Amendment to Current Report — Form 8-K
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Document/Exhibit Description Pages Size
1: 8-K/A Form 8-K/A for Period Ended 8/30/96 16 54K
2: EX-20.1 The McKinley Group, Inc. Audited Financial Stmts 19 96K
3: EX-23.1 Consent of Independent Auditors 1 5K
EX-20.1 — The McKinley Group, Inc. Audited Financial Stmts
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[PRICE WATERHOUSE LLP LETTERHEAD]
August 6, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The McKinley Group, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of The McKinley Group, Inc. at
December 31, 1994 and 1995 and at June 30, 1996, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, and for the six months ended June 30, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and is not in compliance with certain covenants
underlying outstanding bank borrowings. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
On August 6, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Excite, Inc. Upon the effectiveness of the
Agreement, the Company's stockholders will exchange all of their shares of
Common Stock for shares of Common Stock of Excite, Inc., in a business
combination to be accounted for as a pooling of interests.
/s/ Price Waterhouse LLP
San Jose, California
THE MCKINLEY GROUP, INC.
BALANCE SHEETS
[Enlarge/Download Table]
December 31, June 30,
------------------------------- ------------
1994 1995 1996
----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,000 $ 153,200 $ 18,200
Short-term investments ........................................... -- 357,700 --
Restricted investments ........................................... -- 452,300 339,700
Accounts receivable, net ......................................... 3,400 154,100 279,900
Employee advances ................................................ 32,400 100,000 8,000
Other current assets ............................................. 5,200 26,800 74,300
----------- ----------- ------------
Total current assets ....................................... 42,000 1,244,100 720,100
Property and equipment, net ......................................... 69,600 766,300 1,283,000
Other assets ........................................................ 20,200 58,400 63,000
----------- ----------- ------------
$ 131,800 $ 2,068,800 $ 2,066,100
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank and margin account borrowings ............................... $ -- $ 796,000 $ 1,100,000
Accounts payable ................................................. 82,600 658,300 2,448,700
Accrued liabilities .............................................. 112,400 500,200 1,069,500
Payable to Netscape Communications Corp. ......................... -- -- 3,500,000
Deferred revenues ................................................ -- 105,000 1,635,100
Notes payable - related parties .................................. 221,000 36,900 1,076,900
Notes payable - other, current portion ........................... 107,500 66,000 100,000
Capital lease obligations, current portion ....................... -- 152,500 365,100
----------- ----------- ------------
Total current liabilities ................................... 523,500 2,314,900 11,295,300
Notes payable - other, less current portion ......................... 100,000 284,000 --
Capital lease obligations, less current portion ..................... -- 320,500 528,000
----------- ----------- ------------
Total liabilities .......................................... 623,500 2,919,400 11,823,300
----------- ----------- ------------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Preferred Stock; no shares issued and outstanding ................ -- -- --
Common Stock, 4,908,750 Series A shares and no Series B shares
issued and outstanding as of December 31, 1994; 7,216,104
Series A shares and no Series B shares issued and outstanding as
of December 31, 1995; 7,241,103 Series A shares and 96,875
Series B shares issued and outstanding as of June 30, 1996 ..... 9,200 32,200 33,400
Additional paid-in capital ....................................... 98,700 2,826,600 4,399,500
Deferred stock option compensation ............................... -- (83,400) (48,500)
Unrealized gain on marketable equity securities .................. -- 152,300 39,700
Accumulated deficit .............................................. (599,600) (3,778,300) (14,181,300)
----------- ----------- ------------
Total stockholders' deficit ................................ (491,700) (850,600) (9,757,200)
----------- ----------- ------------
$ 131,800 $ 2,068,800 $ 2,066,100
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
1
THE MCKINLEY GROUP, INC.
STATEMENTS OF OPERATIONS
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Six Months Ended
Year Ended December 31, June 30,
----------------------------- --------------------------------
1994 1995 1995 1996
--------- ----------- ----------- ------------
(Unaudited)
Revenues:
Advertising .................. $ 56,700 $ 2,000 $ -- $ 548,200
License fees ................. -- 366,800 10,000 274,300
Other ........................ 153,100 149,600 81,700 95,300
--------- ----------- ----------- ------------
Total revenues ......... 209,800 518,400 91,700 917,800
--------- ----------- ----------- ------------
Costs and expenses:
Cost of advertising revenues . 426,000
Cost of other revenues ....... 67,100 89,100 50,100 9,400
Research and development ..... 339,100 1,128,800 364,100 1,328,100
Sales and marketing .......... 37,200 780,800 162,100 6,772,100
General and administrative ... 361,600 1,674,600 430,100 2,672,200
--------- ----------- ----------- ------------
Total costs and expenses 805,000 3,673,300 1,006,400 11,207,800
--------- ----------- ----------- ------------
Loss from operations ............ (595,200) (3,154,900) (914,700) (10,290,000)
Other income (expense):
Interest expense ............. (13,000) (33,600) (9,800) (143,100)
Other ........................ 8,600 9,800 7,900 30,100
--------- ----------- ----------- ------------
Net loss ........................ $(599,600) $(3,178,700) $ (916,600) $(10,403,000)
========= =========== =========== ============
The accompanying notes are an integral part of these financial statements.
