EXHIBIT 20.1
TABLE OF CONTENTS
WHOWHERE? INC.
Page
----
Report of the Independent Auditors..................................................... F-1
Balance Sheets at December 31, 1997 and 1996........................................... F-2
Statements of Operations for the year ended December 31, 1997 and 1996
and for the period from May 10, 1995 (Inception) through December 31, 1995.......... F-3
Statements of Stockholders' Equity for the year ended December 31, 1997 and 1996 and
for the period from May 10, 1995 (Inception) through December 31, 1995.............. F-4
Statements of Cash Flows for the year ended December 31, 1997 and 1996 and
for the period from May 10, 1995 (Inception) through December 31, 1995.............. F-5
Notes to Financial Statements.......................................................... F-7
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
WhoWhere?, Inc.
We have audited the accompanying balance sheets of WhoWhere?, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (May 10,
1995) to December 31, 1995 and for each of the two years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WhoWhere?,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for the period from inception (May 10, 1995) to December 31, 1995 and
for each of the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 18, 1998
WHOWHERE?, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,209 $ 2,033
Accounts receivable, net of allowance for doubtful accounts
of $ 223 at August 2, 1998, $10 at December 31, 1997
(none at December 31, 1996) 896 65
Note receivable from stockholder 2,650
Prepaid expenses and other current assets 198 38
------------------- -------------------
Total current assets 8,953 2,136
Property and equipment, net 1,353 444
Intangible assets, net 1,628
Notes receivable from founders, including interest 504
------------------- -------------------
$ 12,438 $ 2,580
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 840 $ 295
Accrued compensation 142 80
Other accrued liabilities 59 7
Current portion of capital lease obligations 159 68
Borrowings under bank line of credit 1,328
Current portion of long-term debt 1,380
------------------- -------------------
Total current liabilities 3,908 450
Non current portion of capital lease obligations 282 184
Long-term debt 1,747 -
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, issuable in series, 10,000,000
shares authorized, aggregate liquidation preference of $13,636
at December 31, 1997, at amounts paid in
Series A convertible, 2,074,823 shares designated, 1,444,162
and 1,429,961 shares issued and outstanding at December 31,
1997 and 1996, respectively 3,687 3,650
Series B convertible, 5,750,000 shares designated, 5,223,683
shares issued and outstanding at December 31, 1997 (none in 9,884
1996)
Common stock, $0.001 par value; 40,000,000 shares authorized:
4,660,874 and 4,509,834 shares issued and outstanding at
December 31, 1997 and 1996, respectively 14 10
Accumulated deficit (7,084) (1,714)
------------------- -------------------
Total stockholders' equity 6,501 1,946
------------------- -------------------
Total liabilities and stockholders' equity $ 12,438 $ 2,580
=================== ===================
See accompanying notes to financial statements.
WHOWHERE?, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
INCEPTION (MAY 10,
YEAR ENDED DECEMBER 31, 1995) TO
------------------------------------------ DECEMBER 31,
1997 1996 1995
------------------- ------------------- -------------------
Revenues:
Advertising revenue $ 2,070 $ 162 $
Consulting and other revenue 11 242 160
------------------- ------------------- -------------------
Total revenues 2,081 404 160
Cost of revenues 748 164
------------------- ------------------- -------------------
Gross profit 1,333 240 160
Operating expenses:
Product development 1,197 625 114
Sales and marketing 2,749 697 1
General and administrative 1,606 626 67
In-process purchased technology 797
Amortization of intangibles 233
------------------- ------------------- -------------------
Total operating expenses 6,582 1,948 182
------------------- ------------------- -------------------
Operating loss (5,249) (1,708) (22)
Interest and other expense (201) (12) (3)
Interest income 80 31
------------------- ------------------- -------------------
Net loss $ (5,370) $ (1,689) $ (25)
=================== =================== ===================
Basic and diluted net
loss per share $ (1.17) $ (0.39) $ (0.01)
=================== =================== ===================
Shares used in computing basic
and diluted net loss per share 4,575,758 4,368,038 2,741,667
=================== =================== ===================
See accompanying notes to financial statements.
