment revenue derived from services. As
services revenue typically has lower margins than product revenue, this has
resulted in decreased margins within our Software and Services segment.
We anticipate that revenue for our Software and Services segment may
increase over the next two to three quarters due primarily to expected revenue
increases for products acquired through our MediaBridge acquisition and due to
new software solutions introduced in January 2001. MediaBridge products are
typically sold to large, well-capitalized companies that we believe may seek
software solutions to improve their businesses.
MEDIA. Media provides a comprehensive system for planning, buying, selling,
and managing Web advertising to advertisers and agencies in addition to
delivering solutions to help advertisers execute, measure, analyze and optimize
their Internet marketing campaigns. A significant portion of Media revenue is
derived primarily from the delivery of advertisements across a network of over
4,400 Web sites. Pricing of advertising is generally based on cost per
advertising impression and varies depending on whether the advertising is run
across the network, across specific categories or on individual Web sites. Cost
of revenue consists primarily of amounts paid to each Web site in the network
based on an agreed upon percentage of the revenue generated by advertisements
run on its site as well as both internal and external ad serving costs.
As part of a corporate restructuring announced during the quarter ended
January 31, 2001, we combined our Media and Media Management segments into one
operating segment. Accordingly, for all periods presented, our segment
information has been reclassified to combine the Media and Media Management
segment information that had previously been separately reported.
Revenue for the Media segment decreased from $24.6 million for the three
months ended January 31, 2000 to $19.8 million for the three months ended
January 31, 2001, a 19% decrease. Gross margin for the Media segment increased
from 10% for the three months ended January 31, 2000 to 11% for the three months
ended January 31, 2001. The decrease in revenue is primarily due to the
continued softness in the overall Media market, partially caused by the
continued loss of "dot com" customers from the market. The increase in the gross
margin percentage for the three months ended January 31, 2001 versus the three
months ended January 31, 2000 was primarily due to the elimination of low or
negative margin guaranteed contracts in the three months ended January 31, 2001,
offset by the impact of a lower revenue base in the three months ended January
31, 2001.
We expect that revenue for our Media segment will continue to be weak
throughout much of the current fiscal year due to excess media inventory in the
market and a continued slow down in spending by "dot com" companies. We believe
that traditional marketers will eventually increase their online advertising
spending and Media revenue will begin to grow at a modest rate in the fourth
quarter of this fiscal year. In an effort to improve our profitability, we have
renegotiated agreements with a majority of the domestic Web sites in our network
to increase the percentage of revenue we retain as well as to require in certain
situations that we recuperate certain costs associated with our ad technology
prior to sharing net revenue with the Web sites; additionally we are in the
process of i) renegotiating agreements with certain of the International Web
sites in our network; ii) terminating certain Web site contracts that are no
longer economically beneficial to us and iii) implementing strategies for
liquidating unsold advertising inventory. While these efforts have reduced the
number of Web sites in our network without significantly reducing our reach,
we believe that such efforts will improve our results of operations and
financial condition.
OPERATING EXPENSES
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
expense was $2.3 million for the three months ended January 31, 2000, resulting
from the AdKnowledge acquisition.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expense. Research and development expenses increased from $5.1
million for the three months ended January 31, 2000 to $10.2 million for the
three months ended January 31, 2001, a 98% increase. This increase was primarily
due to the inclusion of the results of operations of AdKnowledge, Flycast and
MediaBridge for the quarter ended January 31, 2001 and an increase in our
research and development staff. Including acquisitions, the average headcount
for our research and development staff was 70% higher for the quarter ended
January 31, 2001 compared to the quarter ended January 31, 2000. Research and
development expenses were 16% of revenue for the three months ended January 31,
2000, compared to 36% of revenue for the three months ended January 31, 2001.
This increase is largely due to the growth in the number of research and
development employees without a corresponding increase in revenue that we
expected during the quarter ended January 31, 2001.
