<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): FEBRUARY 2, 1998
EXCITE, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA
--------------------------------------------
(State or other jurisdiction of
incorporation)
0-28064 77-0378215
- ---------------------- ---------------------
(Commission (IRS Employer
File Number) Identification No.)
555 Broadway, Redwood City, CA 94063
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(Address of principal executive offices) (Zip Code)
(650) 568-6000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report)
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<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
February 2, 1998, related to the Registrant's completion of the acquisition of
MatchLogic, Inc. ("MatchLogic") by means of a merger (the "Merger") of XCite
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
the Registrant with and into MatchLogic, as set forth below and in the pages
attached hereto:
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
See Exhibit 20.1 for the audited financial statements of MatchLogic
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
Pro Forma Combined Condensed Financial Information (Unaudited)
The following unaudited Pro Forma Combined Condensed Financial
Statements reflect the business combination between Excite, Inc. ("Excite" or
the "Company") and MatchLogic which is accounted for as a pooling of interests.
The Unaudited Pro Forma Combined Condensed Financial Statements are based on,
and should be read in conjunction with, the historical financial statements and
the notes thereto of Excite included in the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1998, and the
historical financial statements and the notes thereto of MatchLogic included
herein.
The unaudited Pro Forma Combined Condensed Balance Sheets combine
Excite's December 31, 1997 balance sheet with MatchLogic's December 31, 1997
balance sheet, giving effect to the Merger as if it had occurred on December 31,
1997.
The unaudited Pro Forma Combined Condensed Statements of Operations
combine Excite's historical condensed statement of operations for the year ended
December 31, 1997 with the corresponding MatchLogic condensed statement of
operations for the period from inception (May 8, 1997) through December 31,
1997.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated as presented in the
accompanying unaudited pro forma combined condensed financial statements, nor is
it necessarily indicative of future operating results or financial position. The
unaudited Pro Forma Combined Condensed Financial Statements do not incorporate
any benefits from cost savings or synergy of operations of the combined company.
Excite and MatchLogic incurred direct transaction costs of approximately
$700,000 associated with the Merger which were charged to operations during the
quarter ended March 31, 1998. There can be no assurance that Excite will not
incur additional charges in subsequent quarters to reflect costs associated with
the Merger or that management will be successful in its efforts to integrate the
operations of the two companies.
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<PAGE> 3
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------
PRO FORMA PRO FORMA
EXCITE MATCHLOGIC ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments .... $ 32,074 $ (8) $ -- $ 32,066
Accounts receivable ......... 20,278 629 -- 20,907
Prepaid expenses and other
current assets ............ 1,972 177 -- 2,149
---------- ---------- ---------- ----------
Total current assets .... 54,324 798 -- 55,122
Property and equipment, net ..... 12,678 2,465 -- 15,143
Intangible assets, net .......... 1,771 -- -- 1,771
Other assets .................... 4,657 -- -- 4,657
---------- ---------- ---------- ----------
$ 73,430 $ 3,263 $ -- $ 76,693
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Bank line of credit and
other notes payable ....... $ 6,100 $ -- $ -- $ 6,100
Accounts payable ............ 4,700 1,017 -- 5,717
Capital lease obligations,
current portion ........... 2,904 274 -- 3,178
Non-lease financing,
current portion ........... 1,176 -- 1,176
Related party liabilities ... 1,575 -- 1,575
Other accrued liabilities ... 10,834 3,572 -- 14,406
Accrued merger expenses -- -- 700 700
---------- ---------- ---------- ----------
Total current liabilities 27,289 4,863 700 32,852
Capital lease obligations ....... 2,789 287 -- 3,076
Non-lease financing ............. 1,613 -- -- 1,613
Convertible debt ................ 5,000 -- 5,000
Shareholders' equity (net
capital deficiency):
Convertible preferred stock.. 813 100 (100) 813
Common stock ................ 121,060 34 10,524 131,618
Additional paid-in capital .. -- 10,424 (10,424) --
Deferred compensation ....... (228) (1,211) -- (1,439)
Unrealized gain on
available-for-sale
investments ............... 15 -- -- 15
Accumulated deficit ......... (84,921) (11,234) (700) (96,855)
---------- ---------- ---------- ----------
Total shareholders'
equity (net capital
deficiency) ............ 36,739 (1,887) (700) 34,152
---------- ---------- ---------- ----------
$ 73,430 $ 3,263 $ -- $ 76,693
========== ========== ========== ==========
</TABLE>
See accompanying notes.