WHOWHERE?, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK TOTAL
---------------------------------------- STOCKHOLDERS'
SERIES A SERIES B COMMON STOCK EQUITY
----------------------------------------------------------- ACCUMULATED NET CAPITAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIT) DEFICIENCY
--------------------------------------------------------------------------------------
Initial Founders' investment - $ - - $ - 4,200,000 $10 $ - $ 10
Net loss - - - - - - (25) (25)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 - - - - 4,200,000 10 (25) (15)
Issuance of common stock to investors - - - - - - -
Issuance of Series A convertible preferred
stock 1,429,961 3,650 - - - - - 3,650
and warrants, net of issuance costs of $24
Issuance of common stock upon exercise
of employee stock options and other
issuances under the plan - - - - 289,834 - - -
Net loss - - - - - - (1,689) (1,689)
--------------------------------------------------------------------------------------
Balances at December 31, 1996 1,429,961 3,650 - - 4,509,834 10 (1,714) 1,946
Issuance of Series A convertible preferred
stock for services rendered 14,201 37 - - - - - 37
Issuance of Series B convertible preferred
stock for cash and conversion of notes
payable, net of issuance costs of $41 - - 5,223,683 9,884 - - - 9,884
Issuance of common stock upon exercise
of employee stock options - - - - 151,040 4 - 4
Net loss - - - - - - (5,370) (5,370)
--------------------------------------------------------------------------------------
Balances at December 31, 1997 1,444,162 $3,687 5,223,683 $9,884 4,660,874 $14 $(7,084) $ 6,501
======================================================================================
See accompanying notes to financial statements.
WHOWHERE?, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
INCEPTION (MAY
10, 1995)
YEAR ENDED YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
------------------- ------------------- -------------------
OPERATING ACTIVITIES
Net loss $(5,370) $(1,689) $ (25)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
In-process purchased technology 797 - -
Depreciation and amortization 602 65 7
Issuance of Series A preferred stock for services
rendered 36 - -
Accrued interest on notes receivable from founders (4) - -
Changes in operating assets and liabilities:
Accounts receivable (831) (51) (14)
Prepaid expenses and other current assets (160) (37) (1)
Notes receivable from founders (500) - -
Accounts payable 545 188 107
Accrued compensation 62 81 -
Other accrued liabilities 52 7 -
------------------- ------------------- -------------------
Cash (used in) provided by operating activities (4,771) (1,436) 74
------------------- ------------------- -------------------
INVESTING ACTIVITIES
Purchases of property and equipment (864) (161) (62)
Payments on acquisition of Angelfire, Inc. (211)
------------------- ------------------- -------------------
Cash used in investing activities (1,075) (161) (62)
------------------- ------------------- -------------------
FINANCING ACTIVITIES
Proceeds from founders - - 10
Payments on capital lease obligations (162) (42)
Proceeds from bank line of credit 1,328 - -
Proceeds from long-term debt 618 - -
Proceeds from issuance of notes receivable - - -
Proceeds from issuance of convertible notes payable 1,425 - -
Proceeds from issuance of Series A convertible
preferred stock and warrants, net of offering costs - 3,650 -
Proceeds from issuance of Series B convertible
preferred stock, net of offering costs 5,809 - -
Proceeds from issuance of common stock 4 - -
------------------- ------------------- -------------------
Cash provided by financing activities 9,022 3,608 10
------------------- ------------------- -------------------
Net increase in cash and cash equivalents 3,176 2,011 22
Cash and cash equivalents at beginning of period 2,033 22 -
------------------- ------------------- -------------------
Cash and cash equivalents at end of period $ 5,209 $ 2,033 $ 22
=================== =================== ===================
WHOWHERE?, INC.
STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
PERIOD FROM
INCEPTION (MAY
10, 1995)
YEAR ENDED YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
------------------- ------------------- -------------------
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
Equipment acquired under capital leases $ 353 $ 293 $
Note receivable from a stockholder in exchange for
issuance of Series B preferred stock $2,650 $ $
Conversion of convertible notes payable to Series B
convertible preferred stock $1,425 $ $
=================== =================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 140 $ 12 $ 2
=================== =================== ===================
See accompanying notes to financial statements.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
WhoWhere?, Inc. ("WhoWhere" or the "Company"), formerly Parsec Communications,
was formed in 1995. The Company is a leading online global communications
directory of people and business information from around the world, including e-
mail address, telephone listings, business URLs and personal home-page listing
presented in English, French, and Spanish. The Company's goal is to develop and
offer network-based services that help people and businesses from across the
world find, communicate, and collaborate with one another on the World Wide Web.
The Company derives a substantial portion of its revenue from selling
advertisements on its Web Sites to customers in various industries.
The Company has incurred operating losses to date and incurred a net loss of
$5,370,000 for the year ended December 31, 1997. Management believes that
available resources will provide sufficient funding to enable the Company to
meet its obligations through at least December 31, 1998. If anticipated
operating results are not achieved, management has the intent and believes it
has the ability to delay or reduce expenditures so as not to require additional
financial resources if such resources were not available.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are primarily invested in money market
accounts with major financial institutions. The fair value of money market
accounts approximate their carrying value at December 31, 1997 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization and
depreciation. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the asset, generally three years. Leasehold
improvements and equipment purchased under capital leases are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset or
the lease term. Amortization on capital leases is included in depreciation
expense. Property and equipment, at cost, consist of the following (in
thousands):
DECEMBER 31,
1997 1996
------------------- -------------------
Computer hardware and software $1,068 $ 167
Furniture and fixtures 126 33
Leasehold improvements 23
Leased computer equipment 600 293
------------------- -------------------
1,794 516
Less accumulated depreciation and amortization (441) (72)
------------------- -------------------
$1,353 $ 444
=================== ===================
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Per Share Amounts
The Company has presented earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS
128 requires the presentation of basic loss per share and diluted loss per share
for all periods presented. As the Company has been in a net loss position for
all periods presented, common stock equivalents were excluded from the diluted
loss per share calculation as they would be antidilutive. As a result, diluted
loss per share is the same as basic loss per share, and has not been presented
separately.
STOCK-BASED COMPENSATION
The Company has elected to continue to use the intrinsic value method of
accounting for stock-based compensation, as permitted by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), and thus recognizes no compensation expense for options granted with
exercise prices that are not less than the fair value of the Company's common
stock on the date of grant.
REVENUE RECOGNITION
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. Advertising revenues
are recognized ratably over the term of the contract provided that the Company
does not have any significant remaining obligations and collection of the
resulting receivable is probable. To the extent minimum guaranteed impression
levels are not met, the Company defers recognition of the corresponding revenues
until guaranteed levels are achieved.
Advertising revenues are also derived from revenue sharing agreements for
advertising sold by third parties on cobranded Internet sites. Revenues from the
sale of certain advertising space are shared with third parties pursuant to the
terms of certain agreements. To date, amounts allocable to third parties have
not been significant.
Consulting and other revenues consist primarily of consulting revenue
generated by assisting other entities setting up web pages and consulting on
directory content and technology for those other entities. Consulting revenue is
recognized when the services are performed.
Revenues from customers representing 10% or more of total revenues were as
follows:
YEARS ENDED DECEMBER 31,
1997 1996 1995
------ ----- -----
CUSTOMER:
A - 28% 61%
B - - 10%
C - 20% -
D - 27% -
E 15% - -
ADVERTISING
Costs related to advertising are expensed as incurred. Advertising expense
for the years ended December 31, 1997 and 1996 was $557,900 and $143,300,
respectively (none for 1995). The Company has not incurred any significant
direct response advertising costs to date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trade receivables. The Company performs
ongoing evaluations of its customers' financial condition and generally does not
require collateral. The Company maintains reserves for credit losses, and such
losses have been within management's expectations. Revenues derived from
customers outside the Untied States have not been significant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, adoption in 1998 will have no impact on the Company's net loss or
stockholders' equity.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION
In October 1997, the Company acquired certain net assets of Angelfire, Inc.
