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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended DECEMBER 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 Identification Number)
Incorporation or Organization)
1091 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of Principal Executive Offices, Including Zip Code)
(415) 943-1200
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, NO
PAR VALUE
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1997 there were 12,246,816 shares of the Registrant's Common
Stock, no par value, outstanding, which is the only class of common or voting
stock of the registrant issued as of that date. The Aggregate market value of
the voting stock held by non-affiliates computed by reference to the closing
price for the common stock as quoted by the Nadaq National Market as of February
28, 1997 was approximately $76,571,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Stockholders to be held in June 1997 are
incorporated by reference into Part III.
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EXCITE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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<TABLE>
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PAGE
PART I NUMBER
<S> <C> <C>
ITEM 1: Business..................................................................... 3
ITEM 2: Properties................................................................... 13
ITEM 3: Legal Proceedings............................................................ 13
ITEM 4: Submission of Matters to a Vote of Security Holders.......................... 13
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters........ 14
ITEM 6: Selected Consolidated Financial Data......................................... 15
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
ITEM 8: Financial Statements and Supplemental Data................................... 33
ITEM 9: Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................... 33
PART III
ITEM 10: Directors and Executive Officers of the Registrant........................... 34
ITEM 11: Executive Compensation....................................................... 36
ITEM 12: Security Ownership of Certain Beneficial Owners and Management............... 36
ITEM 13: Certain Relationships and Related Transactions............................... 36
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 37
Signatures ............................................................................. 60
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PART I
ITEM 1: BUSINESS
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SUMMARY
This Annual Report on Form 10-K ("Report") 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 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"), 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, the
inability of the Company to effectively integrate the technology and operations
of The McKinley Group, Inc. ("McKinley"), the assets relating to AOL's
WebCrawler service (the "WebCrawler Assets") acquired 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors that
May Affect Future Results" and elsewhere in this Report. The following summary
is qualified in its entirety by the more detailed information, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors that May Affect Future Results," and consolidated
financial statements and notes thereto, appearing elsewhere in this Report.
Unless the context otherwise requires, the term "Company" or "Excite" refers to
Excite, Inc. and its subsidiaries.
THE COMPANY
Excite, Inc., which was formed in June 1994, provides a gateway to 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 which combine proprietary search technology,
editorial Web reviews, aggregated content from third parties, bulletin boards,
chat and personalization capabilities. The Company's goal is to be the Web's
leading branded media network with the largest consumer reach, thereby creating
an efficient means of advertising on the Web. To this end, the Excite Network
serves as a home base where consumers can gather, interact and return to during
each Web experience.
On August 30, 1996, the Company acquired The McKinley Group, Inc. in a
merger transaction accounted for as a pooling of interests (see Note 3 of Notes
to Consolidated Financial Statements.) McKinley was incorporated in December
1993. All financial information has been restated to reflect the combined
operations of the Company and McKinley. From December 7, 1993 (inception)
through December 31, 1993, McKinley had no revenues and insignificant operating
expenses which have been included in the consolidated results of operations for
the year ended December 31, 1994.
The Company has incurred operating losses to date and incurred a net loss of
approximately $43.1 million for the year ended December 31, 1996. The Company
believes that additional funding will be needed to finance expected operations
in the year ending December 31, 1997. On March 3, 1997 the Company filed a
registration statement on Form S-1 with the United States Securities and
Exchange Commission for the proposed sale of up to 2,300,000 shares of the
Company's Common Stock. This registration statement is not yet effective, and
there can be no assurance that the offering proposed to be made thereby will be
consummated. If such additional funding is not available, or if anticipated
operating results are not achieved, management has the intent and believes it
has the ability to delay or reduce expenditures so as not to require additional
financial resources through at least December 31, 1997.
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The Company derives a substantially all of its revenues from selling
advertising on its Web sites to customers in various industries. The Company
currently derives a large percentage of its revenues from advertising through
the "Net Search" buttons on the Netscape home page under the terms of two
agreements entered into with Netscape in April 1996 (see Note 12 of Notes to
Consolidated Financial Statements) which expire on March 31, 1997; however, in
March 1997, Netscape agreed to extend the provisions of these agreements to
April 30, 1997 and entered into new agreements covering the period from May 1,
1997 through April 30, 1998 (see Note 13 of Notes to Consolidated Financial
Statements.)
In November 1996, the Company entered into a series of agreements with AOL,
a provider of online services, whereby a co-branded version of Excite's sevice
became the exclusive Internet search and directory service for AOL. Under these
agreements, Excite also acquired AOL's WebCrawler search and directory
technology for consideration consisting of 1,950,000 shares of the Company's
Series E-1 and E-2 Convertible Preferred Stock, that were issued upon closing in
March 1997 (see Notes 3, 7 and 13 of Notes to Consolidated Financial
Statements.)
THE EXCITE NETWORK
The Company offers a network of services under the Excite brand and the
WebCrawler brand that target different segments of Web consumers.
Excite services
Excite Search. The Excite Search Web search service helps consumers find
information on the Web by searching through Excite's index of Web documents.
Since October 1995, the Company has substantially increased the size of its
index of Web documents, from 1.5 million Web documents to over 50 million. The
Company's automatic spider technology completely refreshes this index in less
than a month. Excite's search technology allows consumers to search in multiple
ways: by keyword; by concept; by Boolean logic; and by proper name. Excite's
query-by-example technology allows users who find a document of interest to find
similar documents with the click of a button. In addition, Excite's automatic
abstract technology provides consumers with a brief abstract of each document
returned by a search.
Excite Reviews. The Excite Reviews Web site review service contains over
60,000 professionally-authored reviews of Web sites. Each site reviewed is also
ranked on a scale of one to four. Consumers can find these reviews by browsing a
series of categories and subcategories or by searching directly using the
Company's concept-based searching technology. Excite's reviews are intended to
help narrow information choices to only high-quality and relevant Web sites and
to present information in a lively and entertaining style.
Excite City.Net. The Excite City.Net travel and destination service helps
consumers locate regional and travel oriented content using a geographically
organized database. This Web database is continually updated to provide access
to information on travel, entertainment, local business, government and
community services for a number of major cities and regions throughout the
world. Currently, the Excite City.Net database provides access to information on
over 4,300 cities and regions.
Excite Live! The Excite Live! personalized information service permits
consumers to personalize their Web interface. Consumers using Excite Live!
create a personal profile to select and update information of interest, such as
personalized stock quotes, news headlines, local and national sports scores,
updates on local and national weather, weekly television listings and horoscopes
as well as personal reminders. In order to use this service, consumers must
register and volunteer interest and demographic information which the Company
then uses to target both content and advertising. Currently, Excite Live! has
approximately 300,000 registered users.
Excite NewsTracker. The Excite NewsTracker personalized news service is a
personalizable news clipping service. Consumers can define custom topics that
they would like to monitor such as business competition, a local sports team, or
a favorite hobby. Using Excite's "spider" technology, Excite NewsTracker scans
300 magazines and newspapers on the Web twice daily (including such sources as
The New York Times, The Washington Post, The
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Boston Globe, Sports Illustrated, Forbes and Fortune) for articles relevant to
that consumer's selected topics and provides the consumer with a listing of
relevant articles. Consumers can also search a database containing the last two
weeks of news from these publications or browse the news headlines from these
sources by general category, such as top stories, business or entertainment.
ExciteSeeing Tours. The ExciteSeeing Tours Web guide service is a "how to"
service designed to instruct a consumer how to perform a particular task using
information from the Web. Tours are professionally written and contain a mix of
narrative and hypertext links to relevant Web resources related to a topic.
Currently Excite has over 500 Web tours on such topics as researching
investments, choosing wines and financing a college education. Tours are
organized and can be accessed from a hierarchical menu of categories.
Excite Talk! The Excite Talk! Web community service is a bulletin board
and chat service which permits consumers to discuss topics of mutual interest.
Consumers can create their own discussions or choose to participate in ongoing
discussions. The Company believes that its Excite Talk! service is designed to
encourages consumer and brand loyalty by fostering a sense of community and
encouraging return visits.
Excite Reference. The Excite Reference online reference service provides
consumers with an interface into multiple information services such as yellow
pages, white pages, email finders, people finders, maps and shareware. The
Company does not develop any of these services itself, but instead has
relationships with third-party providers of these services. Generally, these
third parties co-brand their services and share advertising revenue with the
Company in exchange for distribution on the Company's Excite Reference pages.
Current partners include Big Book, WhoWhere, MapQuest and Quote.com. The Company
believes that this type of relationship is beneficial as it enables the Company
to offer a variety of services to consumers without having to incur development
and maintenance costs while enabling the Company to have the opportunity to
receive revenue from these services.
WebCrawler services
WebCrawler Search. The WebCrawler Web Search service helps consumers find
information on the Web by searching through WebCrawler's index of Web documents.
WebCrawler Search enables consumers to search the Web in multiple ways: by
keyword, by Boolean logic, by phrase and by example, or by document similarity.
Search results can be listed by title only or by full listing with an abstract.
Listings which have been reviewed are identified and consumers can easily click
to the review.
WebCrawler Select. The WebCrawler Select Web site review service contains
over 4,600 professionally-authored Web site reviews organized into 18 top-level
categories. Consumers can find these reviews by selecting one of the top-level
categories, by searching on a topic of interest or by browsing the "what's new"
page. WebCrawler's Select database is intended to help consumers narrow
information choices to only the most valuable Web sites.
The Company also offers on the WebCrawler service, WebCrawler Map, Search
the Web Backwards and Web Roulette.
MARKETING
The Company endeavors to achieve broad market penetration and increased
usage of the Excite Network services by:
Building distribution
The Company seeks to obtain new consumers by providing multiple gateways
into the Excite Network, thereby increasing its visibility on Web access points.
The Company has established premier positions on Web sites operated by Microsoft
and Netscape, two of the most highly-trafficked Web sites, and AOL which is the
leading online service provider ("OSP"). On the Microsoft and Netscape Web
sites, the Company has such positions for both its Excite and WebCrawler brands.
In addition, the Company has established a number of "off-Web"
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distribution opportunities with companies such as Apple, Sega and WebTV.
Typically, these arrangements feature Excite as the default Web navigation
network. See "-- Strategic Alliances," and "Risk Factors that May Affect Future
Results -- Dependence on Netscape and AOL" and "-- Dependence on Third-Party
Relationships."
Building brand awareness and recognition
The Company's marketing goal is to build the brands of the Excite Network
into well-recognized consumer brands. During the fourth quarter of 1996, the
Company launched a national brand-building campaign centered around the Jimi
Hendrix song "Are You Experienced?" and incurred expenses of approximately $5.0
million for this campaign. This campaign included television, national print,
radio and outdoor advertising. The Company believes this campaign resulted in
increased Excite brand awareness. During the first quarter of 1997, the Company
is continuing its brand advertising campaign, although at lower spending levels
as compared with the fourth quarter of 1996. The Company believes that the
WebCrawler brand has strong consumer awareness today and the Company will make
selective marketing investments to maintain that awareness.
Increasing usage by existing consumers
The Company regularly enhances its services and updates the content hosted
on the Excite Network in order to encourage consumers to utilize the Excite
Network more frequently. The Company has also developed personalized services,
such as Excite Live! and Excite NewsTracker, that enable consumers to establish
a personal profile and receive information targeted to their interests. Because
customizing these personalized services typically requires some effort and time
on the part of the consumer, the Company believes that consumers who use these
personalized services will continue to use the Excite Network. The Company also
offers community building services, such as Excite Talk!, designed to increase
consumer usage and loyalty.
ADVERTISING AND SALES
The Company derives substantially all of its revenues from the sale of
advertisements. Advertisements on the Excite Network are banner or billboard
style advertisements and are prominently displayed throughout the Excite
Network. As the consumer interacts with the Excite Network, new advertisements
are displayed. From each advertisement screen, consumers can hyperlink directly
to an advertiser's own Web site, thus enabling the advertiser an opportunity to
directly interact with a consumer who has expressed interest in the
advertisement. The Company believes that since consumers view advertisements
only after they request a new page, the focus of the consumer's attention to the
advertisement is likely to be higher than it is in other forms of media.
The Company generally enters into agreements with advertisers pursuant to
which the Company guarantees a minimum number of impressions for a fixed fee.
The Company charges higher per impression fees for advertising products that
target a specific audience. The Company's list prices for advertising currently
range from $26 to $65 per thousand impressions ("CPM"). The Company offers a
variety of advertising programs that enable advertisers to target their
audiences at various levels of market segmentation; mass market placement, which
does not have any market segmentation; and affinity placement, which delivers
advertisements to an audience with a specific content interest. In March 1997,
the Company announced a new strategic content direction intended to offer even
more targeted advertisements to consumers of specific demographic profiles by
aligning Excite's services into channels. Each channel will focus on a specific
topic such as Arts & Entertainment, Sports, Business and Computing, among
others. This channels model is intended to allow advertisers to purchase
advertising in a format similar to other media.
The Company's existing and planned advertising programs range from those
with a broad reach to those that are specifically targeted:
General Rotation (at a CPM of $26.) The Company offers a general
rotation program that enables advertisers to reach a large number of
consumers utilizing the Excite Network. Advertising banners rotate through
Excite Network pages, including the home page and results pages of Excite
and
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WebCrawler. This program delivers a higher volume of mass market Excite Web
consumers and provides frequent exposure for advertisers.
Content (at a CPM of $35.) The Company provides a set of programs that
provide advertisers with the opportunity to target advertising by content
within services such as Excite Reviews, Excite NewsTracker, ExciteSeeing
Tours and WebCrawler Select pages. These programs deliver targeted messages
to preselected affinity groups in categories such as sports, computing,
automotive and finance.
City.Net (at a CPM of $40-$45.) The Company provides a program on its
Excite City.Net service that enables advertisers to direct advertisements to
geographical affinity groups. This targeted approach can be used to
complement a national marketing strategy with local or regional messages.
Keywords (at a CPM of $48-$65.) The Company's keyword program offers
advertisers an opportunity to target specific audiences by assigning
advertisement banners to certain key words or concepts. For example, when
Windows 95 is searched, a Microsoft advertisement could be displayed on the
search results page. Because of the ability to customize the targeted nature
of potential customers, the Company is able to charge premium rates for such
keyword advertising.
Excite Live! (to be offered at a CPM of $60-$80.) The Company plans to
enable advertisers to target Excite Live! consumers at a greater level of
detail and precision than the other advertising methods described above.
Based upon the demographic and psychographic information collected from
subscribers of Excite Live!, advertisers will be able to deliver targeted
messages to groups of individuals.
Currently, a substantial majority of the advertisements sold on the Excite
Network are general rotation advertisements. The Company's strategy is to
migrate advertisers to more targeted advertisement placements. The CPM rates
listed above are based on the Company's standard rate card. Actual CPM rates
depend upon a variety of factors, including, without limitation, the duration of
the advertising contract and the number of impressions purchased, and are often
negotiated on a case-by-case basis.
Through Excite's various advertising programs, advertisers can combine
multiple advertising packages in order to develop a complete advertising plan
that reaches many audience types and that is designed to maximize reach,
frequency of exposure and consumer response. For example, an airline company
might have general rotation as a base of mass exposure. The advertising schedule
could be enhanced based upon topical affinity, by displaying a banner every time
a consumer searches using the word "travel" or "airfare," as well as by
displaying an advertisement to all Excite Live! consumers who have expressed an
interest in travel. The schedule could be further refined by placing banners on
the travel page in Excite Reviews or WebCrawler Select, as well as on a variety
of U.S. and international city pages on Excite City.Net that may correspond to
hubs of national or international business.
The Company has built a direct sales organization of 32 professionals
located in San Francisco, New York and Los Angeles. The Company believes that
such a sales force dedicated to selling advertising only on the Excite Network
provides a higher level of customer service and satisfaction to advertisers
during both the buying and reporting process. Because the Company's direct sales
organization is focused and educated on the Excite Network, they can best match
high value advertising opportunities with companies who can benefit from them.
Because the Company has a dedicated group of professionals focused on
advertising reporting and measurement, advertisers can receive up-to-date
information on the placement and effectiveness of their advertisements. In
addition, the Company believes that in order to be a leader in Web
advertising and provide the highest level of service, it must continue to
develop technologies for the precise and timely placement, targeting and
measurement of advertising.
For 1996, over 500 brands from various industries were advertised on the
Excite Network as compared with 13 as of December 31, 1995. The following is a
list of brands or companies for which advertisers purchased more than $10,000 in
advertising on the Excite Network during 1996:
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TECHNOLOGY TELECOMMUNICATIONS
- ---------- ------------------
Apple AT&T
Fujitsu GTE
Hewlett-Packard MCI
Hitachi Pacific Bell
IBM Sprint
Intel U S West
Microsoft
Netscape PUBLISHING
Silicon Graphics ----------
Sun Microsystems The Atlanta Journal Constitution
Toshiba The Chicago Tribune
Encyclopedia Brittanica
AUTOMOTIVE Newsweek
- ---------- The New York Times
Ford The Wall Street Journal
Honda
Saturn CONSUMER
Toyota --------
American Greetings
FINANCIAL Disney
- --------- Duracell
American Express FTD
Charles Schwab Glaxo Wellcome
Chemical Bank J. C. Penney
Kaufmann Fund Kodak
Metlife L.L. Bean
Prudential Procter & Gamble
Scudder Sears, Roebuck
Wells Fargo Bank Time Warner
During 1996, one customer accounted for approximately 12% of total revenues.
No other customer accounted for more than 10% of revenues during 1996.
TECHNOLOGY
Search and retrieval technology
The Company's search services are based on proprietary retrieval technology
designed to permit efficient and highly effective searches by emphasizing
quality and precision in the search process. This technology combines a
concept-based retrieval technology with sophisticated browsing tools. In
addition, the Company has developed proprietary spider technology designed to
enhance the quantity and quality of information contained in the Company's
databases, thereby enhancing the quality of information retrieved in a search.
Concept-based retrieval. The Company believes that most Web navigation
companies use "keyword" searching in their retrieval process, in which only
those documents that contain the keywords specified in the query are retrieved.
While keyword searching is effective in some instances (and may be enhanced by
the use of a built-in thesaurus), it does not allow the user to retrieve
information relevant to a search that does not include the exact text of a
keyword (or synonym, if a thesaurus is used.) For example, a keyword search of
the words "intellectual property" may not return documents relating to software
piracy or copyright law if such documents do not contain the words
"intellectual" or "property." Keyword searching may also result in the retrieval
of a great deal of irrelevant information that happens to contain the keyword.
The Company's concept-based retrieval technology uses advanced statistical
methods which it believes increase the precision or relevance of information
retrieved. The Company's retrieval technology analyzes information for
statistical correlations between terms and documents. These correlations, which
can be loosely described as "concepts," are then used to improve the retrieval
process. Accordingly, a search can retrieve information that is relevant to the
consumer's query even if that information contains none of the keywords in the
original query.
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Scalability. Because of the size of its database (approximately 50 million
Web documents) as well as the number of searches conducted (approximately 4 to 5
million pages per day), the Company must maintain a strong core competency in
searching large databases efficiently. To this end, the Company has developed a
number of advanced, proprietary techniques to accelerate queries over large
databases while accommodating a large number of users.
Relevance enhancement. Retrieval of relevant documents on the Web can be
particularly challenging. Many documents may contain keywords which a consumer
may search but which are not relevant to the query. In addition, some authors
create documents which use frequently searched words, an activity referred to as
"stuffing," in an attempt to artificially enhance their relevance to certain
queries. Consequently, the Company has developed technology that is designed to
enhance the relevance of "high-quality" documents and reduce the relevance of
documents that are "low-quality."
Browsing tools. The Company's technology includes sophisticated browsing
tools that help consumers better understand the information that has been
retrieved. These browsing tools include:
Query-by-example. If a consumer retrieves a document that he or she
finds particularly appropriate, the consumer can click on a
"query-by-example" button. Without requiring the consumer to reformulate the
query, the system then executes an additional search and retrieves documents
that it finds to be statistically similar to the example document.
Automatic abstracting. The Company's technology automatically creates an
abstract or summary of a Web document by selecting sentences from the
document that it finds to be statistically likely to closely describe its
core concepts. This technology lets consumers evaluate the relevancy of Web
documents without taking the time to visit them or read the entire document.
The Company believes that this abstracting function is superior to
abstracting functions of most competitive systems, which it believes
generally select the first few sentences of a document or select one or more
sentences containing the keywords of the search.
Spider technology. Information for the Company's databases is collected
through the use of "spiders," which are software programs that autonomously roam
the Web by following hypertext links, automatically identifying and collecting
material to be included in the Company's databases. The Company's spider
technology completely refreshes its index of 50 million pages in less than a
month. The Company's technology also allows it to refresh millions of the most
popular Web pages on a much more frequent basis (every few days.)
Personalization technology
The Company has developed a flexible set of tools to allow access to
customized content for each individual consumer. This technology is utilized in
the Excite Live! service. The Company also utilizes sophisticated learning
technology in its Excite NewsTracker service, which examines the concepts in a
consumer's profile and, over time, suggests related concepts that might also
interest the consumer.
Network operations
The Company believes that Web site operational performance is a significant
factor in attracting and maintaining a customer base on the Web. Operational
performance includes reliable 24 hour accessibility and fast page download time.
In order to maintain the highest standards, the Company is building its network
operations center on its own premises in California. This center will enable the
Company to provide direct control over its main Web sites. In addition, the
Company has agreed to enter into a strategic relationship with AOL to host a
mirrored site in Reston, Virginia. The Company believes that this will provide
better access for customers in the Eastern half of the country.
As of February 1, 1997, there were 77 employees on the Company's research
and development staff. Excluding charges for purchased in-process technology,
product development costs were $415,000, $2.8 million and $8.0 million in 1994,
1995 and 1996, respectively. See "Management's Discussion and Analysis of
Financial Condition
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and Results of Operations - Risk Factors that May Affect Future Results --
Technological Change; Dependence on New and Enhanced Services; Risk of Delays"
and "-- Risk of Capacity Constraints; Dependence on Computer Infrastructure."
