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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 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)
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(415) 943-1200
(Registrant's telephone number, including area code)
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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 No x
----- -----
As of April 29, 1996, there were 10,767,732 shares of the Registrant's common
stock outstanding.
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FORM 10-QSB
EXCITE, INC.
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1: Financial Statements
Condensed Balance Sheets as of March 31, 1996
and December 31, 1995 ............................. 3
Condensed Statements of Operations for the three
months ended March 31, 1996 and 1995 .............. 4
Condensed Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 .............. 5
Notes to Condensed Financial Statements ................. 6
ITEM 2: Management's Discussion and Analysis or Plan of Operation 8
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings ....................................... 16
ITEM 2: Changes in Securities ................................... 16
ITEM 3: Defaults Upon Senior Securities ......................... 16
ITEM 4: Submission of Matters to a Vote of Security Shareholders 16
ITEM 5: Other Information ....................................... 16
ITEM 6: Exhibits and Reports on Form 8-K ........................ 16
Signature ............................................... 19
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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EXCITE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
(unaudited) (note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 11,709,380 $ 606,380
Accounts receivable .................................... 1,042,050 184,252
Prepaid expenses .................................. 184,574 80,609
------------ ------------
Total current assets ......................... 12,936,004 871,241
Property and equipment, net ................................. 932,084 683,611
Other assets ................................................ 640,544 177,172
------------ ------------
$ 14,508,632 $ 1,732,024
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable ....................................... $ 1,325,259 $ 452,984
Accrued compensation ................................... 83,509 49,952
Accrued liabilities .................................... 452,797 114,435
Capital lease obligations .............................. 162,867 60,842
------------ ------------
Total current liabilities ......................... 2,024,432 678,213
Notes payable ............................................... 1,000,000 303,400
Capital lease obligations ................................... 271,672 87,270
Redeemable convertible preferred stock ...................... 16,182,442 3,847,019
Commitments
Shareholders' Equity (net capital deficiency)
Common stock ........................................... 2,579,459 671,597
Deferred compensation .................................. (508,303) (548,303)
Notes from shareholders ................................ (72,988) -
Accumulated deficit .................................... (6,968,082) (3,307,172)
------------ ------------
Total shareholders' equity (net capital deficiency) (4,969,914) (3,183,878)
------------ ------------
$ 14,508,632 $ 1,732,024
============ ============
</TABLE>
Note: 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 MARCH 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues $ 1,146,652 -
Cost of revenues 382,768 -
------------ ------------
Gross profit 763,884 -
Operating expenses:
Product development .................. 849,178 83,639
Sales and marketing .................. 3,163,777 4,992
General and administrative ........... 418,429 32,448
------------ ------------
Total operating expenses ........ 4,431,384 121,079
------------ ------------
Operating loss ............................ (3,667,500) (121,079)
Interest income ........................... 29,578 -
Interest expense .......................... (22,988) (144)
------------ ------------
Net loss .................................. $ (3,660,910) $ (121,223)
============ ============
Net loss per share ........................ $ (0.35) $ (0.01)
============ ============
Shares used in computing net loss per share 10,561,558 10,561,558
============ ============
</TABLE>
See notes to condensed financial statements.
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EXCITE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
---- ----
<S> <C> <C>
Net loss ........................................................ $ (3,660,910) $ (121,223)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred compensation ...................... 40,000 -
AOL warrant ................................................ 1,625,000
Depreciation and amortization .............................. 65,156 1,044
Changes in assets and liabilities:
Accounts receivable ................................... (857,798) -
Prepaid expenses ...................................... (103,965) (2,500)
Other assets .......................................... (463,372) 238
Accounts payable ...................................... 872,275 26,171
Accrued compensation .................................. 33,557 514
Accrued liabilities ................................... 338,362 (35,002)
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Net cash used in operating activities ............ (2,111,695) (130,758)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ........................ (313,629) (24,104)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ...................... (39,408) -
Proceeds from capital lease obligations .................... 325,835 -
Loans to shareholders ...................................... (72,988) -
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 12,335,423 -
Proceeds from sale of common stock and common stock warrants 132,862 -
------------ ------------
Net cash provided by financing activities ............. 13,528,324 488,000
------------ ------------
Net increase in cash and cash equivalents ........ 11,103,000 333,138
Cash and cash equivalents at beginning of period ........... 606,380 9,507
------------ ------------
Cash and cash equivalents at end of period ................. $ 11,709,380 $ 342,645
============ ============
</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 Web. The Company expects to derive a majority of
its revenue from selling advertising on its Web sites 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 period ended March 31, 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 $30.8 million of cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
with the initial public offering, (i) all outstanding shares of its preferred
stock were 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 million principal amount of notes payable were converted
into 160,000 shares of its common stock. On May 7, 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 at a price of $17.00 per share. The Company received
an additional $4.7 million of cash, net of underwriting discounts and
commissions.
