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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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) (Zip Code)
(978) 684-3884
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No { ]
The number of shares outstanding of the registrant's Common Stock as of
December 1, 2001 was 196,567,656.
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ENGAGE, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2001
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of July 31, 2001 and
October 31, 2001 (unaudited)................................... 3
b) Consolidated Statements of Operations (unaudited) for the
three months ended October 31, 2000 and 2001................... 4
c) Consolidated Statements of Cash Flows (unaudited) for the
three months ended October 31, 2000 and 2001................... 5
d) Notes to Interim Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES
EXHIBIT INDEX
2
ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
JULY 31, OCTOBER 31,
2001 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 33,261 $ 30,013
Accounts receivable, less allowance for doubtful accounts of $1,782 and $1,640 at
July 31, 2001 and October 31, 2001 respectively ........................................ 8,357 7,236
Prepaid expenses ......................................................................... 1,221 1,539
Current assets of discontinued operations ................................................ 13,016 5,686
----------- -----------
Total current assets ............................................................... 55,855 44,474
----------- -----------
Property and equipment, net ................................................................ 7,094 6,291
Intangible assets, net of accumulated amortization of $83,180 and $90,504 at July 31, 2001
and October 31, 2001, respectively ....................................................... 61,389 54,065
Other assets ............................................................................... 7,258 2,538
Non-current assets of discontinued operations .............................................. 1,241 1,141
----------- -----------
Total assets ........................................................................... $ 132,837 $ 108,509
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligation under capital lease ........................................ $ 2,806 $ 2,792
Current portion of long-term debt ........................................................ 1,693 1,959
Debt to CMGI ............................................................................. -- 52,064
Accounts payable ......................................................................... 5,903 4,449
Due to CMGI affiliates ................................................................... 1,699 1,378
Accrued expenses ......................................................................... 38,396 19,433
Deferred revenue ......................................................................... 6,365 3,982
----------- -----------
Total current liabilities .............................................................. 56,862 86,057
----------- -----------
Due to CMGI ................................................................................ 39,821 --
Deferred revenue ........................................................................... 24 --
Obligation under capital lease, net of current portion ..................................... 759 628
Long-term debt, net of current portion ..................................................... 266 --
Other long-term liabilities ................................................................ 396 382
----------- -----------
Total liabilities ...................................................................... 98,128 87,067
----------- -----------
Minority interest .......................................................................... 6,755 6,833
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, 0 shares issued and
outstanding at July 31, 2001 and October 31, 2001, respectively ....................... -- --
Common stock, $.01 par value, 350,000 shares authorized, 196,539 and 195,510 shares issued
and outstanding at July 31, 2001 and October 31, 2001, respectively .................. 1,965 1,956
Additional paid-in capital ............................................................... 3,774,494 3,717,719
Deferred compensation .................................................................... (4,337) (2,598)
Accumulated other comprehensive income ................................................... 558 399
Accumulated deficit ...................................................................... (3,744,726) (3,702,867)
----------- -----------
Total stockholders' equity ............................................................. 27,954 14,609
----------- -----------
Total liabilities and stockholders' equity ............................................. $ 132,837 $ 108,509
=========== ===========
See accompanying notes to interim consolidated financial statements.
3
ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 2001
--------- ---------
Product revenue ............................................... $ 7,704 $ 986
Product revenue, related parties .............................. 820 26
Services and support revenue .................................. 4,693 5,380
Services and support revenue, related parties ................. 193 266
--------- ---------
Total revenue .......................................... 13,410 6,658
--------- ---------
Cost of product revenue ....................................... 25 (142)
Cost of services and support revenue .......................... 5,370 4,821
Amortization of developed technology .......................... 784 1,458
--------- ---------
Total cost of revenue .................................. 6,179 6,137
--------- ---------
Gross profit ......................................... 7,231 521
--------- ---------
Operating expenses:
In-process research and development ...................... 700 --
Research and development ................................. 2,536 2,419
Selling and marketing .................................... 15,344 3,264
General and administrative ............................... 4,535 2,636
Amortization and impairment of goodwill and other
intangibles ............................................ 10,724 5,866
Restructuring costs ...................................... 859 975
Stock compensation ....................................... 355 362
--------- ---------
Total operating expenses ............................... 35,053 15,522
--------- ---------
Operating loss ....................................... (27,822) (15,001)
Other income (expense):
Interest income .......................................... 1,897 243
Interest expense ......................................... (27) (406)
Minority interest ........................................ 343 93
Other income (expense), net .............................. (42) 161
--------- ---------
Loss from continuing operations ...................... (25,651) (14,910)
--------- ---------
Loss from discontinued operations ............................. (148,166) --
--------- ---------
Net loss ...................................................... $(173,817) $ (14,910)
========= =========
Basic and diluted net loss per share data:
Continuing operations ......................................... $ (0.14) $ (0.08)
Discontinued operations ....................................... (0.78) --
--------- ---------
Basic and diluted net loss per share .......................... $ (0.92) $ (0.08)
========= =========
Weighted average number of basic and diluted shares outstanding 188,739 196,615
========= =========
See accompanying notes to interim consolidated financial statements.