-3-
<PAGE> 4
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------
PRO FORMA PRO FORMA
EXCITE MATCHLOGIC ADJUSTMENTS(1) COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ......................... $ 50,151 $ 3,964 $ -- $ 54,115
Cost of revenues ................. 19,937 1,099 -- 21,036
----------- ----------- ----------- -----------
Gross profit ..................... 30,214 2,865 -- 33,079
Operating expenses:
Research and development....... 13,427 3,267 -- 16,694
Sales and marketing ........... 27,599 4,411 -- 32,010
Distribution license fees
and data acquisition costs .. 7,615 1,750 -- 9,365
General and administrative .... 8,057 1,420 -- 9,477
Charge for purchased in-process
technology ................. -- 2,346 -- 2,346
Other merger and acquisition
related costs, including
amortization of goodwill
and other purchased
intangibles ................ 3,389 600 -- 3,989
----------- ----------- ----------- -----------
Total operating expenses ... 60,087 13,794 -- 73,881
----------- ----------- ----------- -----------
Operating loss ................... (29,873) (10,929) -- (40,802)
Interest income .................. 1,246 57 -- 1,303
Interest and other expense ....... (1,055) (362) -- (1,417)
Equity share of losses of
affiliated company ............ (477) -- -- (477)
----------- ----------- ----------- -----------
Net loss ......................... $ (30,159) $ (11,234) $ -- $ (41,393)
=========== =========== =========== ===========
Basic and diluted net loss
per share ...................... $ (2.18) $ (2.94)
=========== ===========
Shares used in computing
basic and diluted net loss
per share ..................... 13,851 226 14,077
=========== =========== ===========
</TABLE>
(1) See Note 3 of Notes to Pro Forma Combined Condensed Financial Statements for
information regarding the non-recurring charges recorded at the time of the
business combination.
See accompanying notes.
-4-
<PAGE> 5
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. PERIODS COMBINED
The condensed consolidated statement of operations of Excite for the year
ended December 31, 1997 has been combined with the condensed statement of
operations of MatchLogic for the period from inception (May 8, 1997) to
December 31, 1997, giving effect to the Merger as if it had occurred on May
8, 1997.
The condensed consolidated balance sheet of Excite as of December 31, 1997
has been combined with the condensed balance sheet of MatchLogic as of the
same date giving effect to the Merger as if it had occurred on December 31,
1997.
2. BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements reflect the
issuance of approximately 3,061,120 shares of Excite Common Stock for all of
the outstanding shares of MatchLogic Common Stock and Convertible Preferred
Stock in connection with the Merger at an exchange ratio of 0.2291 shares of
Excite Common Stock for each share of MatchLogic Common Stock and
Convertible Preferred Stock.
3. MERGER TRANSACTION COSTS
Excite and MatchLogic incurred direct transaction costs of approximately
$700,000 associated with the Merger, primarily for legal and other
professional consulting fees, which was charged to operations during the
quarter ending March 31, 1998. The unaudited pro forma combined condensed
balance sheet gives effect to such charges as if they had been incurred as
of December 31, 1997, but the effect of these costs has not been reflected
in the unaudited pro forma combined condensed statement of operations as
they are nonrecurring in nature. It is expected that substantially all of
the cash transactions and other charges will be paid out of the existing
cash and cash equivalents of Excite within six to twelve months after the
consummation of the merger. There can be no assurance that Excite will not
incur additional charges in subsequent quarters to reflect costs associated
with the Merger or that management will be successful in their efforts to
integrate the operations of the two companies.
4. PRO FORMA LOSS PER SHARE
The pro forma combined basic and diluted net loss per share is based on the
combined weighted average number of common shares of Excite Common Stock and
MatchLogic Common Stock outstanding during the year using the exchange ratio
based on the issuance of approximately 769,660 shares of Excite Common Stock
for all of the outstanding shares of MatchLogic Common Stock as of February
2, 1998. All convertible debt, convertible preferred stock, warrants,
employee stock options and shares subject to repurchase rights that had not
lapsed have been excluded from the computation of pro forma combined basic
and diluted earnings per share because all such securities are anti-dilutive
for the period presented.