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.
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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 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 (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 shareholders approved, the 1996
Employee Stock Purchase Plan (the "Purchase Plan") which authorized the issuance
of 150,000 shares of common stock. 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.
6. SUBSEQUENT EVENT
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 totalling $5
million over the course of the year. The $5 million commitment will be expensed
as a sales and marketing cost during the quarter ended June 30, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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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 revenues for the quarter ended March 31, 1995
(the "1995 Quarter"). Total revenues were $1,146,652 for the quarter ended March
31, 1996 (the "1996 Quarter"). The Company expects 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.
Historically contract revenues, which consisted principally of custom
product development and consulting, constituted substantially all of the
Company's revenues. Contract revenues for the 1996 Quarter were not material and
are not expected to be a significant source of revenues in future periods.
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 payroll benefits,
telecommunications costs, equipment depreciation, overhead allocation and costs
related to revenue sharing agreements. Cost of revenues were $382,768 or 33% of
total revenues for the 1996 Quarter and are expected to increase in absolute
dollars and may increase as a percentage of revenues as the Company increases
costs to support expanded services.
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Gross margin percentage was 67% of total revenues for the 1996 Quarter.
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 March 31, 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 achieving and maintaining market
leadership. 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 1996 Quarter was $40,000. The amortization of this deferred compensation
will continue to have an adverse effect on the Company's results of operations.
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 were $849,178 for the 1996 Quarter, as compared to $83,639 for the
1995 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.
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SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
consulting fees, advertising sales commissions, creative services and
promotional expenses. Sales and marketing expenses were $3,163,777 for the 1996
Quarter as compared to $4,992 for the 1995 Quarter. This spending reflected 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. Other sales and marketing costs consisted of 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 in absolute dollars in future periods. In addition,
the Company anticipates a $5 million charge to sales and marketing expense in
the quarter ended June 30, 1996 as it relates to the Company's agreement with
Netscape.
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 were $418,429 for the 1996 Quarter as compared to
$32,448 for the 1995 Quarter. The increases in general and administrative
expenses were due to increased personnel, professional service fees and
allowances for doubtful accounts to support the Company's growth. The Company
anticipates that its general and administrative expenses will continue to
increase significantly in absolute dollar amounts as the Company expands it
administrative and executive staff, adds infrastructure 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
Since inception through March 8, 1996, the Company has financed its
operations and met its capital expenditure requirements primarily from proceeds
of the private sale of equity securities totaling approximately $16.3 million.
At March 31, 1996 the Company had $11.7 million in cash and cash equivalents.
On April 10, 1996, the Company completed its initial public offering of
2,000,000 shares of its common stock at a per share price of $17.00. Net
proceeds from this offering were approximately $30.8 million net of
underwriting discounts, commissions and other offering costs. On May 7, 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 at a price of $17.00 per share.
The Company received an additional $4.7 million of cash, net of
underwriting discounts and commissions.
Operating activities used cash of $2.1 million during the 1996 Quarter.
The net cash used during this period was primarily due to net losses and was
also due to an increase in accounts receivable, which was offset by increases in
accrued liabilities and accounts payable. Investing activities used net cash of
$313,629 during the 1996 Quarter primarily to purchase property and equipment.
