Form 8-K Amendment

 

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): April 26, 2005

 


 

Marchex, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Delaware   000-50658   35-2194038

(State or other jurisdiction

of incorporation)

  (Commission File Number)  

(I.R.S. Employer

Identification No.)

 

413 Pine Street

Suite 500

Seattle, Washington 98101

(Address of Principal Executive Offices)

 

(206) 331-3300

(Registrant’s telephone number, including area code)

 


 

Check the appropriate box if the Form 8-K filing is intended to simultaneously satisfy the reporting obligation of the registrant under any of the following provisions:

 

  ¨ Written communications pursuant to Rule 425 under the Securities Act

 

  ¨ Soliciting material pursuant to Rule 14a-12 of the Exchange Act

 

  ¨ Pre-commencement communications pursuant to Rule 14d-2(b) Exchange Act

 

  ¨ Pre-commencement communications pursuant to Rule 13e-4(c) Exchange Act

 


 

1


Item 2.01. Acquisition or Disposition of Assets.

 

On April 26, 2005, Marchex, Inc., a Delaware corporation (“Marchex” or the “Company”), completed the acquisition of certain assets of Pike Street Industries, Inc., a Washington corporation (“Pike Street”). Pike Street is an online Yellow Pages and lead generation provider for local merchants. The aggregate consideration pursuant to the Asset Purchase Agreement is an amount of cash equal to $12,500,000, 242,748 shares of Marchex’s Class B common stock (which was obtained by dividing $4,000,000 (the “Equity Consideration”) by the average of the last quoted sale price for shares of Marchex’s Class B common stock on the Nasdaq National Market for the ten trading days immediately prior to the closing) (the “Closing Market Price”) and 212,404 shares of Marchex’s Class B common stock (which was obtained by dividing $3,500,000 (the “Restricted Equity Consideration”) by the Closing Market Price). The Restricted Equity Consideration is subject to vesting over the three year period from the closing date and forfeiture upon the occurrence of certain events.

 

The Asset Purchase Agreement contains customary representations and warranties and requires Pike Street and the stockholders to indemnify Marchex for certain liabilities arising under the Asset Purchase Agreement, subject to certain limitations and conditions. At closing, Marchex deposited into escrow for a period of twelve months from the closing $1,250,000 in cash, 24,275 shares of Marchex’s Class B common stock issued as the Equity Consideration and 81,927 shares of Marchex’s Class B common stock issued as the Restricted Equity Consideration for the benefit of Pike Street and the stockholders to secure their respective indemnification and other obligations under the Asset Purchase Agreement.

 

Marchex has also agreed to use best efforts to file a registration statement to register the shares of Class B common stock issued as the Equity Consideration and Restricted Equity Consideration thereunder for resale with the SEC on or before June 5, 2005. In accordance therewith, Marchex filed a Registration Statement on Form S-3 with the Securities and Exchange Commission on May 31, 2005 under the Securities Act of 1933, as amended, relating to 1,382,093 shares of Marchex’s Class B common stock which such shares included the shares of Equity Consideration and Restricted Equity Consideration issued to the Stockholders in connection with the Closing. Such registration statement was declared effective on July 7, 2005.

 

The acquisition consideration was determined by arms’ length negotiation between the parties. Marchex funded the cash portion of the acquisition consideration from cash on hand.

 

Marchex filed a Current Report on Form 8-K on May 2, 2005 announcing the completion of the acquisition of certain assets of Pike Street. The purpose of this Form 8-K/A is to amend the Current Report on Form 8-K filed on May 2, 2005 to include the financial statements and pro forma financial information required by Item 9.01.

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial statements of businesses acquired.

 

The unaudited condensed financial statements of Pike Street Industries, Inc. as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 and the audited financial statements of Pike Street Industries, Inc. as of December 31, 2004 and for the years ended December 31, 2003 and 2004 are attached hereto as Exhibit 99.2 and are incorporated herein by reference.

 

(b) Pro forma financial information.

 

The unaudited pro forma condensed consolidated financial statements for Marchex, Inc. as of March 31, 2005 and for the year ended December 31, 2004 and the three months ended March 31, 2005 are attached hereto as Exhibit 99.3 and are incorporated herein by reference.

 

2


(c) Exhibits.

 

Exhibit No.

    

Description


2.1 *    Asset Purchase Agreement, dated as of April 26, 2005, by and among Marchex, Inc., Pike Street Industries, Inc. and the holders of all of the issued and outstanding capital stock of Pike Street Industries, Inc.
23.1      Independent auditors’ consent.
99.1 *    Press Release, dated April 27, 2005.
99.2      The unaudited condensed financial statements of Pike Street Industries, Inc. as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 and the audited financial statements of Pike Street Industries, Inc. as of December 31, 2004 and for the years ended December 31, 2003 and 2004.
99.3      Marchex, Inc. unaudited pro forma condensed consolidated financial statements as of March 31, 2005 and for the year ended December 31, 2004 and the three months ended March 31, 2005.

* Previously filed.

 

 

3


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: July 11, 2005       MARCHEX, INC.
        By:   /s/    MICHAEL A. ARENDS
            Name:   Michael A. Arends
            Title:   Chief Financial Officer

 

 

4


EXHIBIT INDEX

 

Exhibit No.

    

Description


2.1 *    Asset Purchase Agreement, dated as of April 26, 2005, by and among Marchex, Inc., Pike Street Industries, Inc. and the holders of all of the issued and outstanding capital stock of Pike Street Industries, Inc.
23.1      Independent auditors’ consent.
99.1 *    Press Release, dated April 27, 2005.
99.2      The unaudited condensed financial statements of Pike Street Industries, Inc. as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 and the audited financial statements of Pike Street Industries, Inc. as of December 31, 2004 and for the years ended December 31, 2003 and 2004.
99.3      Marchex, Inc. unaudited pro forma condensed consolidated financial statements as of March 31, 2005 and for the year ended December 31, 2004 and the three months ended March 31, 2005.

* Previously filed.