("Angelfire") for approximately $2,720,000 in cash and notes payable (see Note
4). Angelfire provides personal home page capabilities for Internet users. The
acquisition has been accounted for by the purchase method of accounting and
accordingly, the accompanying financial statements include the results of
Angelfire subsequent to the acquisition date.
The purchase included tangible net assets of $62,000 and in-process purchased
technology of $797,000 at fair market value. The remaining purchase price of
$1,861,000 is being amortized over the estimated useful lives of the intangible
assets acquired of two years. The Company determined the amounts to be allocated
to developed and in-process technology based on whether technological
feasibility had been achieved (as defined and utilized by the Company in
assessing software capitalization) and whether there was any alternative future
use for the technology. Other considerations included the time and cost to
complete each project, anticipated gross profit, and associated risks which
included the inherent difficulties and uncertainties in completing the project
and thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. The Company
concluded that the in-process technology had no alternative future use after
taking into consideration the potential for usage of the technology in different
products, resale of the technology and internal usage.
Pro forma information for periods prior to the acquisition have not been
presented, because the results of Angelfire's operations were not material to
the Company's historical results.
3. NOTES RECEIVABLE FROM STOCKHOLDERS
In November 1997, the Company received a secured full-recourse promissory
note from a stockholder for $2,650,000 in exchange for the issuance of 1,394,737
shares of Series B preferred stock (see Note 6). The note bears interest at 6%
per annum and was due in February 1998. The note was repaid in February 1998.
In December 1997, the Company made a loan to two of the Company's founders in
the amount of $250,000 each. The notes bear interest at a rate of 6% per annum,
and are secured by shares of common stock of the Company. The notes mature no
later than November 2001 and as early as 30 days after a change in control or
the consummation of an initial public offering.
4. BANK LINE OF CREDIT AND NOTES PAYABLE
In May 1997, the Company entered into a convertible note and warrant purchase
agreement with various investors which raised approximately $1,425,000. The
notes accrued interest at 8% per annum and were converted into 750,000 shares of
Series B convertible preferred stock in November 1997 at $1.90 per share (see
Note 6).
The Company has a line of credit with a bank that provides for working
capital advances up to $1,500,000 and expires in September 1998. A portion of
the borrowings under the line of credit are limited to specified percentages of
eligible accounts receivable, as defined, and are collateralized by
substantially all of the assets of the Company. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.5% (9.0% at December 31,
1997). Under the terms of the line of credit agreement, the Company is required
to maintain certain financial covenants. In addition, payment of cash dividends
is prohibited without the bank's consent when borrowings are outstanding. At
December 31, 1997, outstanding borrowings under the line of credit were
approximately $1,328,000. The Company was out of compliance with certain
covenants at the end of the year. The bank has waived these covenants during the
period the Company was out of compliance.
In October 1997, the Company entered into a $1,600,000 credit facility with a
leasing company to finance equipment purchases. Amounts outstanding under this
credit facility bear interest at an imputed rate of 15.7%, are repayable in 42
equal monthly installments and are collateralized by the underlying property and
equipment. At December 31, 1997, the Company has borrowed $618,000 under the
credit facility.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
In connection with the Company's acquisition of Angelfire, the Company
entered into notes payable to the former stockholders in the aggregate principal
amount of $2,509,000. The notes earn interest at a rate of 7% compounded
annually and are subordinate to outstanding borrowings under the Company's
$1,500,000 line of credit with a bank. The principal and accumulated interest on
the notes is due in three installments as follows: $1,289,000, $1,000,000 and
$500,000 in 1998, 1999 and 2000, respectively.
