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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive (Zip Code)
offices)
(650) 568-6000
(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.
YES X NO
---- ----
As of October 31, 1997, there were 15,965,700 shares of the Registrant's Common
Stock outstanding.
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FORM 10-Q
EXCITE, INC.
INDEX
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<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1: Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996....................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996........... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996............... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
ITEM 3: Quantitative and Qualitative Disclosures About Market
Risk........................................................... 21
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 22
ITEM 2: Changes in Securities and Use of Proceeds...................... 22
ITEM 3: Defaults Upon Senior Securities................................ 22
ITEM 4: Submission of Matters to a Vote of Security Holders............ 22
ITEM 5: Other Information.............................................. 22
ITEM 6: Exhibits and Reports on Form 8-K............................... 23
Signatures..................................................... 24
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 3,765 $ 3,971
Short-term investments ............................... 27,591 16,863
Restricted investments ............................... 353 1,496
Accounts receivable, net ............................. 12,304 3,340
Prepaid expenses and other current assets ............ 1,931 1,070
--------- ---------
Total current assets .............................. 45,944 26,740
Property and equipment, net ............................. 11,137 8,194
Intangible assets, net .................................. 3,994 11,841
Other assets ............................................ 5,082 923
--------- ---------
$ 66,157 $ 47,698
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable .......... $ 6,701 $ 1,200
Accounts payable ..................................... 2,673 6,699
Accrued compensation ................................. 2,150 861
Accrued distribution license fees .................... 127 2,300
Capital lease obligations, current portion ........... 2,541 2,325
Deferred revenues .................................... 915 1,784
Other accrued liabilities ............................ 3,797 3,447
--------- ---------
Total current liabilities ....................... 18,904 18,616
Notes payable ........................................... 1,399 --
Capital lease obligations ............................... 2,660 3,985
Shareholders' equity
Convertible Preferred stock .......................... 14,209 15,816
Common stock ......................................... 102,002 59,999
Deferred compensation ................................ (269) (388)
Unrealized loss on available-for-sale investments .... (136) (128)
Accumulated deficit .................................. (72,612) (50,202)
--------- ---------
Total shareholders' equity ...................... 43,194 25,097
--------- ---------
$ 66,157 $ 47,698
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $ 14,422 $ 4,049 $ 31,432 $ 8,239
Cost of revenues:
Hosting costs ............................ 2,295 1,015 5,727 1,674
Royalties and other cost of revenues ..... 994 150 1,944 307
Amortization of purchased technology ..... 1,939 -- 6,276 --
-------- -------- -------- --------
Total cost of revenues ............. 5,228 1,165 13,947 1,981
-------- -------- -------- --------
Gross profit ............................... 9,194 2,884 17,485 6,258
Operating expenses:
Product development ...................... 3,132 2,038 9,415 5,523
Sales and marketing ...................... 6,400 6,304 19,214 11,996
Distribution license fees ................ 2,867 253 4,527 11,878
General and administrative ............... 2,410 1,752 5,352 5,676
Merger and acquisition related costs,
including amortization of goodwill
and other purchased intangibles ....... 305 2,293 1,571 2,365
-------- -------- -------- --------
Total operating expenses ........... 15,114 12,640 40,079 37,438
-------- -------- -------- --------
Operating loss ............................. (5,920) (9,756) (22,594) (31,180)
Interest income ............................ 477 512 821 1,034
Interest and other expense ................. (293) (110) (637) (260)
-------- -------- -------- --------
Net loss ................................... $ (5,736) $ (9,354) $(22,410) $(30,406)
======== ======== ======== ========
Net loss per share ......................... $ (0.37) $ (0.78) $ (1.67) $ (2.59)
======== ======== ======== ========
Shares used in computing net loss per
share ................................... 15,465 11,964 13,395 11,758
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................. $(22,410) $(30,406)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred compensation ............... 119 430
Warrant issued ...................................... -- 1,625
Depreciation ........................................ 4,081 1,250
Amortization of intangible assets ................... 7,847 --
In-process research and development expense ......... -- 71
Loss on disposal of property and equipment .......... -- 116
Provision for loan impairment ....................... -- 629
Changes in assets and liabilities:
Accounts receivable ............................... (8,964) (2,130)
Prepaid expenses and other current assets ......... (861) (2,616)
Other assets ...................................... (4,159) (848)
Accounts payable .................................. (4,026) 3,757
Accrued compensation .............................. 1,929 --
Accrued distribution license fees ................. (2,173) 3,875
Other accrued liabilities ......................... 350 3,190
Deferred revenues ................................. (869) 2,618
-------- --------
Net cash used in operating activities ........... (29,136) (18,439)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................... (6,648) (1,514)
Purchases of investments .............................. (33,964) (38,521)
Sales and maturities of investments ................... 24,371 10,978
Notes and advances to Novo MediaGroup, Inc. ........... -- (629)
-------- --------
Net cash used in investing activities ........... (16,241) (29,686)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ................. (1,485) (338)
Proceeds from bank line of credit and other notes
payable ............................................ 8,000 4,300
Payments on bank line of credit and other notes payable (1,100) (2,540)
Proceeds from sale of redeemable convertible preferred
stock .............................................. -- 12,282
Proceeds from sale of common stock and exercise of
options and warrants ............................... 39,756 36,953
-------- --------
Net cash provided by financing activities ....... 45,171 50,657
-------- --------
Net (decrease) increase in cash and cash equivalents ... (206) 2,532
Cash and cash equivalents at beginning of period ....... 3,971 760
======== ========
Cash and cash equivalents at end of period ............ $ 3,765 $ 3,292
======== ========
NON-CASH FINANCING ACTIVITIES
Conversion of preferred stock to common stock ......... $ 3,232 $ 16,225
Conversion of notes payable to common stock ........... -- 1,400
Amendment of common stock warrant to preferred stock
warrant ............................................. 1,625 --
Fixed assets acquired under capital leases ............ 2,045 6,542
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest ................................ $ 657 $ 60
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Basis of Presentation
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software,
Inc., which was formed in June 1994, provides a gateway to the World Wide Web
("the Web") that organizes, aggregates and delivers information to meet the
needs of individual consumers. Designed to help consumers make sense of the Web,
the Excite Network, including the Excite and WebCrawler brands, contains a suite
of specialized information services organized under topical channels which
combine proprietary search technology, editorial Web reviews, aggregated content
from third parties, bulletin boards, chat, electronic mail, and personalization
capabilities. The Company derives a substantial portion of its revenues from
selling advertising and sponsorships on its Web sites to customers in various
industries. The Company conducts its business within one industry segment.
The unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated. On
August 30, 1996, the Company acquired The McKinley Group, Inc. ("McKinley") in a
merger transaction accounted for as a pooling of interests. McKinley was
incorporated in December 1993. All financial information has been restated to
reflect the combined operations of the Company and McKinley.
