<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28064
EXCITE, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1091 N. SHORELINE BOULEVARD
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
(415) 943-1200
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes x No
As of July 19, 1996, there were 11,067,732 shares of the Registrant's Common
Stock outstanding.,
<PAGE> 2
FORM 10-QSB
EXCITE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Balance Sheets as of June 30, 1996 and
December 31, 1995...................................................3
Condensed Statements of Operations for the three and six
months ended June 30, 1996 and 1995 .............................. 4
Condensed Statements of Cash Flows for the six
months ended June 30, 1996 and 1995............................... 5
Notes to Condensed Financial Statements........................... 6
ITEM 2: Management's Discussion and Analysis or Plan of Operation ........ 9
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................. 18
ITEM 2: Changes in Securities............................................. 18
ITEM 3: Defaults Upon Senior Securities................................... 18
ITEM 4: Submission of Matters to a Vote of Security Holders............... 18
ITEM 5: Other Information................................................. 18
ITEM 6: Exhibits and Reports on Form 8-K.................................. 18
Signature......................................................... 19
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCITE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, 1995
1996 (1)
------------------ -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $43,881,321 $ 606,380
Accounts receivable.......................................... 1,626,714 184,252
Prepaid expenses............................................. 594,495 80,609
------------------ -------------------
Total current assets...................................... 46,102,530 871,241
Property and equipment, net...................................... 2,322,549 683,611
Other assets..................................................... 154,846 177,172
------------------ -------------------
$48,579,925 $1,732,024
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable............................................. $ 584,961 $ 452,984
Accrued compensation......................................... 80,438 49,952
Accrued distribution agreement............................... 5,000,000 -
Accrued liabilities.......................................... 1,105,504 114,435
Capital lease obligations.................................... 223,210 60,842
Deferred revenue............................................. 293,801 -
------------------ -------------------
Total current liabilities............................... 7,287,914 678,213
Notes payable.................................................... - 303,400
Capital lease obligations........................................ 314,912 87,270
Redeemable convertible preferred stock........................... - 3,847,019
Commitments
Shareholders' Equity (net capital deficiency)
Common stock................................................. 55,401,806 671,597
Deferred compensation........................................ (468,304) (548,303)
Accumulated deficit.......................................... (13,956,403) (3,307,172)
------------------ -------------------
Total shareholders' equity (net capital deficiency)..... 40,977,099 (3,183,878)
------------------ -------------------
$48,579,925 $1,732,024
================== ===================
</TABLE>
(1) The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements.
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EXCITE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1996 1995 1996 1995
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues
$ 2,125,406 $ 250,000 $ 3,272,058 $ 250,000
Cost of revenues 423,415 74,000 806,183 74,000
------------ ------------ ------------ ------------
Gross profit 1,701,991 176,000 2,465,875 176,000
Operating expenses:
Product development 1,226,093 212,868 2,075,271 296,507
Sales and marketing 7,168,204 57,291 10,331,981 62,283
General and administrative 773,707 81,487 1,192,136 113,935
------------ ------------ ------------ ------------
Total operating expenses 9,168,004 351,646 13,599,388 472,725
------------ ------------ ------------ ------------
Operating loss (7,466,013) (175,646) (11,133,513) (296,725)
Interest income 488,557 2,359 518,135 2,215
Interest expense (10,864) -- (33,852) --
============ ============ ------------ ------------
Net loss $ (6,988,320) $ (173,287) $(10,649,230) $ (294,510)
============ ============ ============ ============
Net loss per share $ (0.63) $ (0.02) $ (0.98) $ (0.03)
============ ============ ============ ============
Shares used in computing net loss per
share 11,117,713 10,561,558 10,839,636 10,561,558
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
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EXCITE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
------------------ ------------------
<S> <C> <C>
Net loss.......................................................... $(10,649,230) $(294,510)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash and deferred compensation.............................. 355,000 -
Warrant issued.................................................. 1,625,000 -