 

 

5

Independent auditors' consent

Exhibit 23.1

 

Independent Auditors’ Consent

 

The Board of Directors

Marchex, Inc.:

 

We consent to the incorporation by reference in the registration statement (No. 333-125372) on Form S-3 and registration statements (Nos. 333-116867 and 333-123753) on Form S-8 of Marchex, Inc. of our report dated June 24, 2005, with respect to the balance sheet of Pike Street Industries, Inc. as of December 31, 2004 and the related statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2003 and 2004, which report appears in this Form 8-K/A of Marchex, Inc.

 

/s/ KPMG LLP

 

Seattle, Washington

July 5, 2005

Unaudited Condensed Financial Statements of Pike Street Industries, Inc.

Exhibit 99.2

 

Independent Auditors’ Report

 

The Board of Directors

Pike Street Industries, Inc.:

 

We have audited the accompanying balance sheet of Pike Street Industries, Inc. as of December 31, 2004, and the related statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2003 and 2004. 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 audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pike Street Industries, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2004 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ KPMG LLP

 

Seattle, Washington

June 24, 2005


Pike Street Industries, Inc.

 

Balance Sheets

 

          Unaudited

     December 31,
2004


   March 31,
2005


Assets              

Current assets:

             

Cash and cash equivalents

   $ 678,865    $ 281,364

Accounts receivable, net

     651,231      664,322

Prepaid expenses

     61,257      44,821
    

  

Total current assets

     1,391,353      990,507

Property and equipment, net

     24,940      24,701

Intangibles assets, net

     251,190      233,540

Other assets

     23,900      23,800
    

  

Total assets

   $ 1,691,383    $ 1,272,548
    

  

Liabilities and Stockholders’ Equity              

Current liabilities:

             

Accounts payable

   $ 49,567    $ 97,331

Accrued payroll and benefits

     55,787      250

Accrued expenses and other current liabilities

     38,789      14,978

Deferred revenue

     —        1,856
    

  

Total current liabilities

     144,143      114,415

Commitments and subsequent event

             

Stockholders’ equity:

             

Common stock, $0.01 par value, 200,000 shares authorized, issued and outstanding at December 31, 2004 and at March 31, 2005

     2,000      2,000

Additional paid-in capital

     98,000      98,000

Retained earnings

     1,447,240      1,058,133
    

  

Total stockholders’ equity

     1,547,240      1,158,133
    

  

Total liabilities and stockholders’ equity

   $ 1,691,383    $ 1,272,548
    

  

 

 

See accompanying notes to financial statements.

 

2


Pike Street Industries, Inc.

 

Statements of Operations

 

    

Year ended
December 31,
2003


   

Year ended
December 31,
2004


   Unaudited

          Three months
ended March 31,
2004


   Three months
ended March 31,
2005


Revenue

   $ 1,477,378     $ 2,987,261    $ 620,501    $ 963,198

Expenses:

                            

Service costs

     123,262       149,484      37,389      51,929

Sales and marketing

     199,506       393,261      97,605      133,824

Product development

     115,200       165,940      41,639      59,400

General and administrative

     164,862       203,711      39,644      107,516
    


 

  

  

Total operating expenses

     602,830       912,396      216,277      352,669
    


 

  

  

Income from operations

     874,548       2,074,865      404,224      610,529

Other income (expense):

                            

Interest income

     893       2,424      480      173

Interest expense

     (5,415 )     —        —        —  

Other

     —         1,171      1,926      191
    


 

  

  

Total other income (expense)

     (4,522 )     3,595      2,406      364
    


 

  

  

Net income

   $ 870,026     $ 2,078,460    $ 406,630    $ 610,893
    


 

  

  

 

 

 

 

 

See accompanying notes to financial statements.

 

3


Pike Street Industries, Inc.

 

Statements of Stockholders’ Equity

 

         

Additional

paid-in
capital


   Retained
earnings


   

Total

stockholders’
equity


 
     Common stock

       
     Shares

   Amount

       

Balances at December 31, 2002

   200,000    $ 2,000    $ 98,000    $ 128,754     $ 228,754  

Net income

   —        —        —        870,026       870,026  

Distributions

   —        —        —        (500,000 )     (500,000 )
    
  

  

  


 


Balances at December 31, 2003

   200,000      2,000      98,000      498,780       598,780  

Net income

   —        —        —        2,078,460       2,078,460  

Distributions

   —        —        —        (1,130,000 )     (1,130,000 )
    
  

  

  


 


Balances at December 31, 2004

   200,000      2,000      98,000      1,447,240       1,547,240  

Net income—unaudited

   —        —        —        610,893       610,893  

Distributions—unaudited

   —        —        —        (1,000,000 )     (1,000,000 )
    
  

  

  


 


Balances at March 31, 2005—unaudited

   200,000    $ 2,000    $ 98,000    $ 1,058,133     $ 1,158,133  
    
  

  

  


 


 

 

 

 

See accompanying notes to financial statements.

 

4


Pike Street Industries, Inc.

 

Statements of Cash Flows

 

                 Unaudited

 
     Year ended
December 31,
2003


    Year ended
December 31,
2004


   

Three months
ended

March 31,
2004


   

Three months
ended

March 31,
2005


 

Cash flows from operating activities:

                                

Net income

   $ 870,026     $ 2,078,460     $ 406,630     $ 610,893  

Adjustments to reconcile net income to net cash provided by operating activities:

                                

Amortization and depreciation

     61,974       72,438       16,699       20,716  

Loss on disposal of property and equipment

     —         1,849       —         —    

Change in certain assets and liabilities:

                                

Accounts receivable, net

     (125,550 )     (408,651 )     (172,661 )     (13,090 )

Prepaid expenses and other assets

     400       (84,257 )     (56,553 )     16,434  

Accounts payable, accrued payroll and benefits, accrued expenses and other current liabilities

     25,423       110,104       (20,935 )     (31,583 )

Deferred revenue

     61,175       (61,175 )     (61,175 )     1,856  
    


 


 


 


Net cash provided by operating activities

     893,448       1,708,768       112,005       605,226  
    


 


 


 


Cash flows from investing activities:

                                

Purchases of property and equipment

     (6,257 )     (25,423 )     —         (2,727 )

Increase in intangible and other non current assets

     (26,439 )     (55,177 )     (1,889 )     —    
    


 


 


 


Net cash used in investing activities

     (32,696 )     (80,600 )     (1,889 )     (2,727 )
    


 


 


 


Cash flows from financing activities:

                                

Distributions to shareholders

     (500,000 )     (1,130,000 )     —         (1,000,000 )

Repayment of shareholder notes payable

     (223,450 )     —         —         —    
    


 


 


 


Net cash used in financing activities

     (723,450 )     (1,130,000 )     —         (1,000,000 )
    


 


 


 


Net increase in cash and cash equivalents

     137,302       498,168       110,116       (397,501 )

Cash and cash equivalents at beginning of period

     43,395       180,697       180,697       678,865  
    


 


 


 


Cash and cash equivalents at end of period

   $ 180,697     $ 678,865     $ 290,813     $ 281,364  
    


 


 


 


 

 

See accompanying notes to financial statements.

