<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28064
EXCITE, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
--------------------
(415) 568-6000
(Registrant's telephone number, including area code)
--------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
As of April 28, 1997, there were 12,359,402 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
- --------------------------------------------------------------------------------
FORM 10-Q
EXCITE, INC.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1: Financial Statements:
Condensed Consolidated Balance Sheets as of March 31,
1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and 1996 . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996 . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 11
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2: Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 3: Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . 20
ITEM 4: Submission of Matters to a Vote of Security Holders . . . . . . . . . . 20
ITEM 5: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
- 2 -
<PAGE> 3
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 7,809 $ 3,971
Short-term investments . . . . . . . . . . . . . . . . . . 5,450 16,863
Restricted investments . . . . . . . . . . . . . . . . . . 1,790 1,496
Accounts receivable, net . . . . . . . . . . . . . . . . . 5,118 3,340
Prepaid expenses and other current assets . . . . . . . . . 1,304 1,070
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . 21,471 26,740
Property and equipment, net . . . . . . . . . . . . . . . . . . 9,663 8,194
Intangible assets, net . . . . . . . . . . . . . . . . . . . . 8,489 11,841
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,124 923
-------- --------
$ 40,747 $ 47,698
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable . . . . . . . . $ 6,100 $ 1,200
Accounts payable . . . . . . . . . . . . . . . . . . . . . 5,129 6,699
Accrued compensation . . . . . . . . . . . . . . . . . . . 1,169 861
Accrued distribution license fees . . . . . . . . . . . . . 230 2,300
Capital lease obligations, current portion . . . . . . . . 2,664 2,325
Deferred revenues . . . . . . . . . . . . . . . . . . . . . 1,205 1,784
Other accrued liabilities . . . . . . . . . . . . . . . . . 3,338 3,447
-------- --------
Total current liabilities . . . . . . . . . . . . . . 19,835 18,616
Capital lease obligations . . . . . . . . . . . . . . . . . . . 3,889 3,985
Shareholders' equity
Convertible Preferred stock . . . . . . . . . . . . . . . 17,441 15,816
Common stock . . . . . . . . . . . . . . . . . . . . . . . 59,101 59,999
Deferred compensation . . . . . . . . . . . . . . . . . . . (348) (388)
Unrealized loss on available-for-sale investments . . . . . (185) (128)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (58,986) (50,202)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . 17,023 25,097
-------- --------
$ 40,747 $ 47,698
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
- 3 -
<PAGE> 4
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,515 $ 1,374
Cost of revenues:
Cost of revenues excluding amortization . . . . . . . . . 2,392 389
Amortization of purchased technology . . . . . . . . . . . 2,399 --
-------- --------
Total cost of revenues . . . . . . . . . . . . . . . 4,791 389
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 2,724 985
Operating expenses:
Product development . . . . . . . . . . . . . . . . . . . 3,066 1,376
Sales and marketing . . . . . . . . . . . . . . . . . . . 6,281 2,489
Distribution license fees . . . . . . . . . . . . . . . . 30 1,625
General and administrative . . . . . . . . . . . . . . . . 1,289 1,141
Merger and acquisition related costs,
including amortization of goodwill and
other purchased intangibles . . . . . . . . . . . . . . 953 --
-------- --------
Total operating expenses . . . . . . . . . . . . . . 11,619 6,631
-------- --------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . (8,895) (5,646)
Interest income . . . . . . . . . . . . . . . . . . . . . . . 230 30
Interest and other expense . . . . . . . . . . . . . . . . . (119) (28)
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,784) $ (5,644)
======== ========
Net loss per share . . . . . . . . . . . . . . . . . . . . . $ (0.72) $ (0.50)
======== ========
Shares used in computing net loss per share . . . . . . . . . 12,214 11,341
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
- 4 -
<PAGE> 5
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
-------- --------
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,784) $ (5,644)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation . . . . . . . . . . . 40 40
Warrant issued . . . . . . . . . . . . . . . . . . . . . . -- 1,625
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,221 143
Amortization of intangibles . . . . . . . . . . . . . . . . 3,352 --
Loss on disposal of property and equipment . . . . . . . . . -- 26