Depreciation and amortization................................... 287,755 6,793
Changes in assets and liabilities:
Accounts receivable........................................... (1,442,462) -
Prepaid expenses.............................................. (442,375) (50,697)
Other assets.................................................. (87,752) 475
Accounts payable.............................................. 131,977 148,049
Accrued compensation.......................................... 30,486 1,665
Accrued distribution agreement................................ 5,000,000 -
Accrued liabilities........................................... 991,069 -
Deferred revenue.............................................. 293,801 (35,999)
------------------ ------------------
Net cash used in operating activities...................... (3,906,732) (224,224)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................... (1,816,615) (102,843)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ............................ (89,776) -
Proceeds from capital lease obligations........................... 479,786 -
Loans to shareholders............................................. (71,511) -
Proceeds from note payable........................................ 2,000,000 500,000
Payments on notes payable......................................... (1,153,400) (12,000)
Proceeds from sale of redeemable convertible preferred stock...... 12,281,949 -
Proceeds from sale of common stock and common stock warrants...... 35,551,240 -
------------------ ------------------
Net cash provided by financing activities.................. 48,998,288 488,000
------------------ ------------------
Net increase in cash and cash equivalents.................. 43,274,941 160,933
Cash and cash equivalents at beginning of period.................. 606,380 9,507
------------------ ------------------
Cash and cash equivalents at end of period........................ $43,881,321 $ 170,440
================== ==================
NON-CASH FINANCING ACTIVITIES
Conversion of preferred stock to common stock..................... $16,225,003 -
Conversion of promissory note payable to common stock............. 1,150,000 -
Exercise of common stock warrant in exchange for reduction in
shares issued.............................................. 148,897 -
</TABLE>
See notes to condensed financial statements.
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EXCITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software,
Inc., was formed in June 1994 and develops and provides Internet navigational
services and products designed to allow consumers, content providers and
advertisers to interact on the World Wide Web (the "Web"). The Company expects
to derive a majority of its revenue from selling advertising on its services to
customers in various industries and to date has had a limited number of
customers.
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to fairly state the
Company's financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited financial statements as included in the Company's
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on April 3, 1996 (Reg. No. 333-2328-LA). The results of
operations for the three and six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 1996. The December 31, 1995 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. INITIAL PUBLIC OFFERING
In April 1996, the Company completed its initial public offering and
issued 2,000,000 shares of its Common Stock to the public at a price of $17.00
per share. The Company received approximately $30.7 million of cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
with the initial public offering, (i) each outstanding share of its preferred
stock was automatically converted into two shares of Common Stock, (ii)
outstanding warrants were exercised (on a net exercise basis) at an exercise
price of $17.00 per share resulting in the issuance of 1,191,176 shares of
Common Stock, (iii) $1.0 million principal amount of notes payable were
converted into 160,000 shares of its Common Stock. In May 1996, pursuant to the
exercise of an over-allotment option granted to the underwriters of the
Company's initial public offering, the Company issued an additional 300,000
shares of its Common Stock to the public at a price of $17.00 per share. The
Company received an additional $4.7 million of cash, net of underwriting
discounts and commissions.
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3. STOCK SPLITS AND PER SHARE AMOUNTS
In July 1995, the Company completed a one-for-nine reverse stock split.
In addition, in February 1996, the Company completed a two-for-one stock split.
Accordingly, all of the common share and per share data have been adjusted to
reflect these stock splits.
Net loss per share is computed using the weighted average number of
shares of Common Stock and dilutive common equivalent shares outstanding during
the period. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, such computations include all common and common equivalent shares
issued within 12 months of the filing date of the Company's initial public
offering as if they were outstanding for all periods presented. Common
equivalent shares consist of the incremental common shares issued upon
conversion of the redeemable convertible preferred stock (using the if-converted
method) and shares issuable upon the exercise of stock options and warrants
(using the treasury stock method).