The condensed consolidated balance sheet as of September 30, 1997, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1997 and 1996, and the condensed consolidated statements of
cash flows for the nine months ended September 30, 1997 and 1996, have been
prepared by the Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
September 30, 1997 and for all periods presented have been made. The condensed
consolidated balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These condensed financial statements should be read in conjunction with
the Company's audited financial statements as included in the Company's Annual
Report on Form 10-K, as amended by Form 10-K/A as filed with the Securities and
Exchange Commission on April 16, 1997. The results of operations for the three
and nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire fiscal year
ending December 31, 1997.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. The Company has
recently entered into a number of longer-term advertising and commerce
sponsorship agreements. These agreements generally involve more integration with
Excite services and provide for more varied sources of revenue to Excite over
the term of the agreements, which average between 2 to 3 years. Under these
agreements, Excite earns fees for exclusivity, for initiation of service and
access to the Excite network, and for generating impressions which in some
instances are guaranteed. These revenues are, for the most part, recognized
ratably over the term of the agreement as specified in the agreements. To the
extent that minimum guaranteed impression levels are not met, the Company defers
recognition of the corresponding revenues until the guaranteed levels are
achieved. The terms of a number of these agreements provide that revenues from
advertising and electronic commerce transactions are to be shared between the
advertiser and Excite as realized.
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Intangible Assets
Intangible assets consist primarily of goodwill, developed technology,
distribution rights, trademarks, bookmarks and trade names, and are being
amortized generally over periods ranging from four months to three years. These
purchased intangibles and goodwill relate to the acquisitions of certain assets
from other companies.
<TABLE>
<CAPTION>
LIFE IN SEPTEMBER 30, DECEMBER 31,
MONTHS 1997 1996
------ -------------- ------------
(In thousands)
<S> <C> <C> <C>
Trademarks, trade names, goodwill and other... 24 - 36 $ 2,708 $ 2,708
Developed technology.......................... 13 8,400 8,400
Operating agreement........................... 4 1,200 1,200
Distribution agreement........................ 24 500 500
-------- --------
12,808 12,808
Less accumulated amortization................. (8,814) (967)
-------- --------
$ 3,994 $ 11,841
======== ========
</TABLE>
Stock Split and Per Share Amounts
In February 1996, the Company completed a two-for-one stock split. All of
the share and per share data have been adjusted to reflect this stock split.
Net loss per share is computed using the weighted average number of shares
of Common Stock outstanding during the period and excludes all common stock
equivalents as they are anti-dilutive. However, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, for the periods prior to the
Company's initial public offering in April 1996, such computations include all
common and common equivalent shares issued within twelve 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).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," ("Statement No. 128") which is required
to be adopted on December 31, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The change is
expected to result in an increase in the loss per share for the nine month
period ended September 30, 1996 to $3.41 due to the exclusion of shares relating
to Staff Accounting Bulletins. The impact of Statement No. 128 on the
calculation of historically reported primary or fully diluted earnings per share
for the period subsequent to the Company's initial public offering is not
expected to be material, as the Company has recorded losses and has therefore
excluded the impact of stock options, as these would be anti-dilutive.
2. ASSET PURCHASE
In November 1996, the Company entered into a series of agreements with
America Online, Inc. ("AOL"), a provider of Internet online services, whereby a
co-branded version of the Excite brand became the exclusive Internet search and
directory service for AOL. Under these agreements, Excite acquired AOL's
WebCrawler search and directory technology (the "WebCrawler Assets") in exchange
for 1,950,000 shares of the Company's Convertible Preferred Stock that were
issued on March 27, 1997, and the amendment of a warrant held by AOL (see Note
7.)
The series of agreements have been accounted for as the acquisition of
rights to developed and in-process technologies and distribution rights. The
intangible assets were recorded based on their independently appraised fair
values as of December 1, 1996. Of the total purchase price, $3.5 million was
allocated to in-
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process technology and the remaining excess purchase price of approximately
$12.6 million was allocated to goodwill, distribution rights, trademarks,
bookmarks and trade names. The amount of the purchase price allocated to
in-process technology was charged to the Company's operations as of December 1,
1996.
The Company determined the amounts to be allocated to developed and
in-process technology based on whether technological feasibility had been
achieved (as defined and utilized by the Company in assessing software
capitalization) and whether there was any alternative future use for the
technology. Other considerations included the time and cost to complete each
project, expected income, and associated risks which included the inherent
difficulties and uncertainties in completing the project and thereby achieving
technological feasibility and risks related to the viability of and potential
changes to future target markets. The Company concluded that the in-process
technology had no alternative future use after taking into consideration the
potential for usage of the technology in different products or services, resale
of the technology and internal usage.
3. RESTRICTED INVESTMENTS
The Company has restricted investments at September 30, 1997 of
approximately $353,000. This amount consists of a restricted certificate of
deposit of $200,000 held as collateral by a financial institution against a
letter of credit for tenant improvements at the Company's new headquarters (see
Note 8.) The remaining $153,000 consists of a restricted investment in common
stock held as collateral by a financial institution against the Company's line
of credit borrowings (see Note 6.)
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (between one and ten years.)
Equipment purchased under capital leases is amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(In thousands)
<S> <C> <C>
Purchased computer equipment and internal use software $ 4,193 $ 1,968
Leased computer equipment and internal use software .. 8,153 7,891
Purchased furniture and fixtures ..................... 2,085 370
Leased furniture and fixtures ........................ 452 297
Leasehold improvements ............................... 2,349 60
-------- --------
17,232 10,586
Less accumulated depreciation and amortization ....... (6,095) (2,392)
-------- --------
$ 11,137 $ 8,194
======== ========
</TABLE>
5. SALE OF COMMON STOCK
On March 3, 1997 the Company filed a registration statement on Form S-1
with the United States Securities and Exchange Commission with respect to the
sale of shares of the Company's Common Stock. The Company sold all of the
2,900,000 shares of the Company's Common Stock offered to Intuit Inc. ("Intuit")
on June 26, 1997 at a price of $13.50 per share (see also Note 9.) Proceeds to
the Company from this offering were approximately $38.4 million net of offering
costs.
Intuit was also granted a right of first refusal to participate in certain
future issuances of the Company's securities in order to prevent dilution of
Intuit's percentage ownership, as well as registration rights with respect to
the shares originally purchased, and any shares that might be purchased pursuant
to the right of first refusal. The agreements also place certain conditions on
Intuit's ability to dispose of its shares of, or acquire additional shares of,
the Company's Common Stock.
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6. BANK LINE OF CREDIT AND NOTES PAYABLE
Line of credit borrowings and notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
(In thousands)
<S> <C> <C>
Bank line of credit..... $ 6,000 $ 1,100
Promissory note ......... 2,000 --
Other notes payable..... 100 100
------- -------
8,100 1,200
Less current portion..... (6,701) (1,200)
------- -------
$ 1,399 $ --
======= =======
</TABLE>
Bank Line of Credit
At December 31, 1996, the Company had a $1.0 million revolving line of
credit with a bank available through March 31, 1997. In March 1997, the Company
replaced this line of credit with a new line of credit in the principal amount
of $6.0 million which will mature in March 1998. This line of credit bears
interest at rates ranging from the bank's prime rate (8.5% at September 30,
1997) to the bank's prime rate plus .25% and is secured by substantially all of
the Company's assets. This line of credit also contains certain financial
covenants, including minimum requirements for tangible net worth, quick ratio
and accounts receivable balances, as well as prohibiting the declaration and
payment of cash dividends on capital stock without the prior written consent of
the bank. At September 30, 1997, a short-term investment with a carrying amount
of $153,000 was held by the bank as collateral for the line of credit borrowings
and is not available to the Company.
Promissory Note
In September 1997, the Company obtained a $2.0 million promissory note
from a financial institution. This note bears interest at a fixed rate of 10.1%,
is secured by certain fixed assets of the Company, and is payable in monthly
installments through September 2000.