5. COMMITMENTS
Capital Leases
The Company leases certain property and equipment under noncancelable lease
agreements that are accounted for as capital leases. Property and equipment at
December 31, 1997 and 1996 include assets under capital leases of approximately
$646,000 and $293,000, respectively. Accumulated amortization related to leased
assets at December 31, 1997 and 1996, was $88,264 and $27,800, respectively.
Operating Leases
The Company leases its corporate offices under a noncancelable lease that
expires December 31, 2002.
Future minimum lease payments are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------------------- -------------------
Years ending December 31:
1998 $194 $ 335
1999 175 351
2000 116 367
2001 12 383
2002 400
----------------- -----------------
Total minimum lease and
principal payments, respectively 497 $1,836
=================
Amount representing interest 56
-----------------
Present value of future lease payments 441
Current portion of capital lease obligations 159
-----------------
Noncurrent portion of capital lease obligations $282
=================
Rent expense was approximately $168,000, $55,000 and $8,000 for 1997, 1996 and
1995, respectively.
6. STOCKHOLDERS' EQUITY
In connection with the formation of the Company, 4,200,000 shares of common
stock were issued to founders of the Company in exchange for $10,000. The
founders' shares contained a repurchase option in the event of a voluntary or
involuntary termination of employment for any reason. In May 1997, the Company
released its option to repurchase any of the founders' shares.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has reserved shares of common stock for issuance at December 31,
1997 as follows:
Stock options 3,888,991
Warrants 1,555,082
Conversion of convertible preferred stock 8,100,741
-------------
13,544,814
=============
CONVERTIBLE PREFERRED STOCK
Series A and B preferred stock is convertible into common stock of the
Company, at the option of the holder, at a conversion price of $1.29 and $1.90,
respectively, subject to adjustment for dilution, if any, resulting from future
stock issuances, stock splits or stock dividends. Shares of preferred stock
automatically convert into common stock in the event of an underwritten public
offering of the Company's common stock in which the aggregate net proceeds are
at least $20,000,000 and the price per share is at least $8.00, subject to
adjustment in the event of, among other things, stock splits and stock
dividends.
Each share of Series A and B preferred stock has a liquidation preference of
$2.57 and $1.90 per share, respectively, plus declared but unpaid dividends.
Thereafter, the remaining assets and funds, if any, shall be distributed ratably
on a per-share basis among the common stockholders and preferred stockholders,
on an as-converted basis. Series A and B preferred stockholders are respectively
entitled to noncumulative dividends at a rate of $0.257 and $0.190 per share,
per annum, if declared by the board of directors, in preference to common stock
dividends. No dividends have been declared to date. The holder of each share of
preferred stock has voting rights equivalent to the number of common shares
assuming conversion.
WARRANTS
In July 1996, the Company issued warrants for the purchase of a total of
608,774 shares of the Company's Series A preferred stock at a price of $2.90 per
share. These warrants, if unexercised, expire on May 15, 2002. The warrants
issued to investors were priced at $0.01 per warrant and total proceeds were
approximately $6,000.
In August 1996, in connection with capital leases, the Company issued warrants
to purchase 21,887 shares of Series A preferred stock at a price per share of
$2.57. These warrants, if unexercised, expire on August 30, 2003. The fair value
of these warrants was determined to be immaterial.
In May 1997, the Company issued warrants to investors for the purchase of
224,997 shares of the Company's Series B preferred stock at a price of $1.90 per
share, pursuant to a convertible note and warrant purchase agreement. These
warrants, if unexercised, expire on May 15, 2002. The fair value of these
warrants was determined to be immaterial.
In September 1997, in connection with a line of credit agreement with a bank,
the Company issued a warrant to purchase 31,578 shares of Series B preferred
stock at a price per share of $1.90. This warrant expires September 22, 2002.
The fair value of this warrant was determined to be immaterial.