2
THE MCKINLEY GROUP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
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Common Stock Additional Deferred
------------------------ Paid-In Stock Option
Shares Amount Capital Compensation
--------- ------- ----------- --------
Balance at December 31, 1993 .... 425,000 $ 700 $ -- $ --
Issuance of Common Stock for
services ..................... 4,356,250 7,200 -- --
Sale of Common Stock for cash ... 127,500 1,300 98,700 --
Net loss ........................ -- -- -- --
--------- ------- ----------- --------
Balance at December 31, 1994 .... 4,908,750 9,200 98,700 --
Issuance of Common Stock for
services ..................... 99,729 1,000 120,300 --
Antidilution issuance ........... 42,510 400 (400) --
Sale of Common Stock for cash ... 1,482,883 14,800 1,875,200 --
Sale of Common Stock for equity
securities ................... 267,857 2,700 372,300 --
Note payable conversion ......... 405,000 4,000 271,000 --
Stock option exercises .......... 9,375 100 6,100 --
Unrealized gain ................. -- -- -- --
Deferred stock option
compensation ................. -- -- 83,400 (83,400)
Net loss ........................ -- -- -- --
--------- ------- ----------- --------
Balance at December 31, 1995 .... 7,216,104 32,200 2,826,600 (83,400)
Sale of Common Stock for cash,
net of issuance costs of
$47,900 ...................... 106,249 1,100 1,351,000 --
Note payable conversion ......... 15,625 100 249,900 --
Unrealized loss ................. -- -- -- --
Stock options canceled .......... -- -- (28,000) 28,000
Amortization of deferred stock
option compensation .......... -- -- -- 6,900
Net loss ........................ -- -- -- --
--------- ------- ----------- --------
Balance at June 30, 1996 ........ 7,337,978 $33,400 $ 4,399,500 $(48,500)
========= ======= =========== ========
[Download Table]
Unrealized
Gain (Loss) on
Marketable Total
Equity Accumulated Stockholders'
Securities Deficit Deficit
--------- ------------ ------------
Balance at December 31, 1993 .... $ -- $ -- $ 700
Issuance of Common Stock for
services ..................... -- -- 7,200
Sale of Common Stock for cash ... -- -- 100,000
Net loss ........................ -- (599,600) (599,600)
--------- ------------ ------------
Balance at December 31, 1994 .... -- (599,600) (491,700)
Issuance of Common Stock for
services ..................... -- -- 121,300
Antidilution issuance ........... -- -- --
Sale of Common Stock for cash ... -- -- 1,890,000
Sale of Common Stock for equity
securities ................... -- -- 375,000
Note payable conversion ......... -- -- 275,000
Stock option exercises .......... -- -- 6,200
Unrealized gain ................. 152,300 -- 152,300
Deferred stock option
compensation ................. -- -- --
Net loss ........................ -- (3,178,700) (3,178,700)
--------- ------------ ------------
Balance at December 31, 1995 .... 152,300 (3,778,300) (850,600)
Sale of Common Stock for cash,
net of issuance costs of
$47,900 ...................... -- -- 1,352,100
Note payable conversion ......... -- -- 250,000
Unrealized loss ................. (112,600) -- (112,600)
Stock options canceled .......... -- -- --
Amortization of deferred stock
option compensation .......... -- -- 6,900
Net loss ........................ -- (10,403,000) (10,403,000)
--------- ------------ ------------
Balance at June 30, 1996 ...... $ 39,700 $(14,181,300) $ (9,757,200)
========= ============ ============
The accompanying notes are an integral part of these financial statements.
3
THE MCKINLEY GROUP, INC.