7. CONVERTIBLE PREFERRED STOCK AND WARRANT
Effective March 27, 1997, the Company issued to AOL a total of 1,950,000
shares of the Company's Series E-1 and E-2 Convertible Preferred Stock in
connection with the closing of the asset purchase agreement relating to the
WebCrawler Assets (see Note 2.) In connection therewith AOL was also granted the
right to exchange the 680,330 shares of Common Stock beneficially owned by it
for an equivalent number of shares of Series E-4 Preferred Stock. AOL has
notified the Company of its intention to exercise this right.
In March 1996, the Company entered into an agreement with AOL whereby, in
return for certain distribution rights, the Company issued a warrant to purchase
650,000 shares of Common Stock at an exercise price of $8.00 per share (the "AOL
Warrant"). This warrant initially expired in March 2001. A charge to operations
of $1.6 million for the fair value of the warrant was recorded at the time of
issuance as a distribution license fee. The value of the warrant was established
through an independent appraisal. In connection with the agreements with AOL
described in Note 2, upon the closing of the acquisition of the WebCrawler
Assets, the AOL Warrant was amended to be exercisable into an equivalent number
of shares of Series E-3 Convertible Preferred Stock at the same exercise price
per share. The value attributed to this amendment of the AOL Warrant was
minimal, as the expiration date was also amended such that 325,000 shares of the
AOL Warrant expired on September 30, 1997, instead of in March 2001.
In September 1997, AOL converted 400,000 shares of the Series E-2
Convertible Preferred Stock into the same number of shares of Common Stock. In
addition, AOL exercised the 325,000 shares of the AOL Warrant that were to
expire on September 30, 1997. AOL received a lesser number of shares in exchange
for a reduction in the exercise price resulting in the issuance of 229,271
shares of Series E-3 Convertible Preferred Stock.
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8. OPERATING LEASE COMMITMENTS
In August 1996, the Company entered into a lease for new corporate offices
located in Redwood City, California. The lease, which has a ten year term,
commenced in April 1997. In April, the Company moved from its previous locations
in Mountain View, Sausalito and San Jose, California, to the new facility. In
March 1997, the Company entered into a lease for additional space adjacent to
its new facility in Redwood City, California. Operating lease expense was
approximately $1.6 million for the nine months ended September 30, 1997.
9. SIGNIFICANT AGREEMENTS AND OTHER COMMITMENTS
In April 1996, the Company (including McKinley) entered into two
agreements with Netscape Communications Corporation ("Netscape") under which the
Company and McKinley were each designated as one of five "Premier Providers" of
search and navigation services accessible from Netscape's "Net Search" page.
Under these agreements, as amended, the "Premier Provider" status was
established for approximately one year through April 30, 1997, in exchange for
which the Company made aggregate payments totaling $10.0 million ($7.0 million
in cash and $3.0 million in advertising on the Company's services) over the term
of the agreements. Management considered that there was significant uncertainty
regarding the recoverability of the amount from future operations; therefore,
the $10.0 million total consideration was expensed as distribution license fee
costs during the quarter ended June 30, 1996.
In March 1997, the Company entered into new agreements, which commenced in
May 1997, whereby the Excite brand became one of four "Premier Providers" and
the WebCrawler brand became one of many "Marquee Providers" of search and
navigation services accessible from Netscape's "Net Search" page. Under the
terms of these new agreements, the Company is committed to make minimum
aggregate payments of $8.25 million in exchange for a guaranteed number of
impressions. Of the $8.25 million minimum which will be expensed over the term
of these agreements, $6.0 million will be paid in cash ($5.5 million in 1997 and
$500,000 in 1998) and $2.25 million will be applied towards advertising by
Netscape on the Excite Network over the one year term of the agreements based
upon delivery of a specified number of advertising impressions. To the extent
that the number of impressions provided by Netscape under the Premier Provider
and Marquee Provider agreements exceed the minimum guarantees, the Company will
be subject to additional fees based on the actual number of impressions
delivered above the minimum. The Company has recorded expenses as distribution
license fees of approximately $4.1 million from May 1997 through September 30,
1997 based upon the number of impressions delivered by Netscape under these
agreements.
In June 1997, the Company entered into a Co-Marketing Services Agreement
and a Trademark License Agreement with Netscape. Under these agreements, Excite
will be responsible for the programming, production, operations and advertising
sales of "International Netscape Guide by Excite" (the "Guide"), a new service
which will be managed by Excite and made available in Japan, Germany, France, UK
and Australian markets, accessible from their respective Netscape Web sites and
from the Guide button on localized versions of the Netscape Communicator tool
bar. These agreements provide that revenue, if any, from advertising on the
Guide, will be shared between the Company and Netscape. The Company made a
one-time non-refundable license fee payment to Netscape of $4.0 million in July
1997 which is included in other assets, which will be amortized to distribution
license fees expense over the terms of these agreements.
Also in June 1997, the Company sold 2,900,000 shares of the Company's
Common Stock to Intuit at a price of $13.50 per share. Proceeds from this
offering were approximately $38.4 million net of offering costs. Also in June
1997, the Company entered into a Joint Activities Agreement with Intuit. Under
this agreement, Intuit will become the exclusive provider and aggregator of
financial content on all of Excite's services, and Excite will become the
exclusive search and navigation service featured in the U.S. versions of
Intuit's Quicken, Quickbooks and TurboTax products. The two companies will share
certain revenues and expenses at varying amounts throughout the seven year term
of this agreement. For the quarter ended September 30, 1997, the Company has
accrued approximately $654,000 in payments due to Intuit under this agreement.
This amount is included in other accrued liabilities on the balance sheet at
September 30, 1997.
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<PAGE> 11
10. SUBSEQUENT EVENTS
In October 1997, the Company and Itochu Corporation and certain affiliated
entities (collectively "Itochu") entered into an agreement with respect to a
joint venture involving the Company's wholly-owned subsidiary, Excite Japan, Co.
Ltd. ("Excite Japan") in order to provide Web based information services to the
Japanese market. The Company will retain a 50% equity interest in Excite Japan.
Itochu will initially have the other 50% equity interest, although it is
anticipated that additional companies may participate in Excite Japan, in which
case Itochu's interest would be reduced. Advertising sales responsibilities will
be assumed by CTC Create Corporation, a wholly-owned subsidiary of Itochu
Corporation. The initial capitalization of Excite Japan will be $10.0 million.
Itochu will loan Excite $5.0 million in order to fund its capital contribution.
This loan will be evidenced by a convertible promissory note which will be
convertible into shares of Excite Common Stock at its maturity date in October
2002, or earlier in the event Excite desires to prepay such note.