4
ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2000 2001
--------- ----------
Cash flows from operating activities:
Net loss ........................................................... $(173,817) $ (14,910)
Loss from discontinued operations .................................. (148,166) --
--------- ---------
Loss from continuing operations .................................... (25,651) (14,910)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization .................................. 9,821 8,220
Provision for bad debts ........................................ 296 89
Stock compensation ............................................. 355 362
Amortization of discount on available-for-sale securities ...... (6) --
Loss on disposal of property and equipment ..................... -- 277
Minority interest .............................................. (456) 93
In-process research and development ............................ 700 --
Changes in operating assets and liabilities, net of impact of
acquisitions:
Accounts receivable ....................................... 2,075 1,032
Prepaid expenses and other assets ......................... (1,728) 4,357
Due to CMGI and affiliates ................................ 2,245 3,923
Accounts payable .......................................... (11,492) (1,454)
Accrued expenses .......................................... 3,619 (17,640)
Deferred revenue .......................................... 628 (2,406)
--------- ---------
Net cash used for continuing operations ............... (19,594) (18,057)
Net cash provided by (used for) discontinued operations (9,988) 7,430
--------- ---------
Net cash used for operating activities ................ (29,582) (10,627)
--------- ---------
Cash flows from investing activities:
Proceeds from redemption of available-for-sale securities .......... 15,732 --
Net cash acquired on acquisition of subsidiaries ................... 2,706 --
Purchases of property and equipment ................................ (4,651) (282)
--------- ---------
Net cash provided by (used for) investing activities .. 13,787 (282)
--------- ---------
Cash flows from financing activities:
Net change in debt to CMGI ......................................... -- 8,000
Proceeds from issuance of common stock, net of issuance costs and
repurchases ....................................................... 4,430 25
Repayment of capital lease obligations ............................. (889) (146)
Repayment of long-term debt ........................................ (528) --
--------- ---------
Net cash provided by financing activities ............. 3,013 7,879
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ............ 248 (218)
--------- ---------
Net decrease in cash and cash equivalents ............................... (12,534) (3,248)
Cash and cash equivalents, beginning of period .......................... 119,809 33,261
--------- ---------
Cash and cash equivalents, end of period ................................ $ 107,275 $ 30,013
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................... $ 27 $ 28
========= =========
See accompanying notes to interim consolidated financial statements.
5
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, these unaudited consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of our management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of our financial position,
results of operations and cash flows at the dates and for the periods indicated.
While we believe that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 2001 which are contained in our Annual Report on Form
10-K filed with the Securities and Exchange Commission (the "SEC") on October
29, 2001. The results for the three-month period ended October 31, 2001 are not
necessarily indicative of the results to be expected for the full fiscal year.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Discontinued Operations
In April 2001 we announced the sale of certain assets of Internet Profiles
Corporation ("I/PRO"). In September 2001, we announced the sale of certain
assets of our AdKnowledge media service and the shutdown of our media network,
both of which, combined with I/PRO, comprised our Media segment. Our media
operations ceased in October 2001. The Media segment has been accounted for as a
discontinued operation. Accordingly, the Media segment's current and non-current
assets have been segregated from continuing operations in the accompanying
consolidated balance sheet, and its operating results have been segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows, and related notes. No liabilities associated with
discontinued operations were assumed by a third party. Revenue and loss from
discontinued operations for the three months ended October 31, 2000 were $27.6
million and $148.2 million, respectively.
The assets identified as part of the disposition of the Media segment are
recorded as current assets of discontinued operations or non-current assets of
discontinued operations; the cash flow of the segment is reported as net cash
used for discontinued operations; and the results of operations of the segment
are reported as loss from discontinued operations. Current assets of
discontinued operations consists of the following:
JULY 31, OCTOBER 31,
2001 2001
---------- ----------
(IN THOUSANDS)
Accounts receivable, net of allowance for doubtful accounts.................................. $ 12,008 $ 4,988
Other current assets......................................................................... 1,008 698
---------- ----------
Total current assets of discontinued operations.................................... $ 13,016 $ 5,686
========== ==========
Non-current assets of discontinued operations consists of the following:
JULY 31, OCTOBER 31,
2001 2001
---------- -----------
(IN THOUSANDS)
Property and equipment, net of accumulated depreciation and amortization..................... $ 701 $ 701
Other assets................................................................................. 540 440
---------- ----------
Total non-current assets of discontinued operations................................. $ 1,241 $ 1,141
========== ==========
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.