STRATEGIC ALLIANCES
A key element of the Company's business strategy is to enter into
relationships with both Web access points and content providers. To this end,
the Company has entered into a number of strategic alliances.
Netscape
The Company entered into agreements with Netscape in April 1996 pursuant to
which the Company's Excite and McKinley brands were each one of the five
"Premier Providers" on Netscape's "Net Search" page for a one year period. In
March 1997, new agreements were entered into which commence in May 1997 whereby
the Excite brand will be one of four "Premier Providers" and the Company's
WebCrawler brand will be one of several "Marquee Providers" of search and
navigation services accessible from Netscape's "Net Search" page. The Company
believes that a substantial amount of its historic traffic on a weekly basis has
been attributable to Netscape. Under the 1996 agreements, the Company made
payments totaling $5.0 million for each of the two "Premier Provider" positions
over the term of the agreements. Under the terms of the 1997 agreements, the
Company is committed to make minimum payments of $8.25 million of which $5.75
million will be paid in cash ($5.25 million in 1997 and $500,000 in 1998) and
$2.5 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. See Notes 12 and 13 of Notes to
Consolidated Financial Statements and " Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors that May Affect
Future Results -- Dependence on Netscape and AOL."
AOL
In November 1996, the Company entered into a five-year distribution
agreement with AOL pursuant to which the Company will provide to AOL a
co-branded version of Excite and, for a minimum of a two year period, be the
exclusive provider of Web search and directory services for AOL. AOL and Excite
will share advertising revenues derived from the use of these services by AOL
subscribers. If either of the parties does not elect to continue the exclusivity
period for the remaining three year period of the agreement, AOL will be
permitted to offer other Web navigation services on its online service; however,
Excite will remain as the "default" Web navigation service and Excite will
receive a larger percentage of the advertising revenues derived from the use of
Excite through AOL. Excite will also advertise AOL's service on Excite and AOL
will pay a commission to the Company for new AOL subscribers referred from these
advertisements. The Company is also required to satisfy certain technical,
product feature and editorial criteria. In addition, the Company completed the
purchase of the WebCrawler Assets from AOL in March 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors that May Affect Future Results -- Dependence on Netscape and AOL, and --
Acquisition Strategy; Integration of Past and Future Acquisitions."
Microsoft
The Company has entered into a distribution and license agreement with
Microsoft pursuant to which Excite is accessible to Microsoft's customers
through The Microsoft Network, Microsoft's Internet Explorer Web Browser and, at
Microsoft's discretion, other channels. The Company and Microsoft share
advertising space availability, or barter, for the traffic that is generated by
Microsoft. This agreement expires in March 1997. The Company is currently
negotiating to extend the term of this agreement. There can be no assurance that
the duration of this agreement will be extended or that a replacement agreement
will be entered into between the Company and Microsoft. To date, this
arrangement has not accounted for a significant portion of the Company's
traffic.
- 10 -
<PAGE> 11
Content alliances
The Company has strategic alliances with a number of content providers
pursuant to which the Company engages in licensing of content or technology,
revenue sharing, syndication and co-branding arrangements. For example, Tribune
Media Services ("Tribune") syndicates rights to Excite Reviews. Excite also
licenses television listings and horoscopes from Tribune, stock quotes from
Quote.com, scores from Sportsline, yellow pages from Big Book, white page
listings from WhoWhere, weather reports from Weatherlabs and maps from Mapquest.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors that May Affect Future Results -- Dependence on
Third-Party Relationships."
COMPETITION
The market for Web advertising and Web search and retrieval services is
intensely competitive. The Company believes that the principal competitive
factors in these markets are name recognition, amount of user traffic, pricing,
performance, ease of use and functionality. The Company's primary competitors
are Web search and retrieval companies such as Infoseek Corporation, Lycos, Inc.
and Yahoo!, Inc. and specific search and retrieval services and products offered
by other companies, including Digital Equipment Corporation's Alta Vista,
HotWired Venture's and Inktomi's HotBot, and OpenText. The Company also competes
indirectly with Web content broadcasting services, such as The PointCast
Network's PointCast, and with services from other database vendors, such as
Lexis/Nexis, Dialog and other companies that offer information search and
retrieval capabilities with their core database products. In the future, the
Company may encounter competition from Internet service providers ("ISPs"),
online service providers ("OSPs"), Web site operators, providers of Web browser
software (such as Netscape or Microsoft) and other Internet services and
products that incorporate search and retrieval features into their offerings,
whether through internal development or by acquisition of one or more of the
Company's direct competitors.
In addition, the Company also competes with ISPs, OSPs, Web browsers and
other Web content providers for the sale of advertisements. The Company believes
that the number of companies relying on fees for Web-based advertising has
increased substantially in the past year. Accordingly, the Company may face
increased pricing pressure for the sale of advertisements on its network, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have longer operating histories in the Web market, greater name
recognition, larger customer bases and databases and significantly greater
financial, technical and marketing resources than the Company. Such competitors
may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
employees, distribution partners, advertisers and content providers. Further,
there can be no assurance that the Company's competitors will not develop Web
search and retrieval services that are equal or superior to those of the Company
or that achieve greater market acceptance than the Company's offerings in the
area of name recognition, performance, ease of use and functionality. There can
also be no assurance that ISPs, OSPs, Web browsers and other Web content
providers will not be perceived by advertisers as having more desirable Web
sites for placement of advertisements. In addition, a number of the Company's
current advertising customers and strategic partners also have established
collaborative relationships with certain of the Company's competitors and a
number of the Company's competitors have established collaborative relationships
with ISPs, OSPs and other Web content providers. Accordingly, there can be no
assurance that the Company will be able to retain a customer base of
advertisers, maintain or increase traffic on its network, that competitors will
not experience greater growth in traffic than the Company as a result of such
relationships, which could have the effect of making their Web sites more
attractive to advertisers or that strategic partners will not sever or will
elect to renew their agreements with the Company. There can also be no assurance
that the Company will be able to compete successfully against its current or
future competitors or that competition will not have a material adverse effect
on the Company's business, results of operations and financial condition.
The Web, in general, and the Company, specifically, also must compete with
traditional advertising media such as print, radio and television for a share of
advertisers' total advertising budgets. To the extent that the Web is not an
effective advertising medium, advertisers may be reluctant to devote a
significant portion of their advertising budget
- 11 -
<PAGE> 12
to the Web. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors that May Affect Future Results --
Developing Market; Validation of the Web as an Effective Advertising Medium" and
"-- Intense Competition."
LICENSES AND INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect it
with copyrights, trademarks, trade secret laws, restrictions on disclosure and
transferring title and other methods, and has been issued a patent with respect
to certain aspects of its searching and indexing technology. The Company is also
in the process of preparing three patent applications with respect to other
aspects of its technology. There can be no assurance that the patent that has
been issued or that any that may issue from these pending applications will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents that have been issued or that may be issued
will not be challenged, invalidated or circumvented, or that any rights granted
thereunder would provide proprietary protection to the Company. Failure of any
patents to provide protection of the Company's technology may make it easier for
the Company's competitors to offer technology equivalent to or superior to the
Company's technology. The Company also generally enters into confidentiality or
license agreements with its employees and consultants, and generally controls
access to and distribution of its documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's services or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright, trademark and trade secret protection may be unavailable or
limited in certain foreign countries, and the global nature of the Web makes it
virtually impossible to control the ultimate destination of the Company's
services. Policing unauthorized use of the Company's technology is difficult.
There can be no assurance that the steps taken by the Company will prevent
misappropriation or infringement of its technology. In addition, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material and
adverse effect on the Company's business, results of operations and financial
condition.
Many parties are actively developing search, indexing and related Web
technologies at the present time. The Company believes that they will take steps
to protect these technologies, including seeking patent protection. As a result,
the Company believes that disputes regarding the ownership of such technologies
are likely to arise in the future.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights, including
claims for infringement resulting from the downloading of materials by the
online or Web services operated or facilitated by the Company. Although the
Company investigates claims and responds as it deems appropriate, there can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any assertions or prosecutions will not
materially and adversely affect the Company's business, results of operations
and financial condition. Irrespective of the validity or the successful
assertion of such claims, the Company would incur significant costs and
diversion of resources with respect to the defense thereof which could have a
material adverse effect on the Company's business, results of operations and
financial condition. If any claims or actions were asserted against the Company,
the Company might seek to obtain a license under a third party's intellectual
property rights. There can be no assurance, however, that under such
circumstances a license would be available on commercially reasonable terms, or
at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors that May Affect Future Results -- Liability
for Information Retrieved from the Web."
The Company currently owns and also licenses from third parties its
technologies. As it continues to introduce new services that incorporate new
technologies, it may be required to license technology from others. There can be
no assurance that these third-party technology licenses will be available to the
Company on commercially reasonable terms, if at all. The inability of the
Company to obtain any of these technology licenses could result in delays or
reductions in the introduction of new services or could adversely affect the
performance of its services until equivalent technology could be identified,
licensed and integrated. See " Management's Discussion and
- 12 -
<PAGE> 13
Analysis of Financial Condition and Results of Operations - Risk Factors that
May Affect Future Results -- Liability for Information Retrieved from the
Web."
EMPLOYEES
As of February 1, 1997, the Company had 191 full-time employees, including
77 in research and development, 80 in marketing and sales, 21 in finance and
administration and 13 in operations and support. The Company's future success
will depend, in part, on its ability to continue to attract, retain and motivate
highly qualified technical and management personnel, particularly highly skilled
technical personnel and engineers involved in new product development, for whom
competition is intense. From time to time, the Company also employs independent
contractors to support its research and development, marketing, sales and
support and administrative organizations. The Company's employees are not
represented by any collective bargaining unit, and the Company has never
experienced a work stoppage. The Company believes its relations with its
employees are good. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors that May Affect Future
Results -- Management of Growth."
- --------------------------------------------------------------------------------
ITEM 2: PROPERTIES
- --------------------------------------------------------------------------------
The Company's headquarters are currently located in a leased facility in
Mountain View, California, consisting of approximately 13,500 square feet of
office space occupied under a lease expiring February 1, 1999 with a renewal
option for an additional year. The Company and the lessor of the Mountain View
facility have agreed that the Company shall surrender such facility in May 1997
and that the lease for such facility shall be canceled upon such surrender. In
April 1997, the Company intends to move its headquarters to a leased facility in
Redwood City, California, consisting of approximately 88,000 square feet of
office space under a ten year lease with a renewal option for an additional five
years. The Company's communications hardware and certain of its computer
hardware are located at a leased facility in San Jose, California which will be
moved to the Redwood City facility. The Company believes that its existing and
proposed facilities and offices are adequate to meet its requirements for the
foreseeable future. There can be no assurance that a system failure at its
current San Jose or future Redwood City operations facilities would not
adversely affect the performance of the Company's services. See " Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors that May Affect Future Results -- Risk of Capacity Constraints;
Dependence on Computer Infrastructure."
- --------------------------------------------------------------------------------
ITEM 3: LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
On November 18, 1996, Kristine Paaso and Laura Lindsey filed a complaint in
the California Superior Court, Santa Clara County, against the Company and
certain of its founders alleging breach of an alleged oral agreement, breach of
fiduciary duty and fraud. The plaintiffs allege that they participated in the
creation of the Company's business plan and were entitled to participate as
officers and shareholders of the Company. The complaint seeks an unspecified
amount of damages, including punitive damages. The Company has filed a demurrer
to this complaint and intends to defend this action vigorously. Although it is
too early to ascertain the possible outcome of this litigation, any litigation,
regardless of outcome, could have an adverse effect on the Company's business,
results of operations and financial condition.
- --------------------------------------------------------------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
There were no submissions of matters to a vote of security holders during the
quarter ended December 31, 1996.
- 13 -
<PAGE> 14
- --------------------------------------------------------------------------------
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- --------------------------------------------------------------------------------
Excite's common stock has been traded on the Nasdaq National Market under
the symbol "XCIT" since April 4, 1996. The high and low closing sales prices of
the Company's Common Stock set forth below are as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
------- -----
<S> <C> <C>
Year Ended December 31, 1996
Second Quarter (from April 4, 1996) $20.00 $8.25
Third Quarter 8.38 5.13
Fourth Quarter 15.25 5.50
</TABLE>
As of December 31, 1996, there were approximately 200 stockholders of
record of the Company's Common Stock, although the Company believes that there
is a larger number of beneficial owners of its Common Stock. The Company has
never paid cash dividends on its stock, and anticipates that it will continue to
retain its earnings, if any, to finance the growth of its business.
- 14 -
<PAGE> 15
- --------------------------------------------------------------------------------
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. During 1996,
Excite acquired McKinley in a transaction accounted for as a pooling of
interests. All financial information has been restated to reflect the combined
operations of Excite and McKinley. The statements of operations data for each of
the years in the three year period ended December 31, 1996 and the balance sheet
data at December 31, 1995 and 1996, are derived from, and are qualified by
reference to, the audited consolidated financial statements of the Company
included elsewhere in this Report and should be read in conjunction with those
financial statements and notes thereto. The balance sheet data at December 31,
1994 are derived from unaudited financial statements of the Company not included
in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994(1) 1995 1996(2)
--------- -------- --------
STATEMENTS OF OPERATIONS DATA: (In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Advertising revenues ......................... $ 57 $ 145 $ 14,030
Contract and other revenues .................. 236 808 727
-------- -------- --------
Total revenues ............................. 293 953 14,757
Cost of revenues ................................ 88 228 4,149
-------- -------- --------
Gross profit .................................... 205 725 10,608
Operating expenses:
Product development .......................... 415 2,810 8,030
Sales and marketing .......................... 37 1,648 21,103
Distribution license fees (3) ................ -- -- 11,878
General and administrative ................... 399 2,326 7,081
Charge for purchased in-process technology ... -- 331 3,500
Other merger and acquisition related costs,
including amortization of goodwill and other
purchased intangibles ...................... -- -- 3,134
-------- -------- --------
Total operating expenses ................. 851 7,115 54,726
-------- -------- --------
Operating loss .................................. (646) (6,390) (44,118)
Interest income (expense) and other ............. (4) (45) 1,001
-------- -------- --------
Net loss ........................................ $ (650) $ (6,435) $(43,117)
======== ======== ========
Net loss per share .............................. $ (0.06) $ (0.58) $ (3.65)
======== ======== ========
Shares used in computing net loss per share (4) . 10,576 11,070 11,818
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995 1996
------ -------- -------
BALANCE SHEET DATA: (In thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments .. $ 12 $ 1,118 $20,834
Working capital (deficit) .......................... (442) (878) 8,124
Total assets ....................................... 157 3,801 47,698
Long-term obligations .............................. 100 995 3,985
Redeemable convertible preferred stock ............. -- 3,847 --
Total shareholders' equity (net capital deficiency) (542) (4,034) 25,097
</TABLE>
- ----------
(1) The year ended December 31, 1994 includes the results of operations from
Inception to December 31, 1994. Inception date is June 9, 1994 for Excite
and December 7, 1993 for McKinley. The operating results for McKinley from
December 7, 1993 through December 31, 1993 were immaterial.
(2) During the fourth quarter of 1996, the Company entered into an agreement to
acquire the WebCrawler Assets from AOL. See " Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors
that May Affect Future Results -- Acquisition Strategy; Integration of Past
and Future Acquisitions," and Note 3 of Notes to Consolidated Financial
Statements for a discussion of the Acquisition and associated costs.
(3) During the second quarter of 1996, the Company entered into two distribution
license agreements with Netscape. See Note 12 of Notes to Consolidated
Financial Statements for a discussion of these agreements and associated
costs.
(4) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net loss per share.
- 15 -
<PAGE> 16
- --------------------------------------------------------------------------------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
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
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"),
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, the inability of
the Company to effectively integrate the technology and operations of The
McKinley Group, Inc. ("McKinley"), the assets relating to AOL's WebCrawler
service (the "WebCrawler Assets") acquired 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 and elsewhere in this Annual Report on Form
10-K ("Report"). The following discussion also should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this Report.
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, providing
custom product development and consulting, and developing services. The Company
first launched its Excite search and directory service in October 1995.
The Company has achieved only limited revenues to date, has incurred
significant operating losses since inception and as of December 31, 1996, the
Company had an accumulated deficit of approximately $50.2 million. Although the
Company has experienced significant revenue growth during 1996, 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. 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 and increase its general and
administrative costs to support the enlarged organization. To the extent that
revenues do not grow at anticipated rates or that increases in such 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, there can be no assurance that the Company will ever achieve or
sustain profitability.
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. In connection with the transaction, the
Company incurred approximately $2.2 million in merger related expenses,
including $1.0 million for legal and other professional consulting fees,
$901,000 for personnel severance and outplacement expenses and $345,000 for
termination of contracts and discontinuation of duplicate operations and
facilities. McKinley has experienced operating losses since inception. 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. See "Risk Factors
that May Affect Future Results -- Acquisition Strategy; Integration of Past and
Future Acquisitions."
- 16 -
<PAGE> 17
On November 25, 1996, the Company announced an expansion of its previous
agreement with AOL, pursuant to which a co-branded version of Excite became the
exclusive Web search and directory service on AOL. The Company also acquired the
WebCrawler Assets (the "Acquisition") 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 an 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 trademarks, distribution rights, bookmarks, trade
names, goodwill and other. 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.
In connection with the Acquisition and distribution agreement, the Company
and AOL have agreed that a co-branded version of the Excite search and directory
services 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. Upon Closing, AOL will pay to the Company a percentage of AOL's
advertising revenues with respect to the sales of advertising derived from the
WebCrawler Assets for the period between December 1, 1996 and the Closing, less
ordinary and customary reserves, and the Company will reimburse AOL for expenses
relating to the WebCrawler Assets. Revenues recorded and derived from the
WebCrawler Assets during the period from December 1, 1996 through December 31,
1996 were immaterial.
The Company expects to derive substantially all of its revenue for the
foreseeable future from selling advertising space on the Excite Network as
consumers use its services for their search and retrieval needs. 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 a 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. At December 31,
1996, the Company had deferred revenues of $1.8 million.
Revenues from the sale of certain advertising space are shared with third
parties pursuant to the terms of certain agreements. To date, amounts allocable
to third parties have not been significant. Contract and other revenues during
the years ended December 31, 1994 and 1995 consisted primarily of contract
revenues earned under agreements to modify the Company's Web directory
technology and fees for the licensing of Web directory content and technology.
Contract revenues are recognized as the work is performed using the percentage
of completion method. License revenues are recognized at the time of delivery,
provided that no significant obligations remain and collection of the resulting
receivable is considered probable. See "-Risk Factors that May Affect Future
Results -- Reliance on Advertising Revenues."
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 operating results in the future. In addition, because of the
rapidly changing 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. See "-Risk Factors that May Affect Future
Results -- Potential Fluctuations in Quarterly Results; Unpredictability of
Future Revenues."
- 17 -
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from the Company's Consolidated
Statement of Operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Advertising revenues ..................................... 19% 15% 95%
Contract and other revenues .............................. 81 85 5
---- ---- ----
Total revenues ......................................... 100 100 100
---- ---- ----
Cost of revenues ............................................ 30 24 28
---- ---- ----
Gross profit ................................................ 70 76 72
Operating expenses:
Product development ...................................... 141 295 54
Sales and marketing ...................................... 13 173 143
Distribution license fees ................................ -- -- 81
General and administrative ............................... 136 244 48
Charge for purchased in-process technology ............... -- 35 24
Other merger and acquisition related costs, including
amortization of goodwill and other purchased intangibles -- -- 21
---- ---- ----
Total operating expenses ............................. 290 747 371
---- ---- ----
Operating loss .............................................. (220) (671) (299)
Interest income (expense) and other ......................... (1) (4) 7
---- ---- ----
Net loss .................................................... (221)% (675)% (292)%
==== ==== ====
</TABLE>
Revenues
In October 1995, the Company began selling advertising space on its network.
Accordingly, there were no significant advertising revenues for 1994 or 1995.
Prior to October 1995, contract and other revenues consisted primarily of
revenues derived from custom product development, licensing of the McKinley
database, royalties from sales of the McKinley Internet Yellow Pages and
consulting fees, which are not expected to be significant sources of revenues in
future periods. Total revenues increased from $293,000 for 1994 to $953,000 for
1995, and to $14.8 million for 1996. The increase in 1995 was due to the
introduction of the Company's services in October 1995 and the increase in 1996
was due primarily to increased sales of advertisements on the Company's Web
sites, increased capacity resulting from the merger with McKinley as well as the
creation and increased size of the Company's direct sales force. For 1995 and
1996, 97% and 27%, respectively, of advertising revenues were derived through
two advertising sales agencies. With the addition of its direct sales force, the
Company does not expect to derive a significant portion of its advertising
revenues from advertising sales agencies in the future. There can be no
assurance that advertising over the Web will become widespread, that a market
for the Company's proposed services will emerge, or that the Company's services
will become generally adopted. See "-Risk Factors that May Affect Future Results
- -- Reliance on Advertising Revenues," "-- Developing Market; Validation of the
Web as an Effective Advertising Medium" and "-- Dependence on Web
Infrastructure."
Two customers accounted for 26% and 16%, respectively, of total revenues in
1995. One customer accounted for approximately 12% of total revenues in 1996.
The increase in advertising revenues is due to increased sales of
advertisements and an increase in sales of targeted advertising with higher
rates per thousand impressions ("CPM") charged to advertisers. 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 CPMs as a result of such competition or otherwise,
future revenues could be adversely affected. See "-Risk Factors that May Affect
Future Results -- Reliance on Advertising Revenues."