 

5


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

Note 1—Description of Business and Summary of Significant Accounting Policies

 

a) Description of Business

 

Pike Street Industries, Inc. (Company), formed in March 2002 and incorporated in the state of Washington, develops, operates, and manages Internet websites, content services, and directory services related to Internet-based yellow and white pages, local or geographical search and content, and college leads markets.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or for any other period. The accompanying unaudited condensed consolidated financial statements of the Company do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read with the financial statements and notes thereto of Pike Street Industries, Inc. for the years ended December 31, 2003 and 2004.

 

b) Revenue Recognition

 

The Company’s primary sources of revenue are performance-based advertising services, which include pay-per-click services, pay-per-search services and costs-per-action services. Revenue from pay-per-click services and pay-per-search services are generated upon the delivery of qualified and reported click-throughs or searches, which occur when an online user clicks or searches on advertiser listings or advertising service provider listings on the Company’s websites. Cost-per-action revenue is generated when the on-line user is redirected from the Company websites to an advertiser website and completes the specified action.

 

Revenue is recognized in the period that the advertising impressions, click-throughs, search or actions occur and are reported, the fee is fixed and determinable and collection is reasonably assured.

 

c) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

 

d) Fair Value of Financial Instruments

 

The Company had the following financial instruments as of the periods presented: cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and benefits, accrued expenses and other current liabilities. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and benefits, accrued expenses and other current liabilities approximates their fair value based on the liquidity of these financial instruments or based on their short-term nature.

 

e) Trade Accounts Receivable

 

Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at period-end and do not bear interest. The Company does not require or receive collateral with respect to its sales. The Company records an allowance for doubtful accounts when it estimates probable credit

 

6


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

losses in existing accounts receivable. The allowance is determined based on analysis of historical bad debts, customer credit worthiness and current economic trends. Past due balances over 90 days and specific other balances are reviewed individually for collectibility and account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company had no allowance and no write-offs in the periods presented.

 

f) Concentrations and Economic Dependence

 

Accounts receivable

 

The percentages of accounts receivable from customers representing 10% or more of accounts receivable are as follows:

 

           Unaudited

 
     December 31,
2004


    March 31,
2005


 

Customer A

   14 %   12 %

Customer B

   13 %   21 %

Customer C

   33 %   20 %

Customer D

   13 %   16 %

 

Revenue

 

Substantially all of the Company’s revenue earned from customers is generated through arrangements that are short-term in nature. The Company may not be successful in renewing any of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The Company may not be successful in entering into agreements with new customers on commercially acceptable terms. In addition, several of these customers may be considered potential competitors.

 

The percentage of revenue earned from customers representing more than 10% of revenue is as follows:

 

                 Unaudited

 
     Year ended
December 31,
2003


    Year ended
December 31,
2004


   

Three months
ended

March 31,
2004


   

Three months
ended

March 31,
2005


 

Customer A

   27 %   17 %   26 %   13 %

Customer B

       12 %   17 %   15 %

Customer C

       21 %       14 %

Customer D

               11 %

Customer E

               10 %

Customer F

           18 %    
    

 

 

 

     27 %   50 %   61 %   63 %
    

 

 

 

 

7


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

Cash and investments

 

The Company maintains its cash and investments with a single financial institution. At certain times during the year, its cash balance may exceed the $100,000 FDIC insured limit. Cash equivalents as of the periods presented consist primarily of money market funds.

 

At December 31, 2004 and at March 31, 2005, the Company had uninsured balances of $579,000 and $181,000, respectively.

 

g) Property and Equipment

 

Property and equipment are stated at cost. Depreciation on computers and other related equipment, and furniture and fixtures is calculated for book purposes on the straight-line method over the estimated useful lives of the assets, generally averaging three years. Repairs, maintenance and small purchases are charged to expense in the year incurred.

 

h) Intangible Assets

 

The Company capitalizes costs incurred to acquire Internet domain names or URLs, which include the initial registration fees, and amortizes the cost over the expected useful life of the domain names on a straight-line basis. The expected useful lives range from 12 to 72 months. In order to maintain the rights to each domain name acquired, the Company pays periodic registration fees, which generally cover a minimum period of 12 months. The Company records registration renewal fees of domain name intangible assets as a prepaid expense and amortizes the cost over the registration period.

 

i) Impairment or Disposal of Long-Lived Assets

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets, primarily domain name intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their estimated fair value. Assets to be disposed of would be separately presented on the balance sheet and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be amortized or depreciated.

 

j) Advertising Expenses

 

Advertising costs are expensed as incurred and include Internet-based direct advertising. The amounts for advertising expense for the years ended December 31, 2003 and 2004 and the unaudited three months ended March 31, 2004 and 2005 were approximately $126,000, $318,000, $80,000, and $115,000, respectively.

 

k) Product Development

 

Product development costs consist primarily of expenses incurred by the Company in the research and development, creation, and enhancement of the Company’s Internet sites and services. Research and development expenses are expensed as incurred and include compensation and related expenses, costs of computer hardware and software, and costs incurred in developing features and functionality of the services. For the periods presented, substantially all of the product development costs were research and development costs.

 

8


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

Product development costs are expensed as incurred or capitalized into property and equipment in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires that cost incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project by capitalized.