6
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
At October 31, 2001, we had outstanding stock options to purchase
13,828,802 shares of common stock at a weighted average exercise price of $6.57
that could potentially dilute earnings per share, including 2,340,967 stock
options at a weighted average exercise price of $0.17 that were in-the-money.
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. DIVIDEND TO CMGI
Under the terms of the Flycast Merger Agreement, upon the exercise of CMGI
options by former Flycast employees, CMGI is obligated to pay us the exercise
price of the related CMGI options issued to the former Flycast employees as part
of CMGI's acquisition of Flycast. Additionally, in the event that former Flycast
employees terminate their employment with us, their unexercised CMGI options are
cancelled and CMGI is obligated to return Engage common shares to us based on
the number of CMGI options cancelled multiplied by the exchange ratio as defined
in the Merger Agreement. Engage common shares returned to us are valued based
upon the per share value originally used to record the non-cash dividend to
CMGI. Any cash or Engage common shares returned to us are treated as a reduction
to the previously recorded dividend to CMGI. A reconciliation of the net
dividend to CMGI recorded as a component of accumulated deficit for the three
months ended October 31, 2001 is as follows:
(IN THOUSANDS)
Net cumulative dividend to CMGI recorded as of July 31, 2001..................................... $ 2,005,138
Value of Engage common shares due from CMGI for option cancellations for the
period August 1, 2001 through October 31, 2001................................................ (56,768)
Cash consideration for exercise price of CMGI stock options exercised from
August 1, 2001 through October 31, 2001....................................................... (1)
-------------
Cumulative net dividend to CMGI as of October 31, 2001...................................... $ 1,948,369
=============
D. COMPREHENSIVE LOSS
The components of 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
OCTOBER 31,
----------------------------
2000 2001
--------- ----------
(IN THOUSANDS)
Net loss...................................................... $(173,817) $ (14,910)
Foreign currency adjustments.................................. 125 (114)
Net unrealized holding gain (loss) arising during the period.. 34 (45)
--------- ---------
Comprehensive loss....................................... $(173,658) $ (15,069)
========= =========
E. NON-CASH TRANSACTIONS
During both the three months ended October 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 $320,000 and $35,000 in both
deferred compensation and additional paid-in capital in the three months ended
October 31, 2000 and 2001, respectively.
During the three months ended October 31, 2000, Engage acquired MediaBridge
through the issuance of shares of Engage common stock.
During the three months ended October 31, 2000 and 2001, as a result of the
termination of employment of former Flycast employees, non-cash financing
activities included the return of shares of Engage common stock previously
issued to CMGI as part of our acquisition of Flycast Communications Corporation.
As a result, we have recorded a reduction of additional paid-in capital and
dividend to CMGI (included within accumulated deficit) of approximately $57.7
million and $56.8 million in the three months ended October 31, 2000 and 2001,
respectively.
7
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
During the three months ended October 31, 2001, approximately $44.1 million
in amounts payable to CMGI were formally converted to secured debt to CMGI (see
Note G).
F. 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
OCTOBER 31,
-------------------------
2000 2001
---- ----
(IN THOUSANDS)
Cost of revenue.................................. $ 87 $ 111
Research and development......................... 65 103
Selling and marketing............................ 167 130
General and administrative....................... 36 18
--------- ----------
Total......................................... $ 355 $ 362
========= =========
G. DEBT TO CMGI
In October 2001, CMGI agreed to loan us $8.0 million under a secured
convertible demand note payable bearing interest at 7.5%. Under the terms of the
note payable, principal and interest will become due and payable on demand any
time on or after August 1, 2002 or earlier upon the occurrence of an event of
default as defined in the note. The principal and/or interest is convertible, at
CMGI's election, into our common stock at a conversion price of $0.25 per share.
In addition, the note contains an anti-dilution provision whereby the conversion
price may be adjusted downward if we were to issue any shares of common stock in
the future at a price per share less than the then current market price. The
note is collateralized by substantially all of our assets.
In October 2001, we also restructured our outstanding amounts payable to
CMGI into a secured promissory note payable in the amount of $42.7 million
bearing interest at 7.5%. Under the terms of the note payable, principal and
interest will become due and payable on demand any time on or after August 1,
2002 or earlier upon the occurrence of an event of default as defined in the
note. The note is collateralized by substantially all of our assets.