- 18 -
<PAGE> 19
In connection with its Premier Provider agreements with Netscape, the
Company entered into advertising agreements with Netscape to deliver a
guaranteed number of Netscape advertising impressions on the Excite Network. As
consideration for such advertising services, Netscape agreed to reduce the
Company's $10.0 million in obligations under the Company's Premier Provider
Agreements with Netscape by $3.0 million, which was classified as deferred
revenues to be recognized over the one year term of the agreements based upon
delivery of a specified number of advertising impressions. For the year ended
December 31, 1996, the Company recognized approximately $1.8 million in revenue
as a result of these agreements. See Notes 12 and 13 of Notes to Consolidated
Financial Statements.
Cost of Revenues
Cost of revenues consists primarily of expenses related to the maintenance
and technical support of the Excite Network, which are comprised principally of
personnel costs, telecommunications costs, equipment depreciation, royalties,
overhead allocations and costs related to revenue sharing agreements. Cost of
revenues was $4.1 million, or 28% of total revenues for 1996. Cost of revenues
for 1994 and 1995 was not comparable to 1996 as the nature of the Company's
revenues changed significantly from 1995 with the launch of the Company's
services in October 1995. In the fourth quarter of 1996, the Company recognized
$186,000 in non-cash expenses for the amortization of purchased technology
relating to the acquisition of the WebCrawler Assets. Cost of revenues may
increase in absolute dollars and as a percentage of total revenues as the
Company increases costs to support expanded services.
Gross Margin
Gross margin was 72% of total revenues for 1996. Gross margins for 1994 and
1995 were not comparable to 1996 as the nature of the Company's revenues changed
significantly from 1995 with the launch of the Company's services in October
1995. In the future, gross margins may be affected by the types of
advertisements sold and revenue-sharing provisions of certain access and content
provider 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, whether due to the lack of
acceptance of the Web as an effective advertising medium, competition or
otherwise, or an increase in the Company's advertising revenue sharing
obligations could adversely affect gross margins.
Operating Expenses
The Company's operating expenses have increased in absolute dollar amounts
in every consecutive quarter from inception through December 31, 1996. 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.
Included in operating expenses for 1996 was a $3.5 million charge for
purchased in-process technology related to the Acquisition, $3.1 million in
merger and acquisition related costs relating to the merger with McKinley and
the Acquisition and $11.9 million in distribution license fees including $1.6
million relating to the issuance of a warrant to purchase 650,000 shares of
Common Stock to AOL (the "AOL Warrant," see Note 7 of Notes to Consolidated
Financial Statements) during the first quarter of 1996 and $10.0 million for
distribution license agreements with Netscape ($6.5 million of which had been
paid in cash or services as of December 31, 1996) during the second quarter of
1996. The Company has recorded deferred compensation of $640,000 for the
difference between the exercise price and the deemed fair value of the Company's
Common Stock for shares 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 on a
monthly basis over a four year period.
- 19 -
<PAGE> 20
Deferred compensation amortized was $9,000 and $243,000 for 1995 and 1996,
respectively. The amortization of this deferred compensation will continue to
have an adverse effect on the Company's results of operations. See Note 8 of
Notes to Consolidated Financial Statements.
Product development. Product development expenses consist principally of
engineering and editorial personnel costs, allocation of overhead, equipment
depreciation, consulting and supplies. Costs related to research, design and
development of products have been charged to product development expense as
incurred. See Note 1 of Notes to Consolidated Financial Statements. Product
development expenses increased from $415,000, or 141% of total revenues for
1994, to $2.8 million, or 295% of total revenues for 1995, and increased in
absolute dollars to $8.0 million, or 54% of total revenues for 1996. This dollar
increase is due primarily to increased engineering and editorial staff required
to develop and enhance the Company's services as well as increased product
development activities resulting from the Acquisition and the merger with
McKinley. The Company believes that a significant level of product development
expenses 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 continue to increase in absolute dollars.
Sales and marketing. Sales and marketing expenses consist principally of
sales and marketing personnel costs, consulting fees, commissions, allocation of
overhead, creative services and promotional and advertising expenses. Sales and
marketing expenses were immaterial for 1994 and increased in absolute dollars
from $1.6 million, or 173% of total revenues for 1995, to $21.1 million, or 143%
of total revenues for 1996. This dollar increase was due primarily to the launch
of a significant media advertising campaign during the fourth quarter of 1996
and to increased sales personnel costs resulting from the transition during the
first half of 1996 from the use of outside advertising sales firms for the sales
of advertisements to a direct sales force and, to a lesser extent, the hiring of
other additional sales and marketing personnel and to increases in other
advertising and promotional expenses. The Company expects to incur significant
promotional and advertising expenses and to continue to hire additional sales
and marketing personnel, and anticipates that these costs will continue to
increase in absolute dollars. In particular, the Company is continuing, although
to a lesser degree, its media campaign which was launched during the fourth
quarter of 1996.
Distribution license fees. Distribution license fees were $11.9 million for
1996. There were no distribution license fees for 1994 or 1995. Distribution
license fees included a one-time, non-cash charge of approximately $1.6 million
during the first quarter of 1996 related to the issuance of the AOL Warrant in
connection with a nonexclusive agreement entered into in March 1996, which will
be amended to be exercisable into an equivalent number of shares of Series E-3
Convertible Preferred Stock. Distribution license fees also included a $10.0
million charge in the second quarter of 1996 relating to the Company's Premier
Provider Agreements with Netscape, which expire in April 1997. In the future, it
is anticipated that any such consideration will be expensed over the term of the
distribution agreement. See Notes 12 and 13 of Notes to Consolidated Financial
Statements. In March 1997, the Company entered into an agreement to continue the
Premier Provider arrangement for the Excite brand, and entered a Marquee
Provider agreement for the WebCrawler brand. Under the terms of these new
agreements, the Company is committed to minimum payments of $8.25 million of
which $5.75 million will be paid in cash ($5.25 million in 1997 and $500,000 in
1998) and $2.5 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. See "-Risk Factors that May Affect
Future Results -- Dependence on Netscape and AOL."
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 from $399,000, or 136% of total
revenues for 1994, to $2.3 million, or 244% of total revenues for 1995, to $7.1
million, or 48% of total revenues for 1996. This dollar increase in general and
administrative expenses was due to 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 continue to increase significantly in absolute
dollars as the Company expands its administrative and executive staff, adds
infrastructure, relocates to a new facility during the second quarter of 1997,
negotiates and assimilates acquisitions of acquired technologies and businesses
and incurs
- 20 -
<PAGE> 21
additional costs related to operating as a public company, such as expenses
related to directors' and officers' insurance, investor relations programs and
increased professional fees.
Charge for purchased in-process technology. The Company recognized a charge
of $3.5 million in the fourth quarter of 1996 for purchased in-process
technology related to the Acquisition. The $331,000 charge for purchased
in-process technology related to the acquisition of City.Net in November 1995.
There were no charges for purchased in-process technology for 1994.
Other merger and acquisition related costs, including amortization of
goodwill and other purchased intangibles. Other merger and acquisition related
costs, including amortization of goodwill and other purchased intangibles,
totaled $3.1 million in 1996. The charge included approximately $2.2 million
related to the merger with McKinley, which consisted primarily of legal and
other professional consulting fees, personnel severance and outplacement
expenses and expenses related to the termination of contracts and
discontinuation of duplicate operations and facilities in the third quarter of
1996, and approximately $769,000 related to the amortization of goodwill and
other intangible assets in 1996 resulting from the Acquisition and the
acquisition of City.Net and other intangible assets. There were no other
significant merger and acquisition related costs for 1994 and 1995.
Interest income (expense) and other. Interest income increased from $5,000
for 1995 to $1.4 million for 1996. This increase reflects larger amounts of
interest being earned on higher average investment balances, due primarily to
cash received from the Company's Series D Preferred Stock financing and initial
public offering in the first half of 1996. Interest expense increased from
$50,000 for 1995 to $409,000 for 1996. This increase was due primarily to
increased expenses associated with capital lease obligations and, to a lesser
extent, interest paid on bank borrowings. Interest income and interest expense
were immaterial for 1994.
Income Taxes
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $37.9 million and $37.7 million, respectively.
The federal net operating loss carryforwards will expire beginning in 2009
through 2011, if not utilized. The state net loss operating carryforwards will
expire at various dates beginning in 1999 through 2001. An ownership change, as
defined in the Tax Reform Act of 1986, may restrict the utilization of
carryforwards. A valuation allowance has been recorded for the entire deferred
tax asset as a result of uncertainties regarding the realization of the asset
due to the lack of earnings history of the Company. See Note 9 of Notes to
Consolidated Financial Statements.
- 21 -
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of the Company's unaudited
quarterly results for the eight quarters in the period ended December 31, 1996,
together with the percentage of total revenues represented by such results. This
information has been derived from unaudited consolidated financial statements of
the Company that, in the opinion of management, reflect all recurring
adjustments necessary to fairly present this information when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere herein. The Company believes that quarterly
operating results for 1995 are not comparable to those for 1996 as the nature of
the Company's business changed significantly from 1995 with the launch of the
Company's services in October 1995. The results of operations for any quarter
are not necessarily indicative of the results to be expected for any future
period. See "-Risk Factors that May Affect Future Results -- Potential
Fluctuations in Quarterly Results; Unpredictability of Future Revenues."
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- -------
(In thousands; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................... $ 28 $ 314 $ 37 $ 574 $ 1,374 $ 2,816 $ 4,049 $ 6,518
Cost of revenues................. 20 104 19 85 389 427 1,165 2,168
------- ------- ------- ------- ------- ------- ------- --------
Gross profit..................... 8 210 18 489 985 2,389 2,884 4,350
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Product development............ 258 403 785 1,364 1,376 2,109 2,038 2,507
Sales and marketing............ 31 193 460 964 2,489 3,203 6,304 9,107
Distribution license fees...... -- -- -- -- 1,625 10,000 253 --
General and administrative..... 158 386 495 1,287 1,141 2,782 1,753 1,405
Charge for purchased in-process
technology................. -- -- -- 331 -- -- -- 3,500
Other merger and acquisition
related costs including
amortization of goodwill
and other purchased
intangibles................ -- -- -- -- -- 73 2,292 769
------- ------- ------- ------- ------- ------- ------- --------
Total operating expenses.. 447 982 1,740 3,946 6,631 18,167 12,640 17,288
------- ------- ------- ------- ------- ------- ------- --------
Operating loss................... (439) (772) (1,722) (3,457) (5,646) (15,778) (9,756) (12,938)
------- ------- ------- ------- ------- -------- ------- --------
Net loss......................... $ (442) $ (769) $(1,739) $(3,485) $(5,644) $(15,408) $(9,354) $(12,711)
======= ======= ======= ======= ======= ======== ======= ========
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenues................. 71 33 51 15 28 15 29 33
------- ------- ------- ------- ------- ------- ------- --------
Gross profit..................... 29 67 49 85 72 85 71 67
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Product development............ 921 129 2,122 237 100 75 50 38
Sales and marketing............ 111 61 1,243 168 181 114 156 140
Distribution license fees...... -- -- -- -- 119 355 6 --
General and administrative..... 564 123 1,338 224 83 99 43 21
Charge for purchased in-process
technology................. -- -- -- 58 -- -- -- 54
Other merger and acquisition
related costs including
amortization of goodwill
and other purchased
intangibles................ -- -- -- -- -- 2 57 12
------- ------- ------- ------- ------- ------- ------- --------
Total operating expenses.. 1,596 313 4,703 687 483 645 312 265
------- ------- ------- ------- ------- ------- ------- --------
Operating loss................... (1,567) (246) (4,654) (602) (411) (560) (241) (198)
------- ------- ------- ------- ------- ------- ------- --------
Net loss......................... (1,579)% (245)% (4,700)% (607)% (411)% (547)% (231)% (195)%
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
With the exception of the third quarter of 1995, the Company's total
revenues have increased in each of the eight quarters ending December 31, 1996.
The decline in revenues in the third quarter of 1995 was due primarily to a
reduction in contract revenue, which was not a significant source of revenues in
1996. Gross margins for 1995 are not comparable to gross margins for 1996 as the
nature of the Company's revenues changed significantly in 1996 with the launch
of the Company's services in October 1995. Gross margins have generally declined
during 1996, due primarily to the growth in infrastructure associated with the
acquisition of McKinley and the amortization
- 22 -
<PAGE> 23
of purchased in-process technology arising from the Acquisition and the
expansion of operations to support an expanded Excite Network.
During the fourth quarter of 1996, the Company entered into an agreement,
which closed in March 1997, to acquire the WebCrawler Assets from AOL in
exchange for 1,250,000 and 700,000 shares of the Company's Series E-1 and E-2
Convertible Preferred Stock, respectively, and recorded the Acquisition as of
December 1, 1996. In addition, as part of the transaction contemplated by the
Acquisition Agreement relating to the Acquisition and distribution agreement
with AOL, AOL will have the right, for a 90 day period following the closing of
the Acquisition, to have 680,330 shares of Common Stock currently owned by AOL
canceled and an equivalent number of shares of Series E-4 Convertible Preferred
Stock issued to it, and the AOL Warrant, which previously was exercisable into
650,000 shares of Common Stock at an exercise price of $8.00 per share will be
amended to become exercisable into 650,000 shares of Series E-3 Convertible
Preferred Stock at the same exercise price per share. As a result of the
Acquisition, during the fourth quarter of 1996, the Company expensed $3.5
million for purchased in-process technology and recorded amortization of other
purchased intangibles of $769,000. See Note 3 of Notes to Consolidated Financial
Statements. During the second quarter of 1996, the Company entered into two
distribution license agreements with Netscape for total consideration of $10.0
million ($6.5 million of which had been paid in cash or services as of December
31, 1996), which was expensed during the second quarter of 1996. In the future,
it is anticipated that any such consideration will be expensed over the term of
the agreement. See Notes 12 and 13 of Notes to Consolidated Financial
Statements. Operating expenses other than distribution license fees and other
merger and acquisition related costs including amortization of goodwill and
other purchased intangibles generally increased during 1996. The increase in
such other operating expenses during 1996 is due to: increased personnel costs
to support the growth in headcount across all operating departments; recording
of the merger with McKinley in the third quarter of 1996 and of the Acquisition
in the fourth quarter of 1996, which resulted in additional product development
and general and administrative expenses; and the creation and launch of the
Excite brand advertising and promotion campaign, which resulted in additional
sales and marketing expenses of approximately $5.0 million in the fourth quarter
of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $20.8 million in unrestricted cash,
cash equivalents and short-term investments. Prior to its initial public
offering, the Company financed its operations and met its capital expenditure
requirements primarily from proceeds of the private sale of equity and debt
securities totaling approximately $18.2 million. In April 1996, the Company
completed its initial public offering of Common Stock. The Company sold
2,300,000 shares of its Common Stock for net proceeds of approximately $35.4
million, net of underwriting discounts and other offering costs. During the
third quarter of 1996, the Company completed its merger with McKinley, resulting
in a significant increase 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 connection with the merger with McKinley, the Company assumed McKinley's
obligations pursuant to a commitment letter with a bank. Pursuant to this
commitment, McKinley has a revolving line of credit and note of up to $1.1
million which bear interest at the bank's prime rate plus 1%. Outstanding
amounts under this commitment are due March 31, 1997. As of December 31, 1996,
$1.1 million was outstanding under these commitments, which are secured by
substantially all of McKinley's assets and are guaranteed by the Company. In
March 1997, the Company entered into a new revolving line of credit for $6.0
million which will replace the McKinley line of credit. This new line of credit
will mature in one year, bear interest at rates ranging from the bank's prime
rate to prime plus .25%, and will be collateralized by a security interest in
all assets of the Company. See Notes 4 and 13 of Notes to Consolidated Financial
Statements.
The Company's operating activities used cash of $4.7 million and $26.1
million in 1995 and 1996, respectively. The increased use of cash in 1996 was
primarily attributable to increased operating expenses and increases in accounts
receivable and prepaid expenses, reduced in part by increases in accrued
distribution license fees, accounts payable and other accrued liabilities.
Although the Company expensed $10.0 million in distribution license fees during
the second quarter of 1996 for its obligations under its Premier Provider
Agreements with Netscape, $2.3 million of this liability remained on the
Company's balance sheet as accrued distribution license fees at December 31,
1996. The Company expects that this amount, together with approximately $5.0
million in accounts payable related to the Company's advertising campaigning
launched during the fourth quarter of 1996, will be paid during
- 23 -
<PAGE> 24
the first quarter of 1997, which payments, together with operating losses for
such period, will significantly reduce the Company's cash balances during such
period.
Investing activities used cash of $1.3 million and $19.4 million in 1995 and
1996, respectively, primarily for net purchases of short-term investments and
property and equipment. Financing activities generated cash of $6.7 million and
$48.7 million in 1995 and 1996, respectively, due to the issuance of Preferred
Stock and Common Stock and promissory notes and proceeds from the exercise of
warrants and options.
The Company's principal commitments at December 31, 1996 consisted of
obligations under operating and capital leases comprising $15.7 million and $7.1
million, respectively. In addition, in March 1997 the Company entered into
agreements resulting in a $5.75 million minimum cash guarantee to Netscape for
the Premier and Marquee Provider agreements for the Excite and WebCrawler
brands. See Note 13 of Notes to Consolidated Financial Statements.
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 December
31, 1996, 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 of approximately $7.5 million for 1997, a portion of which may be
financed by the sale of equity securities and a portion of which may be financed
through equipment leases and bank borrowings.
The Company has incurred operating losses to date and incurred a net
loss of approximately $43.1 million for the year ended December 31, 1996. The
Company believes that additional funding will be needed to finance expected
operations in the year ending December 31, 1997. On March 3, 1997 the Company
filed a registration statement on Form S-1 with the United States Securities
and Exchange Commission for the proposed sale of up to 2,300,000 shares of the
Company's Common Stock. This registration statement is not yet effective, and
there can be no assurance that the proposed offering to be made thereby will be
consummated. If such additional funding is not available, or if anticipated
operating results are not achieved, management has the intent and believes it
has the ability to delay or reduce expenditures so as not to require additional
financial resources through at least December 31, 1997.
- 24 -
<PAGE> 25
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report 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 those set forth in the following risk factors and elsewhere in this
Report.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; UNPREDICTABILITY OF FUTURE REVENUES
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 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 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 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 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. If the Company fails to meet this guaranteed number of impressions,
the ability of the Company to sell advertising to new or existing advertisers
could be adversely affected. See "-- Reliance on Advertising Revenues."
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 by 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, 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
- 25 -
<PAGE> 26
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would be materially and adversely
affected. See "-- Volatility of Stock Price."
DEPENDENCE ON NETSCAPE AND AOL
The Company entered into agreements with Netscape in April 1996 pursuant to
which the Company's Excite and McKinley brands were each one of the five
"Premier Providers" on Netscape's "Net Search" page for a one year period in
exchange for which the Company was required to make payments totaling $10.0
million in cash and advertising services over the term of the agreements. See
Note 12 of Notes to Consolidated Financial Statements. In March 1997, new
agreements were entered into which commence in May 1997 whereby the Excite brand
will be one of four "Premier Providers" and the Company's WebCrawler brand will
be one of several "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 payments of $8.25 million
of which $5.75 million will be paid in cash ($5.25 million in 1997 and $500,000
in 1998) and $2.5 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. See Note 13 of Notes to
Consolidated Financial Statements. The Company believes that it has been, and
will continue to be, substantially dependent on its relationship with Netscape
for a significant percentage of its user traffic.
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 services are designated as the exclusive Web search and retrieval
service for AOL for at least a two year period. Pursuant to this agreement, the
Company and AOL will share advertising revenues attributable to the co-branded
version of the Excite services hosted on AOL. 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 Excite services would become the
"default" search and directory services 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 of traffic on the Excite
Network 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. See "--
Acquisition Strategy; Integration of Past and Future Acquisitions," below and
"Business -- Strategic Alliances."
RELIANCE ON ADVERTISING REVENUES
There is a lack of proven business models for companies like Excite which
rely substantially upon the sale of advertisements on the Web. The Company's
current business model, which evolves as the Web develops, is based on deriving
substantially all of its revenues from selling advertising space on its network
as consumers utilize the Company's services for their Web search and retrieval
needs. A majority of the Company's advertising customers purchase advertisements
on a short-term basis. There can be no assurance that current advertisers will
continue or increase the level of, or that potential new advertisers will
purchase, advertisements on the Excite Network. 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 establishing and maintaining the
Excite and WebCrawler brands is a critical aspect of developing a large user
base and that the importance of brand recognition as competition increases. In
addition, there is intense competition in the sale of advertising on the Web,
resulting in a wide range of rates quoted and a variety of pricing models
offered by different vendors for a variety of advertising services which makes
it difficult to project future levels of advertising revenues and rates. It is
also difficult to predict which pricing models will be adopted by the industry
or advertisers. For example, advertising rates based on the number of "click
throughs" from the Company's network to
- 26 -
<PAGE> 27
the advertiser's pages, instead of rates based solely on the number of
impressions, would materially adversely affect the Company's revenues. 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. See "-- Developing Market; Validation of the Web as an
Effective Advertising Medium," "-- Intense Competition," "-- Technological
Change; Dependence on New and Enhanced Services; Risk of Delays," and "Business
- -- Advertising and Sales."
ACQUISITION STRATEGY; INTEGRATION OF PAST AND FUTURE ACQUISITIONS
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 complementary to the Company's business. In August 1996, the
Company completed the acquisition of McKinley and in November 1996, the Company
entered into an agreement with AOL to acquire the WebCrawler Assets which closed
effective on March 27, 1997.
Although the Company believes that its previous acquisitions were in the
best interests of the Company and its shareholders, 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. The Company could face similar integration issues with respect to the
Acquisition. There can also be no assurance that a given acquisition, if
consummated, would not have a material adverse effect on the Company's business,
results of operations and financial condition.
DEVELOPING MARKET; VALIDATION OF THE WEB AS AN EFFECTIVE ADVERTISING MEDIUM
The market for the Company's services 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 Web or who
seek to derive significant revenues from the sale of advertisements on the Web.