5. CONFORMING AND PRO FORMA ADJUSTMENTS
There were no adjustments required to conform the accounting policies of
Excite and MatchLogic. Certain amounts for MatchLogic have been reclassified
to conform with Excite's financial statement presentation. There have been
no significant intercompany transactions.
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<PAGE> 6
(c) EXHIBITS.
The following exhibits are filed herewith:
20.1 MatchLogic, Inc. audited financial statements for the
period from inception (May 8, 1987) to December 31, 1997
23.1 Consent of Ernst & Young LLP, Independent Auditors.
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<PAGE> 7
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this amendment to be signed on its behalf by
the undersigned thereunto duly authorized.
EXCITE, INC.
Date: March 31, 1998 By: /s/ Robert C. Hood
--------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
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<PAGE> 1
EXHIBIT 20.1
FINANCIAL STATEMENTS
MATCHLOGIC, INC.
FOR THE PERIOD FROM INCEPTION (MAY 8, 1997)
TO DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
MatchLogic, Inc.
Financial Statements
For the Period from Inception (May 8, 1997)
to December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................1
Audited Financial Statements
Balance Sheet.........................................................................2
Statement of Operations...............................................................3
Statement of Net Capital Deficiency...................................................4
Statement of Cash Flows...............................................................5
Notes to Financial Statements.........................................................6
</TABLE>
<PAGE> 3
Report of Independent Auditors
The Board of Directors and Stockholders
MatchLogic, Inc.
We have audited the accompanying balance sheet of MatchLogic, Inc. as of
December 31, 1997, and the related statements of operations, net capital
deficiency, and cash flows for the period from inception (May 8, 1997) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MatchLogic, Inc. at December
31, 1997, and the results of its operations and its cash flows for the period
from inception (May 8, 1997) to December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
February 19, 1998
<PAGE> 4
MatchLogic, Inc.
Balance Sheet
December 31, 1997
(In thousands, except par value)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ (8)
Accounts receivable, net of allowance for
doubtful accounts of $18 629
Other current assets 177
--------
Total current assets 798
Property and equipment, net 2,465
--------
$ 3,263
========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 1,017
Accrued liabilities 3,572
Current portion of capital lease obligations 274
--------
Total current liabilities 4,863
Capital lease obligations 287
Commitments
Net capital deficiency:
Convertible preferred stock, $0.01 par value, 10,268 shares
authorized, 10,000 shares issued and outstanding; aggregate
liquidation preference of $8,400 100
Common stock, $0.01 par value, 17,000 shares authorized, 3,359
shares issued and outstanding 34
Additional paid-in capital 10,424
Deferred compensation (1,211)
Accumulated deficit (11,234)
--------
Net capital deficiency (1,887)
--------
$ 3,263
========
</TABLE>
See accompanying notes.
2
<PAGE> 5
MatchLogic, Inc.
Statement of Operations
Period from Inception (May 8, 1997) to
December 31, 1997
(In thousands)
<TABLE>
<S> <C>
Revenues:
Internet advertising $ 1,917
Database marketing 1,171
Consulting and other 876
--------
Total revenues 3,964
Operating costs and expenses:
Cost of revenues 1,099
Research and development 3,267
Data acquisition costs 1,750
Sales and marketing 4,411
General and administrative 1,420
Amortization of purchased intangibles 600
Acquisition of in-process research and development 2,346
--------
Total operating costs and expenses 14,893
--------
Loss from operations (10,929)
Interest expense (113)
Other income and expense, net (192)
--------
Net loss $(11,234)
========
</TABLE>
See accompanying notes.
3
<PAGE> 6
MatchLogic, Inc.