In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us in our fiscal year 2002 subsequent to October 1, 2001 under a
secured convertible promissory note bearing interest at 7.5%. Under the terms of
the promissory note, principal and interest will become due and payable on
demand any time on or after August 1, 2002 or earlier upon the occurrence of an
event of default as defined in the note. The principal and/or interest on the
intercompany debt incurred each calendar month under the note will be
convertible, at CMGI's election, into our common stock at a conversion price
equal to the closing price of our common stock on the last trading day of such
calendar month. In addition, the note contains an anti-dilution provision
whereby the conversion price may be adjusted downward if we were to issue any
shares of common stock in the future at a price per share less than the then
current market price. The note is collateralized by substantially all of our
assets. Debt incurred under this agreement was approximately $1.4 million as of
October 31, 2001.
H. RELATED PARTY TRANSACTIONS
We outsourced data center operations from companies in which CMGI has a
significant ownership interest. Total cost of revenue related to outsourcing
from related parties for the three months ended October 31, 2000 and 2001 was
approximately $3.2 million and $650,000, respectively.
I. RESTRUCTURING
In the first fiscal quarter of fiscal 2001, we implemented a restructuring
plan designed to bring costs more in line with revenue and strengthen our
financial performance. The restructuring plan included a reduction of our
workforce by approximately 170 persons or approximately 12% of our worldwide
headcount. All of these actions were completed prior to October 31, 2000. As a
result of the reduction in headcount, we undertook plans to close two office
locations and consolidate operations. In connection with this restructuring
plan, we incurred severance costs for terminated employees, accrued future lease
costs and wrote off unamortized
8
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
leasehold improvements for office locations being closed.
In the first fiscal quarter of fiscal 2002, we implemented a restructuring
plan designed to reduce corporate overhead costs by reducing the size of the
company's finance and marketing staffs, as well as several senior management
positions. In addition, the plan included a reduction in the Company's research
and development, operations and professional services groups. As a result, our
total workforce was reduced by approximately 60 persons or approximately 22% of
our worldwide headcount. The reduction in corporate overhead costs and research
and development staffs reflected a decrease in staffing needs due to the closing
of our Media segment during the first quarter of fiscal 2002. The reduction in
our operations and professional services groups reflects a downsizing due to
expectations about the continued weakness in demand for our products and
services in the immediate future.
The following table sets forth a summary of these restructuring costs and
related charges (in thousands):
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
2000 2001
---- ----
(IN THOUSANDS)
Severance and applicable payroll taxes........ $ 1,852 $ 975
Write-off of leasehold improvements........... 496 --
Accrual for future lease costs................ 1,782 --
--------- ---------
Total...................................... $ 4,130 $ 975
========= =========
Included in the $4,130,000 restructuring charge incurred in the first
fiscal quarter of fiscal 2001 are $3,633,000 of cash costs and $497,000 in
non-cash related costs. All charges incurred in the first fiscal quarter of
fiscal 2002 were cash charges.
Of the $4,130,000 of charges in the first quarter of fiscal 2001, $859,000
was included in continuing operations with the remaining $3,271,000 included in
loss from discontinued operations.
As of October 31, 2001, approximately $27.9 million of all restructuring
charges recorded during fiscal 2001 and the first quarter of fiscal 2002 have
been paid and the remaining $6.9 million of unpaid costs are expected to be paid
through February 2003.
J. LEGAL PROCEEDINGS
On or about September 6, 2001, the first of several putative class action
complaints was filed in the United States District Court for the Southern
District of New York naming us, several of our present and former officers and
directors and the underwriters for our July 19, 1999 initial public offering as
defendants. Purportedly filed on behalf of those persons who purchased our
common stock between July 19, 1999 and December 6, 2000, the complaints allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934.
Specifically, the complaints each allege that the defendants failed to
disclose "excessive commissions" purportedly solicited by and paid to the
underwriter defendants in exchange for allocating shares of the Company's stock
to preferred customers and alleged agreements among the underwriter defendants
and preferred customers tying the allocation of IPO shares to agreements to make
additional aftermarket purchases at pre-determined prices. Plaintiffs claim that
the failure to disclose these alleged arrangements made our prospectus
incorporated in our registration statement on Form S-1 filed with the SEC in
July 1999 materially false and misleading. Plaintiffs seek unspecified damages.
We believe that the allegations are without merit and we intend to
vigorously defend against the plaintiffs' claims. As the litigation is in an
initial stage, we are not able at this time to estimate the possibility of loss
or range of loss, if any, that might result.