As a result, the Company's mix of services and advertising packages may undergo
substantial changes as the Company reacts to competitive and other developments
in the overall Web market. The Company is highly dependent upon the increased
use of the Web for information, publication, distribution and commerce. In
particular, the Web is an unproven medium for advertising supported services.
Accordingly, the Company's future operating results will depend substantially
upon the increased use of the Web for information, publication, distribution and
commerce and the emergence of the Web as an effective advertising medium. Many
of the Company's advertisers have only limited experience with the Web as an
advertising medium, have not yet devoted a significant portion of their
advertising expenditures to Web-based advertising, and may not find such
advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. For instance, advertisers of consumer
products have not yet engaged in significant advertising on the Web and may not
do so in the future. No standards have been widely accepted for the measurement
of the effectiveness of Web-based advertising, and there can be no assurance
that such standards will develop sufficiently to support the Web as an effective
advertising medium. Moreover, critical issues concerning the commercial use of
the Web (including security, reliability, cost, ease of use, access, quality of
service and acceptance of advertising) remain unresolved and may impact the
growth of Web use or the placement of advertisements on the Web. If widespread
commercial use of the Web does not develop, or if the Web does not develop as an
effective advertising medium, the Company's business, results of operations and
financial condition will be materially and adversely affected. See "-- Reliance
on Advertising Revenues," "-- Risk of Capacity Constraints; Dependence on
Computer Infrastructure" and "-- Dependence on the Web Infrastructure."
- 27 -
<PAGE> 28
INTENSE COMPETITION
The market for Web advertising and Web search and retrieval services is
intensely competitive. The Company believes that the principal competitive
factors in these markets are name recognition, amount of user traffic, pricing,
performance, ease of use and functionality. The Company's primary competitors
are Web search and retrieval companies such as Infoseek Corporation, Lycos,
Inc., and Yahoo!, Inc. and specific search and retrieval services and products
offered by other companies, including Digital Equipment Corporation's Alta
Vista, HotWired Venture's and Inktomi's HotBot, and OpenText. The Company also
competes indirectly with Web content broadcasting services, such as The
PointCast Network's PointCast, and with services from other database vendors,
such as Lexis/Nexis, Dialog and other companies that offer information search
and retrieval capabilities with their core database products. In the future, the
Company may encounter competition from ISPs, OSPs, Web site operators, providers
of Web browser software (such as Netscape or Microsoft) and other Internet
services and products that incorporate search and retrieval features into their
offerings, whether through internal development or by acquisition of one or more
of the Company's direct competitors.
In addition, the Company also competes with ISPs, OSPs, Web browsers and
other Web content providers for the sale of advertisements. 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, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have longer operating histories in the Web market, greater name
recognition, larger customer bases and databases and significantly greater
financial, technical and marketing resources than the Company. Such competitors
may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
employees, distribution partners, advertisers and content providers. Further,
there can be no assurance that the Company's competitors will not develop Web
search and retrieval services that are equal or superior to those of the Company
or that achieve greater market acceptance than the Company's offerings in the
area of name recognition, performance, ease of use and functionality. There can
also be no assurance that ISPs, OSPs, Web browsers and other Web content
providers will not be perceived by advertisers as having more desirable Web
sites for placement of advertisements. In addition, a number of the Company's
current advertising customers and strategic partners also have established
collaborative relationships with certain of the Company's competitors and a
number of the Company's competitors have established collaborative relationships
with ISPs, OSPs and other Web content providers. Accordingly, there can be no
assurance that the Company will be able to retain a customer base of
advertisers, maintain or increase traffic on its network, that competitors will
not experience greater growth in traffic than the Company as a result of such
relationships, which could have the effect of making their Web sites more
attractive to advertisers or that strategic partners will not sever or will
elect to renew their agreements with the Company. There can also be no assurance
that the Company will be able to compete successfully against its current or
future competitors or that competition will not have a material adverse effect
on the Company's business, results of operations and financial condition.
The Web, in general, and the Company, specifically, also must compete with
traditional advertising media such as print, radio and television for a share of
advertisers' total advertising budgets. To the extent that the Web is not an
effective advertising medium, advertisers may be reluctant to devote a
significant portion of their advertising budget to the Web. See "-- Reliance on
Advertising Revenues," "-- Developing Market; Validation of the Web as an
Effective Advertising Medium" and "Business -- Competition."
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW AND ENHANCED SERVICES; RISK OF DELAYS
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. These market characteristics are exacerbated by the emerging nature of
the Web and the apparent need of companies from a multitude of industries to
offer Web-based products and services. Accordingly, the Company's future success
will depend on its ability to adapt to rapidly changing technologies, its
ability to adapt
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<PAGE> 29
its services to evolving industry standards and its ability to continually
improve the performance, features and reliability of its network in response to
both evolving demands of the marketplace and competitive service and product
offerings. The failure of the Company to adapt to such changes and evolution
would have a materially adverse effect on the Company's business, results of
operations and financial condition.
Because the attractiveness of the Excite Network to advertisers is based
substantially upon the amount of traffic on the Excite Network, broad acceptance
of the Excite Network by consumers is critical to the Company's future success.
The Company's business model contemplates offering a variety of Web-related
services. Some of these services have been recently introduced, including its
Excite Live!, Excite NewsTracker, ExciteSeeing Tours and Excite Reference
services. Failure of the Company to successfully design, develop, test,
introduce and market such new services or the failure of the Company's recently
introduced services to achieve market acceptance could result in reduced traffic
on the Excite Network. Furthermore, there can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
design, development, testing, introduction or marketing of these services, or
that its new services and enhancements will adequately meet the requirements of
the marketplace and achieve any degree of significant market acceptance.
Furthermore, existing services or new releases by the Company, whether improved
versions of existing services or introductions of new services, may contain
undetected errors that require significant design modifications, resulting in a
loss of consumer confidence and consumer support. Delays in the commencement of
or errors contained in new services and enhancements may result in customer
dissatisfaction and delay or loss of advertising revenue. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or enhancements in a timely manner in accordance with its business
model or in response to changing market conditions or consumer requirements, or
if the recently introduced services or enhancements contain errors or do not
achieve a significant degree of market acceptance, the Company's business,
results of operations and financial condition would be materially and adversely
affected.
MANAGEMENT OF GROWTH
The rapid execution necessary for the Company to successfully offer services
and implement its business plan requires an effective planning and management
process. The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, operational and
financial resources. As of February 1, 1997, the Company had grown to 191
employees from 38 employees at March 1, 1996. As a result of the acquisition of
McKinley by the Company in August 1996, the Company added approximately 50
employees. The Company expects that the number of its employees will
significantly increase over the next 12 months. In addition, the Company has
recently hired, and expects to continue to hire, a number of new executive
officers. The Company's financial and management controls, reporting systems and
procedures are also very limited. Although the Company has implemented controls,
systems and procedures, it has limited experience with such controls, systems
and procedures. The Company still must improve its financial and management
controls, reporting systems and procedures and expand, train and manage its work
force. Further, the Company is required to manage multiple relationships with
various customers, strategic partners and other third parties. These
requirements will be exacerbated in the event of further growth in the Company
or in the number of its third-party relationships. Although the Company believes
that it has made adequate allowances for the costs and risks associated with
this expansion, there can be no assurance that the Company's systems, procedures
or controls will be adequate to support the Company's operations or that Company
management will be able to achieve the rapid execution necessary to successfully
offer its services and implement its business plan. The Company's future
operating results will also depend on its ability to expand its sales and
marketing organization and expand its support organization commensurate with the
growth of its business and the Web. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be materially and adversely affected.
DEPENDENCE ON 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 Network on Web browsers such as those offered by Netscape and
Microsoft and agreements with ISPs and OSPs
- 29 -
<PAGE> 30
such as AOL and Microsoft and also include arrangements for providing content
for certain services offered by the Company. 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. Moreover, the Company does not
have agreements with many Web site operators who provide links to the Excite
Network, and such Web site operators may terminate such links at any time
without notice to the Company. In addition, there can be no assurance that such
third parties regard their relationship with the Company as important to their
own respective businesses and operations, that they will not reassess their
commitment to the Excite Network at any time in the future, or that they will
not develop their own competitive services or products, either during their
relationship with the Company or after their relationship with the Company
expires. Further, there can be no assurance that the services of those companies
that provide access or links to the Excite Network will achieve market
acceptance or commercial success. Accordingly, 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.
The Company believes that certain of its third-party relationships are
important to its ability to attract traffic and advertisers. The failure of one
or more of the third-party relationships which the Company regards as strategic
to achieve or maintain market acceptance or commercial success or the
termination of one or more of such strategic relationships could significantly
reduce traffic on the Excite Network, which would have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, the termination of, or the failure of the Company to renew, the
Company's position on a Web browser or its relationship with an ISP or OSP would
significantly reduce traffic on the Company's Web sites which would also have a
material adverse effect on the Company's business, results of operations and
financial condition. See "-- Dependence on Netscape and AOL" and "Business --
Strategic Alliances."
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. An increase in the volume of searches conducted
through the Excite Network 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 amount of Web pages and traffic increases, there
can be no assurance that the Excite Network will be able to scale
proportionately. The Company is also dependent upon Web browsers, ISPs, OSPs and
other Web site operators, which have experienced significant outages in the
past, for access to its network, and consumers have experienced 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. 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. 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 online 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.
Substantially all of the Company's communications hardware and certain of
its computer hardware operations are located at leased facilities in San Jose,
Mountain View and Sausalito, California and the Company intends to relocate all
of its hardware operations to Redwood City, California during the first half of
1997. All of these areas are 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 these locations would not adversely affect the performance of
the Excite Network. These systems are vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures, break-ins and similar
events. The
- 30 -
<PAGE> 31
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 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.
DEPENDENCE ON THE WEB INFRASTRUCTURE
The success of the Excite Network will depend in large part upon the
development of a Web infrastructure, such as a reliable network backbone with
the necessary speed, data capacity and security, or timely development of
complementary products such as high speed modems, for providing reliable Web
access and services. Because global commerce and online exchange of information
on the Web and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Web will prove to be a
viable commercial marketplace. The Web has experienced, and is expected to
continue to experience, significant growth in the number of users and amount of
traffic. To the extent that the Web continues to experience increased numbers of
users, frequency of use or increased bandwidth requirements of users, there can
be no assurance that the Web infrastructure will continue to be able to support
the demands placed on it by this continued growth or that the performance or
reliability of the Web will not be adversely affected by this continued growth.
In addition, the Web could lose its viability due to delays in the development
or adoption of new standards and protocols (for example, the next-generation
Internet Protocol) to handle increased levels of activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary products or services necessary to make the Web a viable commercial
marketplace will be developed, or, if they are developed, that the Web will
become a viable commercial marketplace for services such as those offered by the
Company. If the necessary infrastructure standards or protocols or complementary
products, services or facilities are not developed, or if the Web does not
become a viable commercial marketplace, the Company's business, results of
operations and financial condition will be materially and adversely affected.
Even if such infrastructure, standards or protocols or complementary products,
services or facilities are developed and the Web becomes a viable commercial
marketplace, there can be no assurance that the Company will not be required to
incur substantial expenditures in order to adapt its services to changing Web
technologies, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Web. However, due to the increasing popularity and use of the Web, it is
possible that a number of laws and regulations may be adopted with respect to
the Web, covering issues such as user privacy, pricing, characteristics and
quality of products and services. For example, the Company may be subject to the
provisions of the recently enacted Communications Decency Act (the "CDA").
Although the constitutionality of the CDA, the manner in which the CDA will be
interpreted and enforced and its effect on the Company's operations cannot be
determined, it is possible that the CDA could expose the Company to substantial
liability. The CDA could also dampen the growth in use of the Web generally and
decrease the acceptance of the Web as a communications and commercial medium,
and could, thereby, have a material adverse effect on the Company's business,
results of operations and financial condition. Other nations, including Germany,
have taken actions to restrict the free flow of material deemed to be
objectionable on the Web. In addition, several telecommunications carriers are
seeking to have telecommunications over the Web regulated by the Federal
Communications Commission (the "FCC") in the same manner as other
telecommunications services. For example, America's Carriers Telecommunications
Association ("ACTA") has filed a petition with the FCC for this purpose. In
addition, because the growing popularity and use of the Web has burdened the
existing telecommunications infrastructure and many areas with high Web use have
begun to experience interruptions in phone service, local telephone carriers,
such as Pacific Bell, have petitioned the FCC to regulate ISPs and OSPs in a
manner similar to long distance telephone carriers and to impose access fees on
the ISPs and OSPs. If either of these petitions are granted, or the relief
sought therein is
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<PAGE> 32
otherwise granted, the costs of communicating on the Web could increase
substantially, potentially slowing the growth in use of the Web. The adoption of
any additional laws or regulations may decrease the growth of the Web, which
could in turn decrease the demand for the Excite Network and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to the Web of existing laws in various jurisdictions governing
issues such as property ownership, libel and personal privacy is uncertain and
will take years to resolve. Any such new legislation or regulation or
application or interpretation of existing laws could have a material adverse
effect on the Company's business, results of operations and financial condition.
Due to the global nature of the Web, it is possible that, although
transmissions of the Excite Network originate in the State of California, the
governments of other states and foreign countries might attempt to regulate the
Company's transmissions or prosecute the Company for violations of their laws.
There can be no assurance that violations of local laws will not be alleged or
charged by state or foreign governments, that the Company might not
unintentionally violate such law or that such laws will not be modified, or new
laws enacted, in the future. Any of the foregoing developments could have a
material adverse effect on the Company's business, results of operations and
financial condition.
LIABILITY FOR INFORMATION RETRIEVED FROM THE WEB
Because materials may be downloaded through the services offered by the
Company and be subsequently distributed to others, there is a potential that
claims may be made against the Company for defamation, negligence, copyright or
trademark infringement or other theories based on the nature and content of such
materials. Such types of claims have been brought, and sometimes successfully
pressed, against OSPs and ISPs in the past. Although the Company carries general
liability insurance, the Company's insurance may not cover potential claims of
this type, or may not be adequate to indemnify the Company for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could 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 four months ended February
28, 1997, the high and low closing prices of the Common Stock were $21.13 and
$5.50, 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 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. See "Market for Registrant's Common Equity and Related Shareholder
Matters."
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<PAGE> 33
- --------------------------------------------------------------------------------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
ANNUAL FINANCIAL STATEMENTS: See Part IV, Item 14 of this Form 10-K.
SELECTED QUARTERLY DATA: The following selected quarterly data should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Results of Operations" appearing
elsewhere in this Form 10-K. During fiscal 1996, Excite acquired McKinley in a
transaction accounted for as a pooling of interests. All financial information
has been restated to reflect the combined operations of Excite and McKinley.
During the fourth quarter of fiscal 1996 the Company entered into an agreement,
which closed effective on March 27, 1997, to acquire the WebCrawler Assets from
AOL in exchange for 1,950,000 shares of Convertible Preferred Stock. As a result
of this acquisition, during the fourth quarter of 1996, the Company expensed
$3.5 million for in-process technology, as well as recording amortization of
other purchased intangibles. See Note 3 of Notes to Consolidated Financial
Statements for a further discussion of this acquisition and related costs.
During the second quarter of 1996, the Company entered into two distribution
license agreements with Netscape for total consideration of $10.0 million which
was expensed during the second quarter of 1996. In the future, it is anticipated
that any such consideration will be expensed over the term of the agreement. See
Notes 12 and 13 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 28 $ 314 $ 37 $ 574 $ 1,374 $ 2,816 $ 4,049 $ 6,518
Gross profit................. 8 210 18 489 985 2,389 2,884 4,350
Distribution license fees.... -- -- -- -- 1,625 10,000 253 --
Merger and acquisition
costs, including charge
for purchased technology
and amortization of -- -- -- 331 -- 73 2,292 4,269
intangibles...............
Total operating expenses..... 447 982 1,740 3,946 6,631 18,167 12,640 17,288
Net loss..................... $ (442) $ (769) $(1,739) $(3,485) $(5,644) $(15,408) $(9,354) $(12,711)
Net loss per share........... $ (0.04) $ (0.07) $ (0.16) $ (0.31) $ (0.50) $ (1.29) $ (0.78) $ (1.06)
</TABLE>
- --------------------------------------------------------------------------------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- --------------------------------------------------------------------------------
None.
- 33 -
<PAGE> 34
- --------------------------------------------------------------------------------
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
DIRECTORS
Information concerning the Company's directors may be found in the section
captioned "Proposal No. 1 Election of Directors" appearing in the Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held in June 1997. Such information is incorporated herein
by reference.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- ----------------------------------------------------------
<S> <C> <C>
George Bell 40 President, Chief Executive Officer and Director
Brett T. Bullington 43 Executive Vice President
Robert C. Hood 55 Executive Vice President, Chief Administrative Officer
and Chief Financial Officer
Cary H. Masatsugu 40 Vice President, Development
Richard B. Redding 41 Vice President, Finance and Administration and Secretary
Jed L. Simmons 36 Senior Vice President and Managing Director, Excite
International
Graham F. Spencer 25 Chief Technology Officer
William B. White, Jr. 39 Senior Vice President, Marketing
Joseph R. Kraus, IV 25 Senior Vice President and Director
</TABLE>
- ----------
Mr. Bell has been President, Chief Executive Officer and a director of
the Company since January 1996. From December 1995 until January 1996, he was a
consultant to the Company. From May 1991 to December 1995, Mr. Bell was employed
by The Times Mirror Company, a publishing and cable television company, most
recently as President -- The Skiing Company for Times Mirror Magazines and
previously as President -- The Outdoor Company and Vice President, Multimedia
for Times Mirror Magazines. Prior to joining The Times Mirror Company, Mr. Bell
worked as an independent producer, writer and packager of television sports and
documentary programming and as a staff producer and writer for the ABC
television network. Mr. Bell has received four Emmy Awards. He received a B.A.
in English from Harvard College.
Mr. Bullington has been Executive Vice President of the Company since
January 1997. From November 1995 to January 1997, he served as Senior Vice
President, Marketing and Sales of the Company and, from August 1995 until
November 1995, he was a consultant to the Company. From May 1995 to August 1995,
Mr. Bullington worked as an independent marketing and sales consultant. From May
1994 to May 1995, Mr. Bullington served as Vice President of Marketing and Sales
for Planning & Logic, Inc., a software company. From January 1992 to May 1994,
he was employed by Taligent, Inc., a software company, as Director of Worldwide
Channel Development. From 1986 to January 1992, Mr. Bullington was employed by
Computer Associates, a software company, where he served most recently as Vice
President, Sales and Marketing. He received a B.A. in Political Science from the
University of California at Santa Barbara.
Mr. Hood has been Executive Vice President, Chief Administrative Officer
and Chief Financial Officer of the Company since December 1996. From November
1996 to December 1996, he was a consultant to the Company. From July 1995 to
February 1996, Mr. Hood served as Chief Operating Officer of RockShox Inc., a
mountain bike component manufacturer. From March 1992 to April 1995, he served
as Senior Vice President and Chief Financial Officer of Crowley Maritime
Corporation, a transportation services company. From April 1991 to February
1992,
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<PAGE> 35
Mr. Hood served as Executive Vice President and Chief Financial Officer of Qume
Corp., a computer peripherals company. He received a B.A. in Economics from
Bates College and an M.B.A. from Dartmouth College.
Mr. Masatsugu has been employed by the Company since April 1996,
most recently as Vice President, Development. From February 1996 to April 1996,
he was a consultant to the Company. From May 1995 to April 1996, Mr. Masatsugu
was employed by Caere Corporation, a software company, most recently as Vice
President, Engineering. From July 1994 to December 1994, he served as Vice
President, Engineering for Calera Recognition, a software company. From February
1994 to July 1994, Mr. Masatsugu was employed by EO, Inc., a computer company,
most recently as Vice President, Engineering. From 1988 to February 1994, he was
employed by GO Corporation, a software company, most recently as Director of
Product Marketing. Mr. Masatsugu received a B.S. in Electrical Engineering from
Stanford University.
Mr. Redding has been Vice President, Finance and Administration since
January 1997 and Secretary of the Company since February 1996. From February
1996 to January 1997, Mr. Redding served as Director of Finance and Acting Chief
Financial Officer of the Company, and from October 1995 until February 1996, he
was a consultant to the Company. From July 1994 to January 1996, Mr. Redding was
employed by Vivus, Inc., a medical technology company, as Controller and
Manager, Financial Planning & Analysis. From November 1993 to July 1994, he
worked as an independent consultant. From 1990 to November 1993, Mr. Redding was
employed by Scios Nova Inc., a biotechnology company, most recently as
Treasurer. He received a B.A. in Biology from the University of California at
Santa Cruz and an M.B.A. from the University of Santa Clara.
Mr. Simmons has been Senior Vice President and Managing Director, Excite
International of the Company since January 1997. From November 1996 to January
1997, he was a consultant to the Company. From January 1992 to December 1996,
Mr. Simmons was employed by Hanna-Barbera Cartoons, Inc., an entertainment
company, most recently as Executive Vice President, International. Mr. Simmons
has a B.A. in Public Policy from Duke University and an M.B.A. from Dartmouth
College.
Mr. Spencer has been Chief Technology Officer of the Company since June
1994. From June 1994 to January 1997, he also served as Vice President,
Technology of the Company, and from June 1994 to March 1996, he was also a
director of the Company. Prior to joining the Company, Mr. Spencer was a student
at Stanford University and worked as an engineer for Apple Computer during June
1992 to September 1992 and June 1993 to September 1993. Mr. Spencer was also
employed, on a part-time basis, as an engineer at Stanford University from 1989
to 1994. He received a B.S. and an M.S. in Computer Science from Stanford
University.