Also in October, the Company entered into an Agreement Plan of
Reorganization to acquire Netbot, Incorporated ("Netbot") in a merger of Netbot
with a wholly-owned subsidiary of the Company for approximately $35 million of
the Company's Common Stock. Netbot is a Seattle-based Internet software
developer of advanced search technology. The acquisition will be accounted for
as a pooling of interests and structured as a tax free reorganization. The
acquisition is subject to a number of conditions, including accuracy of
representations and warranties, absence of adverse changes and obtaining
necessary corporate approvals, qualification for accounting of the transactions
as a pooling of interests and other customary conditions. This transaction is
expected to close in the quarter ended December 31, 1997. If the acquisition is
not consummated, the parties will enter into an agreement to acquire a license
of certain of Netbot's technology and Excite will make an equity investment in
Netbot.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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FORWARD LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, without limitation, the failure of the Company to
achieve increases in advertising revenues, the failure of the Company to
maintain premier positions on certain high traffic World Wide Web ("Web") access
points such as those maintained by America Online, Inc. ("AOL"), Microsoft
Corporation ("Microsoft") and Netscape Communications Corporation ("Netscape"),
risks associated with the consumer acceptance of the Company's personal finance
channel jointly developed and operated by Intuit Inc. ("Intuit"), the ability of
the Company to expand its international operations, particularly in light of the
fact that the Company has limited operating experience in the international
market, the ability of the Company to successfully integrate sponsored services
and the ability of the Company to meet minimum guaranteed impressions under
sponsorship agreements, the failure of the Company to anticipate and adapt to a
developing market, the rejection of the Company's services by Web consumers
and/or advertisers, the inability of the Company to maintain and increase levels
of traffic on the Excite Network, development of equal or superior services or
products by competitors, the failure of the market to adopt the Web as an
advertising medium, reductions in market prices for Web-based advertising as a
result of competition or otherwise, the ability of the Company to achieve higher
CPM rates for targeted advertising as well as the ability of the Company to
increase the percentage of its advertising inventory sold, the inability of the
Company to effectively integrate the technology and operations of Netbot or any
other subsequently acquired businesses or technologies with its operations, the
inability to identify, attract, retain and motivate qualified personnel, general
economic conditions and those risk factors set forth under "Risk Factors that
May Affect Future Results" included in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. In addition, because the
Company has limited experience with sponsorship advertising agreements, the
Company is unable to determine what effect such agreements will have on future
gross margins and results of operations. The Company is also unable to determine
whether it will be able to continue to enter into such agreements in the future.
The following discussion also should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, as amended by
Form 10-K/A, filed with the Securities and Exchange Commission on April 16,
1997.
OVERVIEW
The Company operates the Excite Network, which includes the Excite and
WebCrawler brands, and provides a gateway to the Web that organizes, aggregates
and delivers information to meet the needs of individual consumers. Excite,
formerly Architext Software, Inc., was formed in June 1994 and, from its
inception to September 1995, its operating activities related primarily to
recruiting personnel, raising capital, purchasing operating assets and providing
custom product development and consulting services. The Company first launched
its Excite search and directory service in October 1995. The Company has
achieved limited revenues to date and has incurred significant operating losses
since inception. See "Risk Factors That May Affect Future Results Extremely
Limited Operating History; Accumulated Deficit and Anticipation of Continued
Losses."
On August 30, 1996, the Company acquired by merger McKinley, a private
company and creator of the Magellan On-Line Guide. The transaction was effected
through the issuance of 850,000 shares of the Company's Common Stock and was
accounted for as a pooling of interests. Because the merger has been accounted
for as a pooling of interests, all financial information for dates and periods
prior to the merger has been restated to reflect the combined operations of the
Company and McKinley.
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The Company acquired the WebCrawler Assets (the "Acquisition") from AOL
for an aggregate of 1,950,000 shares of the Company's Convertible Preferred
Stock. The Acquisition, which was consummated in March 1997 (the "Closing"), was
recorded for accounting purposes as of December 1, 1996. The transaction was
accounted for as the acquisition of rights to developed and purchased in-process
technology and distribution rights. Of the total purchase price, $3.5 million
was allocated to purchased in-process technology and the remaining excess
purchase price of approximately $12.6 million was allocated to goodwill,
distribution rights, trademarks, bookmarks and trade names. The amount of the
purchase price allocated to purchased in-process technology was charged to the
Company's operations as of December 1, 1996. The identified intangible assets
and goodwill are being amortized over periods ranging from four months to three
years. See Note 1 of Notes to Consolidated Financial Statements.
In connection with the Acquisition and a distribution agreement, the
Company and AOL have agreed that a co-branded version of the Excite service will
be the exclusive provider of Web search and directory services to AOL's
customers for a minimum of two years. The Company will receive a share of
revenues generated by the co-branded version of the Excite services hosted on
AOL as royalties, and AOL will incur all hosting, advertising and selling
expenses. On March 13, 1997, the co-branded service "NetFind" became available
on AOL, which allows AOL subscribers easier access to Excite Search and Excite
Directory. To date, revenue received by the Company relating to the above
agreement has been less than anticipated.
In March 1997, the Company entered into new agreements with Netscape to
continue the Premier Provider arrangement for the Excite brand, and entered into
a Marquee Provider agreement for the WebCrawler brand covering the period from
May 1, 1997 through April 30, 1998. Under the terms of these new agreements, the
Company is committed to make minimum payments of $8.25 million in exchange for a
guaranteed number of impressions. Of the $8.25 million minimum, $6.0 million
will be paid in cash ($5.5 million in 1997 and $500,000 in 1998) and $2.25
million will be applied towards advertising by Netscape on the Excite Network
over the one year term of the agreements based upon delivery of a specified
number of advertising impressions. To the extent that the number of impressions
provided by Netscape under the Premier Provider and Marquee Provider agreements
exceed the minimum guarantees, the Company will be subject to additional fees
based on the actual number of impressions delivered above the minimum.
In April 1997, the Company launched a channels-based format for its
service and content on the Excite brand to provide consumers with an interface
that reflects the way they navigate through other forms of media and enables
advertisers to more effectively reach target consumers. The Excite brand
includes 14 channels of topical interest such as Arts & Entertainment, Sports
and Business & Investing, among others. In September 1997, the Company launched
a similar channels-based format for its service and content on the WebCrawler
brand with 15 channels.
In June 1997, the Company entered into a Co-Marketing Services Agreement
and a Trademark License Agreement with Netscape. Under these agreements, Excite
will be responsible for the programming, production, operations and advertising
sales of "International Netscape Guide by Excite" (the "NetGuide"), a new
service which will be managed by Excite and made available in Japan, Germany,
France, UK and Australian markets, accessible from their respective Netscape Web
sites and from the Guide button on localized versions of the Netscape
Communicator tool bar. These agreements provide that revenue, if any, from
advertising on the Guide, will be shared between the Company and Netscape. The
Company made a one-time non-refundable license fee payment to Netscape of $4.0
million in July 1997 which is included in other assets, which will be amortized
to distribution license fees expense over the terms of these agreements. As of
October 31, 1997, NetGuide is operational in Japan, Germany and the United
Kingdom.
Also in June 1997, the Company sold 2,900,000 shares of the Company's
Common Stock to Intuit at a price of $13.50 per share. Proceeds from this
offering were approximately $38.4 million net of offering costs. In connection
with this investment, Excite and Intuit entered into a Joint Activities
Agreement pursuant to which Intuit became the exclusive provider and aggregator
of financial content on all of Excite's services, and Excite became the
exclusive search and navigation service featured in the U.S. versions of
Intuit's Quicken, Quickbooks and TurboTax products. The two companies will share
certain revenues and expenses at varying amounts throughout the seven year term
of this agreement.