Statement of Net Capital Deficiency
Period from Inception (May 8, 1997) to December 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE PREFERRED STOCK COMMON STOCK
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of common stock to
founder at $0.10 per share in
May 1997 -- $ -- 3,358,823 $ 34
Option granted to preferred
stock investors to purchase
ownership interest of FirstLogic -- -- -- --
Issuance of Series A
convertible preferred stock
for ownership interest held
by FirstLogic, net of
offering expenses of $180 2,263,889 23 -- --
Issuance of Series A
convertible preferred stock,
net of offering expenses of $115 7,736,111 77 -- --
Warrants issued in connnection
with bank financing -- -- -- --
Deferred compensation -- -- -- --
Amortization of deferred
compensation -- -- -- --
Net loss from inception (May 8,
1997) to December 31, 1997 -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1997 10,000,000 $ 100 3,358,823 $ 34
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS'
ADDITIONAL NET
PAID-IN DEFERRED ACCUMULATED CAPITAL
CAPITAL COMPENSATION DEFICIT DEFICIENCY
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of common stock to
founder at $0.10 per share in
May 1997 $ 302 $ -- $ -- $ 336
Option granted to preferred
stock investors to purchase
ownership interest of FirstLogic 600 -- -- 600
Issuance of Series A
convertible preferred stock
for ownership interest held
by FirstLogic, net of
offering expenses of $180 1,697 -- -- 1,720
Issuance of Series A
convertible preferred stock,
net of offering expenses of $115 6,308 -- -- 6,385
Warrants issued in connection
with bank financing 110 -- -- 110
Deferred compensation 1,407 (1,407) -- --
Amortization of deferred
compensation -- 196 -- 196
Net loss from inception (May 8,
1997) to December 31, 1997 -- -- (11,234) (11,234)
---------- ---------- ---------- ----------
Balances at December 31, 1997 $ 10,424 $ (1,211) $ (11,234) $ (1,887)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 7
MatchLogic, Inc.
Statement of Cash Flows Period
from Inception (May 8, 1997) to December 31, 1997
(In thousands)
<TABLE>
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $(11,234)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of purchased intangibles 600
Charge for acquired in-process research and development 2,346
Depreciation and amortization 688
Amortization of deferred compensation 196
Changes in operating assets and liabilities:
Accounts receivable (629)
Other current assets (122)
Accounts payable 1,017
Accrued liabilities 3,572
Other (290)
--------
Net cash used in operating activities (3,856)
CASH FLOWS USED IN INVESTING ACTIVITIES
Expenditures for property and equipment (2,364)
--------
Net cash used in investing activities (2,364)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Issuance of promissory notes 925
Payments made under capital lease obligations (173)
Proceeds from issuance of preferred stock, net of offering expenses
of $115 5,460
--------
Net cash provided by financing activities 6,212
--------
Net decrease in cash and cash equivalents (8)
Cash and cash equivalents at beginning of period --
--------
Cash and cash equivalents at end of period $ (8)
========
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 58
========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock to Founder in exchange for relinquishment of
employment contract with, and options to acquire common stock of,
FirstLogic $ 336
========
Series A convertible preferred stock issued for ownership interest
held by FirstLogic, net of offering expenses of $180 $ 1,720
========
Option granted to preferred stock investors to purchase ownership
interest of FirstLogic $ 600
========
Preferred stock issued in exchange for cancellation of promissory
notes $ 925
========
Value ascribed to warrants issued in connection with line of credit $ 110
========
Deferred compensation $ 1,407
========
Assets purchased under capital lease obligations $ 734
========
</TABLE>
See accompanying notes
5
<PAGE> 8
MatchLogic, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MatchLogic, Inc. ("MatchLogic" or the "Company"), was incorporated in the State
of Delaware on May 8, 1997, as a wholly owned subsidiary of a Colorado
corporation with the same name ("Parent Company"). MatchLogic is engaged in the
business of providing Internet advertising management and optimization services
to advertisers and agencies. Additionally, the Company provides database and
direct marketing services to advertisers for effective delivery of direct mail,
e-mail and market research. The Parent Company was wholly owned by FirstLogic,
Inc. ("FirstLogic") and the founder and president ("Founder") of the Company.
The Founder received shares in the Parent Company from FirstLogic in exchange
for the Founder's relinquishment of his employment contract with FirstLogic
(including severance benefits) and release of all of his stock options in
FirstLogic. Concurrently, certain venture capital investors provided the first
of four bridge loans to fund the operations of MatchLogic.