4. SHAREHOLDER'S EQUITY
In February 1996, the Company's board of directors authorized an
increase in the number of authorized shares of Common Stock and Preferred Stock
to 25,000,000 and 4,000,000 shares, respectively. In addition, the Company's
board of directors adopted, and the Company's shareholders approved, the 1996
Employee Stock Purchase Plan (the "Purchase Plan") which authorized the issuance
of 150,000 shares of Common Stock thereunder. Shares may be purchased under the
Purchase Plan at 85% of the lesser of the fair market value of the Common Stock
on the grant or purchase date. At the same meeting, the Company's board of
directors adopted, and subsequently the Company's shareholders approved, the
1996 Equity Incentive Plan (the "1996 Plan") and 1996 Directors Stock Option
Plan (the "Directors Plan") which authorized the issuance of 1,500,000 and
150,000 shares of Common Stock, respectively, upon exercise of stock options
granted to directors under the Directors Plan and to employees and certain
consultants or independent contractors under the 1996 Plan.
5. CAPITAL LEASES
In March 1996, the Company entered into a master equipment lease which
provides for the purchase of up to $2 million of property and equipment under
capital lease. At June 30, 1996, $1.8 million was available under this lease
line.
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6. SIGNIFICANT AGREEMENT
In April 1996, the Company entered into a new agreement with Netscape
Communications Corporation ("Netscape") under which the Company is designated as
one of five "Premier Providers" of search and navigation services accessible
from the "Net Search" button from the Netscape home page. The agreement provides
that the "Premier Provider" status will be established for one year from April
1, 1996, in exchange for which the Company will make payments totaling $5.0
million over the course of the year. Excite, to date, has a limited operating
history with limited revenues and operating losses. As a result the amount of
the Netscape agreement may not be recoverable in future periods and accordingly
has been expensed in the second quarter. The $5.0 million commitment was
expensed as a sales and marketing cost during the quarter ended June 30, 1996.
7. ACQUISITION
In June 1996, the Company signed a letter of intent to acquire by
merger The McKinley Group Inc., a closely held private company and creator of
the Magellan On-Line Guide. The transaction will be effected through the
issuance of approximately 1.2 million shares of Excite Common Stock and will be
accounted for as a pooling and structured as a tax free exchange. Completion of
this agreement is subject to numerous conditions, including negotiation and
execution of a definitive merger and related agreements, due diligence and
standard regulatory approval by the shareholders of The McKinley Group and other
approvals. The transaction is expected to close in the third quarter of 1996.
The McKinley Group has experienced operating losses since inception and
has only achieved limited revenues to date. In the event that the acquisition is
consummated, the Company must successfully integrate the operations, products
and services and technologies of The McKinley Group. Furthermore, in light of
the operating histories of both companies, there can be no assurance that the
Company will attain profitability.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors That May Affect Further Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form SB-2
as declared effective by the Securities and Exchange Commission on April 3, 1996
(Reg. No. 333-2328-LA).
RESULTS OF OPERATIONS
REVENUES
In October 1995, the Company began selling advertising space on its Web
sites. Accordingly there were no advertising revenues for the three and six
months ended June 30, 1995. Total revenues were $2.1 million and $3.3 million
for the three and six months ended June 30, 1996, respectively. For the quarter
ending June 30, 1996 (the "second quarter"), revenues increased 85% from $1.1
million for the first quarter ended March 31, 1996 (the "first quarter"). The
quarterly increase in advertising revenues is due to increased sales of
advertisements and an increase in sales of targeted advertising with higher
rates charged to customers. A decrease in the amount of targeted advertising as
compared to total advertisements sold could adversely affect revenues. The
Company expects to continue to derive its revenue for the foreseeable future
from selling advertising space on its Web sites. There can be no assurance that
advertising over the Internet will become widespread, that a market for the
Company's proposed services will emerge, or that the Company's services will
become generally adopted.
The Company's 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 the consumer) for a fixed
fee. Advertising revenues are recognized ratably over the term of the contract.
To the extent minimum guaranteed impression levels are not met, the Company
defers recognition of the corresponding revenues until guaranteed levels are
achieved. See "Risk Factors that may Affect Future Results-Reliance on
Advertising Revenues."
Revenues for the three and six months ended June 30, 1995 consisted of
revenues derived from custom product development and consulting, and were not
material. These are not expected to be significant sources of revenues in future
periods.