We are currently party to various legal proceedings and claims which arise
in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, we do not believe that the outcome of any of these
legal matters will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
9
ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
K. SUBSEQUENT EVENT
In November 2001, we increased our ownership percentage in Engage Japan,
Inc. from 66.6% to 94.0% through the issuance of one million shares of our
common stock to Sumitomo Corporation, the minority stockholder in Engage Japan,
Inc.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
At October 31, 2001, we were an approximately 76% owned subsidiary of CMGI,
Inc. We are a provider of content management software for multichannel
marketing. Our solutions are used by marketers, publishers, printers, direct
mailers, Web sites and agencies to improve the performance and efficiency of
their marketing efforts across multiple forms of media. Our solutions combine
workflow automation and digital asset management functions and enable delivery
of the resulting marketing programs across both traditional and new media
channels. Whether the final product is print advertising, catalogs, direct mail,
circulars, Web site promotions, or online advertising, we believe our solutions
streamline the planning, management, and delivery of multichannel marketing
programs and materials, improving brand consistency and reducing production
costs. Our solutions support collaboration across workgroups including
colleagues, clients, partners and vendors and are designed to integrate easily
into an organization's overall business workflow allowing marketing to share
plans, schedules, costs and historical product and campaign performance with
finance, planning, accounting, and merchandising.
In September 2001, we announced the sale of certain assets of our
AdKnowledge media service and the shutdown of our media network. As a result,
for all periods presented, the Media segment has been accounted for as a
discontinued operation. Accordingly, the Media segment's current and non-current
assets have been segregated from continuing operations in the accompanying
consolidated balance sheets, and its operating results have been segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows, and related notes to interim consolidated
financial statements for all periods presented.
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2000 AND OCTOBER 31, 2001
Revenue, Cost of Revenue and Gross Margin
Revenue is derived primarily through the sale of software licenses and
related software and consulting services. Service revenue includes fees charged
for AdBureau, our outsourced advertising management service, training,
installation, software support and maintenance and actual consulting for
customer specific requirements. Cost of revenue consists primarily of fees paid
for outsourced data center operations needed to support our AdBureau product as
well as payroll, royalties, amortization of developed technology intangible
asset, benefits and allocated overhead of our support and consulting groups.
Product revenue decreased from $8.5 million in the three months ended
October 31, 2000 to $1.0 million in the three months ended October 31, 2001, an
88% decrease. The decrease in product revenue was due primarily to a decrease in
license revenue related to our AdManager software and to a lesser extent,
decreases in license revenue for our ProfileServer and ContentServer products.
In the three months ended October 31, 2000 we recorded approximately $4.5
million of product revenue from an AdManager source code sale. Service revenue
increased from $4.9 million in the three months ended October 31, 2000 to $5.6
million in the three months ended October 31, 2001, a 16% increase. The increase
in service revenue is the direct result of our September 2000 acquisition of
MediaBridge.
Product gross margin decreased from 91% in the three months ended October
31, 2000 to (30%) in the three months ended October 31, 2001. The decrease in
product gross margin is due to an increase in non-cash amortization of developed
technology resulting from the MediaBridge acquisition and the significant
decline in high margin product revenue. Product revenue represented $8.5 million
or 64% of total revenue in the three months ended October 31, 2000 as compared
to $1.0 million or 15% of total revenue in the three months ended October 31,
2001.
Services gross margin increased from (10%) in the three months ended
October 31, 2000 to 15% in the three months ended October 31, 2001. The
improvement in services gross margin is due to better utilization of our service
and support staff in the three months ended October 31, 2001 as compared to the
three months ended October 31, 2000 and reduced expenses in the three months
11
ended October 31, 2001 as compared to the three months ended October 31, 2000
due to headcount reductions.
Sales to one customer accounted for 33% of our total revenue for the three
months ended October 31, 2000. Sales to one customer accounted for 12% of our
total revenue for the three months ended October 31, 2001. Our customer base
consists of geographically diverse customers across many industries.
We anticipate that revenue may increase over the next two to three quarters
due primarily to expected license sales increases of our ContentServer software.
If license revenue increases as expected, our gross margin should increase as
well due to higher gross margin associated with license revenue.
Operating Expenses
In-Process Research and Development. In-process research and development
expense was $700,000 for the three months ended October 31, 2000, resulting from
the MediaBridge acquisition.
Research and Development. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expense. Our research and development expenses decreased from $2.5
million in the three months ended October 31, 2000 to $2.4 million in the three
months ended October 31, 2001, a 5% decrease. This decrease was primarily due to
savings related to restructuring activities in the three months ended October
31, 2001, offset by the inclusion of the MediaBridge results in the full
three-month period ended October 31, 2001. Our research and development staff
decreased 40% from October 31, 2000 to October 31, 2001. Research and
development expenses were 19% of revenue for the three months ended October 31,
2000 compared to 36% of revenue for the three months ended October 31, 2001.