On May 9, 1997, MatchLogic Colorado was merged with the Company with the Company
being the surviving corporation. In connection with the merger, all Parent
Company preferred and common stock was exchanged for the same number of shares
in the Company. The creation of the Delaware subsidiary and the subsequent
merger was done in connection with the ultimate sale of the Company to the
Founder and venture capital investors.
Prior to the Company's incorporation and the above merger, venture capital
investors paid FirstLogic $600,000 for an option to purchase FirstLogic's
ownership interest in the Company. This option was exercised on May 9, 1997
whereby FirstLogic sold its entire ownership interest in the Parent Company,
which consisted of 2,263,889 shares of Series A preferred stock, for $1,720,000,
net of offering expenses of $180,000, to certain venture capital investors.
6
<PAGE> 9
MatchLogic, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATION AND BUSINESS (CONTINUED)
For accounting purposes, the venture capital investors and the Founder are
deemed to represent a control group that purchased 100% of MatchLogic from
FirstLogic. As a result, the amounts paid by the venture capital investors to
FirstLogic and the value of the common shares exchanged for the Founder's
relinquishment of his employment contract with FirstLogic and release of all of
his stock options in FirstLogic have been "pushed-down" to the Company and
allocated to the net assets acquired based upon their estimated fair values. The
fair value of the assets and liabilities consisted of approximately $290,000 in
net tangible liabilities, approximately $600,000 associated with the gross
margin of one consulting contract, and approximately $2,346,000 of acquired
in-process research and development that had not reached technological
feasibility and that had no alternative future use. At approximately the same
time, the Company sold 7,736,111 newly issued shares of Series A preferred stock
to venture capital investors for $6,385,000, net of offering expenses of
$115,000.
On February 2, 1998, the Company was acquired by Excite, Inc.,
("Excite"), an Internet media company, in a transaction accounted for as a
pooling of interests. In connection with the agreement, Excite exchanged
3,061,120 shares of its common stock for all the capital stock of the Company
and assumed all of the outstanding warrants and options of the Company at the
exchange ratio of 0.2291 shares of Excite common stock for each share of
MatchLogic capital stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company maintains its cash and cash equivalents in depository and money
market accounts with several financial institutions.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable at December 31, 1997.
Generally, the Company does not require collateral or other security to support
customer receivables, which are principally from users of the Company's products
and services. The Company performs periodic credit evaluations of its customers
and maintains an allowance for potential credit losses based on historical
experience and other information available to management. Actual credit losses
may differ significantly from estimated amounts included in the allowance for
doubtful accounts and such differences could be material to the financial
statements.
7
<PAGE> 10
MatchLogic, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful life of the
asset, which generally ranges from three to five years.
REVENUE RECOGNITION
The Company recognizes advertising revenue as advertising banners are played and
consulting revenue as services are performed.
During the period from inception (May 8, 1997) to December 31, 1997, two
customers accounted for 41% and 25% of total revenues. These customers had
outstanding accounts receivable balances of $334,000 and $0 as of December 31,
1997, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
has adopted the "disclosure only" alternative described in SFAS No. 123,
"Accounting for Stock-Based Compensation."
8
<PAGE> 11
MatchLogic, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS ASSOCIATED WITH THE YEAR 2000 (unaudited)
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurance that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which include third-party software and
hardware technology.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
(In thousands)
<S> <C>
Computer equipment and software $ 3,010
Furniture and fixtures 88
------------------
3,098
Less accumulated depreciation and
amortization (633)
------------------
$ 2,465
==================
</TABLE>
3. COMMITMENTS
The Company leases its facilities under noncancelable operating leases
containing escalation clauses which require the Company to pay maintenance and
operating expenses, such as taxes, insurance, and utilities.
Property and equipment includes equipment recorded under capital leases of
approximately $734,000 and related accumulated amortization of $213,000 at
December 31, 1997.
Rent expense totaled $184,000 for the period from inception through December 31,
1997.
9
<PAGE> 12
MatchLogic, Inc.