In October 1997, in connection with a credit facility with a leasing company,
the Company issued a warrant to purchase 21,053 shares of Series B preferred
stock at a price per share of $1.90 and an additional number of shares on the
date the Company has borrowed in excess of $800,000 pursuant to the credit
facility. The additional number is determined by dividing 40,000 by the exercise
price in effect on the date the Company borrows in excess of $800,000. The
warrant expires on October 15, 2007 or on the fifth anniversary of the closing
of an underwritten public offering of the Company's common stock. The fair value
of this warrant was determined to be immaterial.
At December 31, 1997, the warrants outstanding have a weighted-average
exercise price of $2.59 and a weighted-average remaining contractual life of 4.3
years.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"),
under which incentive stock options or nonqualified stock options to purchase
common stock may be granted to eligible participants. Under the Plan, options to
purchase common stock may be granted with exercise prices not less than 85% of
the fair value of the Company's common stock on the date of grant, as determined
by the board of directors. Options become exercisable as determined by the board
of directors (generally over 4 years) and expire after 10 years.
Activity under the Plan is as follows:
OUTSTANDING OPTIONS
------------------------------------------------
WEIGHTED-
SHARES NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
-----------------------------------------------------------------------
Balance at December 31, 1995 1,200,000 800,000 $ 0.0002
Additional shares authorized 500,865
Options granted (454,500) 454,500 $0.133278
Options exercised (289,834) $0.000204
Options canceled 396,000 (396,000) $0.006522
-----------------------------------------------------------------------
Balance at December 31, 1996 1,642,365 568,666 $0.099997
Additional shares authorized 1,829,000
Options granted (1,802,500) 1,802,500 $ 0.25
Options exercised (151,040) $ 0.228
Options canceled 194,542 (194,542) $ 0.0924
-----------------------------------------------------------------------
Balance at December 31, 1997 1,863,407 2,025,584 $ 0.23937
=======================================================================
At December 31, 1997 and 1996, options to purchase 2,025,584 and 568,666 shares,
respectively, were exercisable at prices ranging from $0.0002 to $0.25. The
weighted-average contractual life of options outstanding at December 31, 1997
was approximately 9.25 years. The weighted-average estimated fair value of stock
options granted during 1997 and 1996 was $0.05 and $0.03, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The effect of applying the minimum value method of SFAS 123 to the Company's
stock option grants did not result in pro forma net loss that is materially
different from historical amounts reported. Therefore, such pro forma disclosure
information is not separately presented herein. Future pro forma net income/loss
and earnings/loss per share results may be materially different from actual
amounts reported.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividends, an expected life of four years, and a risk-free interest rate of 5.8%
for the years ended December 31, 1997 and 1996 and 5.3% for the period ended
December 31, 1995, respectively.
8. INCOME TAXES
As of December 31, 1997, the Company had federal and California net operating
loss carryforwards of approximately $6,000,000 and $2,900,000, respectively. The
net operating loss will expire at various dates beginning in 2000 through 2012,
if not utilized.
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the change in ownership provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
DECEMBER 31,
1997 1996
--------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,200,000 $ 700,000
Capitalized research and development 100,000
--------------------------------------
Total deferred tax assets 2,300,000 700,000
Valuation allowance (2,300,000) (700,000)
--------------------------------------
Net deferred tax assets $ - $ -
======================================
The net deferred tax assets have been fully offset by a valuation allowance.
The net valuation allowance increased by $693,000 during the year ended December
31, 1996.
9. CONCENTRATIONS OF OTHER RISKS
The Company currently uses one vendor to supply customer activity information
that is required for timely revenue recognition and customer billing on certain
customer contracts. If this vendor were to experience supply constraints or
financial difficulties, the Company could experience difficulties in the timely
recognition of revenue and customer billing for certain contracts.
9. SUBSEQUENT EVENTS (UNAUDITED)
On August 7, 1998, Lycos, Inc., entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.