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SELLING AND MARKETING. Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees, advertising
expenses, costs of attending trade shows and depreciation expense. Selling and
marketing expenses increased from $18.3 million for the three months ended
January 31, 2000 to $26.3 million for the three months ended January 31, 2001, a
44% increase. The increase in costs was primarily due to the inclusion of the
results of operations of AdKnowledge, Flycast, VBN, ISI, Space and MediaBridge
for the quarter ended January 31, 2001. Additionally, in the second through
fourth quarters of fiscal 2000 we increased the size of our sales and marketing
group in anticipation of revenue growth and we significantly expanded our
international sales operations. Overall, including acquisitions and the reasons
noted above, the average headcount for our sales and marketing staff was 47%
higher for the quarter ended January 31, 2001 compared to the quarter ended
January 31, 2000. Sales and marketing expenses were 58% of revenue for the three
months ended January 31, 2000, compared to 94% for the three months ended
January 31, 2001. This increase is largely due to the growth in the number of
sales and marketing employees without a corresponding increase in revenue for
this period.
GENERAL AND ADMINISTRATIVE. General and administrative costs consist
principally of payroll and related costs, consulting and professional fees,
facilities and related costs, bad debt expense and depreciation expense. General
and administrative expenses increased from $5.0 million for the three months
ended January 31, 2000 to $11.6 million for the three months ended January 31,
2001, a 131% increase. Approximately 58% of the increase in general and
administrative expense was due to additional bad debt expense recorded in the
quarter ended January 31, 2001, as compared to the quarter ended January 31,
2000. The incremental bad debt expense relates principally to uncollectible
accounts with our Media segment resulting from the large number of "dot com"
companies that are troubled or have gone out of business subsequent to January
31, 2000. The remainder of the increase in general and administrative costs is
due primarily to an increase in payroll and related costs associated with
developing an administrative infrastructure to support operations and the
inclusion of the results of operations of AdKnowledge, Flycast, Space and
MediaBridge for the quarter ended January 31, 2001. General and administrative
costs were 16% of revenue for the three months ended January 31, 2000, compared
to 41% for the three months ended January 31, 2001, primarily due to increased
bad debt expense recorded in the three months ended January 31, 2001 and the
shortfall in expected revenue we experienced in our most recent quarter, without
a corresponding decrease in general and administrative costs.
AMORTIZATION AND IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES. Amortization
of intangible assets increased from $27.6 million for the three months ended
January 31, 2000 to $628.3 million for the three months ended January 31, 2001.
During the three months ended January 31, 2001, we recorded impairment charges
totaling approximately $521.8 million as a result of management's business
review and impairment analysis performed at January 31, 2001, under its existing
policy regarding impairment of long-lived assets. Impairment charges were
recorded on intangibles assets generated from our acquisitions of Adsmart,
I/PRO, AdKnowledge, Flycast, VBN, and Space. Where impairment indicators were
identified, management determined the amount of the impairment charge by
comparing the carrying value of goodwill and certain other intangible assets to
their fair value. Management determines fair value utilizing a combination of
the discounted cash flow methodology, which is based upon converting expected
future cash flows to present value, and the market approach, which includes
analysis of market price multiples of companies engaged in lines of business
similar to our business. The market price multiples are selected and applied to
us based on the relative performance, future prospects and risk profile of
Engage in comparison to the guideline companies. We continued to see sequential
declines in operating results for our media business during the second quarter
of fiscal 2001, primarily as a result of the continued weak overall demand in
the Internet advertising market. As a result, during management's quarterly
review of the value and periods of amortization of both goodwill and other
intangible assets, it was determined that the carrying value of goodwill and
certain other intangible assets within our Media segment were not fully
recoverable. Given that we operate in a volatile environment, it is reasonably
possible that the impairment factors we evaluated will change in subsequent
periods. This could result in material impairment charges in future periods.