Mr. White has been Senior Vice President, Marketing of the Company since
September 1996 and has been employed by the Company since September 1996. From
June 1993 to September 1996, Mr. White was employed by Sega Entertainment, Inc.,
a computer games company, most recently as Senior Vice President and General
Manager. From 1987 to March 1993, Mr. White served as Director of Marketing and
Corporate Communications for Nintendo of America, a computer games company. He
received a B.S. in Business Administration from the University of Southern
California and an M.B.A. from Loyola Marymount University.
Mr. Kraus has been Senior Vice President of the Company since January 1997
and a director of the Company since June 1994. He served as Senior Vice
President, Business Development of the Company from January 1996 to January 1997
and, from June 1994 to January 1996, served as President of the Company. Prior
to joining the Company, Mr. Kraus was a student at Stanford University. He
received a B.A. in Political Science from Stanford University.
Executive officers are chosen by, and serve at the discretion of, the Board
of Directors. There are no family relationships among any of the executive
officers of the Company.
- 35 -
<PAGE> 36
- --------------------------------------------------------------------------------
ITEM 11: EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Information required by this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held in
June 1997. Such information is incorporated herein by reference.
- --------------------------------------------------------------------------------
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
Information required by this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Proxy Statement to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held in June 1997. Such information is
incorporated herein by reference.
- --------------------------------------------------------------------------------
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Information required by this Item may be found in the section captioned
"Executive Compensation - Certain Transactions" appearing in the Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held in June 1997. Such information is incorporated herein by
reference.
- 36 -
<PAGE> 37
- --------------------------------------------------------------------------------
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
Upon written request, the Company will provide, without charge, a copy of the
Company's annual report on Form 10-K, including the consolidated financial
statements, financial statement schedules and any exhibits for the Company's
most recent fiscal year. All requests should be sent to:
Excite, Inc.
Investor Relations
1091 N. Shoreline Boulevard
Mountain View, CA 94043
(415) 943-1200
<TABLE>
<CAPTION>
Page
(a) The following documents are filed as part of this report: Number
------
<S> <C>
1. Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors.............................................. 41
Consolidated Balance Sheets as of December 31, 1995 and 1996................................... 42
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996.................................................................................. 43
Consolidated Statements of Shareholders' Equity (Net Capital Deficiency) for the years
ended December 31, 1994, 1995 and 1996.................................................... 44
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996............................................................................. 45
Notes to Consolidated Financial Statements..................................................... 46
</TABLE>
2. Financial Statement Schedules.
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits.
The following exhibits are files as part of, or incorporated by
reference into, this Form 10-K:
Exhibit
Number Exhibit Title
- ------ -----------------------------------------------------------------------
2.01 - Agreement and Plan of Reorganization dated as of August 7, 1996 by
and among the Registrant, Excite Acquisition Corporation, The McKinley
Group, Inc., Isabel Maxwell, Christine Maxwell, David Hayden, Roger
Malina and Daniel Lynch. (1)
2.02 - Agreement of Merger dated as of August 30, 1996 by and between Excite
Acquisition Corporation and the McKinley Group, Inc. (1)
3.01 - Registrant's Amended and Restated Articles of Incorporation. (2)
3.02 - Registrant's Bylaws, as amended. (3)
4.01 - Form of Specimen Certificate for Registrant's Common Stock. (4)
4.02 - Restated and Amended Investors' Rights Agreement. (4)
4.03 - Amendment to Restated and Amended Investors' Rights Agreement dated
as of August 1, 1996. (9)
4.04 - Amendment to Restated and Amended Investors' Rights Agreement dated
as of November 25, 1996.
4.05 - Registration Rights Agreement dated as of November 25, 1996 by and
among the Registrant, America Online, Inc. and AOL Ventures, Inc. (9)
- 37 -
<PAGE> 38
4.06 - Voting Agreement dated as of November 25, 1996 by and among the
Registrant and certain shareholders.
4.07 - Letter Agreement dated as of November 25, 1996 by and among certain
shareholders of Excite, Inc.
9.01 - Voting Trust Agreement dated as of November 25, 1996 by and among the
Registrant, America Online, Inc., AOL Ventures, Inc. and Richard
Redding. (9)
*10.01 - Registrant's 1995 Equity Incentive Plan. (3)
*10.02 - Registrant's 1996 Equity Incentive Plan, as amended. (9)
*10.03 - Registrant's 1996 Directors Stock Option Plan. (3)
*10.04 - Registrant's 1996 Employee Stock Purchase Plan. (3)
*10.05 - Registrant's 401(k) Plan. (9)
10.06 - Form of Indemnity Agreement entered into by Registrant with each of
its directors. (3)
10.07 - Bridge Line of Credit Agreement, dated as of February 23, 1996, among
the Registrant and Kleiner Perkins Caufield & 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. (3)
*10.08 - Promissory Note, dated as of February 27, 1996, issued by
Graham F. Spencer to the Registrant. (3)
*10.09 - Secured Full Recourse Promissory Note, dated as of March 15,
1996, issued by Brett T. Bullington to the Registrant. (9)
*10.10 - Stock Pledge Agreement dated as of March 15, 1996 by and
between the Registrant and Brett T. Bullington. (9)
*10.11 - Offer Letter dated January 25, 1996, as amended, to Richard B.
Redding. (3)
*10.12 - Offer Letter dated November 30, 1995, as amended, to Brett T.
Bullington. (3)
*10.13 - Offer Letter dated March 6, 1996, to Cary H. Masatsugu. (3)
*10.14 - Offer Letter dated January 16, 1996, as amended, to George
Bell. (3)
*10.15 - Offer Letter dated as of November 15, 1996, to Robert C. Hood.
(9)
*10.16 - Offer Letter dated as of September 23, 1996 to William White
Jr. (9)
*10.17 - Offer Letter dated as of November 21, 1996, to Jed Simmons. (9)
*10.18 - Consulting Agreement dated as of November 19, 1996 by and
between the Registrant and Robert C. Hood. (9)
*10.19 - Consulting Agreement dated as of November 22, 1996 by and
between the Registrant and Jed Simmons. (9)
10.20 - Office Lease, dated as of January 22, 1996, by and between the
Registrant and McCandless Land and Cattle Company. (3)
10.21 - Series D Preferred Stock Purchase Agreement dated as of March 8, 1996
by and among the Registrant and various investors. (5)
10.22 - Warrant to purchase 650,000 shares of Common Stock dated March 8,
1996 issued to AOL Ventures, Inc. (5)
#10.23 - Net Search Program -- Premier Provider Agreement dated as of
March 28, 1996 between the Registrant and Netscape Communications
Corporation. (6)
10.24 - Office Lease, dated as of August 9, 1996, by and between the
Registrant and Martin/Campus Associated, L.P. (7)
10.25 - Acquisition Agreement dated as of November 25, 1996 by and among the
Registrant, America Online, Inc. and Global Network Navigator, Inc. (9)
- 38 -
<PAGE> 39
10.26 - Net Search Program - Premier Provider Agreement dated as of March 27,
1996, and as amended March 27, 1996 and January 21, 1997, between The
McKinley Group, Inc. and Netscape Communications Corporation. (8)
11.01 - Statement of earnings per share. (9)
21.01 - List of Subsidiaries. (9)
23.01 - Consent of Ernst & Young LLP, Independent Auditors.
24.01 - Power of Attorney (see signature page.)
27.01 - Financial Data Schedule (EDGAR version only.)
- ----------
* Indicates a management contract or compensatory plan or arrangement.
# Confidential treatment was ordered or has been requested with respect
to certain portions of these agreements. 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 September 12, 1996, as an
exhibit to the Registrant's Form 8-K (File No. 0-28064) regarding the
acquisition of The McKinley Group, Inc.
(2) Previously filed with the Commission on July 4, 1996, as an exhibit to
the Registrant's Registration Statement on Form S-8 (File No.
333-07625).
(3) Previously filed with the Commission on March 11, 1996, as an exhibit
to the Registrant's Registration Statement on Form SB-2 (File No.
333-2328-LA)
(4) Previously filed with the Commission on March 29, 1996, as an exhibit
to Amendment No. 1 to the Registrant's Registration Statement on Form
SB-2 (File No. 333-2328-LA)
(5) Previously filed with the Commission on April 3, 1996, as an exhibit to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2
(File No. 333-2328-LA)
(6) Previously filed with the Commission on April 3, 1996, as an exhibit to
Amendment No. 3 to the Registrant's Registration Statement on Form SB-2
(File No. 333-2328-LA)
(7) Previously filed with the Commission on November 8, 1996, as an exhibit
to the Registrant's Form 10-Q SB (File No. 0-28064) for the period
ended September 30, 1996.
(8) Previously filed with the Commission on February 28, 1997, as an
exhibit to the Registrant's Form 10-Q SB/A (File No. 0-28064).
(9) Previously filed with the Commission on March 3, 1997, as an exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
333-22669)
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
quarter ended December 31, 1996.
(c) Exhibits: See item 14(a)3 above.
(d) Financial Statement Schedules: See Item 14(a)2 above.
- 39 -
<PAGE> 40
- --------------------------------------------------------------------------------
EXCITE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................................. 41
Consolidated Balance Sheets as of December 31, 1995 and 1996....................................... 42
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996....................................................................................... 43
Consolidated Statements of Shareholders' Equity (Net Capital Deficiency) for the years
ended December 31, 1994, 1995 and 1996......................................................... 44
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996.................................................................................. 45
Notes to Consolidated Financial Statements......................................................... 46
</TABLE>
- 40 -
<PAGE> 41
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Excite, Inc.
We have audited the accompanying consolidated balance sheets of Excite, Inc.
as of December 31, 1995 and 1996, and the related consolidated statements of
operations, shareholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. In August 1996, the Company merged
with the McKinley Group, Inc. in a transaction that was accounted for as a
pooling of interests. We did not audit the financial statements of The McKinley
Group, Inc. for the years ended December 31, 1994 or 1995 , which statements
reflect total assets constituting approximately 54% of the related consolidated
financial statement totals at December 31, 1995, and net losses constituting
approximately 92% and 49% of the consolidated financial statement totals for the
years ended December 31, 1994 and 1995, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for The McKinley Group, Inc. is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Excite, Inc. at
December 31, 1995 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, after giving retroactive effect to the business combination with The
McKinley Group, Inc. as described in the notes to the consolidated financial
statements, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 29, 1997
- 41 -
<PAGE> 42
EXCITE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 760 $ 3,971
Short-term investments...................................................... 358 16,863
Restricted investments...................................................... 452 1,496
Accounts receivable, net.................................................... 338 3,340
Prepaid expenses and other current assets................................... 207 1,070
----------- -----------
Total current assets.................................................... 2,115 26,740
Property and equipment, net.................................................... 1,450 8,194
Intangible assets.............................................................. 190 11,841
Other assets................................................................... 46 923
----------- -----------
$ 3,801 $ 47,698
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Notes payable, current portion.............................................. $ 899 $ 1,200
Accounts payable............................................................ 1,111 6,699
Accrued compensation........................................................ 428 861
Accrued distribution license fees........................................... -- 2,300
Capital lease obligations, current portion.................................. 213 2,325
Deferred revenues........................................................... 105 1,784
Other accrued liabilities................................................... 237 3,447
----------- -----------
Total current liabilities............................................... 2,993 18,616
----------- -----------
Notes payable.................................................................. 587 --
Capital lease obligations...................................................... 408 3,985
Commitments and contingencies
Redeemable convertible preferred stock, no par value; issuable in series: 4,000
shares authorized at December 31, 1995 (none at December 31, 1996), 1,890
shares issued and outstanding at December 31, 1995 (none at December
31, 1996)................................................................... 3,847 --
Shareholders' equity (net capital deficiency):
Convertible preferred stock issuable, no par value
Authorized -- 4,000 shares issuable in series
Issuable at December 31, 1996 -- 1,950 shares; aggregate liquidation
preference of $1,445...................................................... -- 15,816
Common stock, no par value
Authorized -- 25,000 shares
Issued and outstanding -- 2,448 and 12,108 shares at December 31, 1995
and 1996, respectively.................................................... 3,530 59,999
Deferred compensation....................................................... (631) (388)
Unrealized gain (loss) on available-for-sale investments.................... 152 (128)
Accumulated deficit......................................................... (7,085) (50,202)
----------- -----------
Total shareholders' equity (net capital deficiency).................. (4,034) 25,097
----------- -----------
$ 3,801 $ 47,698
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 42 -
<PAGE> 43
EXCITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Advertising revenues........................................ $ 57 $ 145 $ 14,030
Contract and other revenues................................. 236 808 727
----------- ----------- -----------
Total revenues.......................................... 293 953 14,757
Cost of revenues:
Cost of advertising revenues................................ -- 65 3,296
Cost of contract and other revenues......................... 88 163 667
Amortization of purchased technology........................ -- -- 186
----------- ----------- -----------
Total cost of revenues.................................. 88 228 4,149
----------- ----------- -----------
Gross profit................................................... 205 725 10,608
Operating expenses:
Product development......................................... 415 2,810 8,030
Sales and marketing......................................... 37 1,648 21,103
Distribution license fees................................... -- -- 11,878
General and administrative.................................. 399 2,326 7,081
Charge for purchased in-process technology.................. -- 331 3,500
Other merger and acquisition related costs, including
amortization of goodwill and other purchased intangibles.. -- -- 3,134
----------- ----------- -----------
Total operating expenses................................ 851 7,115 54,726
----------- ----------- -----------
Operating loss................................................. (646) (6,390) (44,118)
Interest income................................................ -- 5 1,410
Interest expense and other..................................... (4) (50) (409)
----------- ----------- -----------
Net loss....................................................... $ (650) $ (6,435) $ (43,117)
=========== =========== ===========
Net loss per share............................................. $ (0.06) $ (0.58) $ (3.65)
=========== =========== ===========
Shares used in computing net loss per share.................... 10,576 11,070 11,818
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-43-
<PAGE> 44
EXCITE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
UNREALIZED SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK GAIN/(LOSS) EQUITY
---------------- ----------------- DEFERRED ON ACCUMULATED (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT COMPENSATION INVESTMENTS DEFICIT DEFICIENCY)
------ ------ ------ ------ ------------ ----------- ------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.. -- $ -- 35 $ 1 $ -- $ -- $ -- $ 1
Issuance of common stock
for cash................. -- -- 899 100 -- -- -- 100
Issuance of common stock
for services............. -- 356 7 -- -- -- 7
Net loss................... -- -- -- -- -- -- (650) (650)
------ ------- ------ ------ ------ ------ -------- ---------
Balance at December 31, 1994.. -- -- 1,290 108 -- -- (650) (542)
Issuance of common stock
for cash................. -- -- 1,024 1,921 -- -- -- 1,921
Exercise of stock options.. -- -- 1 6 -- -- -- 6
Issuance of common stock
for equity securities.... -- -- 33 300 -- -- -- 300
Issuance of common stock
for services............. -- -- 8 196 -- -- -- 196
Note payable conversion.... -- -- 22 275 -- -- -- 275
Issuance of common stock
and warrant in connection
with asset purchase
agreement................ -- -- 70 84 -- -- -- 84
Deferred compensation
related to stock options,
net of amortization...... -- -- -- 640 (631) -- -- 9
Unrealized gain on
available-for-sale
investments.............. -- -- -- -- -- 152 -- 152
Net loss................... -- -- -- -- -- -- (6,435) (6,435)
------ ------- ------ ------ ------ ------ -------- ---------
Balance at December 31, 1995.. -- -- 2,448 3,530 (631) 152 (7,085) (4,034)
Issuance of common stock
for cash................. -- -- 283 1,412 -- -- -- 1,412
Notes payable conversions.. -- -- 87 400 -- -- -- 400
Issuance of warrant in
connection with
distribution agreement... -- -- -- 1,625 -- -- -- 1,625
Issuance of shares, note
payable conversion and
exercise of outstanding
warrants in connection
with the Company's IPO, net
of issuance costs of
$3,682..................... -- -- 3,651 36,418 -- -- -- 36,418
Conversion of redeemable
preferred stock in
connection with the
Company's IPO............ -- -- 5,324 16,129 -- -- -- 16,129
Exercise of stock options.. -- -- 300 375 -- -- -- 375
Amortization of deferred
compensation, net of
cancellations............ -- -- -- 7 243 -- -- 250
Issuance of common and
preferred stock
issuable in
connection with asset
purchase agreements...... 1,950 15,816 15 103 -- -- -- 15,919
Unrealized loss on
available-for-sale
investments.............. -- -- -- -- -- (280) -- (280)
Net loss................... -- -- -- -- -- -- (43,117) (43,117)
------ ------- ------ ------ ------ ------ -------- ---------
Balance at December 31, 1996.. 1,950 $15,816 12,108 $59,999 $ (388) $ (128) $(50,202) $ 25,097
====== ======= ====== ======= ====== ====== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 44 -
<PAGE> 45
EXCITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
-------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (650) $ (6,435) $(43,117)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation ................... -- 9 243
Issuance of warrants .................................... -- -- 1,625
Equity securities issued for services ................... 7 196 --
Depreciation ............................................ 11 140 2,189
Amortization of intangible assets ....................... -- 19 954
Charge for purchased in-process technology .............. -- 331 3,500
Loss on disposal of property and equipment .............. -- -- 96
Provision for loan impairment ........................... -- -- 629
Changes in assets and liabilities:
Accounts receivable ................................... (3) (335) (2,957)
Prepaid expenses and other current assets ............. (11) (168) (863)
Other assets .......................................... (23) (36) (873)
Accounts payable ...................................... 136 1,021 5,515
Accrued compensation .................................. 44 384 425
Accrued distribution license fees ..................... -- -- 2,300
Other accrued liabilities ............................. 122 117 2,533
Deferred revenues ..................................... -- 105 1,679
------- -------- --------
Net cash used in operating activities ............... (367) (4,652) (26,122)
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ......................... (85) (811) (892)
Purchases of investments .................................... -- (358) (49,765)
Sales and maturities of investments ......................... -- -- 31,936
Notes and advances to Novo MediaGroup, Inc. ................. -- -- (629)
Payment on asset purchase ................................... -- (150) --
------- -------- --------
Net cash used in investing activities ............... (85) (1,319) (19,350)
------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations ....................... -- (69) (1,875)
Proceeds from notes payable ................................. 344 1,277 3,490
Payments on notes payable ................................... -- (263) (2,426)
Proceeds from sale of redeemable convertible preferred stock -- 3,847 12,282
Proceeds from sale of common stock and common stock warrants 100 1,927 37,212
------- -------- --------
Net cash provided by financing activities ........... 444 6,719 48,683
------- -------- --------
Net increase in cash and cash equivalents ...................... (8) 748 3,211
Cash and cash equivalents at beginning of period ............ 20 12 760
------- -------- --------
Cash and cash equivalents at end of period .................. $ 12 $ 760 $ 3,971
======= ======== ========
Non-cash financing activities:
Conversion of redeemable convertible preferred stock to
common stock .............................................. $ -- $ -- $ 16,129
Conversion of notes payable to common stock ................. $ -- $ 275 $ 1,400
Fixed assets acquired under capital leases .................. $ -- $ 676 $ 7,564
Supplemental cash flow disclosure:
Cash paid for interest ...................................... $ -- $ 17 $ 379
</TABLE>
See accompanying notes to consolidated financial statements.
- 45 -
<PAGE> 46
EXCITE, INC.
NOTES TO 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 which combine proprietary search technology,
editorial Web reviews, aggregated content from third parties, bulletin boards,
chat and personalization capabilities. The Company's goal is to be the Web's
leading branded media network with the largest consumer reach, thereby creating
an efficient means of advertising on the Web. To this end, the Excite Network
serves as a home base where consumers can gather, interact and return to during
each Web experience. The Company derives a substantial portion of its revenues
from selling advertising on its Web sites to customers in various industries.
The consolidated financial statements 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 (see Note 3.) McKinley was incorporated in December 1993.
All financial information has been restated to reflect the combined operations
of the Company and McKinley. From December 7, 1993 (inception) through December
31, 1993, McKinley had no revenues and insignificant operating expenses which
have been included in the consolidated results of operations for the year ended
December 31, 1994.
The Company has incurred operating losses to date and incurred a net loss of
approximately $43.1 million for the year ended December 31, 1996. The Company
believes that additional funding will be needed to finance expected operations
in the year ending December 31, 1997. If such additional funding is not
available, management believes that available resources will provide sufficient
funding to enable the Company to meet its obligations through at least December
31, 1997. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources if such resources were not available.
The Company currently derives a large percentage of its revenues from
advertising through the "Net Search" buttons on the Netscape home page. Under
the terms of the April 1996 agreements with Netscape (see Note 12,) this
facility expires on March 31, 1997; however, in March 1997, Netscape agreed to
extend the provisions of these agreements to April 30, 1997, and entered into
new agreements covering the period from May 1, 1997 through April 30, 1998 (see
Note 13.)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
- 46 -
<PAGE> 47
Long-Lived Assets
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. The adoption of SFAS 121 in fiscal 1996 had no
impact on the Company's financial condition or operating results.
The carrying value of goodwill and intangible assets is reviewed on a
regular basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. To date no such impairment has been
indicated. Should there be an impairment in the future, the Company will measure
the amount of the impairment based on undiscounted expected future cash flows
from the impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. Advertising revenues
are recognized ratably over the term of the contract. To the extent minimum
guaranteed impression levels are not met, the Company defers recognition of the
corresponding revenues until guaranteed levels are achieved.
Revenues from the sale of certain advertising space are shared with third
parties pursuant to the terms of certain agreements. To date, amounts allocable
to third parties have not been significant. Contract and other revenues during
the years ended December 31, 1994 and 1995 consisted primarily of contract
revenues earned under agreements to modify the Company's Internet directory
technology and fees for the licensing of Internet directory content and
technology. Contract revenues are recognized as the work is performed using the
percentage of completion method. License revenues are recognized at the time of
delivery, provided that no significant obligations remain and collection of the
resulting receivable is considered probable.