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RESULTS OF OPERATIONS
REVENUES
Revenues increased by $10.4 million and $23.2 million from $4.0 million
and $8.2 million for the three and nine months ended September 30, 1996,
respectively, to $14.4 million and $31.4 million for the comparable periods in
1997, respectively. This increase is primarily the result of an increase in the
number of advertisements sold, an increase in sales of targeted advertisements
with higher rates, an increase in the number of advertisers purchasing
advertising banners on the Company's Web sites and an increase in sponsorship
advertising revenue. The Company expects to continue to derive substantially all
of its total revenue from selling advertisements on its network. Because the
market for advertising on the Web is intensely competitive, advertising rates
could be subject to pricing pressures in the future. If the Company is forced to
reduce its advertising rates or experiences lower CPM's (price per thousand
impressions) as a result of such competition or otherwise, future revenues could
be adversely affected. Beginning in the second quarter of 1997, the Company
started to sell a combination of sponsorship and banner advertising contracts in
addition to the banner advertising contracts historically sold by the Company.
Such sponsorship advertising contracts have longer terms, involve more
integration with Excite's services and may allow advertisers to be the exclusive
sponsor of the portions of Excite and/or WebCrawler content. The Company does
not expect revenue growth relating to sponsorship advertising revenue to
continue at the current rate in future periods as availability of exclusive
sponsorship may be limited.
COST OF REVENUES
Cost of revenues consists primarily of hosting costs, royalties and other
cost of revenues, as well as amortization of purchased technology. Hosting costs
relates to the maintenance and technical support of the Excite Network, which
are comprised principally of personnel costs, telecommunications costs,
equipment depreciation, and overhead allocations. Royalties and other cost of
revenues includes expenses related to royalties, license agreements and revenue
sharing agreements. Including amortization of purchased technology, total cost
of revenues increased $4.1 million and $12.0 million from $1.2 million, or 29%
of revenues, and $2.0 million, or 24% of revenues, for the three and nine months
ended September 30, 1996, respectively to $5.2 million, or 36% of revenues, and
$13.9 million, or 44% of revenues, for the three and nine months ended September
30, 1997, respectively. The increase in royalties and other cost of revenues was
mainly due to increased royalties payment as well as margin sharing from revenue
sharing agreements entered into in 1997. Cost of revenues, excluding the
amortization of purchased technology, increased $2.1 million and $5.7 million
from $1.2 million, or 29% of revenues and $2.0 million, or 24% of revenues for
the three and nine months ended September 30, 1996, respectively, to $3.3
million or 23% of revenues and $7.7 million or 24% of revenues for the
comparable periods in 1997, respectively. The increase in absolute dollars is
due primarily to increased personnel expenses and equipment costs relating to
maintaining and supporting the Company's Web sites and increasing revenue
sharing costs for the distribution of the Company's services and the acquisition
of content. Cost of revenues, excluding amortization, in future periods are
expected to increase in absolute dollars and may increase as a percentage of
revenues as the Company increases costs to support expanded services.
In the three and nine month periods ended September 30, 1997, the Company
also recognized, as a component of total cost of revenues, amortization of
purchased technology of $1.9 million and $6.3 million, respectively, related to
the purchase of the WebCrawler Assets. Amortization expense is expected to be
approximately $1.9 million in the last quarter of 1997, assuming no additional
acquisitions and no significant adjustments to the economic lives of the
underlying purchased technology.
GROSS MARGIN
Gross margin as a percentage of revenues was 64% and 56% for the three and
nine month periods ended September 30, 1997, respectively, as compared to 71%
and 76% for the comparable periods of 1996, respectively. The decline in the
gross margin as a percentage of revenues was due primarily to the amortization
of purchased technology discussed above. In addition, the growth in
infrastructure associated with the merger
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<PAGE> 15
with McKinley and the acquisition of the WebCrawler Assets, and expansion of
operations to support expanded Web site offerings also contributed to the
decrease. In the future, gross margins may be affected by the types of
advertisements sold and revenue-sharing provisions of distribution and content
agreements. Advertisements which target a specific audience typically have
higher gross margins than advertisements which target the mass Web consumer
market. Furthermore, pursuant to the provisions of certain agreements with
operators of Web access points and with content providers, the Company shares
advertising revenues based upon the number of consumers directed to its network.
A low level of targeted advertising as a percentage of total advertising sold, a
decrease in targeted or mass Web advertising rates or an increase in the
Company's advertising revenue sharing obligations could adversely affect gross
margins.
OPERATING EXPENSES
The Company's operating expenses have generally increased in absolute
dollar amounts since inception through September 30, 1997. This trend reflects
the Company's rapid transition from the product development stage to marketing
and offering its services. 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 for the foreseeable future.
PRODUCT DEVELOPMENT. Product development expenses consist principally of
engineering and editorial personnel costs, allocation of overhead, equipment
depreciation, consulting fees and supplies. Costs related to research, design
and development of products have been charged to product development expense as
incurred. Product development expenses increased in absolute dollars by $1.1
million and $3.9 million from $2.0 million, or 50% of revenues and $5.5 million,
or 67% of revenues for the three and nine months ended September 30, 1996,
respectively, to $3.1 million, or 22% of revenues and $9.4 million, or 30% of
revenues for the comparable periods in 1997, respectively. The increase in
absolute dollars was primarily attributable to an increase in engineering and
editorial headcount to support the move to a channels format for the Excite
Network as well as increased product development activities resulting from the
acquisition of the WebCrawler Assets and the merger with McKinley. 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 increase in absolute dollars in future periods.
SALES AND MARKETING. Sales and marketing expenses consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
allocation of overhead, creative services, promotional and advertising expenses.
Sales and marketing expenses increased in absolute dollars by $0.1 million and
$7.2 million from $6.3 million, or 156% of revenues and $12.0 million, or 146%
of revenues for the three and nine months ended September 30, 1996,
respectively, to $6.4 million or 44% of revenues and $19.2 million or 61% of
revenues for the comparable periods in 1997, respectively. The increase in
absolute dollars was due primarily to the hiring of additional sales and
marketing personnel offset in part by a decline in marketing activities for the
Magellan brand. In addition, the nine months ended September 30, 1997 included
increased advertising and promotional expenses associated with the continuation
of the Company's media campaign that was launched during the fourth quarter of
1996 into the first quarter of 1997. The Company expects to incur significant
promotional and advertising expenses and anticipates that these costs will
increase in absolute dollars although the Company has no current plans to
undertake any promotional and advertising campaign similar to that undertaken
during the fourth quarter of 1996.
DISTRIBUTION LICENSE FEES. Distribution license fees increased by $2.6
million and decreased by $7.4 million from $253,000 and $11.9 million for the
three and nine months ended September 30, 1996, respectively, to $2.9 million
and $4.5 million for the comparable periods in 1997, respectively. The first
quarter of 1996 included a one-time, non-cash charge of approximately $1.6
million related to the issuance of the AOL Warrant. The second quarter of 1996
included a $10.0 million charge relating to the Company's Premier Provider
agreements with Netscape. In March 1997, the Company entered into new
agreements, which commenced in May 1997, whereby the Excite brand became one of
four "Premier Providers" and the WebCrawler brand became one of many "Marquee
Providers" of search and navigation services accessible from Netscape's "Net
Search" page. Therefore, total distribution license fees for 1997 include
expenses
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associated with these new contracts since May. The Company expects that, absent
entering into additional significant distribution agreements, distribution
license fees will remain relatively constant and consistent with 1997 amounts in
future quarters. In addition, in June 1997 the Company entered into a
Co-Marketing Services Agreement and a Trademark License Agreement with Netscape.
