EXHIBIT 99.3
MARCHEX, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IndustryBrains Acquisition
On July 27, 2005, Marchex, Inc. (“Company”) acquired IndustryBrains, Inc. (“IndustryBrains”), a company focused on monetizing vertical and brand name Web sites through contextual advertising solutions, for the following consideration:
| • | $17.2 million in cash and estimated acquisition cost; plus |
| • | 788,046 shares of Class B common stock; plus |
| • | 176,909 shares of restricted Class B common stock which will vest over a two-and-one half year period in installments of 33.34% after each ten month period during that term. |
The shares of Class B common stock, excluding the shares of restricted Class B common stock, were valued (for accounting purposes) at an aggregate amount of approximately $13.4 million.
The shares of restricted Class B common stock were valued at $17.00 per share (the last reported sales price on the closing date) for an aggregate amount of approximately $3.0 million. The shares of restricted Class B common stock were issued to employee stockholders of IndustryBrains who became employees of the Company.
The asset purchase agreement contained customary representations and warranties and required IndustryBrains’ 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 $2.5 million, 118,207 shares of the 788,046 shares of Class B common stock, and 26,536 shares of the 176,909 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
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 six months ended June 30, 2005 give effect to the Company’s acquisition of IndustryBrains and to previously reported acquisitions, which include goClick.com, Inc. (goClick), Name Development Ltd. (Name Development), and Pike Street Industries, Inc. (Pike Street) (collectively, the “previously reported acquisitions”) as if they had occurred on January 1, 2004.
The unaudited pro forma condensed consolidated statements of operations for the period 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 share of Class B common stock and preferred stock as necessary to consummate the Name Development asset acquisition for the year ended December 31, 2004; (4) Pike Street’s historical results of operations for the year ended December 31, 2004; and (5) IndustryBrains’ historical results of operations for the year ended December 31, 2004.
The unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2005 combine: (1) the Company and its subsidiaries’ historical results of operations for the six months ended June 30, 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; (4) Pike Street’s historical results of operations for the pre-acquisition period from January 1, 2005 to April 25, 2005 and (5) IndustryBrains’ historical results of operations for the six months ended June 30, 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 | ||||
Pike Street | April 26, 2005 | $ | 2,987,261 | $ | 912,396 | $ | 2,078,460 | ||||
Total | $ | 27,423,862 | $ | 6,449,505 | $ | 20,741,762 | |||||
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 six months ended June 30, 2005 of the previously reported acquisitions from January 1, 2005 through their respective dates of acquisition are as follows:
| Date Acquired | Revenue | Operating Expense | Net Income | ||||||||
Name Development | February 14, 2005 | $ | 2,544,459 | $ | 350,343 | $ | 2,019,785 | ||||
Pike Street | April 26, 2005 | $ | 1,230,494 | $ | 448,922 | $ | 781,985 | ||||
Total | $ | 3,774,953 | $ | 799,265 | $ | 2,801,770 | |||||
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 IndustryBrains as of June 30, 2005 and gives effect to the acquisition as if had occurred on June 30, 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 acquisitions 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, goClick, Name Development, Pike Street and IndustryBrains and related notes contained thereto and in the reports and information the Company has on file with the SEC.
2
MARCHEX, INC.