Advertising
Costs related to advertising are expensed as incurred. Advertising expense
was insignificant for the year ended December 31, 1994 and was approximately
$144,000 and $10.4 million for the years ended December 31, 1995 and 1996,
respectively.
- 47 -
<PAGE> 48
Cash, Cash Equivalents, Short-Term Investments and Fair Value of Financial
Instruments
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. All of the
Company's cash equivalents and short-term investments, consisting principally of
commercial paper and government securities, are classified as available-for-sale
as of the balance sheet date. These securities are recorded at fair market
value. Unrealized gains and losses on these investments are included in
shareholders' equity. The cost of securities sold is based on specific
identification. There were no material gross realized gains or losses from sales
of securities in the periods presented. The fair value of investments is based
on quoted market prices at December 31, 1996. The estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. All available-for-sale investments generally mature in
one year or less.
<TABLE>
<CAPTION>
GROSS UNREALIZED
HISTORICAL -------------------
COST GAIN LOSS FAIR VALUE
---- ---- ---- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash ................................ $ 758 $ -- $ -- $ 758
U.S. Government securities .......... 1,604 -- -- 1,604
Money market funds .................. 1,609 -- -- 1,609
------- ----- -------- -------
$ 3,971 $ -- $ -- $ 3,971
======= ===== ======== =======
Short-term investments:
Commercial paper .................... $ 3,882 $ 3 $ -- $ 3,885
U.S. Government securities .......... 12,203 5 -- 12,208
Corporate notes ..................... 770 -- -- 770
------- ----- -------- -------
$16,855 $ 8 $ -- $16,863
======= ===== ======== =======
Restricted investments:
Restricted certificate of deposit ... $ 1,332 $ -- $ -- $ 1,332
Restricted investment in common stock 300 -- (136) 164
------- ----- -------- -------
$ 1,632 $ -- $ (136) $ 1,496
======= ===== ======== =======
</TABLE>
The restricted certificate of deposit is being held as collateral by a
financial institution against a letter of credit for tenant improvements at the
Company's new headquarters (see Note 5.)
The restricted investment in common stock is being held as collateral by a
financial institution against the Company's line of credit borrowings (see Note
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 (one to five 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>
DECEMBER 31,
------------------------
1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Purchased computer equipment and internal use software $ 901 $ 1,968
Leased computer equipment and internal use software .. 673 7,891
Purchased furniture and fixtures ..................... 13 370
Leased furniture and fixtures ........................ 3 297
Leasehold improvements ............................... 16 60
-------- --------
1,606 10,586
Less accumulated depreciation and amortization ....... (156) (2,392)
-------- --------
$ 1,450 $ 8,194
======== ========
</TABLE>
- 48 -
<PAGE> 49
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>
DECEMBER 31,
LIFE IN -----------------------
MONTHS 1995 1996
------ -------- ------
(In thousands)
<S> <C> <C> <C>
Trademarks, trade names, goodwill
and other............................ 24 - 36 $ 209 $ 2,708
Developed technology.................. 13 -- 8,400
Operating agreement................... 4 -- 1,200
Distribution agreement................ 24 -- 500
-------- ---------
209 12,808
Less accumulated amortization......... (19) (967)
-------- ---------
$ 190 $ 11,841
======== =========
</TABLE>
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, does not require collateral on accounts receivable.
When required, the Company maintains allowances for credit losses and such
losses have been within management's expectations. The Company's services are
provided to customers in several industries, primarily in North America.
Provisions for doubtful accounts were insignificant in 1995 and $670,000 for
the year ended December 31, 1996. Accounts receivable are stated net of
allowances for doubtful accounts of $425,000 at December 31, 1996 (none at
December 31, 1995.)
Two customers accounted for approximately 52% and 17% respectively, of total
revenues in 1994. Two customers accounted for approximately 26% and 16%
respectively, of total revenues in 1995. One customer accounted for
approximately 12% of total revenues in 1996.
Product Development Costs
Product development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. Therefore, all product development costs have been charged to
operations as incurred.
Per Share Amounts
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 Securities and
Exchange Commission Staff Accounting Bulletins, for the periods prior to the
Company's initial public offering, such computations include all common and
common equivalent shares issued within twelve months of the filing date as if
they were outstanding for all periods presented. Common equivalent shares
consist of the
- 49 -
<PAGE> 50
incremental common shares issued upon conversion of 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.)
2. INITIAL PUBLIC OFFERING
In April 1996, the Company completed its initial public offering and issued
2,300,000 shares of its Common Stock at a price of $17.00 per share. The Company
received approximately $35.4 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of the
initial public offering, each outstanding share of Redeemable Convertible
Preferred Stock was automatically converted into two shares of Common Stock,
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, and $1.0 million principal amount of notes payable was converted
into 160,000 shares of Common Stock.
3. MERGER AND ASSET PURCHASES
Merger
In August 1996, the Company acquired McKinley, a closely held private
company and creator of the Magellan On-Line Guide. The transaction was effected
through the issuance of approximately 850,000 shares of the Company's Common
Stock and was accounted for as a pooling of interests. In connection with the
transaction, the Company incurred approximately $2.2 million in merger related
expenses, including $1.0 million for legal and other professional fees, $901,000
for personnel severance and outplacement expenses and $345,000 for termination
of distribution contracts and discontinuation of duplicate operations and
facilities. A total of approximately $524,000 was included in other accrued
liabilities at December 31, 1996 for the remaining merger related liabilities.
Separate results of the combined entities for the years ended December 31,
1994 and 1995, and for the eight month period ended August 30, 1996 (date of
merger) are as follows:
<TABLE>
<CAPTION>
UNAUDITED
EIGHT MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- AUGUST 30,
1994 1995 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Excite...................... $ 83 $ 435 $ 5,182
McKinley.................... 210 518 1,661
----------- ----------- -----------
$ 293 $ 953 $ 6,843
=========== =========== ===========
Net loss:
Excite...................... $ (51) $ (3,257) $ (13,793)
McKinley.................... (599) (3,178) (12,306)
----------- ----------- -----------
$ (650) $ (6,435) $ (26,099)
=========== =========== ===========
</TABLE>
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
Asset Purchases
In November 1995, the Company entered into an asset purchase agreement with
City.Net Express ("City.Net"), a company which develops automated software
systems for managing content and links over the Internet. Under the terms of the
agreement, the Company purchased certain assets of City.Net in exchange for cash
of $150,000, 70,000 shares of Common Stock, a promissory note of $300,000, and a
warrant to purchase 45,000 shares of Common Stock at an exercise price of $3.33
per share for a total purchase consideration valued at $534,000. Of the purchase
- 50 -
<PAGE> 51
price, $203,000 was allocated to identified intangible assets and $331,000 was
allocated to purchased in-process technology which was charged to operations at
the time of the acquisition. The Company determined the amounts to be allocated
to developed and in-process technology based on whether technological
feasibility had been achieved and whether there was an alternative future use
for the technology.
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 Excite 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"), for 1,950,000 shares of the
Company's Series E-1 and E-2 Convertible Preferred Stock, that are issuable upon
closing (see Notes 7 and 13.) In addition, as part of the transactions
contemplated by these agreements, AOL will have the right, for a 90 day period
following the closing, which was effective on March 27, 1997, to have 680,330
shares of common stock beneficially owned by AOL canceled and an equivalent
number of shares of series E-4 Convertible Preferred Stock issued to it, and a
warrant held by AOL (which previously was exercisable into 650,000 shares of
common stock at an exercise price of $8.00 per share) will be amended to become
exercisable into 650,000 shares of series E-3 Convertible Preferred Stock at the
same exercise price per share. The acquisition was recorded as of December 1,
1996. Upon closing, AOL will pay to the Company a percentage of AOL's
advertising revenues with respect to the sales of advertising derived from the
WebCrawler Assets for the period between December 1, 1996 and the closing, less
ordinary and customary reserves, and the Company will reimburse AOL for expenses
relating to the WebCrawler Assets. Revenues recorded in the period ended
December 31, 1996 were immaterial. Shareholders' equity at December 31, 1996
includes the 1,950,000 shares of Convertible Preferred Stock issuable to AOL.
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 purchased in-process technology and the remaining excess purchase
price of approximately $12.6 million was allocated to trademarks, distribution
rights, bookmarks, trade names, goodwill and other. 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 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, resale of the
technology and internal usage.
4. BANK LINE OF CREDIT AND NOTES PAYABLE
Bank borrowings and other notes payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
(In thousands)
<S> <C> <C>
Bank line of credit.......................................... $ 796 $ 1,100
Note payable in connection with asset purchase (Note 3)...... 300 --
Other notes payable.......................................... 390 100
----------- -----------
1,486 1,200
Less current portion......................................... (899) (1,200)
----------- -----------
$ 587 $ --
=========== ===========
</TABLE>
- 51 -
<PAGE> 52
Bank Line of Credit
The Company has a $1.0 million revolving line of credit with a bank
available through March 31, 1997. Additionally, in May 1996, the Company
received $100,000 from the same bank under a demand note. Borrowings at December
31, 1996 totaled $1.1 million and are secured by substantially all of McKinley's
assets and are guaranteed by the Company. Interest on borrowings is payable
monthly at the bank's prime rate (8.25% at December 31, 1996) plus 1%. At
December 31, 1996, a short-term investment with a carrying amount of $164,000
was held by the bank as collateral for borrowings under the line of credit and
is not available to the Company.
Notes Payable
In 1996, the Company repaid $150,000 of the note payable which arose in
connection with an asset purchase, and converted the remaining $150,000 into
45,000 shares of Common Stock. Other notes payable represent amounts due to
individuals with interest rates ranging from 6% to 11%. In 1996, the Company
converted $250,000 of other notes payable into 41,604 shares of Common Stock.
5. COMMITMENTS
Capital Leases
In March 1996, the Company entered into a master equipment lease which
provides for the purchase of up to $2.5 million of property and equipment under
capital leases. At December 31, 1996, $132,000 was available under this lease
line. In the second half of 1996, the Company entered into additional equipment
leases, not included in the master lease line, totaling $4.8 million. These
leases generally have terms of 30 to 36 months.
Building Lease
In August 1996, the Company entered into a lease for new corporate offices
located in Redwood City, California. The Company anticipates that this lease,
which has a ten year term, will commence during the second quarter of 1997 at
which time the Company will move from its present offices in Mountain View,
Sausalito and San Jose, California.
Annual minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------ -----------
YEARS ENDING DECEMBER 31, (In thousands)
<S> <C> <C>
1997................................................................... $ 1,257 $ 2,812
1998................................................................... 1,849 2,707
1999................................................................... 1,586 1,576
2000................................................................... 1,514 --
2001................................................................... 1,514 --
Thereafter............................................................. 7,948 --
------------ -----------
Total minimum payments required............................................. $ 15,668 $ 7,095
============
Less amounts representing interest.......................................... (785)
-----------
Present value of future lease payments...................................... 6,310
Less current portion........................................................ (2,325)
-----------
$ 3,985
===========
</TABLE>
Rent expense under operating leases was approximately $24,000, $152,000 and
$722,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
- 52 -
<PAGE> 53
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Each share of Redeemable Convertible Preferred Stock outstanding at December
31, 1995 automatically converted to two shares of Common Stock upon the closing
of the Company's initial public offering in April, 1996.
7. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
Information regarding Convertible Preferred Stock, including the amounts
issuable under the acquisition of certain assets from AOL, consists of the
following (no par value):
<TABLE>
<CAPTION>
SHARES
ISSUABLE AT
SHARES DECEMBER 31, LIQUIDATION
AUTHORIZED 1996 PREFERENCE
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
Series E-1............................... 1,250 1,250 $ 1,438
Series E-2............................... 700 700 7
Series E-3............................... 650 -- --
Series E-4............................... 680 -- --
------------ ----------- -----------
Total Series E................. 3,280 1,950 $ 1,445
=========== ===========
Undesignated............................. 720
------------
Total authorized............... 4,000
============
</TABLE>
Holders of the Series E Convertible Preferred Stock will be entitled to
non-cumulative dividends, as and if declared by the Board of Directors ("The
Board"), on a pro rata basis with the common stock holders.
The holders of Series E-1, E-2, E-3 and E-4 Convertible Preferred Stock will
be entitled to liquidation preferences of $1.15, $0.01, $8.0 and $8.819 per
share respectively, prior to and in preference to any payment or distribution to
holders of Common Stock.
Each holder of shares of Convertible Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock into which such
shares of Preferred Stock could convert and, so long as at least 1,640,165
shares of Series E Convertible Preferred Stock are outstanding, the Preferred
Stock as a class shall be entitled to elect one director. Subject to adjustment,
the Preferred Stock holders are entitled, upon conversion, to the same number of
Common shares as represented by their Preferred Stock holdings. At the option of
the holder, each share of Preferred Stock shall be convertible, at any time or
from time to time, into shares of Common Stock.
Common Stock
At December 31, 1996, 1,780,020 shares of Common Stock issued by the Company
were subject to stock repurchase agreements whereby the Company has the option
to repurchase the unvested shares upon termination of employment for any reason,
with or without cause, at the original price paid for the shares. Generally the
stock vests 30% immediately with the remaining 70% vesting ratably over 48
months from the date of issuance. At December 31, 1996, 493,226 shares of Common
Stock were subject to repurchase at the option of the Company at the original
exercise price ranging from $0.00045 to $0.035.
Warrants
During 1995, the Company issued warrants to purchase 30,000 shares of Series
A and 16,000 shares of Series B Redeemable Convertible Preferred Stock at
exercise prices of $0.67 and $1.25 per share, respectively, in connection
- 53 -
<PAGE> 54
with an equipment lease agreement. These warrants converted into warrants to
purchase Common Stock upon the Company's initial public offering in April 1996.
In January 1997, the holder of these warrants elected to exercise the warrants
and receive a lesser number of shares in exchange for a reduction in the
exercise price resulting in the issuance of 43,466 shares of Common Stock.
During 1995, the Company issued warrants to purchase 1,200,000 shares of
Common Stock at an exercise price of $0.125 per share in connection with the
sale of Series B Redeemable Convertible Preferred Stock. These warrants were
exercised in April 1996 in connection with the Company's initial public
offering.
During 1995, the Company issued warrants to purchase 36,000 and 28,540
shares of Common Stock at exercise prices of $0.67 and $1.25 per share,
respectively, in connection with an employment offer. These warrants were
exercised in 1996.
During 1995, the Company issued warrants to purchase 2,356 shares of Common
Stock at an exercise price of $32.66 per share in connection with obtaining a
working capital line of credit from a bank (see Note 4.) These warrants expire
in September 2001.
In February 1996, the Company issued warrants to purchase 7,095 shares of
Common Stock at an exercise price of $101.27 per share in connection with a
consulting services agreement. These warrants fully vest on January 31, 1997 and
expire on January 31, 1999.
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
warrant expires in March 2001. The value of the warrant was established though
an independent appraisal. A charge to operations of $1.6 million for the fair
value of the warrant was recorded at the time of issuance. Upon the closing of
the acquisition of the WebCrawler Assets, this warrant will be converted into a
warrant to purchase an equivalent number of shares of Series E-3 Convertible
Preferred Stock at the same exercise price per share.
Stock Splits
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. All
of the share and per share data have been adjusted to reflect these stock
splits.
8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
During 1995, the Company adopted the 1995 Equity Incentive Plan (the "1995
Plan") under which incentive stock options or non-qualified stock options to
purchase Common Stock may be granted to eligible participants. Under the 1995
Plan, options to purchase Common Stock may be granted at prices no less than 85%
of the fair market value on the date of grant (110% of fair value in certain
instances.) Options generally vest over a 48-month period. Options granted under
the 1995 Plan before its termination in April 1996 remain outstanding in
accordance with their terms, but no further options have been granted under the
1995 Plan after the date of its termination.
Additionally, in February 1996 the Company's Board of Directors adopted, and
in March 1996 the Company's shareholders approved, increases to the number of
shares authorized for issuance under the 1995 Plan totaling 550,000 shares, 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 eligible participants under the 1996 Plan and to directors under the
Directors Plan. In November 1996 and January 1997, the Board approved amendments
to the 1996 Plan, subject to shareholder approval, to increase the number of
shares thereunder by 800,000 and 2,455,000 shares, respectively.
- 54 -
<PAGE> 55
The 1996 Plan serves as the successor equity incentive program to the Company's
1995 Plan. The 1996 Plan provides for the grant of either incentive stock
options (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended) or non qualified stock options and stock bonuses and the issuance of
restricted stock by the Company to eligible participants at a price no less than
85% of the fair value on the date of grant. Options generally vest over a 48
month period. No person is eligible to receive more than 500,000 shares in any
calendar year pursuant to grants under the 1996 Plan, other than new employees
of the Company who will be eligible to receive up to a maximum of 800,000 shares
in the calendar year in which they commence employment with the Company. Shares
that (i) are subject to issuance upon exercise of an option but cease to be
subject to such stock option for any reason other than exercise of such stock
option, (ii) are subject to an award granted under the 1996 Plan but are
forfeited or are repurchased by the Company at the original issue price or (iii)
are subject to an award that otherwise terminates without shares being issued
will again be available for grant and issuance in connection with future awards
under the 1996 Plan. The 1996 Plan will terminate in February 2006, unless
terminated earlier in accordance with the provisions of the 1996 Plan.
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE ------------------------------------- WEIGHTED
FOR NUMBER OF AVERAGE
GRANT SHARES PRICE PER SHARE EXERCISE PRICE
---------- --------- -------------------- --------------
(Shares in thousands)
<S> <C> <C> <C> <C>
Initial shares authorized.......... 1,650 -- -- --
Options granted.................. (1,375) 1,375 $0.035 - $ 34.612 $ 0.31
Options exercised................ -- (1) $ 8.194 $ 8.19
---------- ---------
Balance at December 31, 1995....... 275 1,374 $0.035 - $ 34.612 $ 0.31
Additional shares authorized..... 3,000 -- -- --
Options granted.................. (2,836) 2,836 $2.500 - $ 67.757 $ 6.80
Options exercised................ -- (300) $0.035 - $ 5.750 $ 0.33
Options canceled................. 263 (263) $0.035 - $ 67.757 $ 10.50
Options expired.................. (528) -- -- --
---------- ---------
Balance at December 31, 1996....... 174 3,647 $0.035 - $ 67.757 $ 4.66
========== =========
</TABLE>
At December 31, 1996, options totaling 758,703 shares have been granted
under the 1996 Plan subject to shareholder approval.
Deferred Compensation
The Company has recorded deferred compensation expense of $640,000 for the
difference between the exercise price and the deemed fair value of certain of
the Company's Common Stock options granted in 1995. This amount is being
amortized over the vesting period of the individual options, generally a
48-month period. Deferred compensation expense recognized in the years ended
December 31, 1995 and 1996 totaled $9,000 and $243,000, respectively.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation is recognized.
- 55 -
<PAGE> 56
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of
approximately 5.7%, and 5.9%; dividend yields of 0%, volatility factors of the
expected market price of the Company's Common Stock of 0.0, and 0.75; and a
weighted-average expected life of the options of two years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996
------------ -----------
(In thousands, except per
share data)
<S> <C> <C>
Net loss-- as reported ............. $ (6,435) $ (43,117)
============ ==========
Net loss-- pro forma ............... $ (6,437) $ (44,104)
============ ==========
Net loss per share-- as reported.... $ (0.58) $ (3.65)
============ ==========
Net loss per share-- pro forma ..... $ (0.58) $ (3.73)
============ ==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
NUMBER WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED- NUMBER WEIGHTED-
AT DEC. 31, REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE 1996 CONTRACTUAL EXERCISE DEC. 31, 1996 EXERCISE
PRICES (In thousands) LIFE PRICE (In thousands) PRICE
---------------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.035 - $ 0.290 1,005 8.3 years $ 0.19 186 $ 0.20
2.500 - 2.500 236 9.1 2.50 18 2.50
5.500 - 9.875 2,248 9.5 6.26 24 6.53
11.190 - 17.125 155 9.3 12.62 4 12.00
67.757 - 67.757 3 9.3 67.67 -- --
--------- ----------
3,647 232 1.22
========= ==========
</TABLE>
Employee Stock Purchase Plan
In February 1996 the Company's Board of Directors adopted, and in March 1996
the Company's shareholders approved, the 1996 Employee Stock Purchase Plan (the
"ESPP") to provide employees of the Company with an opportunity to purchase
Common Stock through payroll deductions. Under the ESPP, 150,000 shares of
Common Stock have been reserved for issuance, subject to anti-dilution
adjustments. The ESPP became effective in December 1996. The Board of Directors
has the authority to determine the duration of offering periods, up to a maximum
of 24 months. Eligible employees may participate in the ESPP by authorizing
payroll deductions of an
- 56 -
<PAGE> 57
amount determined by the Board of Directors. The amount of authorized payroll
deductions may not be less than 2% nor more than 10% of an employee's
compensation, not to exceed $21,250 per year. Amounts withheld are applied at
the end of every six-month accumulation period to purchase shares of Common
Stock, but not more than the number of shares as the Board of Directors shall
determine.
Participants may withdraw their contributions at any time prior to fifteen
days before the stock is purchased, and such contributions will be returned to
the participants without interest. The purchase prices is equal to 85% of the
lower of (i) the market price of the Company's Common Stock immediately before
the beginning of the applicable period or (ii) the market price of the Company's
Common Stock at the time of the purchase. As of December 31, 1996, no shares had
been purchased under the ESPP.
Employee Benefit Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their pretax earnings up to the Internal Revenue Service's annual
contribution limit. The Company is not required to contribute to the Savings
Plan and has made no contributions since the inception of the Savings Plan.