Additionally, the increase in amortization expense was due in part to
amortization expense resulting from our acquisitions of AdKnowledge in December
1999, Flycast in January 2000, VBN and ISI in June 2000, Space in August 2000
and MediaBridge in September 2000. Intangible assets recorded for all of the
aforementioned acquisitions are being amortized over two-three years under the
straight-line method.
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RESTRUCTURING. In January of fiscal 2001, we implemented a restructuring
plan (the "Q2 Restructuring") designed to further increase operational
efficiencies and bring costs in line with revenue. The Q2 Restructuring
included a reduction in workforce by approximately 275 persons or 26% of our
worldwide headcount, with a scheduled completion date of April 30, 2001.
Employees affected by the restructuring were notified both through direct
personal contact and by written notification. In addition to headcount
reductions, we have undertaken plans to close various offices. In connection
with the Q2 Restructuring, we incurred severance costs for terminated employees,
accrued future lease costs and wrote off unamortized leasehold improvements and
furniture and fixtures for office locations being closed. As a result of the Q2
Restructuring we have recorded restructuring expense of $16.8 million during the
three months ended January 31, 2001.
STOCK COMPENSATION. Stock compensation expense increased from $224,000 for
the three months ended January 31, 2000 to $5.7 million for the three months
ended January 31, 2001. Substantially all of the increase relates to
amortization of deferred compensation recorded as part of our acquisitions of
Space and MediaBridge. We recorded $18.9 million of deferred compensation
related to approximately 1,525,000 common shares issuable to the employee
shareholders of Space contingent upon the employees' remaining with us for one
year after the date of acquisition. The amount recorded as deferred compensation
for Space is being amortized to expense over the one-year employment
continuation period. We also recorded approximately $7.0 million of deferred
compensation related to the intrinsic value of stock options issued to
MediaBridge employees. The amount recorded as deferred compensation for
MediaBridge is being amortized to expense over three years, the remaining
vesting period of the related stock options. Finally, approximately $635,000 of
the increase is the result of stock compensation recorded in connection with the
acceleration of stock options granted to several executives whose employment
with Engage was terminated during the second quarter of fiscal 2001.
EQUITY IN LOSS OF JOINT VENTURE
Equity in loss of joint venture for the three months ended January 31, 2000
represented our share of our Japanese joint venture's losses. Equity in loss of
joint venture was $374,000 in the three months ended January 31, 2000. In June
2000, we acquired a majority ownership position of Engage Technologies Japan,
and, accordingly, began consolidating the results of operations of Engage
Technologies Japan and ceased recognizing equity in loss of joint venture
expense.
MINORITY INTEREST
Minority interest for the three months ended January 31, 2001 was
$312,000. In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, and, accordingly, began consolidating the results of
operations of Engage Technologies Japan. Minority interest for the three months
ended January 31, 2001 reflects the minority shareholders' share of the losses
of Engage Technologies Japan for the three-month period.
INTEREST INCOME
Interest income increased from $1.4 million for the three months ended
January 31, 2000 to $1.6 million for the three months ended January 31, 2001, an
11% increase. The increase in interest income was primarily due to an increase
in the rates of return on our cash equivalents and short-term investments during
the three months ended January 31, 2001 as compared to the three months ended
January 31, 2000.
INTEREST EXPENSE
Interest expense decreased from $685,000 for the three months ended January
31, 2000 to $278,000 for the three months ended January 31, 2001, a 59%
decrease. During fiscal 1998, Adsmart entered into an arrangement with CMGI that
required Adsmart to accrue interest on Adsmart's intercompany debt with CMGI at
a rate of 7% per annum. During the three months ended January 31, 2000, interest
expense was recorded on this debt, all of which was converted into equity in
connection with the closing of our acquisition of Adsmart in April 2000.