Unaudited Pro Forma Condensed Balance Sheet
As of June 30, 2005
| Marchex, Inc. (Historical) | IndustryBrains (Historical) | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||||
| Assets | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 71,292,532 | $ | 782,984 | $ | (16,500,096 | ) | a | $ | 55,575,420 | ||||||||
Accounts receivable, net | 7,771,592 | 1,057,127 | 8,828,719 | |||||||||||||||
Prepaid expenses and other current assets | 1,176,603 | 17,165 | 1,193,768 | |||||||||||||||
Refundable income taxes | 2,509,483 | 2,509,483 | ||||||||||||||||
Deferred tax assets | 401,087 | 5,041 | 406,128 | |||||||||||||||
Total current assets | 83,151,297 | 1,862,317 | (16,500,096 | ) | 68,513,518 | |||||||||||||
Property and equipment, net | 1,797,194 | 104,410 | (19,271 | ) | a | 1,882,333 | ||||||||||||
Deferred tax assets | 1,351,690 | 1,351,690 | ||||||||||||||||
Intangibles and other assets, net | 15,159,314 | 11,173 | 15,170,487 | |||||||||||||||
Goodwill | 154,250,051 | 25,138,587 | a | 179,388,638 | ||||||||||||||
Intangible assets from acquisitions, net | 55,899,422 | 8,100,000 | a | 63,999,422 | ||||||||||||||
| 228,457,671 | 115,583 | 33,219,316 | 261,792,570 | |||||||||||||||
Total assets | $ | 311,608,968 | $ | 1,977,900 | $ | 16,719,220 | $ | 330,306,088 | ||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||
Current Liabilities: | ||||||||||||||||||
Accounts payable | $ | 7,671,270 | $ | 666,218 | $ | 8,337,488 | ||||||||||||
Accrued expenses and other current liabilities | 1,723,923 | 586,819 | 733,422 | a | 3,044,164 | |||||||||||||
Deferred revenue | 2,015,469 | 343,749 | 2,359,218 | |||||||||||||||
Total current liabilities | 11,410,662 | 1,596,786 | 733,422 | 13,740,870 | ||||||||||||||
Other non-current liabilities | 50,942 | 7,879 | 2,962,251 | c | 3,021,072 | |||||||||||||
Total liabilities | 11,461,604 | 1,604,665 | 3,695,673 | 16,761,942 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||||
Convertible preferred stock | 55,205,369 | 55,205,369 | ||||||||||||||||
Class A common stock | 122,500 | 122,500 | ||||||||||||||||
Class B common stock | 237,291 | 9,650 | a | 246,941 | ||||||||||||||
Common stock | 403,951 | (403,951 | ) | b | — | |||||||||||||
Additional paid-in capital | 251,843,392 | 16,394,568 | a | 268,237,960 | ||||||||||||||
Deferred stock-based compensation | (3,457,120 | ) | (3,007,436 | ) | a | (6,464,556 | ) | |||||||||||
Accumulated deficit | (3,804,068 | ) | (30,716 | ) | 30,716 | b | (3,804,068 | ) | ||||||||||
Total stockholders’ equity | 300,147,364 | 373,235 | 13,023,547 | 313,544,146 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 311,608,968 | $ | 1,977,900 | $ | 16,719,220 | $ | 330,306,088 | ||||||||||
See notes to unaudited pro forma condensed consolidated statements.
3
MARCHEX, INC.
Unaudited Pro Forma Condensed Consolidated Statements of Operations
For year ended December 31, 2004
| Marchex, Inc. (Historical) | Previously Reported Acquisitions (5) | Pro Forma Adjustments for Previously Reported Acquisitions and Offerings | Subtotal | IndustryBrains (Historical) | IndustryBrains Pro Forma | Pro Forma Combined | ||||||||||||||||||||||||
Revenue | $ | 43,804,272 | $ | 27,423,862 | $ | (17,818 | ) | h | $ | 71,210,316 | $ | 6,692,836 | $ | (259,132 | ) | d | $ | 77,644,020 | ||||||||||||
Expenses: | ||||||||||||||||||||||||||||||
Service costs (1) | 27,449,938 | 4,172,894 | (838,650 | ) | h,i | 30,784,182 | 3,182,339 | (270,028 | ) | d,e | 33,696,493 | |||||||||||||||||||
Sales and marketing (1) | 4,414,043 | 413,714 | — | 4,827,757 | 1,640,834 | 6,468,591 | ||||||||||||||||||||||||
Product development (1) | 2,291,430 | 262,682 | — | 2,554,112 | 265,689 | 2,819,801 | ||||||||||||||||||||||||
General and administrative (1) | 4,111,544 | 1,600,215 | — | 5,711,759 | 433,986 | 6,145,745 | ||||||||||||||||||||||||