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COST OF REVENUES AND GROSS MARGIN
Cost of revenues consists of expenses related to the maintenance and
support of the Company's Web sites, which is comprised of salaries and benefits,
telecommunications costs, equipment depreciation, overhead allocation and costs
related to revenue sharing agreements. Cost of revenues were $423,415 and
$806,183 for the three and six months ended June 30, 1996. For the second
quarter costs of revenues increased 11% from $382,768 for the first quarter due
primarily to increased personnel expenses and equipment costs relating to
maintaining and supporting the Company's Web sites, but are expected to increase
in absolute dollars and may increase as a percentage of revenues as the Company
increases costs to support expanded services.
Gross margin as a percentage of total revenues was 80% and 75% for the
three and six months ended June 30, 1996, respectively, and 67% for the first
quarter. The quarterly improvement in the gross margin compared to the first
quarter is due to the growth in revenues while associated costs stayed
relatively fixed. In the future, gross margins will be impacted by the types of
advertisements sold and revenue-sharing provisions of certain access and content
provider agreements. Advertisements which target a specific audience typically
result in higher gross margins than advertisements which target the mass
Internet consumer market. Furthermore, pursuant to the provisions of certain
agreements with operators of Internet access points and with content providers,
the Company often shares advertising revenues with Internet access providers or
content providers based upon the number of consumers directed to its Web sites
or based upon the location of advertisements. A decrease in targeted advertising
as a percentage of total advertising sold, or an increase in the Company's
advertising revenue sharing obligations could adversely impact gross margins.
OPERATING EXPENSES
The Company's operating expenses have increased in absolute dollar
amounts in every consecutive quarter through June 30, 1996. This trend reflects
the Company's transition from the product development stage to marketing and
offering its services and products. The Company believes that continued
expansion of operations is essential to the Company's business plans. As a
consequence, the Company intends to continue to increase expenditures in all
operating areas.
In 1995, the Company recorded deferred compensation of $555,866 for the
difference between the grant price and the deemed fair value of the Company's
Common Stock for 1,373,382 shares of its Common Stock subject to options granted
in 1995. The majority of this deferred compensation is being charged to general
and administrative expenses and is being amortized over the vesting period of
the options, generally forty-eight months. Deferred compensation amortized for
the three and six month periods ended June 30, 1996 was $40,000 and $80,000,
respectively. The amortization of this deferred compensation will continue to
have an adverse effect on the Company's results of operations.
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PRODUCT DEVELOPMENT. Product development expenses include expenses associated
with the development of services and products and consist principally of
personnel costs, overhead costs, editorial costs, equipment depreciation and
supplies. Costs related to research, design and development of products have
been charged to product development expense as incurred. Product development
expenses for the three and six months ended June 30, 1996 were $1.2 million and
$2.1 million respectively, an increase of $1.0 million and $1.8 million when
compared with the comparable periods of 1995. For the second quarter product
development expenses increased 45.8% from $849,178 for the first quarter. These
expenses represented 58% and 63% of net sales for the three and six months ended
June 30, 1996 compared with 85% and 119%, respectively, for the comparable
periods of 1995 and 74% for the first quarter. The Company believes that a
significant level of product development expense is required to remain
competitive and, accordingly, the Company anticipates that it will continue to
devote substantial resources to product development and that these costs will
substantially increase in absolute dollars in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
distribution costs, salaries, consulting fees, advertising sales commissions,
creative services and promotional expenses. Sales and marketing expenses for the
three and six months ended June 30, 1996 were $7.2 million and $10.3 million
respectively. Because it had not yet commercially introduced its products and
services, the Company had no material sales and marketing expenses for the
comparable periods in 1995. For the second quarter sales and marketing expenses
increased 125% from $3.2 million for the first quarter. Included in the $7.2
million expense for the second quarter is a $5.0 million charge relating to the
Company's distribution agreement with Netscape (see Note 6 to the condensed
financial statements). The first quarter spending included a non-cash charge of
approximately $1.6 million related to the issuance of a warrant to a