Interest expense recorded in the three months ended January 31, 2001 relates
principally to capital lease obligations and notes payable assumed as part of
the AdKnowledge and Flycast acquisitions.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 31, 2000 AND JANUARY 31, 2001
REVENUE, COST OF REVENUE AND GROSS MARGIN
SOFTWARE AND SERVICES. Revenue from our Software and Services segment
increased from $12.7 million for the six months ended January 31, 2000 to $21.7
million for the six months ended January 31, 2001, a 71% increase. Gross margin
for the Software and Services segment decreased from 72% for the six months
ended January 31, 2000 to 38% for the six months ended January 31, 2001. The
increase in revenue for the six months ended January 31, 2001 was due to
additional revenue attributable to MediaBridge, which we acquired on September
11, 2000, partially offset by a 7% decrease in revenue derived from existing
Engage software products . The decrease in Software and Services gross margin
was due to the inclusion of MediaBridge's results in the six months ended
January 31, 2001, which includes payroll and related costs for its professional
services group, the inclusion of non-cash amortization of developed technology
intangible assets recorded as part of the MediaBridge acquisition, and to a
lesser extent an increased number of employees. The acquisition of MediaBridge
has changed the revenue mix between products and services, resulting in an
increase in the percentage of segment revenue derived from services. As services
revenue typically has lower margins than product revenue, this has resulted in
decreased margins within our Software and Services segment.
MEDIA. Revenue for the Media segment increased from $38.7 million for the
six months ended January 31, 2000 to $47.4 million for the six months ended
January 31, 2001, a 22% increase. Gross margin for the Media segment increased
from 4% for the six months ended January 31, 2000 to 11% for the six months
ended January 31, 2001. The increase in revenue is primarily due to the
acquisitions of AdKnowledge and Flycast. The increase in the gross margin
percentage for the six months ended January 31, 2001
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versus the six months ended January 31, 2000 was primarily due to a reduction in
the number of low or negative margin guaranteed contracts in the six months
ended January 31, 2001.
OPERATING EXPENSES
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
expense was $2.3 million for the six months ended January 31, 2000, resulting
from the AdKnowledge acquisition. In-process research and development expense
was $700,000 for the six months ended January 31, 2001, resulting from the
MediaBridge acquisition.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$8.4 million for the six months ended January 31, 2000 to $21.6 million for the
six months ended January 31, 2001, a 157% increase. This increase was primarily
due to the inclusion of the results of operations of AdKnowledge, Flycast and
MediaBridge for the six months ended January 31, 2001 and an increase in our
research and development staff. Including acquisitions, the average headcount
for our research and development staff was 107% higher for the six months ended
January 31, 2001 compared to the six months ended January 31, 2000. Research and
development expenses were 16% of revenue for the six months ended January 31,
2000, compared to 31% of revenue for the six months ended January 31, 2001. This
increase is largely due to the growth in the number of research and development
employees without the increase in revenue that we expected during the six months
ended January 31, 2001.
SELLING AND MARKETING. Selling and marketing expenses increased from $30.3
million for the six months ended January 31, 2000 to $58.7 million for the six
months ended January 31, 2001, a 94% increase. The increase in costs was
primarily due to the inclusion of the results of operations of AdKnowledge,
Flycast, VBN, ISI, Space and MediaBridge for the quarter ended January 31, 2001.