STATEMENTS OF CASH FLOWS
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Six Months Ended
Year Ended December 31, June 30,
----------------------------- --------------------------------
1994 1995 1995 1996
--------- ----------- ----------- ------------
(Unaudited)
Cash flows from operating activities:
Net loss ..................................... $(599,600) $(3,178,700) $ (916,600) $(10,403,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .............. 9,700 88,600 20,300 221,900
Equity securities issued for services ...... 7,200 196,300 132,900 --
Provision for doubtful accounts ............ -- -- -- 44,000
Provision for loan impairment .............. -- -- -- 629,200
Loss on disposal of fixed assets and
other assets ............................. -- -- -- 90,200
Changes in assets and liabilities:
Accounts receivable ...................... (3,400) (150,700) (31,200) (169,800)
Employee advances ........................ (3,900) (67,600) 500 92,000
Other current assets ..................... (5,200) (21,600) (13,800) (47,500)
Other assets ............................. (20,100) (38,200) (19,400) (4,600)
Accounts payable ......................... 128,600 575,700 30,400 1,790,400
Accrued liabilities ...................... 112,400 387,800 174,200 521,400
Payable to Netscape Communications Corp... -- -- -- 3,500,000
Deferred revenues ........................ -- 105,000 15,000 1,530,100
--------- ----------- ----------- ------------
Net cash used in operating activities ........... (374,300) (2,103,400) (607,700) (2,205,700)
--------- ----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment ........... (72,400) (279,400) (67,600) (285,700)
Purchase of investments ...................... -- (357,700) -- --
Sale of investments .......................... -- -- -- 352,800
Notes and advances to Novo MediaGroup, Inc.... -- -- -- (629,200)
--------- ----------- ----------- ------------
Net cash used in investing activities ........... (72,400) (637,100) (67,600) (562,100)
--------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from sale of Common Stock ........... 100,000 1,896,300 1,620,000 1,400,000
Proceeds from issuance of notes payable ...... 328,500 495,900 270,200 1,040,000
Proceeds from (repayment of) margin
account borrowings ......................... -- 146,000 -- (146,000)
Proceeds from bank borrowings ................ -- 650,000 -- 450,000
Principal payments on notes payable .......... -- (262,500) -- --
Payments on capital lease obligations ........ -- (33,000) (181,800) (111,200)
--------- ----------- ----------- ------------
Net cash provided by financing activities ....... 428,500 2,892,700 1,708,400 2,632,800
--------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents .................................. (18,200) 152,200 1,033,100 (135,000)
Cash and cash equivalents at beginning
of year ...................................... 19,200 1,000 1,000 153,200
--------- ----------- ----------- ------------
Cash and cash equivalents at end of year ........ $ 1,000 $ 153,200 $ 1,034,100 $ 18,200
========= =========== =========== ============
Supplemental disclosures (Note 3):
Cash paid for interest ....................... $ -- $ 17,300 $ 2,600 $ 60,100
========= =========== =========== ============
Cash paid for income taxes ................... $ 800 $ 800 $ 800 $ 2,100
========= =========== =========== ============
The accompanying notes are an integral part of these financial statements.
4
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
THE COMPANY
The McKinley Group, Inc. (the "Company") was incorporated in Delaware on
December 7, 1993. The Company's principal business activities include Internet
advertising, licensing of Internet directory technology and publishing Internet
directory content. Advertising services are offered primarily to corporate
entities seeking to expand their market presence through the Internet's
Worldwide Web. Domestic and international Internet service providers comprise
the principal market for the Company's Internet directory technology. Internet
directory content, in both paper and digital formats, is marketed to individual
and corporate Internet users.
The Company has suffered recurring losses from operations, has a net
capital deficiency at June 30, 1996 of approximately $9,800,000 and was not in
compliance with certain covenants underlying outstanding bank borrowings. In
addition, the Company's management and Board of Directors have assessed the
existing market for its Internet publishing and directory services and have
concluded that to effectively compete in such market would require significant
additional equity financing, which the Company has been unable to obtain. In
response to these factors, which raise substantial doubt about the Company's
ability to continue as a going concern, the Board of Directors have caused or
accepted the resignation of certain officers and key employees, including the
Company's Chief Executive Officer and have implemented a plan to maintain
operations until a viable financing or liquidation strategy can be developed.
On August 6, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Excite, Inc. (Excite). Consummation of the
Agreement is subject to resolution of various matters, including approval by
stockholders of the Company and of Excite. Upon the effectiveness of the
Agreement, the Company's stockholders will exchange all of their shares of
Common Stock for shares of Common Stock of Excite, in a business combination to
be accounted for as a pooling of interests. Under a Memorandum of Agreement
dated June 27, 1996 and through August 5, 1996, Excite has provided the Company
with working capital advances totaling approximately $2.6 million. The advances
accrue interest at a specified prime rate plus 2%, are subordinated to
$1,100,000 of existing bank borrowings and are collateralized by a security
interest in all assets of the Company.
In the event that the Agreement with Excite is not consummated, it is
possible that the Company would be unable to continue operations and that the
Board of Directors would be required to pursue other merger strategies or
liquidation. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
From December 7, 1993 (inception) through December 31, 1993, the Company
had no revenue and incurred $51,300 in general and administrative expenses.
These operating costs, which are considered insignificant, have been included in
the results of operations for the year ended December 31, 1994.
5
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's advertising revenues are derived principally from short-term
advertising contracts which guarantee a minimum number of "impressions" or times
that any advertisement is delivered by the Company's Internet directory server
and viewed by an Internet user. Advertising revenues are recognized over the
contract term using the percentage of completion method based on the number of
impressions delivered as a percentage of the guaranteed minimum or recognized
ratably over the contract term once the minimum guaranteed impressions are met.