Notes to Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
At December 31, 1997, future minimum lease payments under capital and
noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------------------------
<S> <C> <C>
Fiscal year
1998 $ 318 $ 179
1999 262 39
2000 43 --
------------ ------------
Future minimum lease payments 623 $ 218
============
Less amounts representing interest (62)
------------
Present value of future minimum lease
payments 561
Less current portion (274)
------------
$ 287
============
</TABLE>
4. LINE OF CREDIT
At December 31, 1997, the Company had a revolving line of credit with a bank
which provides for borrowings of 80% of eligible accounts receivable plus an
additional $1,500,000, up to a maximum of $3,000,000. As of December 31, 1997,
the Company had no borrowings outstanding under this facility. The line is
secured by the general assets of the Company and interest is due on outstanding
borrowings at the bank's prime rate plus 1%. The line expires on December 1,
1998. The Company issued warrants to purchase 17,857 shares of Series A
preferred stock that are exercisable at $0.84 per share and warrants to purchase
7,142 shares of common stock that are exercisable at $6.30 per share to the bank
in connection with this line of credit. The Company has allocated a value of
$110,000 to these warrant issuances which will be recorded as interest expense
over the term of the agreement.
10
<PAGE> 13
MatchLogic, Inc.
Notes to Financial Statements (continued)
5. PROMISSORY NOTES
In connection with formation, the Company issued promissory notes for aggregate
proceeds of $925,000 to venture capital investors. These notes accrued interest
at the prime rate and were offset against proceeds due from the Series A
preferred stock financing which occurred upon the Company's incorporation. The
Company issued warrants to purchase 166,666 shares of Series A preferred stock
at $1.08 per share in connection with these promissory notes. The Company
believes that the value of the warrants at the date of issuance was not material
and no value has been attributed to them in these financial statements.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Dividends on the convertible preferred stock of $0.01 per share are payable when
and if declared by the board of directors. The dividend requirements of the
preferred stock must be satisfied prior to payment of any dividends or
distributions with respect to the Company's common stock. No dividends have been
declared to date.
11
<PAGE> 14
MatchLogic, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Company's Board of Directors currently has four members. Holders of Series A
preferred stock voting separately as a class are entitled to elect a minimum of
three directors and potentially up to three additional directors under the terms
of the Company's Articles of Incorporation. Preferred stockholders are entitled
to voting rights equivalent to the number of common shares into which their
shares are convertible. Subject to certain antidilution provisions, each share
of Series A preferred stock is convertible at any time into one common share.
All preferred shares convert automatically to common stock (10,000,000 shares if
converted at December 31, 1997) in the event of a public offering of the
Company's common stock with aggregate proceeds to the Company of at least
$15,000,000 and a price per share of not less than $3.60 (as adjusted for any
stock dividends, stock splits or recapitalization). Additionally, all preferred
shares convert automatically to common stock upon the written approval of the
holders of at least two-thirds of the then-outstanding Series A preferred
stockholders.
COMMON STOCK
The Company's outstanding common stock is wholly owned by its Founder. Shares
outstanding vest over a three-year period ending May 2000 (1,679,413 shares
vested as of December 31, 1997). Unvested shares are subject to a repurchase
option held by the Company at the original price of $0.10 per share paid by the
Founder for these shares upon his termination of employment.
WARRANTS
At December 31, 1997, warrants were outstanding to purchase 180,239 shares of
the Company's common stock at prices ranging from $1.08 to $6.30 and 184,523
shares of the Company's Series A preferred stock at prices ranging from $0.84 to
$1.08 per share. These warrants were issued in connection with certain
financings, are exercisable at any time, and expire at various times in 2002.
12
<PAGE> 15
MatchLogic, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
1997 EQUITY COMPENSATION PLAN
In May 1997, the Board of Directors approved the 1997 Equity Compensation Plan
(the "Plan"), which provides for the issuance of incentive and nonqualified
stock options and stock appreciation rights. The Plan provides for the purchase
of up to 1,939,140 shares of the Company's common stock. There were 77,140
shares available for future grant under the Plan as of December 31, 1997. Under
the terms of the Plan, options and stock appreciation rights may be granted to
eligible participants at prices determined by the Company's Board of Directors
on the date of grant. The exercise price must be equal to at least 100% of the
current fair value of the underlying shares or 110% in the case of an incentive
stock option granted to a 10% stockholder. Vesting periods are determined by the
Board of Directors. Options expire at the earlier of 10 years from the option
grant date for incentive and nonqualified stock options or 5 years from the time
of grant for incentive stock options granted to a 10% stockholder.