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 | — | 2,326,355 | j | 3,216,875 | 6,305 | 2,005,069 | f | 5,228,249 | |||||||||||||||||||||
Amortization of intangible assets from acquisitions (4) | 4,965,503 | — | 16,392,878 | i | 21,358,381 | — | 2,983,333 | e | 24,341,714 | |||||||||||||||||||||
Total operating expenses | 44,822,018 | 6,449,505 | 17,880,583 | 69,152,106 | 5,529,153 | 4,718,374 | 79,399,633 | |||||||||||||||||||||||
Gain on sale of intangible assets, net | — | 1,532,664 | — | 1,532,664 | — | 1,532,664 | ||||||||||||||||||||||||
Income from operations | (1,017,746 | ) | 22,507,021 | (17,898,401 | ) | 3,590,874 | 1,163,683 | (4,977,506 | ) | (222,949 | ) | |||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||
Interest income | 265,354 | 28,652 | — | 294,006 | — | 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 | 182 | — | 3,826 | — | 3,826 | ||||||||||||||||||||||||
Total other income | 318,594 | 28,834 | — | 347,428 | — | — | 347,428 | |||||||||||||||||||||||
Income before provision for income taxes | (699,152 | ) | 22,535,855 | (17,898,401 | ) | 3,938,302 | 1,163,683 | (4,977,506 | ) | 124,479 | ||||||||||||||||||||
Income tax expense (benefit) | 33,941 | 1,794,093 | (30,807 | ) | k | 1,797,227 | 80,021 | (908,445 | ) | g | 968,803 | |||||||||||||||||||
Net income (loss) | (733,093 | ) | 20,741,762 | (17,867,594 | ) | 2,141,075 | 1,083,662 | (4,069,061 | ) | (844,324 | ) | |||||||||||||||||||
Accrual of convertible preferred stock dividends | — | — | 2,375,000 | l | 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 | ) | $ | 20,741,762 | $ | (20,242,594 | ) | $ | (654,355 | ) | $ | 1,083,662 | $ | (4,069,061 | ) | $ | (3,639,754 | ) | |||||||||||
Basic net income (loss) per share applicable to common stockholders | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.12 | ) | |||||||||||||||||||||
Shares used to calculate basic net income (loss) per share | 22,087,503 | 6,600,336 | m | 28,687,839 | 797,742 | m | 29,485,581 | |||||||||||||||||||||||
Diluted net income (loss) per share applicable to common stockholders | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.12 | ) | |||||||||||||||||||||
Shares used to calculate diluted net income (loss) per share | 22,087,503 | 6,600,336 | m | 28,687,839 | 797,742 | m | 29,485,581 | |||||||||||||||||||||||
(1) Excludes acquisition-related retention consideration, stock-based compensation and amortization of intangibles. |
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(2) Components of acquisition-related consideration |
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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 |
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Service costs | 10,800 | — | 383,849 | 394,649 | — | — | 394,649 | |||||||||||||||||||||||
Sales and marketing | 155,734 | — | 581,589 | 737,323 | 6,305 | 296,931 | 1,040,559 | |||||||||||||||||||||||
Product development | 59,883 | — | 779,328 | 839,211 | — | — | 839,211 | |||||||||||||||||||||||
General and administrative | 664,103 | — | 581,589 | 1,245,692 | — | 1,708,138 | 2,953,830 | |||||||||||||||||||||||
(4) Components of amortization of intangible assets |
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Service costs | 3,520,878 | — | 12,177,286 | 15,698,164 | — | 1,500,000 | 17,198,164 | |||||||||||||||||||||||
Sales and marketing | 701,077 | — | 942,473 | 1,643,550 | — | 1,033,333 | 2,676,883 | |||||||||||||||||||||||
General and administrative | 743,548 | — | 3,273,119 | 4,016,667 | — | 450,000 | 4,466,667 | |||||||||||||||||||||||
(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 by acquisition. |
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See notes to unaudited pro forma condensed consolidated statements.