Revenues from the sale of certain advertising space are shared with third
parties pursuant to the terms of certain agreements. The Company records
advertising revenues, net of amounts allocable to third parties under the terms
of such agreements. To date, amounts allocable to third parties have not been
significant.
Revenues from the license of Internet directory content and technology are
recognized at the time of delivery provided that no significant obligations
remain and collection of the resulting receivable is considered probable. Any
insignificant vendor obligations are accrued at the time of sale.
Other revenues during the periods from December 7, 1993 (inception) through
December 31, 1995, are composed primarily of contract revenues earned under
agreements to modify the Company's Internet directory technology and are
recognized as the work is performed. Other revenues for the six months ended
June 30, 1996, are composed primarily of royalties from book publishing
arrangements, which are recognized when earned.
PRODUCT DEVELOPMENT COSTS
The costs of developing and maintaining the Company's proprietary Internet
directory and databases are expensed as incurred and are included in research
and development costs.
Statement of Financial Accounting Standard No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. All product development costs have been expensed as incurred.
6
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
ADVERTISING COSTS
Advertising costs incurred by the Company are recorded as an expense the
first time an advertisement appears. Advertising expenses for the years ended
December 31, 1994 and 1995, respectively, were insignificant. For the six months
ended June 30, 1996, the Company incurred approximately $5.2 million in
advertising expenses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENTS
Management determines the appropriate classification of its investments at
the time of purchase and reevaluates the classification at each reporting date.
Investment securities classified as trading are reported at fair value and the
net unrealized gains and losses are included as part of results from operations.
Investments classified as available-for-sale are recorded at fair value and net
unrealized gains and losses are recognized as a separate component of
stockholders' deficit.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, and trade accounts receivable which are generally not
collateralized. The Company limits its exposure to credit loss by placing its
cash, cash equivalents, and investments with high credit quality financial
institutions. Concentrations of credit risk with respect to accounts receivable
are considered to be limited due to the quality of customers comprising the
Company's customer base and their dispersion across varying business segments
and geographies. The Company performs ongoing credit evaluations of its
customers' financial condition to determine the need for an allowance for
doubtful accounts. Gross accounts receivable at December 31, 1994 were
insignificant. Three customers accounted for approximately 65%, 16%, and 12%,
respectively, of total accounts receivable at December 31, 1995. Two customers
accounted for approximately 32% and 16%, respectively, of total accounts
receivable at June 30, 1996. Two customers accounted for approximately 73% and
24%, respectively, of total revenue in 1994. Three customers accounted for
approximately 48%, 29%, and 14%, respectively, of total revenue in 1995. Four
customers accounted for approximately 30%, 20%, 13% and 10%, respectively, of
total revenue during the six months ended June 30, 1996. One customer accounted
for 89% of total revenue during the six months ended June 30, 1995.
7
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the remaining lease terms. Repair and
maintenance costs are charged to expense as incurred.
INCOME TAXES
Income taxes are provided using the asset and liability approach. Under the
asset and liability approach, deferred taxes are provided for the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. Tax credits are treated as reductions of income taxes in the year in
which the credits are used for income tax purposes.
From inception through December 31, 1994, the Company elected to be treated
as an "S Corporation" for federal and state income tax purposes. Under these
elections, tax losses and other tax attributes resulting from the Company's
operations were passed-through to stockholders. Accordingly, net operating loss
and tax credit carryforwards generated during this period are not available to
the Company. Effective January 1, 1995, the Company revoked its S Corporation
elections.
STOCK DIVIDENDS
Share information for all periods presented has been retroactively adjusted
to reflect a 1,000-for-1 split of Common Stock in September 1995, 1.46-for-1
split in May 1995 effected in the form of a dividend, and a 3-for-1 split in
February 1996.
INTERIM RESULTS (UNAUDITED)
The accompanying statements of operations and of cash flows for the six
months ended June 30, 1995 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of financial position, results
of operations and cash flows for the interim periods. The results of operations
and cash flows for the six months ended June 30, 1995 and 1996 are not
necessarily indicative of the results to be expected for any other period or for
the year ending December 31, 1996. The financial data and other information
disclosed in these notes to financial statements related to the six months ended
June 30, 1995 is also unaudited.
NEW ACCOUNTING PRONOUNCEMENTS
The Company accounts for its Stock Option Plan and Employee Stock Purchase
Plan in accordance with the Provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-based
Compensation." FAS 123 is effective for fiscal
8
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
years beginning after December 15, 1995. The Company expects to continue to
account for its plans in accordance with the provisions of APB 25. Accordingly,
FAS 123 is not expected to have any material impact on the Company's financial
position or results of operations.