wholly-owned subsidiary of America Online ("AOL") to purchase 650,000 shares of
Common Stock. Without these charges, sales and marketing expenses would have
been approximately $1.6 million, $2.2 million and $3.7 million, for the first
quarter and the second quarter and for the six months ended June 30, 1996,
respectively. Excluding these charges, the increase from the first quarter to
the second quarter was due primarily to the hiring of additional sales and
marketing personnel and organizational and promotional expenses. The Company
expects to incur significant promotional expenses, as well as expenses related
to hiring additional sales and marketing personnel and increased advertising
expenses and anticipates that these costs will substantially increase from the
amount of sales and marketing expenses, excluding expenses related to the
Netscape agreement, in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries for administrative and executive personnel, allowance for
doubtful accounts, and fees for professional services. General and
administrative expenses for the three and six months ended June 30, 1996 were
$773,707 and $1.2 million respectively, an increase of $692,220 and $1.1 million
when compared with the comparable periods last year. For the second quarter,
general and administrative expenses increased 84.9% from $418,429 for the first
quarter. The quarterly and year-to-date increases in general and administrative
expenses were due to increased personnel, professional service fees, allowances
for doubtful accounts and relocation to new facilities to support the Company's
growth. The Company anticipates that its general and administrative expenses
will continue to increase significantly in
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absolute dollar amounts as the Company expands it administrative and executive
staff, adds infrastructure, negotiates and assimilates acquisitions of acquired
technologies and businesses and incurs additional costs related to being a
public company, such as expenses related to directors' and officers' insurance,
investor relations programs and increased professional fees.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company had $43.9 million in cash and cash
equivalents. During the second quarter, the Company completed its initial public
offering of 2,300,000 shares of its Common Stock at a per share price of $17.00.
Net proceeds from this offering were approximately $35.4 million, net of
underwriting discounts, commissions and other offering costs. The Company's cash
and cash equivalents are being maintained in short-term and medium term
investment grade interest-bearing securities until required for other purposes.
Operating activities used cash of $3.9 million during the second
quarter. The net cash used was primarily due to net losses and increases in
accounts receivable and prepaid expenses, which was offset in part by increases
in accrued distribution agreement, accounts payable and accruals. Although the
Company recorded $5.0 million in sales and marketing expense during the second
quarter for its obligations to Netscape under the Company's "Premier Provider"
agreement with Netscape, the Company must still pay this amount to Netscape. In
addition, The McKinley Group is a party to a similar agreement with Netscape.
Therefore, if the acquisition of The McKinley Group is consummated, the Company
will have to make an additional payment of approximately $5.0 million to
Netscape under the "Premier Provider" agreement for the Magellan service.
Investing activities used net cash of $1.8 million for the purchase of
property and equipment. Financing activities generated cash of $49.0 million
primarily from the sale of Common and Preferred Stock, promissory notes, capital
leases and proceeds from the exercise of warrants.
Capital expenditures have been, and further expenditures are
anticipated to be, primarily for facilities and equipment to support expansion
of the Company's operations and management information systems. While the
Company has no material capital commitments, the Company anticipates that its
planned purchases of capital equipment for the remainder of 1996 will require
additional expenditures of approximately $3.0 million to address increasing
capacity demands from Netscape and America Online and resulting from the
proposed acquisition of The McKinley Group.
The Company continues to evaluate strategic investments in other
companies and the acquisition of products, businesses and technologies that
complement the Company's business that may utilize significant amounts of cash
or involve the issuance of a significant amount of equity securities. Currently,
the Company does not have any understandings, commitments or agreements with
respect to any such material investments or acquisitions, except as disclosed in
Note 7 to the condensed financial statements.
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The Company believes that its $38.8 million of working capital at June
30, 1996, together with cash flows generated from advertising revenues, will be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and business expansion for at least the next 12 months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on April 3, 1996 (Reg. No. 333-2328-LA).