4
MARCHEX, INC.
Unaudited Pro Forma Condensed Consolidated Statements of Operations
For the six months ended June 30, 2005
| Marchex, Inc. (Historical) | Previously Reported Acquisitions (4) | Pro Forma Previously Offerings | Subtotal | IndustryBrains (Historical) | IndustryBrains Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||||||||||
Revenue | $ | 39,564,005 | $ | 3,774,953 | $ | — | $ | 43,338,958 | $ | 5,502,074 | $ | (32,699 | ) | d | $ | 48,808,333 | ||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||
Service costs (1) | 21,407,535 | 280,250 | (131,093 | ) | i | 21,556,692 | 2,858,327 | (43,782 | ) | d,e | 24,371,236 | |||||||||||||||||||
Sales and marketing (1) | 2,868,881 | 170,584 | — | 3,039,465 | 1,115,163 | 4,154,628 | ||||||||||||||||||||||||
Product development (1) | 2,065,094 | 77,754 | — | 2,142,848 | 191,236 | 2,334,084 | ||||||||||||||||||||||||
General and administrative (1) | 2,925,595 | 270,677 | — | 3,196,272 | 225,605 | 3,421,877 | ||||||||||||||||||||||||
Stock-based compensation (2) | 643,707 | — | 38,939 | j | 682,646 | 60,890 | 501,192 | f | 1,244,728 | |||||||||||||||||||||
Amortization of intangible assets from acquisitions (3) | 8,032,808 | — | 1,493,753 | i | 9,526,561 | — | 1,491,666 | e | 11,018,228 | |||||||||||||||||||||
Total operating expenses | 37,943,620 | 799,265 | 1,401,599 | 40,144,484 | 4,451,221 | 1,949,076 | 46,544,781 | |||||||||||||||||||||||
Gain on sale of intangible assets, net | — | 29,486 | — | 29,486 | — | 29,486 | ||||||||||||||||||||||||
Income (loss) from operations | 1,620,385 | 3,005,174 | (1,401,599 | ) | 3,223,960 | 1,050,853 | (1,981,775 | ) | 2,293,038 | |||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||
Interest income | 856,356 | 222 | — | 856,578 | 5,467 | 862,045 | ||||||||||||||||||||||||
Interest expense | (3,460 | ) | — | — | (3,460 | ) | — | (3,460 | ) | |||||||||||||||||||||
Other, net | 4,000 | 7,853 | — | 11,853 | — | 11,853 | ||||||||||||||||||||||||
Total other income | 856,896 | 8,075 | — | 864,971 | 5,467 | — | 870,438 | |||||||||||||||||||||||
Income (loss) before provision for income taxes | 2,477,281 | 3,013,249 | (1,401,599 | ) | 4,088,931 | 1,056,320 | (1,981,775 | ) | 3,163,476 | |||||||||||||||||||||
Income tax expense (benefit) | 949,589 | 211,479 | 406,173 | k | 1,567,241 | 117,156 | (311,472 | ) | g | 1,372,925 | ||||||||||||||||||||
Net income (loss) | 1,527,692 | 2,801,770 | (1,807,772 | ) | 2,521,690 | 939,164 | (1,670,303 | ) | 1,790,551 | |||||||||||||||||||||
Convertible preferred stock dividends | 1,031,806 | — | 296,875 | l | 1,328,681 | — | 1,328,681 | |||||||||||||||||||||||
Net Income (loss) applicable to common stockholders | $ | 495,886 | $ | 2,801,770 | $ | (2,104,647 | ) | $ | 1,193,009 | $ | 939,164 | $ | (1,670,303 | ) | $ | 461,870 | ||||||||||||||
Basic net income per share applicable to common stockholders | $ | 0.02 | $ | 0.03 | $ | 0.01 | ||||||||||||||||||||||||
Shares used to calculate basic net income per share | 32,790,977 | 1,741,166 | m | 34,532,143 | 847,027 | m | 35,379,170 | |||||||||||||||||||||||
Diluted net income per share applicable to common stockholders | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||||||||||||||||||||
Shares used to calculate diluted net income per share | 35,149,062 | 1,839,879 | m | 36,988,941 | 938,566 | m | 37,927,507 | |||||||||||||||||||||||
(1) Excludes stock-based compensation and amortization of intangibles. |
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(2) Components of stock-based compensation |
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Service costs | 134,634 | — | (21,039 | ) | 113,595 | — | — | 113,595 | ||||||||||||||||||||||