Stock appreciation rights may be granted in conjunction with all or part of any
stock option granted under the Plan. The exercise price of any stock
appreciation right shall be equal to (i) the exercise price of the related stock
option or (ii) the current fair value of the underlying shares. Stock
appreciation rights are exercisable and terminate in conjunction with the
related stock option or as determined by the Board of Directors. No stock
appreciation rights were granted under the Plan.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------
SHARES WEIGHTED-
AVAILABLE FOR AVERAGE
OPTION GRANT SHARES EXERCISE PRICE
------------- --------- --------------
<S> <C> <C> <C>
Balance at inception (May 8, 1997) -- -- $ --
Options authorized 1,939,140 -- $ --
Options granted (1,876,500) 1,876,500 $ 0.19
Options exercised -- -- $ --
Options canceled 14,500 (14,500) $ 0.10
--------- ---------
Balance at December 31, 1997 77,140 1,862,000 $ 0.19
========= ========= =========
</TABLE>
13
<PAGE> 16
MatchLogic, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
1997 EQUITY COMPENSATION PLAN (CONTINUED)
Compensation cost based on the fair value of the options as prescribed by SFAS
No. 123 would not have had a material effect on the Company's net loss.
At December 31, 1997, options to purchase 315,750 shares of common stock were
vested and exercisable at a weighted average exercise price of $0.10
Options outstanding at December 31, 1997 had the following characteristics:
<TABLE>
<S> <C>
Range of exercise prices $0.10-$0.81
Weighted-average exercise price $0.19
Weighted-average remaining contractual life 9.55 years
</TABLE>
The weighted-average fair value at grant date of options granted during the
period ended December 31, 1997 was $0.03. The fair value of each option granted
is estimated on the date of grant using the minimum value option pricing model
with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Risk-free interest rate 6.125%
Expected life of options 3 years
</TABLE>
During 1997, the Company issued options to purchase shares of common stock with
respect to which the Company recorded deferred compensation of $1,407,000 for
financial reporting purposes to reflect the difference between the exercise
price and deemed fair value for financial statement presentation purposes.
Amortization of such deferred compensation totaled $196,000 for the period from
inception (May 8, 1997) to December 31, 1997.
7. RELATED PARTY TRANSACTIONS
In June 1997, the Company entered into a one-year consulting agreement with
SourceWorks, Inc., whereby SourceWorks agreed to provide consulting services to
the Company. The Founder of the Company owns 33% of SourceWorks common stock.
Consulting fees paid by the Company in the amount of $501,000 are included in
research and development expense for the period from inception (May 8, 1997) to
December 31, 1997. Included in accrued liabilities at December 31, 1997 was
$71,000 owed to SourceWorks.
14
<PAGE> 17
MatchLogic, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES
At December 31, 1997, the Company had a net operating loss carryforward for
federal and state tax purposes of approximately $8,000,000, which will expire
in the tax year ended 2012. Due to the "change of ownership" provisions of the
Internal Revenue Code, utilization of the net operating loss carryforward may
be limited.
As of December 31, 1997, the Company had deferred tax assets of approximately
$3,000,000 which relate primarily to the future tax benefits of net operating
loss carryforwards. Due to the Company's lack of earnings history, the deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $3,000,000 during the period ended December 31, 1997.
9. DEFINED CONTRIBUTION PENSION PLAN
The Company provides a 401(k) defined contribution pension plan (the "Plan") to
its eligible employees. All employees, as defined under the Plan, are eligible
to participate immediately. Employee contributions to the Plan are subject to
certain statutory limitations. The after-tax voluntary contributions to the Plan
are subject to certain statutory limitations. The after-tax voluntary
contributions are limited to 20% or the applicable Internal Revenue Services
limit ($9,500 for 1997) of the aggregate compensation paid to the employee in
all the years of participation in the Plan. The Company's contribution to the
Plan is discretionary. The Company did not make any contributions in the period
from inception (May 8, 1997) to December 31, 1997.
15
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated February 19, 1998, with respect to the
financial statements of MatchLogic, Inc., in the Current Report on Form 8-K/A of
Excite dated March 31, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Palo Alto, California
March 31, 1998