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,778) (718)
Prepaid expenses and other current assets . . . . . . . . (234) (402)
Other assets . . . . . . . . . . . . . . . . . . . . . . (201) (466)
Accounts payable . . . . . . . . . . . . . . . . . . . . (1,570) 1,207
Accrued distribution license fees . . . . . . . . . . . . (2,070) --
Accrued compensation . . . . . . . . . . . . . . . . . . 308 63
Other accrued liabilities . . . . . . . . . . . . . . . . (109) 395
Deferred revenues . . . . . . . . . . . . . . . . . . . . (579) 28
-------- --------
Net cash used in operating activities . . . . . . . . (10,404) (3,703)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment . . . . . . . . . . . . . (1,605) (65)
Purchases of investments . . . . . . . . . . . . . . . . . . (3,121) --
Sales and maturities of investments . . . . . . . . . . . . . 14,183 --
-------- --------
Net cash provided by (used in) investing activities . 9,457 (65)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations . . . . . . . . . . . (842) (80)
Proceeds from notes payable . . . . . . . . . . . . . . . . . 6,000 2,350
Payments on notes payable . . . . . . . . . . . . . . . . . . (1,100) (1,226)
Proceeds from sale of redeemable convertible preferred stock -- 12,335
Proceeds from sale of common stock and common stock warrants 727 1,485
-------- --------
Net cash provided by financing activities . . . . . . 4,785 14,864
-------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . . 3,838 11,096
Cash and cash equivalents at beginning of period . . . . . . 3,971 760
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . $ 7,809 $ 11,856
======== ========
NON-CASH FINANCING ACTIVITIES
Amendment of common stock warrant to preferred stock warrant $ 1,625 $ --
Conversion of notes payable to common stock . . . . . . . . . -- 250
Fixed assets acquired under capital leases . . . . . . . . . 1,084 558
</TABLE>
See notes to condensed consolidated financial statements.
- 5 -
<PAGE> 6
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Basis of Presentation
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software,
Inc., which was formed in June 1994, provides a gateway to the World Wide Web
("the Web") that organizes, aggregates and delivers information to meet the
needs of individual consumers. Designed to help consumers make sense of the
Web, the Excite Network, including the Excite and WebCrawler brands, contains a
suite of specialized information services 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 unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated. On
August 30, 1996, the Company acquired The McKinley Group, Inc. ("McKinley") in
a merger transaction accounted for as a pooling of interests. McKinley was
incorporated in December 1993. All financial information has been restated to
reflect the combined operations of the Company and McKinley.
The condensed consolidated balance sheet as of March 31, 1997 and the
condensed consolidated statements of operations and cash flows for the three
months ended March 31, 1997 and 1996, have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 1997 and for all
periods presented have been made. The condensed consolidated balance sheet at
December 31, 1996 has been derived from the audited financial statements at
that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These financial statements should be read in conjunction with the
Company's audited financial statements as included in the Company's Annual
Report on Form 10-K, as amended by Form 10-K/A as filed with the Securities and
Exchange Commission on April 16, 1997. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1997.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. 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 revenues are
-6-
<PAGE> 7
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.
Intangible Assets
Intangible assets consist primarily of goodwill, developed technology,
distribution rights, trademarks, bookmarks and trade names, and are being
amortized generally over periods ranging from four months to three years.
These purchased intangibles and goodwill relate to the acquisitions of certain
assets from other companies.
<TABLE>
<CAPTION>
LIFE IN MARCH 31, DECEMBER 31,
MONTHS 1997 1996
------ --------- ------------
(In thousands)
<S> <C> <C> <C>
Trademarks, trade names, goodwill and other . . . . 24 - 36 $ 2,708 $ 2,708
Developed technology . . . . . . . . . . . . . . . 13 8,400 8,400
Operating agreement . . . . . . . . . . . . . . . . 4 1,200 1,200
Distribution agreement . . . . . . . . . . . . . . 24 500 500
-------- --------
12,808 12,808
Less accumulated amortization . . . . . . . . . . . (4,319) (967)
-------- --------
$ 8,489 $ 11,841
======== ========
</TABLE>
Stock Split and Per Share Amounts
In February 1996, the Company completed a two-for-one stock split. All
of the share and per share data have been adjusted to reflect this stock split.