NOTE 3 - NONCASH FINANCING ACTIVITIES:
During 1995 and the six months ended June 30, 1996, computer equipment with
a cost of $505,900 and $531,300, respectively, was acquired under capital lease
obligations.
During May 1995, $250,000 in notes payable to a Director were converted
pursuant to the original note terms, into 375,000 shares of the Company's Series
A Common Stock. Additionally, $25,000 in notes payable to a nonrelated party
were converted into 30,000 shares of the Company's Series A Common Stock.
During May 1995, the Company granted 99,729 shares of Series A Common Stock
to certain key employees and recognized $121,300 as compensation expense.
During June 1995, 267,857 shares of Series A Common Stock were sold to
NETCOM On-Line Communication Services, Inc. ("Netcom") for 12,565 Netcom Common
Shares with a market value of $300,000 on the transaction date. Additionally, in
connection with this investment, certain officers, directors and employees of
the Company received options to purchase Netcom common stock valued at $75,000,
which was recorded as compensation expense and additional paid-in capital.
During January 1996, $250,000 of notes payable to a nonrelated party were
converted into 15,625 shares of Series B Common Stock.
9
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 4 - INVESTMENTS AND RESTRICTED INVESTMENTS:
The cost and fair market value of investments, which are based on quoted
market prices at December 31, 1995, are as follows:
[Enlarge/Download Table]
Gross Gross
Historical Unrealized Unrealized
Cost Fair Value Gain Loss
-------- -------- ------ ------
December 31, 1995
Trading:
Corporate equity securities ....... $101,100 $103,300 $3,700 $1,500
Corporate and government bonds..... 204,700 202,000 -- 2,700
Mutual funds ...................... 50,400 52,400 2,000 --
-------- -------- ------ ------
$356,200 $357,700 $5,700 $4,200
======== ======== ====== ======
At December 31, 1995 and June 30, 1996, the Company held investments with a
book value of $300,000 and a fair market value of $452,300 and $339,700,
respectively. These investments are being held as collateral by a financial
institution against the Company's line of credit borrowings; see Note 6.
NOTE 5 - BALANCE SHEET COMPONENTS:
[Enlarge/Download Table]
December 31, June 30,
-------------------------- -----------
1994 1995 1996
--------- ----------- -----------
Property and equipment, net:
Computer equipment ...................... $ 79,300 $ 664,800 $ 1,476,400
Purchased internal-use software ......... -- 176,600 64,400
Leasehold improvements .................. -- 16,000 45,000
Furniture and fixtures .................. -- 7,200 7,200
--------- ----------- -----------
79,300 864,600 1,593,000
Accumulated depreciation and amortization (9,700) (98,300) (310,000)
--------- ----------- -----------
$ 69,600 $ 766,300 $ 1,283,000
========= =========== ===========
At December 31, 1995 and June 30, 1996, computer equipment includes
$505,900 and $1,037,200 financed under capitalized lease obligations and the
related accumulated amortization totaled $28,600 and $159,600, respectively.
[Download Table]
December 31, June 30,
----------------------- ----------
1994 1995 1996
-------- ---------- ----------
Accrued liabilities:
Accrued payroll and benefits ............ $ 43,200 $ 378,300 $ 256,700
Royalties payable to related parties .... 52,600 51,700 36,200
Accrued interest ........................ 16,600 32,900 87,600
Deferred rent ........................... -- 37,300 34,300
Accrued consulting ...................... -- -- 250,000
Other accrued liabilities ............... -- -- 404,700
-------- ---------- ----------
$112,400 $ 500,200 $1,069,500
======== ========== ==========
10
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 6 - SHORT-TERM BORROWINGS AND NOTES PAYABLE:
SHORT-TERM BORROWINGS
The Company has a $1.0 million revolving line of credit with a bank
available through October 31, 1996. Additionally, in May 1996, the Company
received $100,000 from the same bank under a demand note. Borrowings under the
line and the note at June 30, 1996 totaled $1.1 million and are collateralized
by all the Company's assets and by personal guarantees from certain officers and
stockholders. Interest on borrowings is payable monthly at the bank's prime rate
plus 1% (9.25% at June 30, 1996). Among other provisions, the Company is
required to maintain $400,000 in cash deposits and unencumbered securities and
comply with certain other financial covenants. In addition, payment of cash
dividends is prohibited without the bank's prior written consent. At June 30,
1996, the Company was not in compliance with the deposit and certain other
financial covenants and has received a waiver for such covenant violations
through October 31, 1996. At June 30, 1996, investments with a carrying amount
of $300,000 (fair market value at June 30, 1996 was $339,700) were held by the
bank as collateral for the line of credit borrowings and are not available to
the Company.