Financing activities generated cash of $13.5 million for the 1996 Quarter
primarily from the issuance of Preferred Stock, promissory notes, capital leases
and proceeds from the exercise of warrants.
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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 $4 million to address increasing
capacity demands from Netscape and AOL.
From time to time the Company expects to evaluate the acquisition of
products, businesses and technologies that complement the Company's business.
Currently, however, the Company does not have any understandings, commitments or
agreements with respect to any such material acquisitions. Cash in excess of
current requirements is invested in investment grade, short-term and medium-term
interest-bearing securities.
The Company believes that its $9.9 million of working capital at March
31, 1996, together with net proceeds from its initial public offering and
available funds and 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, 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 March 31, 1996, the Company
had an accumulated deficit of approximately
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$7.0 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 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,
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 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
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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.
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" button from the
Netscape home page. Prior to entering into this agreement, the Company had a
similar agreement with Netscape. The Company believes that from December 1995 to
March 1996 (the term of this prior agreement) approximately 20% to 40% of its
user traffic on a weekly basis was directed from Netscape. During April, 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 million over
the course of the year. The Company anticipates charging all this $5 million to
sales and marketing expenses during the quarter ending June 30, 1996. If the
Company were not able to enter into a replacement agreement with Netscape at the
end of the one year term or if such a replacement agreement with Netscape is
executed containing materially worse terms than those contained in the 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
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medium, the Company's business, results of operations and financial condition
will be materially adversely affected.
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. To date, the Company's
advertising program has generated limited long-term advertising contracts.
Although the Company has recently established a direct sales force,
substantially all of its historical advertising revenues have been generated
through one advertising sales agency. To the extent that the Company continues
to rely on a single advertising sales agency for placement of advertising on its
services, a termination of such arrangement would materially adversely affect
the Company's advertising revenues. Furthermore, there can be no assurance that
these advertisers will continue or increase the level of advertisements on the
Company's Web sites. 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,
-14-
<PAGE> 15
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 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.
-15-
<PAGE> 16
- - --------------------------------------------------------------------------------
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
The shareholders approved the following actions by unanimous written
consent on the dates indicated below:
On March 4, 1996, the shareholders approved an amendment to the
Company's Articles of Incorporation in connection with the Company's Series D
Preferred Stock financing. The shareholders also approved an amendment to the
Company's Bylaws to change the variable size in the number of members of its
Board of Directors from 3 to 5 members to a variable Board of Directors of 4 to
7 members.
On March 11, 1996, the shareholders approved an increase, to 2,000,000
shares, in the number of shares of the Company's Common Stock covered by its
1995 Equity Incentive Plan (the "1995 Plan"). The shareholders also approved
loans to two officers of the Company and an amendment to the Company's Articles
of Incorporation to change the size in the number of members of its Board of
Directions from a variable size of 4 to 7 members to 7 members.
On March 29, 1996, the shareholders approved an increase, to 2,200,000
shares, in the number of shares of the Company's Common Stock coverered by the
1995 Plan.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is being filed as part of this Report:
3.01 Articles of Incorporation, as amended (1)
-16-
<PAGE> 17
3.02 Bylaws, as amended (1)
4.01 Form of Specimen Stock Certificate (2)
4.02 Form of Restated and Amended Investors' Rights Agreement (2)
10.01 1996 Equity Incentive Plan.(1)
10.02 1996 Directors Stock Option Plan.(1)
10.03 1996 Employee Stock Purchase Plan.(1)
10.04 Form of Indemnity Agreement entered into by the Company with each of
its directors.(1)
10.05 Bridge Line of Credit Agreement, dated as of February 23, 1996,
among the Company and Kleiner Perkins Caulfield & Byers VII, KPCB
VII Founders Fund, KPCB Information Sciences Zaibatsu Fund II,
Institutional Venture Partners VI, Institutional Venture Management
VI and IVP Founders Fund I, L.P., and Form of Convertible Promissory
Note and Form of Promissory Note, as amended.(1)