Under these agreements with Netscape, the Company will be responsible for the
programming, production, operations and advertising sales of "International
Netscape Guide by Excite," a new service which will be made available in Japan,
Germany, France, UK and Australian markets. In connection therewith, the Company
made a payment of $4.0 million to Netscape in July 1997, which will be amortized
over terms of these agreements. See Note 9 of Notes to Condensed Consolidated
Financial Statements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of administrative and executive personnel costs, provision for
doubtful accounts, allocation of overhead and fees for professional services.
General and administrative expenses increased by $0.7 million and decreased by
$0.3 million, respectively, from $1.8 million, or 43% of revenues and $5.7
million, or 69% of revenues for the three and nine months ended September 30,
1996, respectively, to $2.4 million, or 17% of revenues and $5.4 million, or 17%
of revenues for the comparable periods in 1997, respectively. The increase in
general and administrative expenses from the same quarter of the prior fiscal
year was primarily due to increased personnel to support expansion of the
Company's operations. The overall decrease in general and administrative
expenses was primarily the result of approximately $594,000 of non-recurring
costs associated with McKinley's unsuccessful efforts to raise equity capital
through an initial public offering in the second quarter of 1996, as well as a
$629,000 note impairment reserve recorded in the second quarter of 1996. These
decreases were offset in part by costs associated with increased personnel,
professional service fees, provision for doubtful accounts and relocation to new
facilities to support the Company's growth. The Company anticipates that its
general and administrative expenses will increase in absolute dollars as the
Company expands its administrative and executive staff, adds infrastructure,
negotiates and assimilates acquisitions of acquired technologies and businesses
and continues to incur costs related to operating as a public company, such as
expenses related to directors' and officers' insurance, investor relations
programs and professional fees.
MERGER AND ACQUISITION COSTS. The Company has in the past, and may in the
future, acquire businesses, technologies, services, product lines, content
databases or access to content databases that are complimentary to the Company's
business. During the three months ended September 30, 1996, the Company incurred
$2.3 million in merger and acquisition costs associated primarily with the
merger with McKinley. During the three and nine months ended September 30, 1997,
the Company incurred merger and acquisition costs of $305,000 and $1.6 million,
respectively, relating to the amortization of goodwill and other purchased
intangibles resulting primarily from the acquisition of the WebCrawler Assets in
December 1996.
INTEREST INCOME (EXPENSE) AND OTHER. Interest income for the three and
nine months ended September 30, 1997 was $477,000 and $821,000, respectively, as
compared to $512,000 and $1,034,000 for the three and nine months ended
September 30, 1996, respectively. Interest income was higher in the 1996 periods
as compared to the same periods of 1997 primarily as a result of interest earned
on the cash received from the Company's initial public offering in April 1996,
which has since been used to fund operations, offset in part by interest earned
on the proceeds of approximately $34.8 million from the sale of Common Stock to
Intuit in the second quarter of 1997. Interest expense and other increased from
$110,000 and $260,000 in the three and nine months ended September 30, 1996,
respectively, to $293,000 and $637,000 for the three and nine months ended
September 30, 1997, respectively. This increase was due primarily to increased
expenses associated with capital lease obligations and bank borrowings.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had $31.4 million in unrestricted
cash, cash equivalents and short-term investments, an increase of $10.5 million
from December 31, 1996. In June 1997, the Company sold 2,900,000 shares of the
Company's Common Stock to Intuit at a price of $13.50 per share. Proceeds from
this offering were approximately $38.4 million net of offering costs. During the
third quarter of 1996, the Company completed its merger with McKinley, and
during the first quarter of 1997, completed its acquisition of the WebCrawler
Assets. These mergers and acquisitions resulted in significant increases in
headcount and overhead, as well as the assumption and payment of additional
liabilities. The Company maintains its cash and cash equivalents in short-term
and medium-term investment-grade interest-bearing securities until required for
other purposes.
In March 1997, the Company entered into a line of credit for $6.0 million
which will mature in March 1998. This line of credit bears interest at rates
ranging from the bank's prime rate to the bank's prime rate plus .25% and is
collateralized by a security interest in substantially all of the Company's
assets. This line of credit agreement contains certain financial covenants,
including minimum requirements for tangible net worth, quick ratio and accounts
receivable balances, as well as prohibiting the declaration and payment of cash
dividends on capital stock without the prior written consent of the bank. As of
September 30, 1997, the Company had outstanding borrowings against this line of
credit of $6.0 million, and was in compliance with all financial covenants. In
September 1997, the Company obtained a $2.0 million promissory note from a
financial institution. This note bears interest at a fixed rate of 10.1%, is
collateralized by certain fixed assets of the Company, and is payable in monthly
installments through September 2000. As of September 30, 1997, the Company had
an outstanding balance of $2.0 million. See Note 6 of Notes to Condensed
Consolidated Financial Statements.
The Company's operating activities for the nine month periods ended
September 30, 1997 and 1996 used cash of approximately $29.1 million and $18.4
million, respectively. The increased use of cash in the nine months ended
September 30, 1997 as compared to the same period of the prior year was
primarily attributable to the payment of previously accrued expenses, including
but not limited to, payments to Netscape and to the Company's advertising agency
for an advertising campaign launched during the fourth quarter of 1996, a $4.0
million license fee payment to Netscape in July 1997 (See Note 9 of the Notes to
Condensed Consolidated Financial Statements) and an increase in accounts
receivable resulting from the increase in sales of sponsorship advertising
contracts in September 1997, offset in part by a decrease in the net loss for
the period as compared to the same period of the prior year.
Investing activities for the nine months ended September 30, 1997 and 1996
used cash of $16.2 million and $29.7 million, respectively. The decreased cash
used was primarily the result of lower net purchases of short-term investments,
partially offset by increased purchases of property and equipment.
Financing activities for the nine months ended September 30, 1997 and 1996
generated cash of $45.2 million and $50.7 million, respectively. Financing
activities for the first nine months of 1996 primarily consisted of the sale of
Redeemable Convertible Preferred Stock and debt securities totaling $12.3
million and the Company's initial public offering totaling $35.4 million.
Financing activities for the first nine months of 1997 primarily consisted of a
bank line of credit borrowing of $6.0 million, a promissory note of $2.0
million, and the sale of Common Stock to Intuit. Capital expenditures have been,
and future expenditures are anticipated to be, primarily for facilities and
equipment to support expansion of the Company's operations and management
information systems. The Company expects that its capital expenditures will
increase as its employee base grows. As of September 30, 1997, the Company did
not have any material commitments for capital expenditures, although the Company
anticipates that its planned purchases of capital equipment and leasehold
improvements will require additional expenditures during the remainder of 1997,
a portion of which may be financed through equipment leases and bank borrowings.
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The Company has completed a number of mergers and acquisitions in the
past, and expects to make other acquisitions and investments in joint ventures
in the future. While the Company believes that such transactions have been and
will continue to be in the best interest of the Company and its stockholders,
these transactions involve risks and may require additional cash investments by
the Company.