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company was founded in June 1994 and commenced offering Excite and
related services and products in October 1995. Accordingly, the Company has an
extremely limited operating history upon which an evaluation of the Company and
its business can be based. The Company's business must be considered in light of
the risks, expenses and problems frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. Specifically, such risks include the failure of
the Company to anticipate and adapt to a developing market, the rejection of the
Company's services and products by Internet consumers, development of equal or
superior services or products by competitors, the failure of the market to adopt
the Internet as an advertising medium, the ability of the Company to consummate
the acquisition of and effectively integrate the technology and operations of
The McKinley Group, Inc. with its operations, and the inability to identify,
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in addressing such risks. In addition, in view of
the rapidly evolving nature of its business and its extremely limited operating
history, the Company believes that period-to-period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. The Company has achieved only limited revenues
to date, has incurred net losses since inception and expects to continue to
operate at a loss for the foreseeable future. As of June 30, 1996, the Company
had an accumulated deficit of approximately $14.0 million. There can be no
assurance that the Company can generate revenue growth, or that any revenue
growth that is achieved can be sustained. Revenue growth that the Company may
achieve may not be indicative of future operating results. In addition, the
Company has increased, and plans to significantly increase further, its
operating expenses in order to increase its sales and marketing efforts, fund
greater levels of product development, increase its editorial staff, and
increase its general and administrative costs to support the enlarged
organization. To the extent that increases in such operating expenses precede or
are not subsequently followed by increased revenues, the Company's business,
results of operations and financial condition will be materially adversely
affected. Given the level of planned expenditures, the Company anticipates that
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<PAGE> 14
it will continue to incur losses for the foreseeable future and there can be no
assurance that the Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history, the
Company has no meaningful historical financial data upon which to base planned
operating expenses. Accordingly, the Company's expense levels are based in part
on its expectations as to future revenues, particularly future advertising
revenues, and to a large extent are fixed. There can be no assurance that the
Company will be able to accurately predict the levels of future revenues, and
the failure to do so would have a materially adverse effect on the Company's
business, results of operations and financial condition. The Company operates
with little or no backlog. In addition, the Company currently derives, and for
the foreseeable future expects to derive, substantially all of its revenues from
the sale of advertising pursuant to short-term advertising contracts. As a
result, quarterly sales and operating results are entirely dependent on
advertising revenues received within the quarter, which are difficult to
forecast, and are also dependent on the Company's ability to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall. The
cancellation or deferral of a small number of existing advertising contracts or
the failure to obtain new advertising contracts in any quarter could adversely
affect the Company's business, results of operations and financial condition for
such quarter. Furthermore, the Company derives advertising revenue based on the
amount of traffic, or page views, on the Company's Web sites. Accordingly, any
significant shortfall of traffic on the Company's Web sites in relation to the
Company's expectations would have an immediate material adverse effect on the
Company's business, results of operations and financial condition.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including
specific economic conditions in the Internet industry, usage of the Internet,
the proposed acquisition of The McKinley Group, Inc., demand for Internet
advertising, changes in advertising rates, seasonal trends in services and
products, introduction or enhancement of services and products by the Company
and its competitors, market acceptance of new services and products, delays in
the introduction of services or products or enhancements by the Company or its
competitors, changes in the Company's pricing policies or those of its
competitors, mix of services and products sold (including the amount of targeted
advertising sold as a percentage of total advertising sold) and the channels
through which those services and products are distributed, and general economic
conditions. As a strategic response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service or
marketing decisions or acquisitions that could have a material adverse effect on
the Company's business, results of operations and financial condition. As a
result, the Company believes that period-to-period comparisons of its results of
operations will not necessarily be meaningful and should not be relied upon as
any indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysis and investors. In such event, the
price of the Company's Common Stock would be likely to be materially adversely
affected.
-14-
<PAGE> 15
NETSCAPE RELATIONSHIP
Under its agreement with Netscape Communications Corporation
("Netscape"), the Company is designated as one of five "Premier Providers" of
search and navigation services accessible from the "Net Search" service. During
the quarter ended June 30, 1996, the Company believes that approximately 20% to
40% of its traffic continues to be directed from Netscape under the new
agreement. The Company believes that it will continue to be dependent on its
relationship with Netscape for a significant percentage of its user traffic.