10.06 Promissory Note, dated as of February 27, 1996, issued by Graham F.
Spencer to the Company.(1)
10.07 Offer Letter dated January 25, 1996, as amended, to Richard B.
Redding.(1)
10.08 Offer Letter dated March 6, 1996, to Cary H. Masatsugu.(1)
10.09 Offer Letter dated January 16, 1996, as amended, to George Bell.(1)
10.10 Premier Provider Agreement, dated as of January 12, 1996, by and
between the Company and Netscape Communications Corporation.(3)*
10.11 Office Lease, dated as of January 22, 1996, by and between the
Company and McCandless Land and Cattle Company.(1)
10.12 Series D Preferred Stock Purchase Agreement dated as of March 8,
1996 by and among the Company and various investors.(2)
10.13 Warrant to purchase 650,000 shares of Common Stock dated March 8,
1996 issued to AOL Ventures, Inc.(2)
10.14 Excite/America Online Equity and Distribution Agreement Term Sheet
dated as of March 7, 1996, by and between the Company and America
Online, Inc.(2)*
10.15 Net Search Program - Premier Provider Agreement dated as of March
28, 1996 between the Company and Netscape.(4)*
-17-
<PAGE> 18
11.01 Statement of Earnings Per Share
27.01 Financial Data Schedule
- - ----------------
*Confidential treatment was ordered with respect to certain portions of this
agreement. Such portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.
(1) Previously filed with the Commission on March 11, 1996, as an
exhibit to the Company's Registration Statement on Form SB-2 (File No.
333-2328-LA)
(2) Previously filed with the Commission on March 29, 1996, as an
exhibit to Amendment No. 1 to the Company's Registration Statement on Form SB-2
(File No. 333- 2328-LA)
(3) Previously filed with the Commission on April 3, 1996, as an
exhibit to Amendment No. 2 to the Company's Registration Statement on Form SB-2
(File No. 333- 2328-LA)
(4) Previously filed with the Commission on April 3, 1996, as an
exhibit to Amendment No. 3 to the Company's Registration Statement on Form SB-2
(File No. 333- 2328-LA)
-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: May 2, 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
- - --------------------------------------------------------------------------------
Page
EXHIBITS Number
11.01 Statement of Earnings Per Share ................. 21
27.01 Financial Data Schedule ......................... 22
-20-
<PAGE> 1
- - --------------------------------------------------------------------------------
EXCITE, INC. EXHIBIT 11.01
STATEMENT OF EARNINGS PER SHARE
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Shares used in computation of net loss per share:
PRIMARY
Average common shares outstanding during the
period 888,884 888,884
Shares relating to SAB No. 64 and 83 9,672,674 9,672,674
------------ ------------
Shares used in computing per share amounts 10,561,558 10,561,558
============ ============
FULLY DILUTED
Average common share outstanding during the
period 888,884 888,884
Shares relating to SAB No. 64 and 83 9,672,674 9,672,674
------------ ------------
Shares used in computing per share amounts 10,561,558 10,561,558
============ ============
Net loss $ (3,660,910) $ (121,223)
============ ============
NET LOSS PER SHARE
Primary $ (0.35) $ (0.01)
============ ============
Fully Diluted $ (0.35) $ (0.01)
============ ============
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT MARCH 31, 1996 AND THE UNAUDITED CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 11709380
<SECURITIES> 0
<RECEIVABLES> 1071582
<ALLOWANCES> (29532)
<INVENTORY> 0
<CURRENT-ASSETS> 12936004
<PP&E> 1041492
<DEPRECIATION> (109408)
<TOTAL-ASSETS> 14508632
<CURRENT-LIABILITIES> 2024432
<BONDS> 0
16182442
0
<COMMON> 2579459
<OTHER-SE> (7549373)
<TOTAL-LIABILITY-AND-EQUITY> 14508632
<SALES> 0
<TOTAL-REVENUES> 1146652
<CGS> 0
<TOTAL-COSTS> 382768
<OTHER-EXPENSES> 4401852
<LOSS-PROVISION> 29532
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3677500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3660910)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3660910)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