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, employee travel and depreciation
expense. Selling and marketing expenses decreased from $15.3 million in the
three months ended October 31, 2000 to $3.3 million in the three months ended
October 31, 2001, a 79% decrease. The decrease in costs was primarily due to
reductions in travel and consulting expenses resulting from cost control
measures and a general reduction in our size during the second half of the three
months ended October 31, 2001, as well as a decrease in advertising and trade
show expenses, offset by our acquisition of MediaBridge. Overall, our sales and
marketing staff decreased 72% from October 31, 2000 to October 31, 2001. Sales
and marketing expenses were 114% of revenue for three months ended October 31,
2000 compared to 49% of revenue for the three months ended October 31, 2001.
General and Administrative. General and administrative expenses consist
principally of payroll and related costs, consulting and professional fees,
facility and related costs and depreciation expense. General and administrative
expenses decreased from $4.5 million in the three months ended October 31, 2000
to $2.6 million in the three months ended October 31, 2001, a 42% decrease. The
decrease in costs was primarily due to decreases in payroll and related costs.
Overall, our general and administrative staff decreased 63% from October 31,
2000 to October 31, 2001. General and administrative costs were 34% of revenue
for the three months ended October 31, 2000 compared to 40% of revenue for the
three months ended October 31, 2001. This increase is the direct result of the
decrease in revenue in the three months ended October 31, 2001 as compared to
the three months ended October 31, 2000.
Amortization and Impairment of Goodwill and Other Intangibles. Amortization
and impairment of goodwill and other intangibles decreased from $10.7 million in
the three months ended October 31, 2000 to $5.9 million in the three months
ended October 31, 2001, a 45% decrease. The decrease was due a decrease in the
amount of goodwill and other intangibles to be amortized in the three months
ended October 31, 2001 as compared to the three months ended October 31, 2000.
In the quarter ended July 31, 2001, we recorded a $109.0 million impairment
charge which reduced the goodwill and other intangible asset base that needed to
be amortized in the three months ended October 31, 2001.
We assess the need to record impairment losses on long-lived assets used in
operations when indicators of impairment are present. On an on-going basis,
management reviews the value and period of amortization or depreciation of
long-lived assets, including costs in excess of net assets of companies
acquired. During this review, the significant assumptions used in determining
the original cost of long-lived assets are reevaluated. Although the assumptions
may vary from transaction to transaction, they generally include revenue growth,
operating results, cash flows and other indicators of value. Management then
determines whether there has been a permanent impairment of the value of
long-lived assets. It is possible that the impairment factors evaluated by
management will change in
12
subsequent periods, given that we operate in a volatile business environment.
This could result in material impairment charges in future periods.
Restructuring Costs. Restructuring expense increased from $859,000 in the
three months ended October 31, 2000 to $975,000 in the three months ended
October 31, 2001, a 14% increase. During the three months ended October 31, 2000
and 2001, restructuring expense within continuing operations consisted of
severance and related costs.
Stock Compensation. Stock compensation expense increased from $355,000 in
the three months ended October 31, 2000 to $362,000 in the three months ended
October 31, 2001, a 2% increase. Substantially all of the increase relates to
amortization of deferred compensation related to stock options issued in our
acquisition of MediaBridge.
Other Income (Expense)
Interest Income. Interest income decreased from $1.9 million in the three
months ended October 31, 2000 to $243,000 in the three months ended October 31,
2001, an 87% decrease. The decrease in interest income was primarily due to
lower cash equivalents and short-term investment balances during fiscal 2001
compared to fiscal 2000 as well as a significant reduction in the rate of return
on those investments.
Interest Expense. Interest expense increased from $27,000 in the three
months ended October 31, 2000 to $406,000 in the three months ended October 31,
2001, a 1,404% increase. The increase in interest expense was the direct result
of converting $42.7 million of amounts we owed to CMGI into debt in October 2001
and related interest on that debt for the month of October 2001.
Minority Interest. Minority interest decreased from $343,000 for the three
months ended October 31, 2000 to $93,000 for the three months ended October 31,
2001, a 73% decrease. Minority interest reflects the minority shareholders'
share of the losses of Engage Japan, Inc.
Other Income (Expense), Net. Other income (expense), net increased from
$(42,000) for the three months ended October 31, 2000 to $161,000 for the three
months ended October 31, 2001, a 483% decrease. The change in other income
(expense), net was primarily due to foreign currency gains related to several of
our European subsidiaries.
Discontinued Operations
Loss From Discontinued Operations. Loss from discontinued operations was
$148.2 million in the three months ended October 31, 2000. Loss on discontinued
operations represents the net operating results for our media operations which
have been classified within discontinued operations as a result of a decision
made in September 2001 to exit the Media segment. The loss from discontinued
operations relates principally to our acquisition of AdKnowledge and Flycast,
and to a lesser extent, the net loss for I/PRO in the three months ended October
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased from $33.3 million at July 31, 2001
to $30.0 million at October 31, 2001. Net cash used in operating activities was
$10.6 million for the three months ended October 31, 2001. Cash used in
operating activities resulted primarily from net losses and a decrease in
accrued expenses, which was partially offset by decreases in accounts receivable
and prepaid expenses and an increase in amounts due to CMGI and affiliates. Net
cash used for investing activities was $282,000 for the three months ended
October 31, 2001. Net cash provided by financing activities was $7.9 million and
consisted primarily of the proceeds of the $8.0 million CMGI borrowing.