 

l) Management’s Use of Estimates

 

Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

 

m) Segment Reporting

 

Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company’s management. For all periods presented, the Company operated as a single segment. The Company operates in a single business segment principally in domestic markets providing Internet transaction services to enterprises.

 

n) Federal Income Taxes

 

The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholders are liable for individual federal income taxes on their respective shares of the corporate income. Accordingly, no provision has been made for federal income tax in the accompanying financial statements.

 

o) Guarantees

 

Indemnification provisions contained within the Company’s customer and distribution partner agreements are generally consistent with those prevalent in the Company’s industry. The Company has not incurred significant obligations under customer and distribution partner indemnification provisions historically and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for potential customer and distribution partner indemnification obligations.

 

p) Recently Issued Accounting Standards

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value-based model of APB Opinion No. 25, provided that the financial statements disclosed the pro forma net income or loss based on the preferable fair-value method. The Company is required to apply SFAS No. 123(R) as of the interim reporting period that begins after December 15, 2005. Thus, the Company’s consolidated financial statements will reflect an expense for (a) all share-based compensation arrangements granted after January 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b) the portion of previous share-based awards for which the requisite service has not been rendered as of that date, based on the grant-date estimated fair value of those awards. The Company does not expect the adoption of SFAS No. 123(R) to have a material impact on the Company’s financial statements.

 

9


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

Note 2—Property and Equipment

 

Property and equipment consisted of the following at:

 

           Unaudited

 
     December 31,
2004


    March 31,
2005


 

Computers and equipment

   $ 33,245     $ 35,972  

Less accumulated depreciation

     (8,305 )     (11,271 )
    


 


Property and equipment, net

   $ 24,940     $ 24,701  
    


 


 

Depreciation expense incurred by the Company was approximately $3,800 and $9,200, and $1,200 and $3,000 for the years ended December 31, 2003 and 2004 and the unaudited three months ended March 31, 2004 and 2005, respectively.

 

Note 3—Intangible assets

 

Intangible assets consisted of the following at:

 

           Unaudited

 
     December 31,
2004


    March 31,
2005


 

Internet Domain names

     417,116       417,116  

Less accumulated amortization

     (165,926 )     (183,576 )
    


 


Intangible assets, net

   $ 251,190     $ 233,540  
    


 


 

Amortization expense incurred by the Company was approximately $57,800, $62,900, $15,400 and $17,600 for the years ended December 31, 2003 and 2004 and the unaudited three months ended March 31, 2004 and 2005, respectively, and has been recorded in service costs in the statements of operations. Estimated amortization expense for the next five years is approximately $70,600, $70,600, $70,600, $25,300 and $13,000 in calendar years 2005, 2006, 2007, 2008 and 2009, respectively.

 

Note 4—Related Party Transaction

 

At December 31, 2002, the Company had demand notes payable to its stockholders totaling $223,450. The notes were unsecured and interest was charged at 10%. The outstanding principal amounts were due and payable on March 31, 2007. Interest was due and payable annually in arrears on commencing March 31, 2003. These notes were repaid in 2003. Interest expense related to these notes was approximately $5,400 for 2003.

 

Note 5—Line of Credit

 

At December 31, 2004, the Company had available a $500,000 bank line of credit, secured by substantially all of the Company’s assets, bearing interest at the prime rate plus 0.75% (approximately 4.75% at December 31, 2004). The Company did not borrow on the line of credit during any of the periods presented. The line of credit was cancelled in February 2005.

 

10


PIKE STREET INDUSTRIES, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 AND UNAUDITED THREE MONTHS

ENDED MARCH 31, 2004 AND 2005

 

Note 6—401(k) Plan

 

The Company has a retirement plan (the Plan) under Section 401(k) of the Internal Revenue code, which covers those employees that meet eligibility requirements. The Plan began in 2003. Eligible employees may contribute to the maximum allowed by § 401(k) for the specific year. Under the Plan, the Company is obligated to make either a plan contribution of 3% of gross earnings of all eligible employees or match 100% of the first 3% of earnings and 50% of the next 2% of earnings contributed by eligible employees.

 

The Company contributed $56,000 and $67,000 for the years ended December 31, 2003 and 2004, respectively, and $10,000 and $13,000 for the unaudited three months ended March 31, 2004 and 2005, respectively.

 

Note 7—Commitments

 

The Company leases office space under a lease that began April 2004 at approximately $1,400 per month. The lease expires March 31, 2007. The Company prepaid the office lease cost for the term of the lease. The current and long-term portions of this amount have been recorded in “Prepaid expenses” and “Other assets”, respectively, in the balance sheets and are being amortized on a straight-line basis over the lease term. The Company is also required to pay common area maintenance fees of approximately $690 per month. Rent expense incurred by the Company was approximately $4,400, $20,800, $2,400 and $6,400 for the years ended December 31, 2003 and 2004 and the unaudited three months ended March 31, 2004 and 2005, respectively.

 

In March 2005, the Company entered into a 1-year contract for website hosting services. The Company has commitments for future payments under this contract. Future minimum payments for the years ending December 31, 2005 and 2006 are $20,250 and $6,750, respectively.

 

Note 8—Subsequent Event

 

On April 26, 2005, Marchex, Inc. acquired certain assets of the Company. The consideration consisted of :

 

    $12,500,000 in cash; plus

 

    242,748 shares of Marchex, Inc. Class B common stock; plus

 

    212,404 shares of restricted Marchex, Inc. Class B common stock, which will vest as employment services are performed over a three-year period in installments of 16.67% after each 6 month period during that term.

 

The assets acquired include a substantial majority of the operating assets of the Company excluding cash and cash equivalents and accounts receivable.

 

11

Marchex, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements

EXHIBIT 99.3

 

MARCHEX, INC.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Pike Street Industries Acquisition

 

On April 26, 2005, Marchex, Inc. (“Company”) acquired certain assets of Pike Street Industries, Inc. (“Pike Street”), an online Yellow Pages and lead generation provider for local merchants.

 

The purchase price consideration consisted of:

 

    $12.7 million in cash and estimated acquisition costs; plus

 

    242,748 shares of Class B common stock; plus

 

    212,404 shares of restricted Class B common stock which will vest over a three-year period in installments of 16.67% after each 6 month period during that term.