Additionally, in the second through fourth quarters of fiscal 2000, we increased
our sales and marketing group in anticipation of revenue growth and we
significantly expanded our international sales operations. Overall, including
acquisitions and the reasons noted above, the average headcount for our sales
and marketing staff was 78% higher for the six months ended January 31, 2001
compared to the six months ended January 31, 2000. Additionally, a portion of
the increase in sales and marketing expenses was caused by an increase in
advertising spending during the first quarter of fiscal 2001 in an effort to
brand the Engage name and build market awareness for our consolidated product
offerings. Sales and marketing expenses were 59% of revenue for the six months
ended January 31, 2000, compared to 85% for the six months ended January 31,
2001. This increase is largely due to the growth in the number of sales and
marketing employees without a related increase in revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $7.8 million for the six months ended January 31, 2000 to $29.4 million for
the six months ended January 31, 2001, a 276% increase. Approximately 66% of the
increase in general and administrative expense was due to bad debt expense of
$15.0 million recorded in the six months ended January 31, 2001, as compared to
$748,000 in the six months ended January 31, 2000. The incremental bad debt
expense relates principally to uncollectible accounts with our Media segment
resulting from the large number of "dot com" companies that are troubled or have
gone out of business subsequent to January 31, 2000. The remainder of the
increase in general and administrative costs is due primarily to an increase in
payroll and related costs associated with developing an administrative
infrastructure to support operations and the inclusion of the results of
operations of AdKnowledge, Flycast, Space and MediaBridge for the six months
ended January 31, 2001. General and administrative costs were 15% of revenue for
the six months ended January 31, 2000, compared to 42% for the six months ended
January 31, 2001, primarily due to increased bad debt expense recorded in the
six months ended January 31, 2001 and the shortfall in expected revenue we
experienced in our most recent six-month period, without a corresponding
decrease in general and administrative costs.
AMORTIZATION AND IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES. Amortization
of intangible assets increased from $31.8 million for the six months ended
January 31, 2000 to $744.2 million for the six months ended January 31, 2001.
During the six months ended January 31, 2001, we recorded impairment charges
totaling approximately $538.6 million as a result of management's business
review and impairment analysis performed during the six month period, under its
existing policy regarding impairment of long-lived assets. Impairment charges
were recorded on intangibles assets generated from our acquisitions of Adsmart,
I/PRO, AdKnowledge, Flycast, VBN, and Space. Where impairment indicators were
identified, management determined the amount of the impairment charge by
comparing the carrying value of goodwill and certain other intangible assets to
their fair value. Management determines fair value utilizing a combination of
the discounted cash flow methodology, which is based upon converting expected
future cash flows to present value, and the market approach, which includes
analysis of market price multiples of companies engaged in lines of business
similar to our business. The market price multiples are selected and applied to
us based on the relative performance, future prospects and risk profile of
Engage in comparison to the guideline companies. We continued to see
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sequential declines in operating results for our Media business during the first
six months of fiscal 2001, primarily as a result of the continued weak overall
demand in the Internet advertising market. As a result, during management's
quarterly review of the value and periods of amortization of both goodwill and
other intangible assets, it was determined that the carrying value of goodwill
and certain other intangible assets within our Media segment were not fully
recoverable. Additionally, the increase in amortization expense was due in part
to amortization expense resulting from our acquisitions of AdKnowledge in
December 1999, Flycast in January 2000, VBN and ISI in June 2000, Space in
August 2000 and MediaBridge in September 2000. Intangible assets recorded for
all of the aforementioned acquisitions are being amortized over two-three years
under the straight-line method.
RESTRUCTURING. In September of fiscal 2001, we implemented a restructuring
plan (the "Q1 Restructuring") designed to bring costs in line with revenue and
strengthen our financial performance. The Q1 Restructuring included a reduction
of our workforce by approximately 170 persons or approximately 12% of our
worldwide headcount, and was completed prior to October 31, 2000. Employees
affected by the restructuring were notified both through direct personal contact
and by written notification. In addition to headcount reductions, we have
undertaken plans to close two office locations and consolidate operations. In
connection with the Q1 Restructuring, we incurred severance costs for terminated
employees, accrued future lease costs and wrote off unamortized leasehold
improvements for office locations being closed. In January of fiscal 2001, we
implemented a restructuring plan (the "Q2 Restructuring") designed to further
increase operational efficiencies and bring costs more in line with revenue. The
Q2 Restructuring included a reduction in workforce by approximately 275 persons
or 26% of our worldwide headcount, with a scheduled completion date of April 30,
2001. Employees affected by the restructuring were notified both through direct
personal contact and by written notification. In addition to headcount
reductions, we have undertaken plans to close various offices. In connection
with the Q2 Restructuring, we incurred severance costs for terminated employees,
accrued future lease costs and wrote off unamortized leasehold improvements and
furniture and fixtures for office locations being closed. As a result of the Q1
and Q2 Restructurings we have recorded restructuring expense of $20.9 million
during the six months ended January 31, 2001.