As of October 31, 2001, we had $30.0 million of cash and cash equivalents.
We anticipate that expenses will decrease modestly during the next three
quarters due to continued cost control measures.
In October 2001, CMGI agreed to loan us $8.0 million under a secured
convertible demand note payable bearing interest at 7.5%. Under the terms of the
note payable, principal and interest will become due and payable on demand any
time on or after August 1, 2002 or earlier upon the occurrence of an event of
default as defined in the note. The note plus accrued interest is convertible,
at CMGI's election, into our common stock at a conversion price of $0.25 per
share. In addition, the note contains an anti-dilution provision whereby the
conversion price may be adjusted downward if we were to issue any shares of
common stock in the future at a price per share less than the then current
market price. The note is collateralized by substantially all of our assets.
13
In October 2001, we also restructured our outstanding amounts payable to
CMGI into a secured promissory note payable in the amount of $42.7 million
bearing interest at 7.5%. Under the terms of the note payable, principal and
interest will become due and payable on demand any time on or after August 1,
2002 or earlier upon the occurrence of an event of default as defined in the
note. The note is collateralized by substantially all of our assets.
In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us in our fiscal year 2002 subsequent to October 1, 2001 under a
secured convertible promissory note bearing interest at 7.5%. Under the terms of
the promissory note, principal and interest will become due and payable on
demand any time on or after August 1, 2002 or earlier upon the occurrence of an
event of default as defined in the note. The principal and/or interest of the
intercompany debt incurred each calendar month under the note will be
convertible, at CMGI's election, into our common stock at a conversion price
equal to the closing price of our common stock on the last trading day of such
calendar month. In addition, the note contains an anti-dilution provision
whereby the conversion price may be adjusted downward if we were to issue any
shares of common stock in the future at a price per share less than the then
current market price. The note is collateralized by substantially all of our
assets. Debt incurred under this agreement was approximately $1.4 million as of
October 31, 2001.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for the remainder of the fiscal year ending July 31, 2002. As of
October 31, 2001, we owe CMGI $52.1 million which will become due and payable on
demand on or after August 1, 2002. As a result, if CMGI demands repayment of
such amount owed, we will need to obtain additional financing prior to August 1,
2002 or renegotiate amounts owed to CMGI so that repayment is extended beyond
August 1, 2002. If additional funds are raised through the issuance of equity or
convertible debt securities, or if CMGI elects to convert our debt into our
common shares, the percentage ownership of our stockholders will be reduced and
our stockholders will 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, develop or enhance services or products or
otherwise respond to competitive pressures may be significantly limited.
FOREIGN OPERATIONS
The results of our international operations are subject to currency
fluctuations. As of October 31, 2001, we had subsidiaries in Europe and a
subsidiary in Japan. To date, our financial condition and results of operations
have not been materially affected by exchange rate fluctuations. However, there
can be no guarantee that our financial condition and results of operations will
not be adversely affected by exchange rate fluctuations in the future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on From 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. Statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"anticipates," "believes," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described or implied in such forward-looking statements. These
statements address or may address the following subjects:
- that we anticipate that revenue may increase over the next two to three
quarters due primarily to expected sales increase of ContentServer
software;
- that if license revenue increases as expected, our gross margin will
increase;
- that impairment factors evaluated by management may change resulting in
material impairment charges in future periods;
- that we anticipate expenses will decrease during the next three
quarters; and
- that we currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for the remainder of the fiscal year ending July 31, 2002.
We caution investors that 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 in our Annual Report
on Form 10-K filed with the SEC on October 29, 2001 in the section titled
"Factors that May Affect Future Results and Market Price of Stock," and the
risks discussed in our other filings with the SEC and elsewhere throughout this
report. We do not intend to update any forward-looking statements after the date
of this Form 10-Q except as required by law.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, debt to CMGI 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, have not used derivative financial instruments to
manage foreign currency fluctuation risk. If 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.
15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2001, CMGI agreed to loan us $8.0 million under a secured
convertible demand note payable bearing interest at 7.5%. Under the terms of the
note payable, principal and interest will become due and payable on demand any
time on or after August 1, 2002 or earlier upon the occurrence of an event of
default as defined in the note. The note plus accrued interest is convertible,
at CMGI's election, into our common stock at a conversion price of $0.25 per
share. In addition, the note contains an anti-dilution provision whereby the
conversion price may be adjusted downward if we were to issue any shares of
common stock in the future at a price per share less than the then current
market price. The note is collateralized by substantially all of our assets. No
person acted as an underwriter with respect to the transaction. We relied on
Section 4(2) of the Securities Act of 1933, as amended, as no public offering
was involved.