 

The shares of Class B common stock excluding the shares of restricted Class B common stock were valued at $17.18 per share (for accounting purposes, in accordance with Emerging Issues Task Force Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Business Combination), for an aggregate amount of approximately $4.2 million.

 

The shares of restricted Class B common stock were valued at $16.85 per share (the last reported sales price on the closing date) for an aggregate amount of approximately $3.6 million. The shares of restricted Class B common stock were issued to the former stockholders of Pike Street who became employees of the Company

 

The asset purchase agreement contained customary representations and warranties and required Pike Street’s stockholders to indemnify the Company for various liabilities arising under the agreement, subject to various limitations and conditions. At the closing, the Company deposited into escrow for the benefit of the stockholders for a period of twelve months from the closing an amount of cash equal to $1.3 million, 24,275 shares of the 242,748 shares of Class B common stock, and 81,927 shares of the 212,404 restricted Class B common stock to secure the stockholders’ indemnification and other obligations under the asset purchase agreement, which is included in the above total purchase price consideration.

 

The estimated fair values of assets acquired are based upon preliminary estimates and may not be indicative of the final allocation of the purchase price consideration.

 

Pro Forma Financial Information

 

Unaudited Pro Forma Condensed Consolidated Statements of Operations

 

The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2004 and the three months ended March 31, 2005 give effect to previously reported acquisitions, which include goClick.com, Inc. (goClick) and Name Development Ltd. (Name Development) (collectively, the “previously reported acquisitions”) and the Company’s acquisition of certain assets of Pike Street as if they had occurred on January 1, 2004.

 

The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2004 combine: (1) the Company and its subsidiaries’ historical results of operations for the year ended December 31, 2004; (2) goClick’s historical results of operations for the pre-acquisition period from January 1, 2004 to July 26, 2004; (3) Name Development’s historical results of operations for the year ended December 31, 2004; (4) an offering of only that number of shares of Class B common stock and preferred stock as necessary to consummate

 


MARCHEX, INC.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

the Name Development asset acquisition for the year ended December 31, 2004; and (5) Pike Street’s historical results of operations for the year ended December 31, 2004.

 

The unaudited pro forma condensed consolidated statements of operations for the three months ended March 31, 2005 combine: (1) the Company and its subsidiaries’ historical results of operations for the three months ended March 31, 2005; (2) Name Development’s historical results of operations for the pre-acquisition period from January 1, 2005 to February 13, 2005; (3) an offering of only that number of shares of Class B common stock and preferred stock as necessary to consummate the Name Development asset acquisition for the period of January 1, 2005 through February 13, 2005; and (4) Pike Street’s historical results of operations for the three months ended March 31, 2005.

 

The components of revenues, operating expenses and net income reflected as historical operating results included in the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2004 of the previously reported acquisitions from January 1, 2004 through December 31, 2004 or their respective dates of acquisition are as follows:

 

     Date Acquired

   Revenue

   Operating
Expense


  

Net

Income


goClick

   July 27, 2004    3,769,347    2,497,691    1,277,152

Name Development

   February 14, 2005    20,667,254    3,039,418    17,386,150

 

The components of revenues, operating expenses and net income reflected as historical operating results included in the unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2005 of the previously reported acquisition from January 1, 2005 through its respective date of acquisition is as follows:

 

     Date Acquired

   Revenue

   Operating
Expense


  

Net

Income


Name Development

   February 14, 2005    2,544,459    350,343    2,019,785

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

The unaudited pro forma condensed consolidated balance sheet combine the historical balance sheets of the Company and its subsidiaries and Pike Street as of March 31, 2005 and gives effect to the acquisition as if had occurred on March 31, 2005.

 

Unaudited Pro Forma Condensed Consolidated Financial Information

 

The unaudited pro forma condensed consolidated financial information is intended for illustrative purposes only and is not necessarily indicative of the combined results that would have occurred had the acquisition taken place on January 1, 2004, nor is it necessarily indicative of results that may occur in the future. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this Form 8-K/A and result in a preliminary allocation of the purchase price based on preliminary estimates of the fair value of the assets acquired and liabilities assumed, and may not be indicative of the final allocation of the purchase price consideration.

 

The unaudited pro forma condensed consolidated financial statements and the accompanying notes should be read in conjunction with the historical financial statements and pro forma condensed financial statements of the Company, Pike Street, goClick and Name Development and related notes contained thereto and in the reports and information the Company has on file with the SEC, including the Company’s Form 8-K filed on May 31, 2005.

 

2


MARCHEX, INC.

 

Unaudited Pro Forma Condensed Balance Sheet

As of March 31, 2005

 

     Marchex, Inc.
(Historical)


    Pike Street
(Historical)


   Pro Forma
Adjustments


   Pro Forma
Combined


 
Assets                                     

Current assets:

                                    

Cash and cash equivalents

   $ 86,465,826     $ 281,364    $ (12,500,000 )   a    $ 73,965,826  
                      (281,364 )   b         

Trade accounts receivable, net

     6,005,845       664,322      (664,322 )   b      6,005,845  

Prepaid expenses and other current assets

     1,046,059       44,821      (44,821 )   b      1,046,059  

Refundable income taxes

     1,509,531       —                     1,509,531  

Deferred tax assets

     415,469       —                     415,469  
    


 

  


      


Total current assets

     95,442,730       990,507      (13,490,507 )          82,942,730  

Property and equipment, net

     1,542,106       24,701      (17,827 )   b      1,548,980  

Deferred tax assets

     402,484       —                     402,484  

Intangibles and other assets, net

     9,159,167       257,340      (257,340 )   b      9,159,167  

Goodwill

     142,482,696       —        11,800,287     a      154,282,983  

Intangible assets from acquisitions, net

     55,756,253       —        5,025,000     a      60,781,253  
    


 

  


      


       209,342,706       282,041      16,550,120            226,174,867  

Total assets

   $ 304,785,436     $ 1,272,548    $ 3,059,613          $ 309,117,597  
    


 

  


      


Liabilities and Stockholders’ Equity                                     

Current Liabilities:

                                    