Net loss per share is computed using the weighted average number of
shares of Common Stock outstanding during the period and excludes all common
stock equivalents as they are anti-dilutive. However, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, for the periods
prior to the Company's initial public offering, such computations include all
common and common equivalent shares issued within twelve months of the filing
date of the Company's initial public offering as if they were outstanding for
all periods presented. Common equivalent shares consist of the incremental
common shares issued upon conversion of the Redeemable Convertible Preferred
Stock (using the if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The change is
expected to result in an increase in the loss per share for the first quarter
ended March 31, 1996 to $3.82 due to the exclusion of shares relating to Staff
Accounting Bulletins. The impact of Statement No. 128 on the calculation of
historically reported primary or fully diluted earnings per share for the
period subsequent to the Company's initial public offering is not expected to
be material, as the Company has recorded losses and has therefore excluded the
impact of stock options, as these would be anti-dilutive.
-7-
<PAGE> 8
2. ASSET PURCHASE
In November 1996, the Company entered into a series of agreements with
America Online, Inc. ("AOL"), a provider of Internet online services, whereby a
co-branded version of the Excite brand became the exclusive Internet search and
directory service for AOL. Under these agreements, Excite acquired AOL's
WebCrawler search and directory technology (the "WebCrawler Assets"), for
1,950,000 shares of the Company's Series E-1 and E-2 Convertible Preferred
Stock, that were issued upon the closing on March 27, 1997 (see Note 7). In
addition, as part of the transactions contemplated by these agreements, AOL
will have the right, for a 90 day period following the closing, 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, was amended to become
exercisable into 650,000 shares of series E-3 Convertible Preferred Stock at
the same exercise price per share.
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.
3. RESTRICTED INVESTMENTS
The Company has restricted investments at March 31, 1997 of approximately
$1.8 million. This amount consists of a restricted certificate of deposit of
$1.7 million held as collateral by a financial institution against a letter of
credit for tenant improvements at the Company's new headquarters (see Note 8.)
The remaining $115,000 consists of a restricted investment in common stock held
as collateral by a financial institution against the Company's line of credit
borrowings (see Note 6.)
-8-
<PAGE> 9
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>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(In thousands)
<S> <C> <C>
Purchased computer equipment and internal use software . . . . . . $ 2,916 $ 1,968
Leased computer equipment and internal use software . . . . . . . . 8,975 7,891
Purchased furniture and fixtures . . . . . . . . . . . . . . . . . 374 370
Leased furniture and fixtures . . . . . . . . . . . . . . . . . . . 297 297
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . 714 60
--------- --------
13,276 10,586
Less accumulated depreciation and amortization . . . . . . . . . . (3,613) (2,392)
--------- --------
$ 9,663 $ 8,194
========= ========
</TABLE>
5. FOLLOW-ON OFFERING
On March 3, 1997 the Company filed a registration statement on Form S-1,
and on April 29, 1997 filed Amendment No. 1 to the 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.
6. NOTES PAYABLE
At December 31, 1996, the Company had a $1.0 million revolving line of
credit with a bank available through March 31, 1997. In March 1997, the Company
replaced this line of credit with a new line of credit for $6.0 million, of
which $3.0 million will mature on September 30, 1997 with the remainder maturing
in March 1998. This line of credit bears interest at rates ranging from the
bank's prime rate (8.5% at March 31, 1997), to prime plus .25% and is secured by
substantially all assets of the Company. This line of credit agreement also
contains certain financial covenants, including minimum requirements for
tangible net worth, quick ratio and accounts receivable balances, as well as
prohibiting the declaration and payment of cash dividends on capital stock
without the prior written consent of the bank. At March 31, 1997, a short-term
investment with a carrying amount of $115,000 was held by the bank as
collateral for the line of credit borrowings and is not available to the
Company.