The Company has incurred losses to date of approximately $72.6 million and
has available working capital at September 30, 1997 of $27.0 million. The
Company believes the existing working capital balance 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 twelve months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes and may
seek to raise such additional funds through pubic or private equity financings
or from other sources. There can be no assurance that such additional financings
will be on terms favorable to the Company, if at all, and will not be dilutive
to the Company's current shareholders.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company has an extremely limited operating history upon which an
evaluation of the Company and its current business can be based. In addition,
there is a lack of proven business models for companies like Excite which rely
substantially upon the sale of advertising on the Web. 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 Web and Web-based
advertising markets. See risks described above under "Forward Looking
Statements". There can be no assurance that the Company will be successful in
addressing such risks. The Company has achieved only limited revenues to date,
has incurred significant operating losses since inception and as of September
30, 1997, the Company had an accumulated deficit of approximately $72.6 million.
The Company has also generally experienced significant increases in operating
losses on an annual and quarterly basis since inception. Although the Company
has recently experienced significant revenue growth, there can be no assurance
that this growth rate will be sustained or that revenues will continue to grow.
There can also be no assurance that any revenue growth that the Company
experiences will be indicative of future operating results. To the extent that
revenues do not grow at anticipated rates or that increases in operating
expenses precede or are not subsequently followed by commensurate increases in
revenues, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition will be materially and adversely affected. Given the level of planned
expenditures, the Company anticipates that it will continue to incur operating
losses through at least the end of 1997. The extent of these losses will be
contingent on the amount of growth in the Company's advertising revenues.
Although the Company does not anticipate that its operating loss will continue
to increase, there can be no assurance that operating losses will not increase
in the future or that the Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; UNPREDICTABILITY OF FUTURE REVENUES
AND DEPENDENCE ON ADVERTISING REVENUES
As a result of the Company's extremely limited operating history, the
Company has limited 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 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 advertising revenues, particularly in
light of the intense competition for the sale of Web-based advertisements and
the uncertainty as to the viability of the Web as an advertising medium, and the
failure to do so would have a materially adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company derives substantially all of its revenues from the sale of advertising
pursuant to short-term advertising contracts. As a result, quarterly revenues
and operating results are 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, the termination of any longer term
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<PAGE> 19
sponsorship agreements, or the failure to obtain new advertising contracts in
any quarter could materially and 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 Excite Network. Accordingly, any significant shortfall of traffic
on the Excite Network in relation to the Company's expectations, or the
expectations of existing or potential advertisers, would have an immediate
material adverse effect on the Company's business, results of operations and
financial condition. In addition, certain of the Company's short-term
advertising contracts as well as its newer sponsorship agreements require the
Company to guarantee a minimum number of impressions. In the event that these
minimum impressions are not met, the Company could be required to refund a
portion of the fees from such advertisers, or certain sponsorship agreements may
be terminated. If the Company fails to meet this guaranteed number of
impressions, the ability of the Company to sell advertising to new or existing
advertisers or continue its sponsorship agreements could be adversely affected.
In addition, the Company's ability to generate significant advertising revenues
will depend, among other things, on advertisers' acceptance of the Web as an
effective and sustainable advertising medium, the development of a large base of
users of the Company's services possessing demographic characteristics
attractive to advertisers and the ability of the Company to develop and update
effective advertising delivery and measurement systems. The Company believes
that the number of companies relying on fees from Web-based advertising has
increased substantially during the past year. Accordingly, the Company may face
increased pricing pressure for the sale of advertisements on its network.
Moreover, "filter" software programs that limit or remove advertising from a Web
user's desktop are available. Widespread adoption of such software by users
could have a material adverse effect upon the viability of advertising on the
Web. Accordingly, there can be no assurance that the Company will be successful
in generating significant future advertising revenues, and a failure to do so
would have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's operating results have varied on a quarterly basis during
its limited operating history and the Company expects to experience significant
fluctuations in future quarterly operating results. Such fluctuations have been
and may in the future be caused by numerous factors, many of which are outside
the Company's control, including, without limitation, specific economic
conditions relating to the Internet and the Web, usage of the Web, demand for
advertising on the Excite Network as well as demand for Web-based advertising in
general, changes in advertising rates as a result of competition or otherwise,
seasonal trends in advertising sales, the advertising budgeting cycles of
advertisers, incurrence of charges in connection with the Company's distribution
relationships with Netscape, AOL and other Internet service providers ("ISPs")
and online service providers ("OSPs") or other third parties, demand for the
Company's services, incurrence of costs relating to acquisitions of businesses
or technologies, introduction or enhancement of services the Company and its
competitors, market acceptance of new services, delays in the introduction of
services or enhancements by the Company or its competitors, changes in the
Company's pricing policies or those of its competitors, mix of types of
advertisements sold, such as the amount of targeted advertising sold as a
percentage of total advertising sold or the number of sponsorship agreements
entered into, capacity constraints and dependencies on computer infrastructure
and general economic conditions. In order to promote and maintain awareness of
the Company's brands, the Company has in the past and may in the future
significantly increase its advertising and/or promotion budgets for a particular
quarter which could materially and adversely affect the Company's business,
results of operations and financial condition for such period. As a strategic
response to a changing competitive environment, the Company may elect from time
to time to make certain other 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 an
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter or quarters the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
DEPENDENCE ON NETSCAPE, AOL AND OTHER THIRD-PARTY RELATIONSHIPS
The Company is currently and will be in the future significantly dependent
on a number of third-party relationships to create traffic and provide content
on the Excite Network, and to make it more attractive to advertisers and
consumers. These relationships include arrangements relating to the positioning
of the Excite
-19-
<PAGE> 20
Network on Web browsers such as those offered by Netscape and Microsoft and
agreements with ISPs and OSPs such as AOL and Microsoft and also include
arrangements for providing content for certain services offered by the Company,
such as the Joint Activities Agreement with Intuit. The Company is also
generally dependent on other Web site operators that provide links to the Excite
Network. Most of these arrangements do not require future minimum commitments to
use the Company's services, to provide access or links to the Excite Network or
to provide content to the Company, are not exclusive and are short-term or may
be terminated at the convenience of the other party. There can be no assurance
that the Company's existing relationships will result in sustained business
partnerships, successful service offerings, or the generation of significant
traffic on the Excite Network or significant revenues for the Company.
Under its new Premier Provider and Marquee Provider Agreements with
Netscape, the Company's Excite service is designated as one of four "Premier
Providers" and the Company's WebCrawler brand is designated as one of many
"Marquee Providers" of search and navigation services accessible from the
Netscape "Net Search" page. The Company believes that a substantial portion of
its aggregate historical user traffic is attributable to Netscape. The Company
believes that it will continue to be substantially dependent on its relationship
with Netscape for a significant percentage of its domestic and international
traffic. See Note 9 of Notes to Condensed Consolidated Financial Statements.
The Company has also entered into a five-year distribution agreement with
AOL pursuant to which a co-branded version of the Excite search and directory
service is designated as the exclusive Web search and retrieval service for AOL
for at least a two year period. After the expiration of this initial two year
exclusivity period, the parties can extend the exclusive arrangement only by
mutual agreement. If the exclusivity period does not extend beyond the initial
two year term, the co-branded service would become the "default" search and
directory service on AOL, however, AOL could enter into a strategic relationship
with a competitor of the Company or offer its own competing services. In such an
event, the amount the Company's advertising revenues could be materially and
adversely affected. In addition, if the Company fails to satisfy certain
technical, product feature and editorial criteria during the term of the
agreement, if the Company and AOL fail to renew this agreement upon the
expiration of the five year term, or if any renewal is on materially worse terms
than the initial agreement with AOL, there could be a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, any decline in the number of AOL subscribers could adversely affect
the amount of traffic on the Excite Network.