Accounts payable

   $ 6,180,961     $ 97,331    $ (97,331 )   b    $ 6,180,961  

Accrued expenses and other current liabilities

     1,979,509       15,228      161,750     a      2,141,259  
                      (15,228 )   b         

Deferred revenue

     1,908,869       1,856      (1,856 )   b      1,908,869  

Earn-out liability payable

     —                             —    
    


 

  


      


Total current liabilities

     10,069,339       114,415      47,335            10,231,089  

Other non-current liabilities

     76,564       —        —              76,564  
    


 

  


      


Total liabilities

     10,145,903       114,415      47,335            10,307,653  

Stockholders’ equity:

                                    

Convertible preferred stock

     55,205,369                           55,205,369  

Common stock

             2,000      (2,000 )   b      —    

Class A common stock

     122,500                           122,500  

Class B common stock

     231,618              4,552     a      236,170  

Additional paid-in capital

     243,708,679       98,000      7,744,866     a      251,453,545  
                      (98,000 )   b         

Deferred stock-based compensation

     (375,282 )            (3,579,007 )   a      (3,954,289 )

Accumulated deficit

     (4,253,351 )     1,058,133      (1,058,133 )   b      (4,253,351 )
    


 

  


      


Total stockholders’ equity

     294,639,533       1,158,133      3,012,278            298,809,944  

Total liabilities and stockholders’ equity

   $ 304,785,436     $ 1,272,548    $ 3,059,613          $ 309,117,597  
    


 

  


      


 

 

See notes to unaudited pro forma condensed consolidated statements.

 

3


MARCHEX, INC.

 

Unaudited Pro Forma Condensed Consolidated Statements of Operations

For the year ended December 31, 2004

 

    Marchex,
Inc.
Historical


    Previously
Reported
Acquisitions
(5)


    Pro Forma
Adjustments
for Previously
Reported
Acquisitions


    Subtotal

    Pike Street
(Historical)


  Pike Street Pro
Forma
Adjustments


    Pro Forma
Combined


 

Revenue

  $ 43,804,272     $ 24,436,601     $ (17,818 )     68,223,055     $ 2,987,261   $ —             $ 71,210,316  
   


 


 


 


 

 


       


Expenses:

                                                           

Service costs (1)

    27,449,938       4,023,410       (775,775 )     30,697,573       149,484     (62,875 )   (c )     30,784,182  

Sales and marketing (1)

    4,414,043       20,453       —         4,434,496       393,261                   4,827,757  

Product development (1)

    2,291,430       96,742       —         2,388,172       165,940                   2,554,112  

General and administrative (1)

    4,111,544       1,396,504       —         5,508,048       203,711                   5,711,759  

Acquisition-related retention consideration (2)

    499,080       —         —         499,080       —                     499,080  

Facility relocation

    199,960       —         —         199,960       —                     199,960  

Stock-based compensation (3)

    890,520       —         —         890,520       —       2,326,355     (d )     3,216,875  

Amortization of intangible assets from acquisitions (4)

    4,965,503       —         14,843,473       19,808,976       —       1,549,405     (c )     21,358,381  
   


 


 


 


 

 


       


Total operating expenses

    44,822,018       5,537,109       14,067,698       64,426,825       912,396     3,812,885             69,152,106  

Gain on sale of intangible assets, net

    —         1,532,664       —         1,532,664       —                     1,532,664  
   


 


 


 


 

 


       


Income from operations

    (1,017,746 )     20,432,156       (14,085,516 )     5,328,894       2,074,865     (3,812,885 )           3,590,874  

Other income (expense)

                                                           

Interest income

    265,354       26,228       —         291,582       2,424                   294,006  

Interest expense

    (5,654 )     —         —         (5,654 )     —                     (5,654 )

Adjustment to fair value of redemption obligation

    55,250       —         —         55,250       —                     55,250  

Other, net

    3,644       (989 )     —         2,655       1,171                   3,826  
   


 


 


 


 

 


       


Total other income

    318,594       25,239       —         343,833       3,595     —               347,428  

Income before provision for income taxes

    (699,152 )     20,457,395       (14,085,516 )     5,672,727       2,078,460     (3,812,885 )           3,938,302  

Income tax expense (benefit)

    33,941       1,794,093       628,275       2,456,309       —       (659,082 )   (e )     1,797,227  
   


 


 


 


 

 


       


Net income

    (733,093 )     18,663,302       (14,713,791 )     3,216,418       2,078,460     (3,153,803 )           2,141,075  

Accrual of convertible preferred stock dividends

    —         —         2,375,000 (g)     2,375,000       —                     2,375,000  

Accretion of redemption value of redeemable

                                                           

convertible preferred stock

    420,430       —         —         420,430       —                     420,430  
   


 


 


 


 

 


       


Net income (loss) applicable to common stockholders

  $ (1,153,523 )   $ 18,663,302     $ (17,088,791 )   $ 420,988     $ 2,078,460   $ (3,153,803 )         $ (654,355 )
   


 


 


 


 

 


       


Basic net income (loss) per share applicable to common stockholders

  $ (0.05 )                   $ 0.01                         $ (0.02 )

Shares used to calculate basic net income (loss) per share

    22,087,503               6,339,887 (f)     28,427,390             260,449     (f )     28,687,839  

Diluted net income (loss) per share applicable to common stockholders

  $ (0.05 )                   $ 0.01                         $ (0.02 )

Shares used to calculate diluted net income (loss) per share

    22,087,503               8,126,614 (f)     30,214,117             260,449     (f )     28,687,839  
                                            (1,786,727 )   (f )        

(1)    Excludes acquisition-related retention consideration, stock-based compensation and amortization of intangible assets.