Notes payable and line of credit borrowings consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(In thousands)
<S> <C> <C>
Bank line of credit . . . . . . . . . . . . . . . . . . . . . $ 6,000 $ 1,100
Other notes payable . . . . . . . . . . . . . . . . . . . . . 100 100
------- -------
$ 6,100 $ 1,200
======= =======
</TABLE>
7. CONVERTIBLE PREFERRED STOCK AND WARRANT
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 (see Note 2).
-9-
<PAGE> 10
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 was
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. The
value attributed to the amendment of the warrant terms from Common Stock to
Series E-3 Convertible Preferred Stock was minimal, as the expiration date of
the warrant was also amended such that this warrant expires with respect to
325,000 shares on September 30, 1997, instead of in March, 2001.
8. COMMITMENTS
In August 1996, the Company entered into a lease for new corporate
offices located in Redwood City, California. The lease, which has a ten year
term, commenced in April 1997. In April, the Company moved from its previous
locations in Mountain View, Sausalito and San Jose, California, to the new
facility. In March 1997, the Company entered into a lease for additional space
adjacent to its new facility in Redwood City, California.
9. 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 Netscape's "Net
Search" page. Under these agreements, including subsequent amendments, the
"Premier Provider" status was established for approximately one year through
April 30, 1997, in exchange for which the Company made aggregate payments
totaling $10.0 million ($7.0 million in cash and $3.0 million in advertising
impressions through the Company's services) over the course of the term of the
agreements. Management considered that there was significant uncertainty
regarding the recoverability of the amount from future operations; therefore,
the $10.0 million total consideration was expensed as distribution license fee
costs during the quarter ended June 30, 1996.
In March 1997, the Company entered into new agreements, which commence in
May 1997, whereby the Excite brand will be one of four "Premier Providers" and
the WebCrawler brand will be one of many "Marquee Providers" of search and
navigation services accessible from Netscape's "Net Search" page. Under the
terms of these new agreements, the Company is committed to make minimum
aggregate payments of $8.25 million in exchange for a guaranteed number of
impressions. Of the $8.25 million, $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.
-10-
<PAGE> 11
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, without limitation, the failure of the Company to
achieve increases in advertising revenues, the failure of the Company to
maintain premier positions on certain high traffic World Wide Web ("Web")
access points such as those maintained by America Online, Inc. ("AOL"),
Microsoft Corporation ("Microsoft") and Netscape Communications Corporation
("Netscape"), 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 McKinley, the WebCrawler Assets 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. The
following discussion also should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, as amended by Form 10-K/A,
filed with the Securities and Exchange Commission on April 16, 1997.
OVERVIEW
The Company operates the Excite Network, which includes the Excite and
WebCrawler brands, and provides a gateway to the Web that organizes, aggregates
and delivers information to meet the needs of individual consumers. Excite,
formerly Architext Software, Inc., was formed in June 1994 and, from its
inception to September 1995, its operating activities related primarily to
recruiting personnel, raising capital, purchasing operating assets, 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 and has incurred significant
operating losses since inception. See "Risk Factors That May Affect Future
Results - Extremely Limited Operating History; Accumulated Deficit and
Anticipation of Continued Losses."
On August 30, 1996, the Company acquired by merger McKinley, a private
company and creator of the Magellan On-Line Guide. The transaction was effected
through the issuance of 850,000 shares of the Company's Common Stock and was
accounted for as a pooling of interests. Because the merger has been accounted
for as a pooling of interests, all financial information for dates and periods
prior to the merger has been restated to reflect the combined operations of the
Company and McKinley.
The Company acquired the WebCrawler Assets (the "Acquisition") from AOL
for an aggregate of 1,950,000 shares of the Company's Convertible Preferred
Stock. The Acquisition, which was consummated in March 1997 (the "Closing"),
was recorded for accounting purposes as of December 1, 1996. The transaction
was accounted for as 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.
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In connection with the Acquisition and distribution agreement, the
Company and AOL have agreed that a co-branded version of the Excite service
will be the exclusive provider of Web search and directory services to AOL's
customers for a minimum of two years. The Company will receive a share of
revenues generated by the co-branded version of the Excite services hosted on
AOL as royalties, and AOL will incur all hosting, advertising and selling
expenses. On March 13, 1997, the co-branded service "NetFind" became available
on AOL, which allows AOL subscribers easier access to Excite Search and Excite
Directory.