STOCK COMPENSATION. Stock compensation expense increased from $326,000 for
the six months ended January 31, 2000 to $9.3 million for the six months ended
January 31, 2001. Substantially all of the increase relates to amortization of
deferred compensation recorded as part of our acquisitions of Space and
MediaBridge. We recorded $18.9 million of deferred compensation related to
approximately 1,525,000 common shares issuable to the employee shareholders of
Space contingent upon the employees' remaining with us for one year after the
date of acquisition. The amount recorded as deferred compensation for Space is
being amortized to expense over the one-year employment continuation period. We
also recorded approximately $7.0 million of deferred compensation related to the
intrinsic value of stock options issued to MediaBridge employees. The amount
recorded as deferred compensation for MediaBridge is being amortized to expense
over three years, the remaining vesting period of the related stock options.
Finally, approximately $635,000 of the increase is the result of stock
compensation recorded in connection with the acceleration of stock options
granted to several executives whose employment with Engage was terminated during
the second quarter of fiscal 2001.
EQUITY IN LOSS OF JOINT VENTURE
Equity in loss of joint venture for the six months ended January 31, 2000
represented our share of our Japanese joint venture's losses. Equity in loss of
joint venture was $700,000 in the six months ended January 31, 2000. In June
2000, we acquired a majority ownership position of Engage Technologies Japan
and, accordingly, began consolidating the results of operations of Engage
Technologies Japan and ceased recognizing equity in loss of joint venture
expense.
MINORITY INTEREST
Minority interest for the six months ended January 31, 2001 was $655,000.
In June 2000, we acquired a majority ownership position in Engage Technologies
Japan, and, accordingly, began consolidating the results of operations of
Engage Technologies Japan. Minority interest for the six months ended January
31, 2001 reflects the minority shareholders' share of the losses of Engage
Technologies Japan for the six-month period.
INTEREST INCOME
Interest income increased from $2.8 million for the six months ended
January 31, 2000 to $3.6 million for the six months ended January 31, 2001, a
30% increase. The increase in interest income was due to an increase in our
average cash and investment balances in the six months ended January 31, 2001 as
compared to the six months ended January 31, 2000 and an increase in the rates
of return on those investments during the six months ended January 31, 2001.
INTEREST EXPENSE
Interest expense decreased from $1.0 million for the six months ended
January 31, 2000 to $627,000 for the six months ended January 31, 2001, a 40%
decrease. During fiscal 1998, Adsmart entered into an arrangement with CMGI that
required Adsmart to accrue interest on Adsmart's intercompany debt with CMGI at
a rate of 7% per annum. During the six months ended January 31, 2000, interest
expense was recorded on this debt, all of which was converted into equity in
connection with the closing of our acquisition of Adsmart in April 2000.
Interest expense recorded in the six months ended January 31, 2001 relates
principally to capital lease obligations and notes payable assumed as part of
the AdKnowledge and Flycast acquisitions.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and available-for-sale securities decreased
from $136.0 million at July 31, 2000 to $77.1 million at January 31, 2001. Net
cash used in operating activities was $58.4 million for the six months ended
January 31, 2001. Cash used in operating activities resulted primarily from net
losses and a decrease in accounts payable, which were partially offset by an
increase in accrued expenses and restructuring costs and a decrease in accounts
receivable, due in part to increased bad debt exposure. Net cash provided by
investing activities was $13.1 million for the six months ended January 31,
2001, primarily from the redemption of available-for-sale securities, offset
somewhat by investments to upgrade our network infrastructure equipment and
costs incurred to improve our office space. Net cash provided by financing
activities was $2.3 million and consisted primarily of proceeds received from
the exercise of stock options offset somewhat by the repayment of capital lease
obligations and long-term borrowings.