      

(2)    Components of acquisition-related consideration

      

Service costs

    116,585                       116,585                           116,585  

Sales and marketing

    204,528                       204,528                           204,528  

Product development

    135,947                       135,947                           135,947  

General and administrative

    42,020                       42,020                           42,020  

(3)    Components of stock-based compensation

      

Service costs

    10,800                       10,800             383,849             394,649  

Sales and marketing

    155,734                       155,734             581,589             737,323  

Product development

    59,883                       59,883             779,328             839,211  

General and administrative

    664,103                       664,103             581,589             1,245,692  

(4)    Components of amortization of intangible assets

      

Service costs

    3,520,878               11,594,548       15,115,426             582,738             15,698,164  

Sales and marketing

    701,077               142,473       843,550             800,000             1,643,550  

General and administrative

    743,548               3,106,452       3,850,000             166,667             4,016,667  

(5)    Represents the historical operating results of the previously reported acquisitions prior to their dates of acquisition by the Company and the pro forma effect of only that number of shares of Class B common stock and preferred stock as necessary to consummate the Name Development asset acquisition. See the unaudited pro forma condensed consolidated financial information for certain operating data for each acquisition.

        

 

See notes to unaudited pro forma condensed consolidated statements.

 

4


MARCHEX, INC.

 

Unaudited Pro Forma Condensed Consolidated Statements of Operations

For the three months ended March 31, 2005

 

    Marchex,
Inc.
Historical


    Previously
Reported
Acquisitions
(5)


    Pro Forma
Adjustments
for Previously
Reported
Acquisitions


    Subtotal

    Pike Street
(Historical)


  Pike Street
Pro Forma
Adjustments


        Pro Forma
Combined


 

Revenue

  $ 18,395,983     $ 2,544,459     $ —       $ 20,940,442     $ 963,198   $ —           $ 21,903,640  
   


 


 


 


 

 


     


Expenses:

                                                         

Service costs (1)

    10,668,907       216,185     $ (191,540 )     10,693,552       51,929     (17,650 )   (c)     10,727,831  

Sales and marketing (1)

    1,324,986       —       $ —         1,324,986       133,824                 1,458,810  

Product development (1)

    774,549       —       $ —         774,549       59,400                 833,949  

General and administrative (1)

    1,452,034       134,158     $ —         1,586,192       107,516                 1,693,708  

Acquisition-related retention consideration (2)

    —         —       $ —         —         —                   —    

Facility relocation

    —         —       $ —         —         —                   —    

Stock-based compensation (3)

    146,538       —       $ —         146,538       —       283,338     (d)     429,876  

Amortization of intangible assets from acquisitions (4)

    3,083,157       —       $ 1,406,876       4,490,033       —       387,352     (c)     4,877,385  
   


 


 


 


 

 


     


Total operating expenses

    17,450,171       350,343       1,215,336       19,015,850       352,669     653,040           20,021,559  

Gain on sale of intangible assets, net

    —         29,486     $ —         29,486       —                   29,486  
   


 


 


 


 

 


     


Income (loss) from operations

    945,812       2,223,602       (1,215,336 )     1,954,078       610,529     (653,040 )         1,911,567  

Other income (expense)

                                                         

Interest income

    268,383       7,957     $ —         276,340       173                 276,513  

Interest expense

    (1,861 )     —       $ —         (1,861 )     —                   (1,861 )

Other, net

    4,000       (295 )   $ —         3,705       191                 3,896  
   


 


 


 


 

 


     


Total other income

    270,523       7,662       —         278,185       364     —             278,549  

Income (loss) before provision for income taxes

    1,216,335       2,231,264       (1,215,336 )     2,232,263       610,893     (653,040 )         2,190,116  

Income tax expense (benefit)

    478,933       211,479     $ 177,186       867,598       —       (16,016 )   (e)     851,582  
   


 


 


 


 

 


     


Net income (loss)

    737,402       2,019,785       (1,392,522 )     1,364,665       610,893     (637,024 )         1,338,534  

Convertible preferred stock dividends

    348,993 (g)     —       $ 282,361       631,354       —                   631,354  
   


 


 


 


 

 


     


Net Income (loss) applicable to common stockholders

  $ 388,409     $ 2,019,785     $ (1,674,883 )   $ 733,311     $ 610,893   $ (637,024 )       $ 707,180  
   


 


 


 


 

 


     


Basic net income per share applicable to common stockholders

  $ 0.01                     $ 0.02                       $ 0.02  

Shares used to calculate basic net income per share

    30,245,678 (f)             3,046,414       33,292,092             313,550     (f)     33,605,642  

Diluted net income per share applicable to common stockholders

  $ 0.01                     $ 0.02                       $ 0.02  

Shares used to calculate diluted net income per share

    32,920,472 (f)             3,046,414       35,966,886             420,187     (f)     36,387,073  

(1)    Excludes acquisition-related retention consideration, stock-based compensation, and amortization of intangible assets.

      

(2)    Components of acquisition-related consideration

      

Service costs

    —                         —                           —    

Sales and marketing

    —                         —                           —    

Product development

    —                         —                           —    

General and administrative

    —                         —                           —    

(3)    Components of stock-based compensation

      

Service costs

    1,800                       1,800             46,751           48,551  

Sales and marketing

    29,507                       29,507             70,835           100,342  

Product development

    10,665                       10,665             94,917           105,582  

General and administrative

    104,566                       104,566             70,835           175,401  

(4)    Components of amortization of intangible assets

      

Service costs

    2,393,425               1,059,108       3,452,533             145,685           3,598,218  

Sales and marketing

    120,833               —         120,833             200,000           320,833  

General and administrative

    568,899               347,768       916,667             41,667           958,334  

(5)    Represents the historical operating results of the previously reported acquisitions prior to their dates of acquisition by the Company and the pro forma effect of only that number of shares of Class B common stock and preferred stock as necessary to consummate the Name Development asset acquisition. See the unaudited pro forma condensed consolidated financial information for certain operating data for each acquisition.

         

 

See notes to unaudited pro forma condensed consolidated statements.

 

5


MARCHEX, INC.

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Pro Forma Adjustments

 

Pro Forma Adjustments for Pike Street

 

(a) The purchase price adjustments reflect cash and direct acquisition costs of approximately $12.7 million to acquire certain assets of Pike Street. Additionally, the Company issued 242,748 shares of Class B common stock valued at $17.18 per share (for accounting purposes) for an aggregate amount of $4.2 million and 212,404 shares of restricted Class B common stock valued at $16.85 per share (the last reported sales price on the closing date) for an aggregate amount of $3.6 million. The $3.6 million of restricted Class B common stock was recorded as deferred stock compensation and the Company expects to recognize stock-based compensation expense over the associated three-year employment periods over which those shares vest, using the accelerated methodology described in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

 

For purposes of the pro forma financial information, a summary of the purchase price consideration for the acquisition is as follows:

 

Cash

   $ 12,500,000

Stock issued

     4,170,411

Direct acquisition costs

     161,750
    

Total

   $ 16,832,161
    

 

The following represents the allocation of the acquired assets of Pike Street. The allocation is based upon Pike Street’s assets as of March 31, 2005.