In March 1997, the Company entered into new agreements with Netscape to
continue the Premier Provider arrangement for the Excite brand, and entered a
Marquee Provider agreement for the WebCrawler brand covering the period from
May 1, 1997 through April 30, 1998. Under the terms of these new agreements,
the Company is committed to make minimum payments of $8.25 million in exchange
for a guaranteed number of impressions. Of the $8.25 million, $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.
RESULTS OF OPERATIONS
REVENUES
Revenues increased $6.1 million from $1.4 million for the three months
ended March 31, 1996 to $7.5 million for the comparable period in 1997. This
increase is due to increased sales of advertisements, an increase in sales of
targeted advertising with higher rates charged to advertisers and an increase
in the number of advertisers purchasing advertising banners on the Company's
web sites. The Company expects to continue to derive substantially all of its
total revenue from selling advertisements on its network. Because the market
for advertising on the Web is intensely competitive, advertising rates could be
subject to pricing pressures in the future. If the Company is forced to reduce
its advertising rates or experiences lower CPM's (price per thousand
impressions) as a result of such competition or otherwise, future revenues
could be adversely affected.
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 and overhead allocations, costs related to revenue
sharing agreements and amortization of purchased technology. Cost of revenues,
excluding the amortization of purchased technology, increased $2.0 million from
$389,000 for the three months ended March 31, 1996 to $2.4 million for the
comparable period in 1997, and represented 28% and 32% of revenues for the
three months ended March 31, 1996 and 1997, respectively. The increase is due
primarily to increased personnel expenses and equipment costs relating to
maintaining and supporting the Company's Web sites and increasing revenue
sharing costs for the distribution of the Company's services and the
acquisition of content. Cost of revenues in future periods are expected to
increase in absolute dollars and may increase as a percentage of revenues as
the Company increases costs to support expanded services.
In the three month period ended March 31, 1997, the Company also
recognized, as a component of total cost of revenues, amortization of purchased
technology of $2.4 million related to the purchase of the WebCrawler Assets,
which represents 32% of revenues. Amortization expense is expected to be
approximately $1.9 million in each of the remaining three quarters of 1997,
assuming no additional acquisitions and no significant adjustments to the
economic lives of the underlying intangible assets.
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GROSS MARGIN
Gross margin as a percentage of revenues was 72% and 36% for the three
month periods ended March 31, 1996 and 1997, respectively. The decline in the
gross margin as a percentage of revenues was due primarily to the amortization
of purchased technology discussed above. In addition, the growth in
infrastructure associated with the merger with McKinley and acquisition of the
WebCrawler Assets, and expansion of operations to support expanded Web site
offerings contributed to the decrease. 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 or an increase in the Company's advertising revenue sharing
obligations could adversely affect gross margins.
OPERATING EXPENSES
The Company's operating expenses have generally increased in absolute
dollar amounts since inception through March 31, 1997. This trend reflects the
Company's rapid transition from the product development stage to marketing and
offering its services. The Company believes that continued expansion of
operations is essential to achieving and maintaining market leadership. As a
consequence, the Company intends to continue to increase expenditures in all
operating areas for the foreseeable future.
PRODUCT DEVELOPMENT. Product development expenses consist principally of
engineering and editorial personnel costs, allocation of overhead, equipment
depreciation, consulting and supplies. Costs related to research, design and
development of products have been charged to product development expense as
incurred. Product development expenses increased $1.7 million or 123% from
$1.4 million for the three months ended March 31, 1996 to $3.1 million for the
comparable period in 1997. These expenses represented 100% and 41% of revenues
in the three month periods ended March 31, 1996 and 1997, respectively. The
increase in absolute dollars was primarily attributable to an increase in
engineering and editorial headcount as well as increased product development
activities resulting from the acquisition of the WebCrawler Assets and the
merger with McKinley. The Company believes that a significant level of product
development expense is required to remain competitive and, accordingly, the
Company anticipates that it will continue to devote substantial resources to
product development and that these costs will increase in absolute dollars in
future periods.