RISK OF CAPACITY CONSTRAINTS; DEPENDENCE ON COMPUTER INFRASTRUCTURE
The Company is dependent on its ability to generate a high volume of
traffic to the Excite Network. Accordingly, the performance of the Excite
Network is critical to the Company's reputation, its ability to attract
advertisers and to achieve market acceptance of the network. Any system failure
that causes interruptions in the availability or increases response time of the
Company's services could reduce user satisfaction and traffic to the Excite
Network and, if sustained or repeated, would reduce the attractiveness of the
Excite Network to advertisers and consumers. The Company is also dependent upon
the communications infrastructure of the Internet Web browsers, ISPs, OSPs and
other Web site operators, all of which have experienced significant outages in
the past, for access to its network, and Web consumers have experienced outages,
delays and other difficulties due to system failures unrelated to the Company's
systems and services. Additional difficulties could also materially and
adversely affect consumer and advertiser satisfaction. 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.
Substantially all of the Company's communications hardware and certain of
its computer hardware operations are located at leased facilities in Redwood
City, California, an area susceptible to earthquakes. The Company has
experienced system failures or outages from time to time in the past, which have
disrupted the operation of the Excite Network. There can be no assurance that a
system failure at this locations would not adversely affect the performance of
the Excite Network. These systems are also 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
-20-
<PAGE> 21
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 cessations in service to
users of the Excite Network. The occurrence of any of these risks could have a
material adverse effect on the Company's business, results of operations and
financial condition.
INTERNATIONAL EXPANSION
While the Company believes that expansion of its services into
international markets is important to its growth and while the Company has
recently entered into an agreement with Netscape to provide the International
Netscape Guide by Excite for certain countries and formed a joint venture in
Japan with Itochu, the Company has limited experience in localization of its
services and in marketing and distributing its products internationally. There
can be no assurance that the Company will be successful in creating localized
versions of its services, that such services will be accepted by users and
advertisers, or that the resulting revenues generated will be adequate to offset
the expense of establishing and maintaining international operations. In
addition, operating in international markets exposes the Company to additional
risks such as, but not limited to, compliance with regulatory requirements and
changes in these requirements, export controls relating to technology, tariffs
and other trade barriers, protection of intellectual property rights,
difficulties in staffing and managing international operations, longer payment
cycles and other collection problems, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences. The occurrence
of any of these risks could have a material adverse effect on any international
operations established by the Company and, consequently, on the Company's
business, results of operations and financial condition.
MERGERS AND ACQUISITIONS
Acquisitions involve a number of special risks. For example, the
assimilation of McKinley's and the Company's operations required, among other
things, the integration of service offerings, coordination of the research and
development and sales and marketing efforts of the two companies, the assumption
by the Company of approximately $10.0 million in liabilities, the addition of
approximately 50 personnel and the distraction of the Company's management from
the day-to-day business of the Company. There can also be no assurance that any
future acquisition, if consummated, would not have a material adverse effect on
the Company's business, results of operations and financial condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is highly volatile and is
subject to wide fluctuations (for example, during the nine months ended
September 30, 1997, the high and low closing prices of the Common Stock were
$34.25 and $7.88, respectively) in response to quarterly variations in operating
results, announcements of technological innovations or new services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In addition, the stock market has recently
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. If brought, such litigation could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Not applicable.
-21-
<PAGE> 22
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In October 1997, the Company and Itochu Corporation and certain
affiliated entities (collectively "Itochu") entered into an agreement with
respect to a joint venture involving the Company's wholly-owned subsidiary,
Excite Japan, Co. Ltd. ("Excite Japan") in order to provide Web based
information services to the Japanese market. The Company will retain a 50%
equity interest in Excite Japan. Itochu will initially have the other 50% equity
interest, although it is anticipated that additional companies may participate
in Excite Japan, in which case Itochu's interest would be reduced. Advertising
sales responsibilities will be assumed by CTC Create Corporation, a wholly-owned
subsidiary of Itochu Corporation. The initial capitalization of Excite Japan
will be $10.0 million.
Also in October, the Company entered into an Agreement Plan of
Reorganization to acquire Netbot, Incorporated ("Netbot") in a merger of Netbot
with a wholly-owned subsidiary of the Company for approximately $35 million of
the Company's Common Stock. Netbot is a Seattle-based Internet software
developer of advanced search technology. The acquisition will be accounted for
as a pooling of interests and structured as a tax free reorganization. The
acquisition is subject to a number of conditions, including accuracy of
representations and warranties, absence of adverse changes and obtaining
necessary corporate approvals, qualification for accounting of the transactions
as a pooling of interests and other customary conditions.
-22-
<PAGE> 23
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) The following reports on Form 8-K were filed during the quarter
ended September 30, 1997:
On September 26, 1997, the Company filed a Form 8-K pursuant to
Item 5 of such Form regarding its sponsorship agreement with
Preview Travel, Inc.
On July 9, 1997, the Company filed a Form 8-K pursuant to Item 5
of such Form regarding a sale of the Company's common Stock to
Intuit, Inc. ("Intuit"), and an agreement with Intuit regarding
the Company's personal finance channel.
-23-
<PAGE> 24
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
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: November 13, 1997 By: /s/ George Bell
--------------------------------------
George Bell
President and Chief Executive Officer
By: /s/ Robert C. Hood
--------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
-24-
<PAGE> 25
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11.01 Statement of Earnings Per Share
27.01 Financial Data Schedule
-25-
<PAGE> 1
- --------------------------------------------------------------------------------
EXCITE, INC. EXHIBIT 11.01
STATEMENT OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Shares used in computation of
net loss per share:
PRIMARY:
Average common shares outstanding
during the period .............. 15,465 11,964 13,395 8,915
Shares relating to SAB No. 64
and 83 ......................... -- -- -- 2,843
--------- --------- -------- --------
Shares used in computing per share
amounts ........................ 15,465 11,964 13,395 11,758
========= ========= ======== ========
FULLY DILUTED:
Average common share outstanding
during the period .............. 15,465 11,964 13,395 8,915
Shares relating to SAB No. 64
and 83 ......................... -- -- -- 2,843
--------- --------- -------- --------
Shares used in computing per share
amounts ........................ 15,465 11,964 13,395 11,758
========= ========= ======== ========
Net loss ........................... $ (5,736) $ (9,354) $(22,410) $(30,406)
========= ========= ======== ========
NET LOSS PER SHARE:
Primary .......................... $ (0.37) $ (0.78) $ (1.67) $ (2.59)
========= ========= ======== ========
Fully Diluted .................... $ (0.37) $ (0.78) $ (1.67) $ (2.59)
========= ========= ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
EXCITE, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,765
<SECURITIES> 27,944
<RECEIVABLES> 12,304
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,944
<PP&E> 17,232
<DEPRECIATION> (6,095)
<TOTAL-ASSETS> 66,157
<CURRENT-LIABILITIES> 18,904
<BONDS> 0
0
14,209
<COMMON> 102,002
<OTHER-SE> (73,017)
<TOTAL-LIABILITY-AND-EQUITY> 43,194
<SALES> 0
<TOTAL-REVENUES> 31,432
<CGS> 0
<TOTAL-COSTS> 13,947
<OTHER-EXPENSES> 40,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 637
<INCOME-PRETAX> (22,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,410)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