 

Equipment

   $ 6,874

Goodwill

     11,800,287

Identifiable intangible assets

     5,025,000
    

Total

   $ 16,832,161
    

 

Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets. The unaudited pro forma condensed consolidated statements of operations do not reflect the amortization of goodwill acquired which is consistent with the guidance in the Financial Accounting Standards Board (FASB), Statement No. 142, Goodwill and Other Intangible Assets. The amortization expense of the identifiable intangible assets is deductible for tax purposes over 15 years.

(b) Represents the elimination of the historical stockholders’ equity and assets, liabilities not acquired or assumed as part of the Pike Street asset acquisition.

 

(c) Represents the amortization of identifiable intangible assets associated with the acquisition of certain assets of Pike Street, which are amortized over their useful lives ranging from 36 to 84 months. Amortization totals $1.5 million in the first twelve months and $1.9 million in the first fifteen months following the acquisition. Pike Street for the year ended December 31, 2004 and for the three months ended March 31, 2005, recorded approximately $63,000 and $18,000, respectively, of amortization included in service costs related to the above-noted intangible assets.

 

(d) Represents stock-based compensation expense associated with shares of restricted Class B common stock issued to the former stockholders of Pike Street who became employees of the Company. The shares of

 

6


MARCHEX, INC.

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

restricted Class B common stock were value at approximately $3.6 million at the acquisition date. The Company is recognizing stock-based compensation expense for the value of these shares over the associated employment period in which these shares vest, which results in $2.3 million in amortization in the first twelve months and $2.6 million in the first fifteen months following the acquisition.

 

(e) Represents pro forma income tax benefit as though Pike Street, a Washington corporation, was taxed as a C corporation for the periods presented using the Company’s combined pro forma effective federal and state rate of 38% for 2004 and its estimated combined effective federal and state rate of 38% for 2005. Prior to the Company’s acquisition, Pike Street was an S-Corporation, whereby shareholders were taxed on their portion of Pike Street’s taxable income.

 

Pro Forma Adjustments for Earnings per Share

 

(f) The following is a reconciliation of shares used to compute the historical basic and diluted net income (loss) per share to pro forma basic and diluted net income (loss) per share for the year ended December 31, 2004 and the three months ended March 31, 2005. Potentially dilutive securities were not included in the computations when their effects would be anti-dilutive.

 

     For the year ended
December 31, 2004


 
     Pro Forma
basic


   Pro Forma
diluted


 

Shares used to calculate Marchex Pro Forma net income per share (as previously reported in Marchex’s Form 8-K filed on May 31, 2005)

   28,427,390    30,214,117  

Exclude pro forma weighted average stock options and warrants and common shares subject to repurchase or cancellation which were included in Marchex’s pro forma shares reported on Form 8-K filed on May 31, 2005

   —      (1,786,727 )

Pike Street:

           

Pro forma effect of shares issued in Pike Street asset acquisition

   242,748    242,748  

Weighted average restricted shares issued in Pike Street asset acquisition for services expected to vest during the period

   17,701    17,701  
    
  

Shares used to calculate pro forma and adjusted pro forma basic and diluted net loss per share

   28,687,839    28,687,839  
    
  

     For the three months ended
March 31, 2005


 
     Pro Forma
basic


   Pro Forma
diluted


 

Shares used to calculate Marchex Pro Forma net income per share (as previously reported in Marchex’s Form 8-K filed on May 31, 2005)

   33,292,092    35,966,886  

Pike Street:

           

Pro forma effect of shares issued in Pike Street asset acquisition

   242,748    242,748  

Weighted average restricted shares issued in Pike Street asset acquisition for services expected to vest during the period

   70,802    177,439  
    
  

Shares used to calculated pro forma and adjusted pro forma basic and diluted net income per share

   33,605,642    36,387,073  
    
  

 

7


MARCHEX, INC.

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For purposes of calculating the shares used for pro forma basic and diluted net income (loss) per share for the year ended December 31, 2004 and the three months ended March 31, 2005, we have adjusted for the following:

 

    included 242,748 shares of Class B common stock issued in the Pike Street asset acquisition.

 

    included the weighted average impact of the 212,404 Class B restricted common shares issued in connection with the Pike Street asset acquisition. These shares are for future services that vest over 3 years. Unvested shares were excluded from the computation of pro forma basic net income (loss) per share in both periods.

 

    excluded the weighted average impact of 1,786,727 of stock options, warrants and common shares subject to repurchase or cancellation from the computation of pro forma diluted net loss per share for the year ended December 31, 2004 due to a pro forma net loss to common stockholders. These shares were included in the Company’s pro forma shares for the year ended December 31, 2004 reported on Form 8-K filed on May 31, 2005.

 

Other information

 

The estimated amortization relating to estimated intangible assets recorded as of March 31, 2005 for the period of April to December 2005 and the next 3 years and thereafter is as follows:

 

     Period of
April 1 to
December 31,
2005


   2006

   2007

   2008

   2009 and
thereafter


   Total

Enhance Interactive

   $ 1,148,000    $ 83,000    $ —      $ —      $ —      $ 1,231,000

TrafficLeader

     265,000      227,000      —        —        —        492,000

goClick

     1,067,000      652,000      144,000      —        —        1,863,000

Name Development

     10,255,000      13,501,000      10,974,000      9,763,000      8,000,000      52,493,000

Pike Street

     1,050,000      1,549,000      1,549,000      646,000      231,000      5,025,000
    

  

  

  

  

  

     $ 13,785,000    $ 16,012,000    $ 12,667,000    $ 10,409,000    $ 8,231,000    $ 61,104,000
    

  

  

  

  

  

 

8