NOTES PAYABLE
Notes payable consist of the following:
[Download Table]
December 31, June 30,
-------------------------- ----------
1994 1995 1996
--------- ----------- ----------
Notes payable - related parties .. $ 221,000 $ 36,900 $1,076,900
Notes payable - other ............ 207,500 350,000 100,000
--------- ----------- ----------
428,500 386,900 $1,176,000
==========
Less current portion ............. (328,500) (102,900)
--------- -----------
$ 100,000 $ 284,000
========= ===========
Notes payable represent amounts due to individuals with interest rates
ranging from 6.0% to 11.0%. In January 1996, the Company converted $250,000 of
notes payable into 15,625 shares of Series B Common Stock.
Notes payable in the amount of $500,000 are mandatorily convertible into
Common Stock upon the closing of a venture capital financing in excess of $3
million. Notes payable in the amount of $270,000 may be converted into Common
Stock at the election of the holder.
11
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain computer equipment under capital lease
agreements that expire in varying amounts through June 1999. Principal is
payable in monthly installments from the inception of each borrowing. In
addition, the Company is obligated under various noncancelable operating leases
for office space and equipment. Rent expense under noncancelable operating
leases totaled $23,500 and $111,500 during the years ended December 31, 1994 and
1995, respectively, and $18,000 and $118,700 for the six months ended June 30,
1995 and June 30, 1996, respectively.
Future minimum payments under capital lease obligations and noncancelable
operating leases were as follows:
[Download Table]
Capital Operating
Leases Leases
----------- --------
Six months ending December 31, 1996 ..... $ 225,300 $124,900
Year ending December 31,
1997 .................................. 427,900 260,100
1998 .................................. 348,700 153,100
1999 .................................. 25,300 9,000
----------- --------
Total minimum lease payments ............ 1,027,200 $547,100
========
Amounts representing interest ........... (134,100)
-----------
Present value of minimum lease payments.. 893,100
Current portion ......................... (365,100)
-----------
Long-term portion ....................... $ 528,000
===========
ADVERTISING AGREEMENT
In March 1996, the Company entered into a one year contract with Netscape
Communications Corp. ("Netscape") to be listed as one of five "Premier
Providers" of Internet search and directory services on Netscape's Internet home
page. In exchange for such listing, the Company is obligated to pay Netscape
$5,000,000 over the one year contract period, which began on April 10, 1996. The
$5,000,000 obligation was charged to advertising expense in April 1996 and is
included in sales and marketing expenses for the six months ended June 30, 1996.
In May 1996, the Company entered into an advertising contract with Netscape
to deliver a guaranteed number of Netscape advertisement impressions through its
Internet directory service. As consideration for such advertising services,
Netscape agreed to reduce the $5,000,000 Premier Provider obligation by
$1,500,000, which has been reclassified to deferred revenues and will be
recognized as the guaranteed Netscape impressions are delivered.
12
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
ROYALTY OBLIGATION
During February 1996, the Company entered into an exclusive technology
license agreement with a provider of on-line information services. The agreement
requires minimum advance royalty payments of $10,000 during 1996. To retain the
exclusive rights to such technology, royalties payable based on the Company's
usage of such technology must exceed $21,000 per month. The Company has the
ability to terminate the agreement without penalty upon 30 days advance notice.
LITIGATION
Various claims arising from vendor payment disputes and other matters in
the ordinary course of business, seeking monetary damages and other relief, are
pending against the Company. The amount of liability, if any, from such claims,
cannot be determined with certainty; however, in the opinion of management, the
ultimate liability for such claims will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
The Company has received a claim for approximately $80,000 from a
consultant. The Company believes the claim is without merit and believes that
the ultimate outcome of this claim will not have a material adverse effect on
the Company's business, financial condition or results of operations.
NOTE 8 - INCOME TAXES:
During the period subsequent to January 1, 1995, the Company incurred
losses and consequently had no provision for income taxes.
At June 30, 1996, the Company had federal and state net operating loss
carryforwards of approximately $11.7 million. The federal and state net
operating loss carryforwards expire in 2010 and 2005, respectively. Should a
substantial change in the Company's ownership occur, utilization of net
operating loss and research and development credit carryforwards will be
limited.
At December 31, 1995 and June 30, 1996, deferred tax assets of
approximately $1.2 million and $5.4 million, respectively, are composed
primarily of net operating loss carryforwards. Management believes that, based
on a number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets such that a
full valuation allowance has been recorded. These factors include the lack of
significant history of profits, recent increases in expense levels, the fact
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, the lack of carryback capacity to
realize deferred tax assets, and the uncertainty regarding market acceptance of
the Company's products. Based on the currently available evidence, management is
unable to assert that it is more likely than not that the Company will generate
sufficient taxable income to realize the Company's deferred tax assets. The
Company will continue to assess the realizability of the deferred tax assets
based on actual and forecasted operating results.