Sales and marketing | 315,431 | — | (91,427 | ) | 224,004 | 60,890 | 74,221 | 359,115 | ||||||||||||||||||||||
Product development | 148,650 | — | 60,894 | 209,544 | — | — | 209,544 | |||||||||||||||||||||||
General and administrative | 44,992 | — | 90,511 | 135,503 | — | 426,971 | 562,474 | |||||||||||||||||||||||
(3) Components of amortization of intangible assets |
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Service costs | 6,283,724 | — | 834,504 | 7,118,228 | — | 750,000 | 7,868,228 | |||||||||||||||||||||||
Sales and marketing | 325,555 | — | 257,778 | 583,333 | — | 516,667 | 1,100,000 | |||||||||||||||||||||||
General and administrative | 1,423,529 | — | 401,471 | 1,825,000 | — | 225,000 | 2,050,000 | |||||||||||||||||||||||
| (4) | 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 by 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 IndustryBrains
(a) The purchase price adjustments reflect cash and estimated acquisition costs of approximately $17.3 million to acquire IndustryBrains. Additionally, the Company issued 788,046 shares of Class B common stock valued (for accounting purposes) at an aggregate amount of $13.4 million and 176,909 shares of restricted Class B common stock valued at $17.00 per share (the last reported sales price on the closing date) for an aggregate amount of $3.0 million. The $3.0 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 two-and-one half 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 | $ | 15,522,596 | |
Stock issued | 13,396,782 | ||
Estimated acquisition costs | 1,710,922 | ||
Total | $ | 30,630,300 | |
The following represents the preliminary purchase price allocation for IndustryBrains based upon IndustryBrains’ assets and liabilities as of June 30, 2005.
Cash acquired | $ | 782,984 | ||
Accounts receivable | 1,057,127 | |||
Current and non-current assets | 33,379 | |||
Property and equipment | 85,139 | |||
Identifiable intangible assets | 8,100,000 | |||
Goodwill | 25,138,587 | |||
Liabilities assumed | (1,604,665 | ) | ||
Deferred non-current tax liabilities | (2,962,251 | ) | ||
Total | $ | 30,630,300 | ||
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 estimated goodwill and intangible assets are not deductible for tax purposes. The fair value of assets acquired and liabilities assumed are based upon preliminary estimates and may vary from the final allocation of the purchase price allocation.
(b) Represents the elimination of the historical stockholders’ equity account of IndustryBrains.
(c) Represents the estimated deferred non-current tax liabilities arising from the purchase.
(d) Represents the elimination of intercompany revenues and service costs between IndustryBrains and the Company.
6
MARCHEX, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(e) Represents the amortization of identifiable intangible assets associated with the acquisition of IndustryBrains, which are amortized over their useful lives ranging from 18 to 36 months. Amortization totals $3.0 million in the first twelve months and $4.5 million in the first eighteen months following the acquisition. IndustryBrains for the year ended December 31, 2004 and for the six months ended June 30, 2005, recorded approximately $11,000 of amortization for both periods in service costs related to the above-noted intangible assets.
(f) Represents stock-based compensation expense associated with shares of restricted Class B common stock issued to the employee stockholders of IndustryBrains who became employees of the Company. The shares of restricted Class B common stock were valued at approximately $3.0 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 $2.0 million in the first twelve months and $2.5 million in the first eighteen months following the acquisition.