9. INCOME TAXES
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $37.9 million and $37.7 million,
respectively. The federal net operating loss carryforwards will expire at
various dates beginning in 2009 through 2011. The state net operating loss
carryforwards will expire at various dates beginning in 1999 through 2001.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
------- --------
(In thousands)
<S> <C> <C>
Net operating loss carryforwards .......... $ 2,200 $ 15,200
Research credits (expiring 2009-2011) ..... 100 400
Non-deductible merger and acquisition costs -- 1,300
Purchased in-process technology ........... 140 1,400
Other ..................................... 120 900
------- --------
Total deferred tax assets ............ 2,560 19,200
Valuation allowance for deferred tax assets (2,560) (19,200)
------- --------
Net deferred tax assets .............. $ -- $ --
======= ========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $2.5 million and $16.6 million during the years ended December 31,
1995 and 1996, respectively.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
- 57 -
<PAGE> 58
10. NOVO MEDIAGROUP, INC. NOTE RECEIVABLE
During 1996, the Company advanced amounts under notes and advances
receivable to Novo MediaGroup, Inc. ("Novo") in the amount of $629,000, of which
$330,000 was evidenced by an 8% promissory note convertible into shares of Novo
common stock. Based on management's assessment of the financial uncertainty with
regard to Novo's ability to repay the outstanding amounts, an impairment reserve
of $629,000 was provided in the quarter ended June 30, 1996.
11. LITIGATION
On November 18, 1996, Kristine Paaso and Laura Lindsey filed a complaint in
the California Superior Court, Santa Clara County, against the Company and
certain of its founders alleging breach of an alleged oral agreement, breach of
fiduciary duty and fraud. The plaintiffs allege that they participated in the
creation of the Company's business plan and were entitled to participate as
officers and shareholders of the Company. The complaint seeks an unspecified
amount of damages, including punitive damages. The Company has filed a demurrer
to this complaint and intends to defend this action vigorously. Although it is
too early to ascertain the possible outcome of this litigation, an unfavorable
outcome could have an adverse effect on the Company's business, results of
operations and financial condition.
The Company is subject to other 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.
12. SIGNIFICANT AGREEMENTS
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 the "Net Search" button on the Netscape
home page. These agreements provide 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 $10.0 million over the course of the year.
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 (see Note 13.)
In May 1996, the Company entered into advertising agreements with Netscape
to deliver a guaranteed number of Netscape advertising impressions through the
Company's services. As consideration for such advertising services, Netscape
agreed to reduce the $10.0 million Premier Provider obligation by $3.0 million,
contingent upon delivery of a specified number of advertising impressions, which
was reclassified to deferred revenue to be recognized over the term of the
agreement (one year) based upon delivery of a specified number of advertising
impressions. As of December 31, 1996, approximately $1.8 million in revenue has
been recognized as a result of these agreements.
13. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On February 25, 1997, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its Common Stock to the
public.
In March 1997, Netscape agreed to extend the provisions of the agreements
discussed in Note 12 to April 30, 1997. In March 1997, the Company also entered
into an agreement to continue the Premier Provider arrangement for the Excite
brand, and entered a Marquee Provider agreement for the WebCrawler brand
covering the period
- 58 -
<PAGE> 59
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, $5.75
million will be paid in cash ($5.25 million in 1997 and $500,000 in 1998) and
$2.5 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.
Effective on 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.
In March 1997, the Company entered into a revolving line of credit for $6.0
million which will replace the existing line of credit (see Note 4.) This line
of credit will mature in one year, bear interest at rates ranging from the
bank's prime rate to prime plus .25%, and will be collateralized by a security
interest in all assets of the Company.
- 59 -
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXCITE, INC.
Date: March 28, 1997 By: /s/ ROBERT C. HOOD
-----------------------------------------
ROBERT C. HOOD
Executive Vice President, Chief
Administrative Officer and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints George Bell and Robert C. Hood, and each of them,
his or her true and lawful attorneys-in-fact, with full power of substitution,
for him and in his name, place and stead in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Report, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------- ---------------------------------- ---------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ GEORGE BELL President, Chief Executive Officer March 28, 1997
- ----------------------- and Director
George Bell
PRINCIPAL FINANCIAL AND PRINCIPLE ACCOUNTING OFFICER:
/s/ ROBERT C. HOOD Executive Vice President, Chief March 28, 1997
- ----------------------- Administrative Officer and Chief
Robert C. Hood Financial Officer
ADDITIONAL DIRECTORS:
/s/ JOSEPH R. KRAUS Acting General Manager and March 28, 1997
- ----------------------- Director
Joseph R. Kraus
/s/ VINOD KHOSLA Director March 28, 1997
- -----------------------
Vinod Khosla
/s/ DONN DAVIS Director March 28, 1997
- -----------------------
Donn Davis
/s/ GEOFFREY Y. YANG Director March 28, 1997
- -----------------------
Geoffrey Y. Yang
/s/ STEPHEN M. CASE Director March 28, 1997
- -----------------------
Stephen M. Case
</TABLE>
- 60 -
<PAGE> 61
Exhibit
Number Exhibit Title
- ------ -----------------------------------------------------------------------
2.01 - Agreement and Plan of Reorganization dated as of August 7, 1996 by
and among the Registrant, Excite Acquisition Corporation, The McKinley
Group, Inc., Isabel Maxwell, Christine Maxwell, David Hayden, Roger
Malina and Daniel Lynch. (1)
2.02 - Agreement of Merger dated as of August 30, 1996 by and between Excite
Acquisition Corporation and the McKinley Group, Inc. (1)
3.01 - Registrant's Amended and Restated Articles of Incorporation. (2)
3.02 - Registrant's Bylaws, as amended. (3)
4.01 - Form of Specimen Certificate for Registrant's Common Stock. (4)
4.02 - Restated and Amended Investors' Rights Agreement. (4)
4.03 - Amendment to Restated and Amended Investors' Rights Agreement dated
as of August 1, 1996. (9)
4.04 - Amendment to Restated and Amended Investors' Rights Agreement dated
as of November 25, 1996.
4.05 - Registration Rights Agreement dated as of November 25, 1996 by and
among the Registrant, America Online, Inc. and AOL Ventures, Inc. (9)
<PAGE> 62
4.06 - Voting Agreement dated as of November 25, 1996 by and among the
Registrant and certain shareholders.
4.07 - Letter Agreement dated as of November 25, 1996 by and among certain
shareholders of Excite, Inc.
9.01 - Voting Trust Agreement dated as of November 25, 1996 by and among the
Registrant, America Online, Inc., AOL Ventures, Inc. and Richard
Redding. (9)
*10.01 - Registrant's 1995 Equity Incentive Plan. (3)
*10.02 - Registrant's 1996 Equity Incentive Plan, as amended. (9)
*10.03 - Registrant's 1996 Directors Stock Option Plan. (3)
*10.04 - Registrant's 1996 Employee Stock Purchase Plan. (3)
*10.05 - Registrant's 401(k) Plan. (9)
10.06 - Form of Indemnity Agreement entered into by Registrant with each of
its directors. (3)
10.07 - Bridge Line of Credit Agreement, dated as of February 23, 1996, among
the Registrant and Kleiner Perkins Caufield & 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. (3)
*10.08 - Promissory Note, dated as of February 27, 1996, issued by
Graham F. Spencer to the Registrant. (3)
*10.09 - Secured Full Recourse Promissory Note, dated as of March 15,
1996, issued by Brett T. Bullington to the Registrant. (9)
*10.10 - Stock Pledge Agreement dated as of March 15, 1996 by and
between the Registrant and Brett T. Bullington. (9)
*10.11 - Offer Letter dated January 25, 1996, as amended, to Richard B.
Redding. (3)
*10.12 - Offer Letter dated November 30, 1995, as amended, to Brett T.
Bullington. (3)
*10.13 - Offer Letter dated March 6, 1996, to Cary H. Masatsugu. (3)
*10.14 - Offer Letter dated January 16, 1996, as amended, to George
Bell. (3)
*10.15 - Offer Letter dated as of November 15, 1996, to Robert C. Hood.
(9)
*10.16 - Offer Letter dated as of September 23, 1996 to William White
Jr. (9)
*10.17 - Offer Letter dated as of November 21, 1996, to Jed Simmons. (9)
*10.18 - Consulting Agreement dated as of November 19, 1996 by and
between the Registrant and Robert C. Hood. (9)
*10.19 - Consulting Agreement dated as of November 22, 1996 by and
between the Registrant and Jed Simmons. (9)
10.20 - Office Lease, dated as of January 22, 1996, by and between the
Registrant and McCandless Land and Cattle Company. (3)
10.21 - Series D Preferred Stock Purchase Agreement dated as of March 8, 1996
by and among the Registrant and various investors. (5)
10.22 - Warrant to purchase 650,000 shares of Common Stock dated March 8,
1996 issued to AOL Ventures, Inc. (5)
#10.23 - Net Search Program -- Premier Provider Agreement dated as of
March 28, 1996 between the Registrant and Netscape Communications
Corporation. (6)
10.24 - Office Lease, dated as of August 9, 1996, by and between the
Registrant and Martin/Campus Associated, L.P. (7)
10.25 - Acquisition Agreement dated as of November 25, 1996 by and among the
Registrant, America Online, Inc. and Global Network Navigator, Inc. (9)
<PAGE> 63
10.26 - Net Search Program - Premier Provider Agreement dated as of March 27,
1996, and as amended March 27, 1996 and January 21, 1997, between The
McKinley Group, Inc. and Netscape Communications Corporation. (8)
11.01 - Statement of earnings per share. (9)
21.01 - List of Subsidiaries. (9)
23.01 - Consent of Ernst & Young LLP, Independent Auditors.
24.01 - Power of Attorney (see signature page.)
27.01 - Financial Data Schedule (EDGAR version only.)
- ----------
* Indicates a management contract or compensatory plan or arrangement.
# Confidential treatment was ordered or has been requested with respect
to certain portions of these agreements. 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 September 12, 1996, as an
exhibit to the Registrant's Form 8-K (File No. 0-28064) regarding the
acquisition of The McKinley Group, Inc.
(2) Previously filed with the Commission on July 4, 1996, as an exhibit to
the Registrant's Registration Statement on Form S-8 (File No.
333-07625).
(3) Previously filed with the Commission on March 11, 1996, as an exhibit
to the Registrant's Registration Statement on Form SB-2 (File No.
333-2328-LA)
(4) Previously filed with the Commission on March 29, 1996, as an exhibit
to Amendment No. 1 to the Registrant's Registration Statement on Form
SB-2 (File No. 333-2328-LA)
(5) Previously filed with the Commission on April 3, 1996, as an exhibit to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2
(File No. 333-2328-LA)
(6) Previously filed with the Commission on April 3, 1996, as an exhibit to
Amendment No. 3 to the Registrant's Registration Statement on Form SB-2
(File No. 333-2328-LA)
(7) Previously filed with the Commission on November 8, 1996, as an exhibit
to the Registrant's Form 10-Q SB (File No. 0-28064) for the period
ended September 30, 1996.
(8) Previously filed with the Commission on February 28, 1997, as an
exhibit to the Registrant's Form 10-Q SB/A (File No. 0-28064).
(9) Previously filed with the Commission on March 3, 1997, as an exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
333-22669)
<PAGE> 1
Exhibit 4.04
AMENDMENT TO RESTATED AND AMENDED
INVESTORS' RIGHTS AGREEMENT
This Amendment (the "Amendment") is entered into as of November 25,
1996, by and among Excite, Inc., a California corporation ("Excite") and the
other persons and entities whose names are set forth on the signature pages
hereto, including AOL Ventures, Inc. ("AOL Ventures"), a Delaware corporation
and wholly owned subsidiary of America Online, Inc., a Delaware corporation
("AOL"). This Amendment amends that certain Restated and Amended Investors'
Rights Agreement dated as of March 8, 1996 by and among Excite and the
investors listed on the signature pages thereto, as further amended by that
certain Amendment to Restated and Amended Investors' Rights Agreement dated as
of August 1, 1996 by and among Excite and the investors listed on the signature
pages thereto (the "Rights Agreement").
RECITALS
A. On March 8, 1996, Excite entered into the Rights Agreement
with certain investors, including AOL Ventures, in connection with the sale of
its Series D Preferred Stock. On August 1, 1996, the Rights Agreement was
amended in connection with the acquisition by Excite of Go Media, Inc.
B. AOL and Excite have entered into a certain Acquisition
Agreement dated as of November 25, 1996 (the "Acquisition Agreement") and other
related agreements, pursuant to which AOL will be issued or have the right to
be issued shares of Excite's Series E Preferred Stock. The shares of Common
Stock into which such Series E Preferred Stock is convertible shall have the
registration rights set forth in that certain Registration Rights Agreement
dated as of November 25, 1996 by and between Excite, AOL and AOL Ventures (the
"Registration Rights Agreement").
C. The Registration Rights Agreement provides AOL with the right
to request various types of registrations of Excite securities held by it (the
"AOL Registrations"). For various reasons, AOL desires and it would not be
practical for the parties to the Rights Agreement (the "Investors") to have
piggyback registration rights with respect to the AOL Registrations and Excite
is therefore asking the Investors to waive such rights. In addition, certain
changes are needed in order for the Rights Agreement and Registration Rights
Agreement to be implemented in parallel without any conflicts.
AGREEMENT
Now, Therefore, in consideration of the mutual promises and covenants
set forth herein, Excite and the Investors hereby agree that the Rights
Agreement shall be amended as follows:
1. Section 2.1 of the Rights Agreement is amended to add thereto
a new definition as follows:
"AOL Registrable Securities". "AOL Registrable Securities"
means the shares of Common Stock issued or issuable to America Online,
Inc. ("AOL") upon the conversion of the Series E Preferred Stock
issued by the Company to AOL pursuant to (i) the Acquisition Agreement
dated as of November 25, 1996, between the Company, AOL and Global
Network Navigator, Inc. (the "Acquisition Agreement"), (ii) the
Operating Agreement, dated as of November 25, 1996, between the
Company and AOL, (iii) the
<PAGE> 2
exercise by AOL of its Warrant dated March 8, 1996, as amended,
and (iv) the exchange of shares of Common Stock of the Company held by
AOL as of November 25, 1996 in connection with the closing of the
transactions provided for in the Acquisition Agreement."
2. The fourth sentence of Section 2.2(b) of the Rights Agreement
shall be amended to read in its entirety as follows:
"Notwithstanding any other provision of this Section 2.2, if
the underwriter(s) advise(s) the Company in writing that marketing
factors require a limitation of the number of securities to be
underwritten then the Company shall so advise all Holders of
Registrable Securities which would otherwise be registered and
underwritten pursuant hereto, and the number of Registrable Securities
that may be included in the underwriting shall be reduced as required
by the underwriter(s) and allocated among the Holders of Registrable
Securities and the holders of any AOL Registrable Securities entitled
to be included in such registration on a pro rata basis according to
the number of Registrable Securities and AOL Registrable Securities
then outstanding held by each Holder requesting registration
(including the Initiating Holders) and each holder of AOL Registrable
Securities entitled to participate in such registration, respectively;
provided, however, that the number of Registrable Securities and AOL
Registrable Securities to be included in any such underwriting and
registration shall not be reduced unless all other securities of the
Company are first entirely excluded from the underwriting and
registration."
3. Section 2.3 of the Rights Agreement shall be amended to read
in its entirety as follows:
"2.3 Piggyback Registrations. The Company shall notify all
Holders of Registrable Securities in writing at least thirty (30) days
prior to filing any registration statement under the Securities Act
for purposes of effecting a public offering of securities of the
Company (including, but not limited to, registration statements
relating to secondary offerings of securities of the Company, but
excluding registration statements relating to any registration under
Section 2.2 or 2.4 of this Agreement or to any employee benefit plan
or a corporate reorganization) and will afford each such Holder an
opportunity to include in such registration statement all or any part
of the Registrable Securities then held by such Holder together with
the holders of any other securities of the Company entitled to
inclusion in such registration, on a pro-rata basis. Each Holder
desiring to include in any such registration statement all or any part
of the Registrable Securities held by such Holder shall, within twenty
(20) days after receipt of the above-described notice from the
Company, so notify the Company in writing, and in such notice shall
inform the Company of the number of Registrable Securities such Holder
wishes to inched in such registration statement. If a Holder decides
not to request to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder
shall nevertheless continue to have the right to include any
Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to
offerings of its securities, all upon the terms and conditions set
forth herein. Notwithstanding the foregoing, the registration rights
granted to the Investors in this Section 2.3 shall not be applicable
with respect to any registrations effected under that certain
Registration Rights Agreement dated as of November 25, 1996, by and
between Excite, AOL and AOL Ventures, Inc."
2
<PAGE> 3
4. Subsections (b)(2) and (3) of Section 2.4 shall be amended to
read in their entirety as follows:
"2.4(b)(2) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public of less than
one million seven hundred fifty thousand dollars ($1,750,000);
(3) if the Company shall furnish to the Holders a certificate
signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such
time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement no more than once during
any twelve month period for a period of not more than ninety (90) days
after receipt of the request of the Holder or Holders under this
Section 2.4; or"
5. AOL Ventures, Inc. shall be removed as a party to the Rights
Agreement.
6. The Rights Agreement as modified herein shall remain in full
force and effect as so modified.
7. For the convenience of the parties, this Amendment may
be executed in one or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same
instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
EXCITE, INC.
By: /s/George Bell
-------------------------------
George Bell, President
INVESTORS:
INSTITUTIONAL VENTURE PARTNERS VI INSTITUTIONAL VENTURE
By: Its Managing General Partner MANAGEMENT VI
Institutional Venture Management VI
By: /s/ GEOFFREY Y. YANG By: /s/ GEOFFREY Y. YANG
--------------------------------- ---------------------------------
GEOFFREY Y. YANG, GENERAL PARTNER GEOFFREY Y. YANG, GENERAL PARTNER
IVP FOUNDERS FUND I, L.P. KLEINER PERKINS CAUFIELD &
By: Its General Partner BYERS VII
Institutional Venture Management VI
By: /s/ GEOFFREY Y. YANG By: /s/ VINOD KHOSLA
--------------------------------- ---------------------------------
GEOFFREY Y. YANG, GENERAL PARTNER VINOD KHOSLA, GENERAL PARTNER
KPCB VII FOUNDERS FUND KPCB INFORMATION SCIENCES
ZAIBATSU FUND II
By: Its General Partner
KPCB VII Associates
By: /s/ VINOD KHOSLA By /s/ VINOD KHOSLA
--------------------------------- ---------------------------------
VINOD KHOSLA, GENERAL PARTNER VINOD KHOSLA, GENERAL PARTNER
TRIBUNE COMPANY AOL VENTURES, INC.
By: /s/Donn Davis By: /s/Miles Gilburn
--------------------------------- ---------------------------------
Name: Donn Davis Name: Miles Gilburn
------------------------------ -----------------------------
Title: President Title: Senior VP, Corporate
---------------------------- Development
-----------------------------
[AMENDMENT TO INVESTORS' RIGHTS AGREEMENT]
4
<PAGE> 5
CHARLES RIVER PARTNERSHIP VII CUC INTERNATIONAL INC.
By: /s/ Richard M. Burns, Jr. By:
---------------------------- ---------------------------------
Name: Richard M. Burns, Jr. Name:
---------------------------- ---------------------------------
Title: General Partner
---------------------------- ---------------------------------
IDG HOLDINGS, INC. ITOCHU TECHNOLOGY, INC.
By: By: /s/ Sigeki Nishiyamo
---------------------------- ---------------------------------
Name: Name: Sigeki Nishiyamo
---------------------------- ---------------------------------
Title: Title: Executive Vice President
---------------------------- ---------------------------------
ITOCHU CORPORATION F&W INVESTMENTS 1994
By: /s/ Eizo Kobayashi By: /s/Laird Simons
----------------------------- --------------------------------
Name: Eizo Kobayashi Name: Laird Simons
----------------------------- -------------------------------
Title: General Manager, Title: Partner
Information Technology ------------------------------
and Information Department
-----------------------------
ROSEWOOD STONE GROUP, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P.
By: /s/ Claudia Stroud By: /s/Richard Stubblefield
--------------------------- -------------------------------
Name: Claudia Stroud Name: Richard Stubblefield
--------------------------- -----------------------------
Title: President Title: Managing Director
--------------------------- ----------------------------
/s/ Kevin Altis /s/ Robert Pittman
- ------------------------------- -----------------------------------
KEVIN ALTIS ROBERT PITTMAN
/s/ Julie Gomoll /s/ Rachel Matthews
- ------------------------------- -----------------------------------
JULIE GOMOLL RACHEL MATTHEWS
[AMENDMENT TO INVESTORS' RIGHTS AGREEMENT]
5
<PAGE> 1
Exhibit 4.06
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is made and entered into as of
November 25, 1996, by and among Excite, Inc., a California corporation
("Excite"), America Online, Inc., a Delaware corporation ("AOL"), and the
parties other than Excite and AOL whose signatures are affixed hereto (the
"Shareholders"). AOL and the Shareholders are sometimes collectively referred
to herein as the "Holders."
A. AOL has entered into an Acquisition Agreement (the
"Acquisition Agreement") and an Operating Agreement with Excite, each dated as
of November 25, 1996, pursuant to which Excite will issue to AOL an aggregate
of 1,950,000 shares of Excite Series E Preferred Stock. In addition, AOL holds
680,330 shares of Excite Common Stock and a warrant to purchase 650,000 shares
of Excite Common Stock.
B. It is a condition to the closing of the Acquisition Agreement
that Excite make such arrangements as are necessary to ensure that AOL will
have the right to have an AOL representative elected to the Board of Directors
of Excite for so long as AOL holds at least 1,315,165 shares of Excite stock on
an as converted to Common Stock basis.