13
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 9 - STOCKHOLDERS' EQUITY:
At December 31, 1994 and December 31, 1995, the Company was authorized to
issue 1,500 and 10,000,000 shares, respectively, with no par value and with a
par value of $0.01 per share, respectively. In February 1996, the Company's
Board of Directors amended the Company's Certificate of Incorporation to provide
for the authorization to issue 30,000,000 shares of $0.01 par value Common
Stock, of which 29,903,125 are designated Series A Common Stock and the
remaining 96,875 are designated as Series B Common Stock. Additionally, the
amendment allowed for the authorization of 5,000,000 shares of $0.01 par value
Preferred Stock, of which 316,456 shares are designated Series A. The Board of
Directors has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.
SERIES A AND SERIES B COMMON STOCK
The holders of each of the series of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders, including the election of Directors, and do not have cumulative
voting rights. Additionally, each holder of Common Stock is entitled to receive
a noncumulative declared dividend in proportion to the number of shares held on
an "as if converted" basis. To date, the Company has not declared or paid any
dividends. Upon liquidation, dissolution or winding up of the Company, the
holders of Series A Common Stock will be entitled to share ratably in the net
assets legally available for distribution to the stockholders after the payment
of all debts and other liabilities of the Company, subject to the prior rights
of any Series B Common Stock and Preferred Stock then outstanding. All
outstanding shares of Common Stock are fully paid and nonassessable.
The Series B Common Stock have rights and privileges equivalent to the
Series A Common Stock and have a liquidation preference equal to $16.00 per
share which is subordinated to the rights of the Series A Preferred Stock
holders. Each share of Series B Common Stock is convertible at the option of the
stockholder into Series A Common Stock based on a conversion formula which
currently results in a 3 for 1 conversion ratio. However, the Series B Common
Stock automatically converts into Series A Common Stock upon the closing of the
sale of the Company's Common Stock in an underwritten public offering which is
based upon the aforementioned conversion formula if the minimum net proceeds to
the Company are $15 million and the minimum price per share is $8.00.
SERIES A PREFERRED STOCK
The Series A Preferred Stock have certain rights, preferences and
restrictions with respect to voting, dividends, conversion and liquidation. Each
holder of Series A Preferred Stock is entitled to the number of votes equal to
the number of shares of Series A Common Stock into which such shares of Series A
Preferred Stock could be converted. Additionally, the holders of Series A
Preferred Stock, voting as a single class, are entitled to elect one member of
the Board of Directors. No shares were outstanding as of June 30, 1996.
14
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
WARRANTS
In October 1995, in connection with obtaining a working capital line of
credit from a bank, the Company issued a warrant to purchase 26,192 shares of
Series A Common Stock with an exercise price of $2.67 per share. This warrant is
exercisable through September 30, 2090, and was deemed to have a nominal value
at the date of grant. See Note 6.
On February 1, 1996, the Company entered into a consulting services
agreement with Creative Artists Agency ("CAA"). Under the terms of the
agreement, the Company is required to pay $500,000 of professional fees over the
term of the agreement or a prorated amount thereof, subject to a minimum payment
of $250,000, if the agreement is prematurely terminated before January 31, 1997.
At June 30, 1996, the Company had accrued $250,000 relating to this arrangement.
Additionally, the Company issued a warrant to purchase 86,787 shares of the
Company's Series A Common Stock with an exercise price of $8.28 per share. The
warrant was deemed to have nominal value at the date of issuance and will be
fully-vested on January 31, 1997. The warrant expires on January 31, 1999,
unless the consulting services agreement is terminated prior to January 31, 1997
by CAA, in which case the warrant will immediately terminate.
In April 1996, in connection with obtaining an increase in the amount
available under its working capital line of credit, the Company issued a warrant
to purchase 2,619 shares of Series A Common Stock with an exercise price of
$2.67. This warrant is exercisable through April 18, 2001, and was deemed to
have a nominal value at the date of grant.
INITIAL PUBLIC OFFERING COSTS
During the six months ended June 30, 1996, general and administrative
expenses include approximately $594,000 of costs associated with the Company's
unsuccessful efforts to raise equity capital through an initial public offering.
15
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - STOCK OPTIONS:
During 1995 and 1996, the Company granted 113,625 and 190,575,
respectively, of nonqualified options to purchase the Company's Series A Common
Stock. These options expire no later than seven years from the date of grant and
vest over periods ranging from three to four years. During 1995, the Company
identified a compensation element relating to the nonqualified option grants
aggregating $83,400 which will be recognized over the vesting periods. During
the six months ended June 30, 1996, the Company canceled 18,750 of these options
and reduced the amount of compensation expense to be recognized by $55,400.
$6,900 of compensation expense was recognized during the six months ended June
30, 1996.
In February 1996, the Company adopted the 1996 Stock Incentive Plan
("Incentive Plan") and the 1996 Employee Stock Purchase Plan ("Purchase Plan").