In October 2001, we also restructured our outstanding amounts payable to
CMGI into a secured promissory note payable in the amount of $42.7 million
bearing interest at 7.5%. Under the terms of the note payable, principal and
interest will become due and payable on demand any time on or after August 1,
2002 or earlier upon the occurrence of an event of default as defined in the
note. The note is collateralized by substantially all of our assets. No person
acted as an underwriter with respect to the transaction. We relied on Section
4(2) of the Securities Act of 1933, as amended, as no public offering was
involved.
In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us in our fiscal year 2002 subsequent to October 1, 2001 under a
secured convertible promissory note bearing interest at 7.5%. Under the terms of
the promissory note, principal and interest will become due and payable on
demand any time on or after August 1, 2002 or earlier upon the occurrence of an
event of default as defined in the note. The principal and/or interest of the
intercompany debt incurred each calendar month under the note will be
convertible, at CMGI's election, into our common stock at a conversion price
equal to the closing price of our common stock on the last trading day of such
calendar month. In addition, the note contains an anti-dilution provision
whereby the conversion price may be adjusted downward if we were to issue any
shares of common stock in the future at a price per share less than the then
current market price. The note is collateralized by substantially all of our
assets. Debt incurred under this agreement was approximately $1.4 million as of
October 31, 2001. No person acted as an underwriter with respect to the
transaction. We relied on Section 4(2) of the Securities Act of 1933, as
amended, as no public offering was involved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Secured Convertible Demand Promissory Note, dated October 4, 2001,
issued to CMGI, Inc., in the principal amount of $8,000,000.
4.2 Secured Convertible Demand Promissory Note, dated October 4, 2001,
issued to CMGI, Inc., for any monthly intercompany debt incurred by
the Company from October 2001 to July 2002.
4.3 Secured Demand Promissory Note, dated September 30, 2001, issued to
CMGI, Inc., in the principal amount of $42,700,000.
10.1 Letter from the Company to Anthony Nuzzo, dated September 24, 2001.
10.2 Letter from Frank Campanella on behalf of the Compensation Committee
to Anthony Nuzzo, dated September 10, 2001.
10.3 Security Agreement by and between the Company and CMGI, Inc., dated
as of October 4, 2001.
10.4 Waiver and Release by and between the Company and CMGI, Inc., dated
October 4, 2001.
10.5 Form of Indemnification Agreement entered into by and between
the Company and each of Anthony Nuzzo, Christopher Evans, Edward
Bennett and Frank Campanella, dated August 20, 2001.
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(b) Reports on Form 8-K
On August 21, 2001 we filed a report on Form 8-K announcing (i) our revenue
for the quarter ended July 31, 2001 was expected to be below our previously
announced expectations, (ii) that CMGI did not renew or extend its $50 million
conditional financing commitment to us and (iii) that we would further reduce
our workforce and would shift our emphasis to content management software for
multichannel marketing.
On September 28, 2001 we filed a report on Form 8-K announcing that two of
the three independent members of our Board of Directors had resigned.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Andover, Massachusetts on
December 14, 2001.
By: /s/ Christopher M. Cuddy
------------------------------------------------
Christopher M. Cuddy
Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ Robert W. Bartlett
------------------------------------------------
Robert W. Bartlett
Executive V.P., Chief Financial Officer and
Treasurer (Principal Accounting and Financial
Officer of the Registrant)
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
4.1 Secured Convertible Demand Promissory Note, dated October 4, 2001,
issued to CMGI, Inc., in the principal amount of $8,000,000.
4.2 Secured Convertible Demand Promissory Note, dated October 4, 2001,
issued to CMGI, Inc., for any monthly intercompany debt incurred
by the Company from October 2001 to July 2002.
4.3 Secured Demand Promissory Note, dated September 30, 2001, issued
to CMGI, Inc., in the principal amount of $42,700,000.
10.1 Letter from the Company to Anthony Nuzzo, dated September 24, 2001.
10.2 Letter from Frank Campanella on behalf of the Compensation
Committee to Anthony Nuzzo, dated September 10, 2001.
10.3 Security Agreement by and between the Company and CMGI, Inc.,
dated as of October 4, 2001.
10.4 Waiver and Release by and between the Company and CMGI, Inc.,
dated October 4, 2001.
10.5 Form of Indemnification Agreement entered into by and between the
Company and each of Anthony Nuzzo, Christopher Evans, Edward
Bennett and Frank Campanella, dated August 20, 2001.