The agreement provides that the "Premier Provider" status will be established
for one year from April 1, 1996, in exchange for which the Company will make
payments totaling $5.0 million over the course of the year. The Company charged
all of this $5.0 million to sales and marketing expense during the quarter
ended June 30, 1996. The McKinley Group is a party to a similar agreement with
Netscape with respect to its Magellan service. Because The McKinley Group has
not yet made this payment to Netscape, the Company will be required to make
this payment in the event that the acquisition is consummated. In addition, the
Company believes that the Magellan service was also dependent upon Netscape for
a significant percentage of its user traffic. If the Company were not able to
enter into a replacement agreement, or agreements if the acquisition of The
McKinley Group is consummated, with Netscape at the end of the one year term or
if such a replacement agreement or agreements contain materially worse terms
than those contained in the current agreement with Netscape, there would be a
material adverse effect on the Company's business, results of operations and
financial condition.
DEVELOPING MARKET: VALIDATION OF THE INTERNET AS AN EFFECTIVE ADVERTISING MEDIUM
The market for the Company's services and products has recently begun
to develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed services and products for use
on the Internet. As a result, the Company's mix of services and products may
undergo substantial changes as the Company reacts to competitive and other
developments in the overall Internet market. The Company's market is highly
dependent upon the increased use of the Internet for information, publication,
distribution and commerce. In particular, the Internet is an unproven medium for
paid advertising sponsorship of services such as the Company's. Accordingly, the
Company's future operating results will depend substantially upon the increased
use of the Internet by individuals and companies for information, publication,
distribution and commerce, the emergence of the Internet as an effective
advertising medium and the successful implementation of the Company's
advertising program. Moreover, critical issues concerning the commercial use of
the Internet (including security, reliability, cost, ease of use, access,
quality of service and acceptance of advertising) remain unresolved and may
impact the growth of Internet use or the placement of advertisements on the
Internet. If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective advertising medium, the Company's
business, results of operations and financial condition will be materially
adversely affected.
-15-
<PAGE> 16
RELIANCE ON ADVERTISING REVENUES
There is a lack of proven business models for companies like Excite
which propose to generate revenues from the sale of advertisements on the
Internet. The Company's current business model, which evolves as the Internet
develops, is based on deriving a substantial majority of its revenues from
selling advertising space on its Web sites as consumers utilize Excite's
services and products for their Internet search and retrieval needs. A
significant portion of the Company's limited revenues to date has been, and for
the foreseeable future, substantially all of its revenues are intended to be
derived from the sale of advertisements. Many of the Company's advertising
customers purchase advertisements on a short-term basis. Prior to the current
quarter, the Company's advertising program has generated limited long-term
advertising contracts. The Company is beginning to enter into a limited number
of long-term contracts. There can be no assurance that these advertisers will
continue or continue to enter into long-term agreements or increase the level of
advertisements on the Company's services. The Company's ability to generate
significant advertising revenues will depend among other things, on advertisers'
acceptance of the Internet as an effective and sustainable medium, the
development of a large base of users of the Company's services and products
possessing demographic characteristics attractive to advertisers, the
development and the expansion of the Company's advertising sales force, and the
establishment and maintenance of desirable advertising sales agency
relationships. In addition, there is intense competition in the sale of
advertising on the Internet resulting in a wide range of rates quoted by
different vendors for a variety of advertising services which makes it difficult
to project future levels of advertising revenues and rates which will be
realized generally or by any specific company. To the extent competitors offer
better results, the Company's revenues will be adversely affected. Failure of
the Company to establish and maintain significant advertising revenues for any
reason would have a material adverse effect on its business, results of
operations and financial condition.
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
traffic to its Web sites. Accordingly, the performance of the Company's services
and products is critical to the Company's reputation, its ability to attract
advertisers to the Company's Web sites and market acceptance of these services
and products. Any system failure that causes interruptions in the availability
or increases in response time of the Company's services would reduce traffic to
the Company's Web sites and, if sustained or repeated, would reduce the
attractiveness of the Company's services to advertisers and other future
potential customers or Internet consumers. An increase in the volume of searches
conducted through the Company's services and products could strain the capacity
of the software or hardware deployed by the Company, which could lead to slower
response time or system failures. In addition, as the number of Web pages and
users increases, there can be no assurance that the Company's services and
products will be able to scale proportionately. The Company is also dependent
upon Web browsers and Internet and on-line service providers for access to its
services, and consumers have experienced difficulties due to system failures
unrelated to the Company's systems, services and products. The Company is also
dependent on hardware suppliers for prompt delivery, installation and service of
servers and other equipment and services used to provide its services and
products. In addition, in order to improve
-16-
<PAGE> 17
performance, the Company may have to make substantial investments to deploy one
or more copies of its Web sites in order to mirror its on-line resources. To the
extent that the capacity restraints described above are not effectively
addressed by the Company, such constraints would have a material adverse effect
on the Company's business, results of operations and financial condition.