These plans are administered by a committee of the Board of Directors (the
"Committee") and are subject to stockholder approval.
1996 STOCK INCENTIVE PLAN
The Company has reserved 1,125,000 shares of Series A Common Stock for
issuance of restricted shares, stock units, nonqualified and incentive stock
options, and stock appreciation rights to the Company's employees, consultants
and outside directors. Under the provisions of the Incentive Plan, nonqualified
stock options to purchase 20,000 shares of the Company's Common Stock will be
granted to outside directors (with certain exceptions) upon their becoming a
member of the Board of Directors. An additional 5,000 options will be granted to
outside directors on each anniversary date thereafter. Options under the
Incentive Plan will be granted at the fair value of the stock at the grant date,
and vest on each one year anniversary over a four-year period. Options granted
under the Incentive Plan have a term of up to 10 years, while the Committee has
the discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards. For the six months ended June 30, 1996, 142,500 shares
were issued under the Incentive Plan.
Share activity under the Company's 1996 Stock Incentive Plan and from the
issuances of nonqualified stock options is as follows:
[Download Table]
Shares Options Outstanding
Availabl e ---------------------------
for Grant Shares Prices
--------- -------- --------
Plan inception ......................... 1,125,000
Options granted ...................... (113,625) 113,625 $0.67 - $2.83
Options exercised .................... -- (9,375) 0.67
--------- --------
Balance at December 31, 1995 ........... 1,011,375 104,250 1.33 - 2.83
Options granted ...................... (333,075) 333,075 1.33 - 5.54
Options canceled ..................... 263,694 (263,694) 1.33 - 5.54
--------- --------
Balance at June 30, 1996 ............... 941,994 173,631 1.33 - 5.54
========= ========
Options exercisable at June 30, 1996.... 10,131
========
16
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 750,000 shares of Series A Common Stock for
issuance under the Purchase Plan. During each purchase period, eligible
employees may designate a portion of their cash compensation, subject to certain
limitations, to be deducted from their compensation for the purchase of Series A
Common Stock. The purchase price of the shares under the Purchase Plan is equal
to 85% of the lesser of the fair market value per share, as defined by the
Purchase Plan, on the last trading day before the participation period or the
last trading day of the current participation period. No shares have been issued
under the Purchase Plan.
NOTE 11 - RELATED PARTY TRANSACTIONS:
NETCOM ON-LINE COMMUNICATION SERVICES, INC. STOCK PURCHASE
On June 28, 1995, the Company sold 1,125,000 shares of its Common Stock to
NETCOM On-Line Communication Services, Inc. ("Netcom") for $1,200,000 and 12,565
Netcom common shares with a market value at the date of grant equal to $23.88
per share or $300,000. In connection with the Netcom investment, certain of the
Company's officers, directors and employees were granted 50,000 options to
purchase Netcom common stock at an exercise price of $23.88 per share. The
Company estimated the value of these options to be $75,000, which was recorded
as compensation expense in 1995.
EMPLOYEE ADVANCES
At December 31, 1995, employee advances include two $50,000 promissory
notes receivable from officers of the Company. The notes bear interest at prime
plus 1% and were repaid in January 1996.
PUBLISHING ROYALTIES
During 1994, 1995 and the six months ended June 30, 1996, the Company
incurred $40,300, $20,200 and $4,600, respectively, of royalty expenses that
were payable to an officer and director of the Company.
CONSULTING AGREEMENTS
During 1995, the Company incurred fees totaling $104,000 for consulting
services by a corporation owned by an individual who is an officer and director
of the Company.
During 1994, the Company entered into an agreement with a Director to
provide various consulting and business advisory services. Under the agreement,
the Company is obligated to make quarterly payments of $5,000.
DEBT FORGIVENESS
In 1994, the Company wrote off loans totaling $29,000 to a company in which
an officer of the Company held an equity interest.
17
THE MCKINLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 12 - NOVO MEDIAGROUP, INC. NOTE RECEIVABLE:
At June 30, 1996, the Company had a notes and advances receivable due from
Novo MediaGroup, Inc. in the amount of $630,200, of which $330,000 was evidenced
by an 8% promissory note convertible into shares of Novo MediaGroup, Inc. Common
Stock. Based on management's assessment of the financial uncertainty with regard
to Novo Media's ability to repay the outstanding amounts, an impairment reserve
of $630,200 was provided at June 30, 1996.
NOTE 13 - SUBSEQUENT EVENTS:
SEPARATION AGREEMENTS
In July and August 1996, the Company entered into severance agreements with
eight officers and employees and accrued aggregate severance costs of
approximately $843,000 as of the agreement dates. The severance agreements
provide up to twelve months salary, depending upon each employee's position and
length of service with the Company.
18
Dates Referenced Herein and Documents Incorporated by Reference
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