As of January 31, 2001, we had $77.1 million of cash and cash equivalents
and available-for-sale securities. We anticipate that expenses will continue to
decline as we begin to more fully realize the results of our restructuring
efforts during the next two quarters.
CMGI has committed to make available to us up to $50.0 million in the form
of debt, equity, or a combination thereof to fund our working capital
requirements, subject to negotiation of mutually acceptable terms and conditions
and approval of both companies' respective Board of Directors. We anticipate
that our available cash, combined with the funds available from the CMGI
commitment will be sufficient to support our operations through the next two
quarters, and assuming our objective to break-even on a cash basis by the end of
the first quarter of fiscal 2002, the next twelve months. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced and our stockholders
may experience dilution of their interest in us. If adequate funds are not
available or are not available on acceptable terms, our ability to continue as a
going concern, to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures may be significantly limited.
FOREIGN OPERATIONS
The results of our international operations are subject to currency
fluctuations. As of January 31, 2001, we had subsidiaries throughout Europe and
the Asia Pacific region. To date, our financial condition and results of
operations have not been materially affected by exchange rate fluctuations.
However, as these operations continue to grow, and operations are commenced in
additional countries, there can be no guarantee that our financial condition and
results of operations will not be adversely affected by exchange rate
fluctuations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying values of financial instruments including cash and cash
equivalents, available-for-sale securities, accounts receivable, accounts
payable and notes payable, approximate fair value because of the short maturity
of these instruments.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, has not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may increase. Therefore, in the
future, we may consider utilizing derivative instruments to mitigate such risks.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on December 20, 2000,
and the following matters were voted on at that meeting:
1. The election of Edward A. Bennett, Christopher A. Evans, Andrew J.
Hajducky, III, Fredric D. Rosen, Anthony G. Nuzzo and David S.
Wetherell, each to serve until the next annual meeting of stockholders
or until their successors are duly elected and qualified. The
following chart shows the number of votes cast for or against each
director, as well as the number of abstentions and broker nonvotes:
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTE
Edward Bennett 173,558,021 140,392 N/A N/A
Christopher Evans 173,558,921 139,492 N/A N/A
Andrew Hajducky 173,472,067 226,346 N/A N/A
Fredric Rosen 173,555,421 142,992 N/A N/A
Anthony Nuzzo 173,467,329 231,084 N/A N/A
David Wetherell 173,474,039 224,374 N/A N/A
2. The proposal to ratify the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ended July 31, 2001. The
following chart shows the number of votes cast for or against the
proposal, as well as the number of abstentions and broker nonvotes:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
173,525,200 60,807 112,406 N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Sublease by and between CMGI, Inc. and the Company, dated November 1, 2000.
10.2 Executive Retention Agreement by and between the Company and Anthony Nuzzo
(b) Reports on Form 8-K
On November 17, 2000, the Company filed an amendment to its report on Form
8-K in connection with the Company's acquisition of MediaBridge Technologies,
Inc. on September 11, 2000.
On January 16, 2001, the Company filed a report on Form 8-K announcing that
it was undertaking a reorganization pursuant to which it was reducing its
headcount by approximately fifty percent.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Andover, Massachusetts on
March 19, 2001.
By: /s/ Anthony G. Nuzzo
--------------------------------------
Anthony G. Nuzzo
Chief Executive Officer and President
By: /s/ Robert W. Bartlett
--------------------------------------
Robert W. Bartlett
Executive V.P., Chief Financial Officer
and Treasurer (Principal Accounting and
Financial Officer of the Registrant)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
10.1 Sublease by and between CMGI, Inc. and the Company, dated
November 1, 2000.
10.2 Executive Retention Agreement by and between the Company and
Anthony Nuzzo
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