(g) Represents the pro forma income tax benefit as though IndustryBrains, a New York corporation, was taxed as a C corporation and the tax benefit associated with the amortization of intangible assets acquired in connection with the Company’s acquisition of IndustryBrains using a combined effective federal, state and city tax rate of 46% for the periods presented. The stock compensation expense related to the Company’s restricted Class B common shares issued in connection with the Company’s acquisition of IndustryBrains is not deductible for tax purposes. Prior to the Company’s acquisition, IndustryBrains was an S-Corporation, whereby for federal and state purposes, shareholders were taxed on their portion of IndustryBrain’s taxable income.
Pro Forma Adjustments for Previously Reported Acquisitions and Offerings
(h) Represents the elimination of intercompany revenues and service costs between the Company and previously reported acquisitions.
(i) Represents the amortization of identifiable intangible assets associated with the previously reported acquisitions arising from the purchase price allocations less amortization recorded under service costs by the previously reported acquisitions related to the above-noted intangible assets.
(j) Represents stock-based compensation expense associated with shares of restricted Class B common stock issued to the employee stockholders of previously reported acquisitions who became employees of the Company.
(k) Represents the tax effect of the pro forma adjustments using combined effective federal and state rates.
(l) Represents preferred stock dividends related to the preferred stock financing associated with the follow-on offering.
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MARCHEX, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pro Forma Adjustments for Earnings per Share
(m) 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 six months ended June 30, 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 loss per share (as previously reported in Marchex’s Form 8-K/A filed on July 11, 2005) | 28,687,839 | 28,687,839 | ||
IndustryBrains: | ||||
Pro forma effect of shares issued in IndustryBrains acquisition | 788,046 | 788,046 | ||
Weighted average restricted shares issued in IndustryBrains acquisition for services expected to vest during the period | 9,696 | 9,696 | ||
Shares used to calculated pro forma and adjusted pro forma basic and diluted net loss per share | 29,485,581 | 29,485,581 | ||
| For the six months ended June 30, 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 September 14, 2005) | 34,532,143 | 36,988,941 | ||
Pike Street: | ||||
Pro forma effect of shares issued in IndustryBrains acquisition | 788,046 | 788,046 | ||
Weighted average restricted shares issued in IndustryBrains acquisition for services expected to vest during the period | 58,981 | 150,520 | ||
Shares used to calculated pro forma and adjusted pro forma basic and diluted net income per share | 35,379,170 | 37,927,507 | ||
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 six months ended June 30, 2005, we have adjusted for the following:
| • | included the pro forma effect of 788,046 shares of Class B common stock issued in the IndustryBrains acquisition. |
| • | included the weighted average impact of the 176,909 Class B restricted common shares issued in connection with the IndustryBrains acquisition. These shares are for future services that vest over two-and-one half years. Unvested shares were excluded from the computation of pro forma basic net income per share. |
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MARCHEX, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other information
The estimated amortization relating to estimated intangible assets recorded as of June 30, 2005 for the period of July to December 2005 and the next 3 years and thereafter is as follows:
Period of July 1 to | 2006 | 2007 | 2008 | 2009 and thereafter | Total | |||||||||||||
Enhance Interactive | $ | 504,000 | $ | 83,000 | $ | — | $ | — | $ | — | $ | 587,000 | ||||||
TrafficLeader | 177,000 | 227,000 | — | — | — | 404,000 | ||||||||||||
goClick | 554,000 | 652,000 | 144,000 | — | — | 1,350,000 | ||||||||||||
Name Development | 6,801,000 | 13,410,000 | 10,909,000 | 9,701,000 | 7,987,000 | 48,808,000 | ||||||||||||
Pike Street | 775,000 | 1,549,000 | 1,549,000 | 646,000 | 231,000 | 4,750,000 | ||||||||||||
IndustryBrains | 1,492,000 | 2,917,000 | 2,558,000 | 1,133,000 | — | 8,100,000 | ||||||||||||
| $ | 10,303,000 | $ | 18,838,000 | $ | 15,160,000 | $ | 11,480,000 | $ | 8,218,000 | $ | 63,999,000 | |||||||
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