C. AOL, the Shareholders and Excite desire to enter into this
Agreement to set forth their agreements and understandings with respect to how
shares of Excite's Common and Preferred Stock ("Capital Stock") held by them
will be voted with respect to the election of an AOL representative to the
Excite Board of Directors.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants made herein, the parties hereby agree as follows:
1. ELECTION OF BOARD OF DIRECTORS.
1.1 VOTING; AOL REPRESENTATION. During the term of this
Agreement, each Holder agrees to vote all shares of Capital Stock of Excite now
or hereafter directly or indirectly owned (of record or beneficially) by such
Holder, in such manner as may be necessary to elect (and maintain in office),
as a member of Excite's Board of Directors, one individual designated by AOL
from time to time in a writing delivered to Excite and signed by AOL. For
purposes of this Agreement, any individual who is designated for election to
Excite's Board of Directors pursuant to this Section 1.1 is hereinafter
referred to as the "AOL Board Designee."
1.2 CHANGES IN AOL BOARD DESIGNEES. From time to time
during the term of this Agreement, AOL may, in its sole discretion:
(a) elect to remove from Excite's Board of Directors the
incumbent AOL Board Designee who occupies a Board seat for which AOL
is entitled to designate the AOL Board Designee under Section 1.1;
and/or
(b) designate a new AOL Board Designee for election to a
Board seat for which AOL is entitled to designate the AOL Board
Designee under Section 1.1 (whether to replace a prior AOL Board
Designee or to fill a vacancy in such Board seat).
<PAGE> 2
In the event of such a removal and/or designation of an AOL Board Designee under
this Section 1.2, the Holders shall vote their shares of Excite's Capital Stock
as provided in Section 1.1 to cause: (a) the removal from Excite's Board of
Directors of the AOL Board Designee so designated for removal by AOL; and (b)
the election to Excite's Board of Directors of any new AOL Board Designee so
designated for election to Excite's Board of Directors by AOL.
1.3 NOTICE. Excite shall promptly give each of the Holders written
notice of any proposal by AOL to remove or elect a new AOL Board Designee. In
any election of directors pursuant to this Section 1, the Holders shall vote
their shares in a manner sufficient to elect to Excite's Board of Directors the
individuals to be elected thereto as provided in this Section 1.
2. FURTHER ASSURANCES. Each of the Holders and Excite agree not to vote
any shares of Capital Stock, or to take any other actions, that would in any
manner defeat, impair, or adversely affect the stated intentions of the parties
under Section 1 of this Agreement.
3. ENFORCEMENT OF AGREEMENT. Each of the Shareholders acknowledges and
agrees that any breach by any of him, her or it of this Agreement shall cause
AOL irreparable harm which may not be adequately compensable by money damages.
Accordingly, in the event of a breach or threatened breach by a Shareholder of
any provision of this Agreement, Excite and AOL shall each be entitled to the
remedies of specific performance, injunction or other preliminary or equitable
relief, including the right to compel any such breaching Shareholder, as
appropriate, to vote such Shareholder's shares of Capital Stock of Excite in
accordance with the provisions of this Agreement, in addition to such other
rights remedies as may be available to Excite or AOL for any such breach or
threatened breach, including but not limited to the recovery of money damages.
4. TERM. This Agreement shall commence as of the Closing (as such
term is defined in Section 1.4 of the Acquisition Agreement) and shall
terminate upon the first to occur of the following:
(a) Such time as AOL or its wholly-owned subsidiaries hold less than
1,315,165 shares of Excite stock on an as converted to Common Stock basis
(as adjusted for stock splits or similar events);
(b) The delivery by AOL of a written notice to Excite to
terminate this Agreement;
(c) Immediately prior to the closing of any of the following: (i)
any consolidation or merger of Excite with or into any other corporation
or corporations in which the holders of Excite's outstanding shares
immediately before such consolidation or merger do not, immediately after
such consolidation or merger, retain stock representing a majority of the
voting power of the surviving corporation of such consolidation or merger
or stock representing a majority of the voting power of a corporation that
wholly owns, directly or indirectly, the surviving corporation of such
consolidation or merger; (ii) the sale, transfer or assignment of
securities of Excite representing a majority of the voting power of all
Excite's outstanding voting securities by the holders thereof to an
acquiring party in a single transaction or series of related transactions;
(iii) any other sale, transfer or assignment of securities of Excite
representing over fifty percent (50%) of the voting power of Excite's then
outstanding
2
<PAGE> 3
voting securities by the holders thereof to an acquiring party; or (iv)
the sale of all or substantially all Excite's assets.
5. GENERAL PROVISIONS.
5.1 ENTIRE AGREEMENT; CAPTIONS. This Agreement and the agreements to
be executed and delivered in connection with the Acquisition Agreement, together
constitute the entire agreement and understanding between the parties and there
are no agreements or commitments with respect to the transactions contemplated
herein except as set forth in this Agreement and the Acquisition Agreement. This
Agreement and the Acquisition Agreement supersede any prior offer, agreement or
understanding between the parties with respect to the transactions contemplated
hereby. The captions in this Agreement are for convenience only and shall not be
considered a part of or affect the construction or interpretation of any
provision of this Agreement.
5.2 NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be personally or sent by certified or
registered United States mail, postage prepaid, or sent by nationally recognized
overnight express courier and addressed as follows:
(a) if to Excite, at:
Excite, Inc.
1091 N. Shoreline Blvd., Suite 200
Mountain View, CA 94043
Attention: President
Facsimile: 415/943-2888
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 9306
Attention: Mark C. Stevens
Facsimile: 415/494-0674
(b) If to AOL:
America Online, Inc.
22000 AOL Way
Dulles, VA 20166
Attention: General Counsel
Facsimile: 703/265-2208
with a copy to:
Piper & Marbury L.L.P.
1200 Nineteenth Street, NW
Washington, DC. 20036-2430
Attention: Edwin M. Martin
Facsimile; 202/223-2085
3
<PAGE> 4
5.3 AMENDMENT; WAIVER. Any term or provision of this Agreement may
be amended only by a writing signed by AOL, Excite and a majority of the
Shareholders, provided however, that any Shareholder who does not agree to such
amendment shall not be bound by such amendment but will be otherwise bound to
the terms of this Agreement that are not in conflict with such amendment. The
observance of any term or provision of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound by such waiver. No waiver by a
party of any breach of this Agreement will be deemed to constitute a waiver of
any other breach or any succeeding breach.
5.4 NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in
this Agreement is intended, or shall be construed, to confer upon or to give any
person, firm or corporation, other than the parties hereto, any rights or
remedies under or by reason of this Agreement.
5.5 EXECUTION IN COUNTERPARTS. For the convenience of the parties,
this Agreement may be executed in one or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same instrument.
5.6 ASSIGNMENT. These rights and obligations of the parties to this
Agreement may not be delegated or assigned by any party hereto without the prior
written consent of the other party and any such attempted delegation or
assignment shall be void.
5.7 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California (excluding
application of any choice of law doctrines that would make applicable the law of
any other state or jurisdiction) and, where appropriate, applicable federal law.
5.8 SEVERABILITY. If any provision of this Agreement is for any
reason and to any extent deemed to be invalid or unenforceable, then such
provision shall not be voided but rather shall be enforced to the maximum extent
then permissible under then applicable law and so as to reasonably effect the
intent of the parties hereto, and the remainder of this Agreement will remain in
full force and effect.
5.9 ATTORNEYS' FEES. Should a suit or arbitration be brought to
enforce or interpret any provision of this Agreement, the prevailing party shall
be entitled to recover reasonable attorneys' fees to be fixed in amount by the
Court or the Arbitrator(s) (including without limitation costs, expenses and
fees on any appeal). The prevailing party will be entitled to recover its costs
of suit or arbitration, as applicable, regardless of whether such suit or
arbitration proceeds to a final judgment or award.
5.10 SECTIONS AND EXHIBITS. Except as otherwise indicated, all
references in this Agreement to "Section (s)" and "Exhibit(s)" are intended to
refer to Section (s) to this Agreement and Exhibit(s) to this Agreement,
respectively.
5.11 DISPUTE RESOLUTION. All disputes arising under this Agreement
between AOL and Excite shall be resolved pursuant to the dispute resolution
procedures set forth in the Commercial Agreement.
4
<PAGE> 5
5.12 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
will not be construed for or against either party.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement on the date and
year first above written.
EXCITE, INC.: AMERICA ONLINE, INC.:
- ----------------------------------- --------------------------------------
By: /s/Richard Redding By: /s/ Miles Gilburn
-------------------------------- ----------------------------------
Name: Richard Redding Name: Miles Gilburn
------------------------------ ---------------------------------
Title: Vice President, Title: Senior VP, Corporate
Development
Finance and Administration --------------------------------
---------------------------
SHAREHOLDERS:
- -----------------------------------
INSTITUTIONAL VENTURE PARTNERS IVP FOUNDERS FUND I, L.P.
VI, L.P.
By Its General Partner By Its General Partner
Institutional Venture Management Institutional Venture Management
VI, L.P. VI, L.P.
By /s/ Geoffrey Y. Yang By /s/ Geoffrey Y. Yang
----------------------------- -------------------------------------
Geoffrey Y. Yang, Geoffrey Y. Yang,
General Partner General Partner
INSTITUTIONAL VENTURE KLEINER PERKINS CAUFIELD & BYERS VIII
MANAGEMENT VI, L.P.
By /s/ Geoffrey Y. Yang By /s/ Vinod Khosla
----------------------------- -------------------------------------
Geoffrey Y. Yang, Vinod Khosla, General Partner
General Partner
KPCB VII FOUNDERS FUND KPCB INFORMATION SCIENCES ZAIBATSU
FUND II
By /s/ Vinod Khosla By /s/ Vinod Khosla
----------------------------- ----------------------------------
Vinod Khosla, General Partner Vinod Khosla, General Partner
ITOCHU TECHNOLOGY, INC. ITOCHU CORPORATION
By /s/Sigeki Nishiyamo By /s/Eizo Kobayashi
----------------------------- -------------------------------
Name Sigeki Nishiyamo Name Eizo Kobayashi
--------------------------- -----------------------------
Title Executive Vice President Title General Manager, Information
-------------------------- Technology and Information
Department
----------------------------
(SIGNATURES CONTINUED ON NEXT PAGE)
6
<PAGE> 7
TRIBUNE COMPANY AOL VENTURES, INC.
By /s/ David Hiller By /s/ Miles Gilburn
------------------------------ ---------------------------------
Name David Hiller Name Miles Gilburn
---------------------------- -------------------------------
Title Senior VP Title Senior VP, Corporate
----------------------------- Devleopment
------------------------------
/s/ Robert W. Pittman /s/ Vinod Khosla
---------------------------------- ------------------------------------
Robert W. Pittman Vinod Khosla
/s/ Joseph R. Kraus, IV /s/ Graham F. Spencer
---------------------------------- ------------------------------------
Joseph R. Kraus, IV Graham F. Spencer
/s/ Brett Bullington /s/ Julie Gomoll
---------------------------------- ------------------------------------
Brett Bullington Julie Gomoll
/s/ Jeff McFadden /s/ Kevin Altis
---------------------------------- ------------------------------------
Jeff McFadden Kevin Altis
IDG HOLDINGS, INC.
/s/ Rachel Matthew By
- ----------------------------------- ------------------------------------
Rachel Matthews
Name ________________________________
Title _______________________________
CHARLES RIVER PARTNERSHIP VII CUC INTERNATIONAL INC.
By /s/ Richard M. Burns Jr. By
------------------------------- ------------------------------------
Name Richard M. Burns Jr. Name
------------------------------- ------------------------------------
Title General Partner
------------------------------- ------------------------------------
(SIGNATURE PAGE TO EXCITE/AOL VOTING AGREEMENT)
7
<PAGE> 8
ROSEWOOD STONE GROUP, INC.
By /s/ Claudia Stroud
-----------------------------
Name Claudia Stroud
-----------------------------
Title President
------------------------------
(SIGNATURE PAGE TO EXCITE/AOL VOTING AGREEMENT)
8
<PAGE> 1
EXHIBIT 4.07
Dated as of November 25, 1996
Institutional Venture Partners VI
Institutional Venture Management VI
IVP Founders Fund I, L.P.
Tribune Company
Kleiner Perkins Caufield & Byers VII
KPCB VII Founders Fund
KPCB Information Sciences Zaibatsu Fund II
(collectively, the "Participating Shareholders")
Re: Registration Rights for Common Stock of Excite, Inc.
Ladies and Gentlemen:
This Letter Agreement ("Letter Agreement") is entered into as of
November 25, 1996, by and among Excite, Inc., a California corporation
("Excite"), America Online, Inc., a Delaware corporation ("AOL"), AOL Ventures,
Inc., a Delaware corporation and a wholly owned subsidiary of AOL ("AOL
Ventures") and the Excite shareholders whose names are set forth on the
signature pages hereto (the "Participating Shareholders"). Reference is hereby
by made to the following agreements:
(1) Restated and Amended Investors' Rights Agreement
("Investors' Rights Agreement") dated as of March 8, 1996 by and among
Excite and the investors (the "Investors") listed on the signature
pages thereto, as further amended by (i) Amendment to the Investors'
Rights Agreement dated as of August 1, 1996 by and among Excite and
the Investors, and (ii) Amendment to the Investors' Rights Agreement
dated as of November 25, 1996 by and among Excite and the Investors
(the "Second Amendment"); and
(2) Registration Rights Agreement ("Registration Rights
Agreement") dated as of November 25, 1996 by and between Excite, AOL
and AOL Ventures ("AOL Ventures") (AOL and AOL Ventures are
collectively referred to herein as "AOL").
As of November 25, 1996, AOL and Excite have entered into an
Acquisition Agreement (the "Acquisition Agreement") and other related
agreements, including the Registration Rights Agreement, pursuant to which AOL
will be issued or have the right to be issued shares of Excite's Series E
Preferred Stock which will be convertible, pursuant to Excite's Articles of
Incorporation, into shares of Excite Common Stock.
<PAGE> 2
Dated as of November 25, 1996
Page 2
The Registration Rights Agreement entered into concurrently with the
Acquisition Agreement is intended to supersede the Investors' Rights Agreement
with respect to all registration rights to be held by AOL with respect to the
shares of Excite Common Stock beneficially owned by it (but does not otherwise
negatively affect the rights of the other parties to the Investors' Rights
Agreement) and by its terms provides AOL with the right to request various
types of registrations of Excite securities held by it (the "AOL
Registrations"). As part of the transaction contemplated by the Acquisition
Agreement AOL negotiated for and desires that none of the Investors under the
Investors' Rights Agreement have piggyback registration rights with respect to
the AOL Registrations. Excite has therefore requested that the Investors, and
the Investors have agreed, to waive such rights by executing the Second
Amendment to the Investors' Rights Agreement.
In consideration of the foregoing and intending to be bound hereby, the
parties to this Letter Agreement agree as follows:
1. Notwithstanding any provision of the Second Amendment to the
Investors' Rights Agreement to the contrary, Excite shall notify the
Participating Shareholders who hold Registrable Securities (as such term is
defined in the Investors' Rights Agreement) in writing at least thirty (30)
days prior to filing by Excite of any registration statement under the
Securities Act on Form S-3 pursuant to the request of AOL under Section 1.3 of
the Registration Rights Agreement.
2. Each Participating Shareholder will be afforded an opportunity
to include in such registration statement all or any part of the Registrable
Securities then held by such Participating Shareholder. Each Participating
Shareholder desiring to include in any such registration statement all or any
part of the Registrable Securities held by such Participating Shareholder
shall, within twenty (20) days after receipt of the above-described notice from
Excite, so notify Excite in writing, and in such notice shall inform Excite of
the number of Registrable Securities such Participating Shareholder wishes to
include in such registration statement. If a Participating Shareholder decides
not to include all of its Registrable Securities in any registration statement
thereafter filed by Excite, such Participating Shareholder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
Excite with respect to offerings of its securities upon the terms and
conditions set forth in the Investors' Rights Agreement.
3. If AOL intends to distribute AOL Registrable Securities
pursuant to a registration requested under Section 1.3 of the Registration
Rights Agreement by means of an underwriting, the right of any Participating
Shareholder's Registrable Securities to be included in such registration
statement pursuant to this Letter Agreement shall be conditioned upon such
Participating Shareholders participating in such underwriting and the inclusion
of such Participating Shareholder's Registrable Securities in the underwriting
to the extent provided herein. All Participating Shareholders proposing to
distribute their Registrable Securities through such underwriting shall enter
into an underwriting agreement in customary form with the managing underwriter
or underwriter(s) selected for such underwriting. Notwithstanding any
<PAGE> 3
Dated as of November 25, 1996
Page 3
other provision of this Letter Agreement or of the Registration Rights
Agreement, if the managing underwriter(s) determine(s) in good faith that
marketing factors require a limitation of the number of share to be
underwritten, then the managing underwriter(s) may exclude shares (including
Registrable Securities) from the registration and the underwriting, and the
number of shares that may be included in the registration and the underwriting
shall be allocated pro-rata among the AOL Registrable Securities and the
Registrable Securities of Participating Shareholders based upon the total
number of Registrable Securities held by AOL and each of the Participating
Shareholders. If any Participating Shareholder disapproves of the terms of any
such underwriting, such Participating Shareholder may elect to withdraw
therefrom by written notice to Excite and the underwriter, delivered at least
ten (10) business days prior to the effective date of the registration
statement. Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration. For any
Participating Shareholder which is a partnership or corporation, the partners,
retired partners and shareholders of such Participating Shareholder, or the
estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "Participating Shareholder", and any pro-rata reduction with respect to
such Participating Shareholder shall be based upon the aggregate amount of
shares carrying registration rights owned by all entities and individuals
included in such "Participating Shareholder", as defined in this sentence.
4. The Participating Shareholders' pro-rata share of expenses
incurred in connection with their participation in any registration effected by
Excite at the request of AOL pursuant to Section 1.3 of the Registration Rights
Agreement (excluding underwriters' and brokers' discounts and commission and
fees and expenses of counsel for the Participating Shareholders), including,
without limitation all federal and "blue sky" registration and qualification
fees, printers' and accounting fees, and fees and disbursements of counsel for
Excite, shall be borne by Excite.
5. This Letter Agreement, the Investors' Rights Agreement
and the Registration Rights Agreement constitute and contain the entire
agreement and understanding of the parties with respect to the subject matter
hereof and supersede any and all prior negotiations, correspondence,
agreements, understandings, duties or obligations between the parties
respecting the subject matter hereof. This Letter Agreement may be amended
only by an instrument in writing signed by each of the parties hereto.
6. This Letter Agreement shall be governed by and
construed exclusively in
<PAGE> 4
Dated as of November 25, 1996
Page 4
accordance with the laws of the State of California, excluding that body of law
relating to conflicts of laws.
7. For the convenience of the parties, this Amendment may
be executed in one or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same
instrument.
Please indicate your agreement to the above by executing a copy of this
Letter Agreement where indicated below and returning a copy to Excite.
EXCITE,INC. AOL VENTURES, INC.
By: /s/ George Bell By: /s/ Miles Gilburn
--------------------------------- --------------------------------------
George Bell, President
Name: Miles Gilburn
--------------------------------------
Title: Senior Vice President
Corporate Development
--------------------------------------
AMERICA ONLINE, INC.
Name: /s/ Miles Gilburn
-----------------------------
Title: Senior Vice President
Corporate Development
-----------------------------
PARTICIPATING SHAREHOLDERS:
INSTITUTIONAL VENTURE PARTNERS VI INSTITUTIONAL VENTURE
By: Its Managing General Partner MANAGEMENT VI
Institutional Venture
Management VI
By: /s/ GEOFFREY Y. YANG By: /s/ GEOFFREY Y. YANG
--------------------------------- -------------------------------------
GEOFFREY Y. YANG, GENERAL PARTNER GEOFFREY Y. YANG, GENERAL PARTNER
IVP FOUNDERS FUND I, L.P. KLEINER PERKINS CAUFIELD &
By: Its General Partner BYERS VII
Institutional Venture
Management VI
By: /s/ GEOFFREY Y. YANG By: /s/ VINOD KHOSLA
--------------------------------- -------------------------------------
GEOFFREY Y. YANG, GENERAL PARTNER VINOD KHOSLA, GENERAL PARTNER
(CONTINUED ON NEXT PAGE)
<PAGE> 5
Dated as of November 25, 1996
Page 5
KPCB VII FOUNDERS FUND KPCB INFORMATION SCIENCES
ZAIBATSU FUND II
By: Its General Partner
KPCB VII Associates
By: /s/ VINOD KHOSLA By: /s/ VINOD KHOSLA
------------------------------ ----------------------------------
VINOD KHOSLA, GENERAL PARTNER VINOD KHOSLA, GENERAL PARTNER
TRIBUNE COMPANY
By: /s/Donn Davis
-----------------------------
Name: Donn Davis
---------------------------
Title: President
--------------------------
(SIGNATURE PAGE OF LETTER AGREEMENT, DATED AS OF NOVEMBER 25, 1996)
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 23.01
- --------------------------------------------------------------------------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-07625 pertaining to the 1995 Equity Incentive Plan, 1996
Equity Incentive Plan, 1996 Directors Stock Option Plan and 1996 Employee Stock
Purchase Plan of Excite, Inc.) of our report dated March 27, 1997, with respect
to the consolidated financial statements of Excite, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Palo Alto, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Excite,
Inc.,s Annual Report on Form 10-K for the year ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,971
<SECURITIES> 18,359
<RECEIVABLES> 3,765
<ALLOWANCES> (425)
<INVENTORY> 0
<CURRENT-ASSETS> 26,740
<PP&E> 10,586
<DEPRECIATION> (2,392)
<TOTAL-ASSETS> 47,698
<CURRENT-LIABILITIES> 18,616
<BONDS> 0
0
15,816
<COMMON> 59,999
<OTHER-SE> (50,718)
<TOTAL-LIABILITY-AND-EQUITY> 47,698
<SALES> 0
<TOTAL-REVENUES> 14,757
<CGS> 0
<TOTAL-COSTS> 4,149
<OTHER-EXPENSES> 54,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409
<INCOME-PRETAX> (43,117)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,117)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,117)
<EPS-PRIMARY> (3.65)
<EPS-DILUTED> (3.65)
</TABLE>