DEPENDENCE ON COMPUTER INFRASTRUCTURE
Substantially all of the Company's communications hardware and certain
of its computer hardware operations are located at a leased facility in San
Jose, California. There can be no assurance that a system failure at this
location would not adversely affect the performance of the Company's services.
This system is vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events. The Company does not
presently have a disaster recovery plan. Although the Company carries property
and business interruption insurance with low coverage limits, its coverage may
not be adequate to compensate the Company for all losses that may occur. Despite
the implementation of network security measures by the Company, its servers are
also vulnerable to computer viruses, physical or electronic break-ins and
similar disruptive problems. Computer viruses, break-ins or other problems
caused by third parties could lead to interruptions, delays or cessation in
service to users of the Company's services and products. The occurrence of any
of these risks could have a material adverse effect on the Company's business,
results of operations and financial condition.
-17-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
11.01 Statement of Earnings Per Share
27.01 Financial Data Schedule (Edgar version only)
(b) No reports on Form 8-K during the quarter ended June 30, 1996.
- - ----------------
-18-
<PAGE> 19
SIGNATURE
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EXCITE, INC.
Date: July 25, 1996 By: /s/ Richard B. Redding
-----------------------------
Richard B. Redding
Director of Finance
Acting Chief Financial Officer and Secretary
By: /s/ George Bell
------------------------------
George Bell
President and Chief Executive Officer
-19-
<PAGE> 20
FORM 10-QSB
EXCITE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBITS NUMBER
<S> <C> <C>
11.01 Statement of Earnings Per Share............... 21
27.01 Financial Data Schedule....................... 22
</TABLE>
-20-
<PAGE> 1
EXCITE, INC. EXHIBIT 11.01
STATEMENT OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
1996 1995 1996 1995
----------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Shares used in computation of
net loss per share:
PRIMARY
Average common shares
outstanding during the period 11,117,713 888,884 6,003,299 888,884
Shares relating to SAB No. 64
and 83 - 9,672,674 4,836,377 9,672,674
================= ================= =================== =================
Shares used in computing per
share amounts 11,117,713 10,561,558 10,839,636 10,561,558
================= ================= =================== =================
FULLY DILUTED
Average common share outstanding
during the period 11,117,713 888,884 6,003,299 888,884
Shares relating to SAB No. 64
and 83 - 9,672,674 4,836,337 9,672,674
----------------- ----------------- =================== =================
Shares used in computing per
share amounts 11,117,713 10,561,558 10,839,636 10,561,558
================= ================= =================== =================
Net loss $(6,988,320) $ (173,287) $(10,649,230) $ (294,510)
================= ================= =================== =================
NET LOSS PER SHARE
Primary $ (0.63) $ (0.02) $ (0.98) $ (0.03)
================= ================= ================= =================
Fully Diluted $ (0.63) $ (0.02) $ (0.98) $ (0.03)
================= ================= ================= =================
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 43,881,321
<SECURITIES> 0
<RECEIVABLES> 1,714,214
<ALLOWANCES> (87,500)
<INVENTORY> 0
<CURRENT-ASSETS> 46,102,530
<PP&E> 2,558,241
<DEPRECIATION> (235,692)
<TOTAL-ASSETS> 48,579,925
<CURRENT-LIABILITIES> 7,287,914
<BONDS> 0
0
0
<COMMON> 55,401,806
<OTHER-SE> (14,424,707)
<TOTAL-LIABILITY-AND-EQUITY> 48,579,925
<SALES> 0
<TOTAL-REVENUES> 2,125,406
<CGS> 0
<TOTAL-COSTS> 423,415
<OTHER-EXPENSES> 9,110,036
<LOSS-PROVISION> 57,968
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,466,013)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,988,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,988,320)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