SALES AND MARKETING. Sales and marketing expenses consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
allocation of overhead, creative services and promotional and advertising
expenses. Sales and marketing expenses increased $3.8 million or 152%, from
$2.5 million for the three months ended March 31, 1996 to $6.3 million for the
comparable period in 1997. These expenses represented approximately 181% and
83% of revenues in the three month periods ended March 31, 1996 and 1997,
respectively. This increase was due primarily to the hiring of additional sales
and marketing personnel and increased advertising and promotional expenses, in
particular, continuation of the Company's media campaign that was launched
during the fourth quarter of 1996. The Company expects to incur significant
promotional and advertising expenses and anticipates that these costs will
increase in absolute dollars although the Company has no current plans to
undertake any promotional and advertising campaign similar to that during the
fourth quarter of 1996.
DISTRIBUTION LICENSE FEES. Distribution license fees decreased from
$1.6 million for the three months ended March 31, 1996 to $30,000 for the
comparable period in 1997. The first quarter of 1996 included a one-time,
non-cash charge of approximately $1.6 million related to the issuance of the
AOL Warrant in connection with a nonexclusive agreement entered into in March
1996, which was amended on March 27, 1997 to be exercisable into an equivalent
number of shares of Series E-3 Convertible Preferred Stock.
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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 approximately
$148,000, or 13% from $1.1 million for the three months ended March 31, 1996 to
$1.3 million for the comparable period in 1997. These expenses represented 83%
and 17% of revenues for the three month periods ended March 31, 1996 and 1997,
respectively. The 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 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 costs related to operating as a public
company, such as expenses related to directors' and officers' insurance,
investor relations programs and increased professional fees.
MERGER AND ACQUISITION COSTS. The Company has in the past, and may in
the future, acquire businesses, technologies, services, product lines, content
databases or access to content databases that are complimentary to the
Company's business. During the three months ended March 31, 1997, the Company
incurred merger and acquisition costs of $953,000 relating to the amortization
of goodwill and other purchased intangibles resulting primarily from the
acquisition of the WebCrawler Assets in December 1996. 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. There
can also be no assurance that any given acquisition, if consummated, would not
have a material adverse effect on the Company's business, results of operations
and financial condition.
INTEREST INCOME (EXPENSE) AND OTHER. Interest income for the three
months ended March 31, 1996 and 1997 were $30,000 and $230,000, respectively.
This increase reflects larger amounts of interest being earned on higher
average investment balances, due primarily to cash received from the Company's
initial public offering in April 1996. Interest expense and other increased
from $28,000 to $119,000 for the three months ended March 31, 1996 and 1997,
respectively. This increase was due primarily to increased expenses associated
with capital lease obligations and interest paid on bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had $13.3 million in unrestricted cash,
cash equivalents and short-term investments, a decline of $7.5 million from
December 31, 1996. 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 March 1997, the Company entered into a line of credit for $6.0 million
of which $3.0 million will mature on September 30, 1997 with the remainder
maturing in March 1998. This line of credit bears interest at rates ranging
from the bank's prime rate to prime plus .25% and is collateralized by a
security interest in all assets of the Company. This line of credit agreement
contains certain financial covenants, including minimum requirements for
tangible net worth, quick ratio and accounts receivable balances, as well as
prohibiting the declaration and payment of cash dividends on capital stock
without the prior written consent of the bank. As
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<PAGE> 15
of March 31, 1997, the Company had outstanding borrowings against this line of
credit of $6.0 million, and was in compliance with all financial covenants.
See Note 7 of Notes to Condensed Consolidated Financial Statements.
The Company's operating activities for the three month periods ended
March 31, 1997 and 1996 used cash of $10.4 million and $3.7 million,
respectively. The increased use of cash was primarily attributable to increased
operating expenses including, but not limited to, payments to Netscape and to
the Company's advertising agency for a $5 million advertising campaign launched
during the fourth quarter of 1996.
Investing activities for the three month periods ended March 31, 1997 and
1996 provided cash of $9.5 million and used cash of $65,000, respectively. The
increased cash provided was primarily due to the net sale of short-term
investments.
Financing activities for the three month periods ended March 31, 1997 and
1996 generated cash of $4.8 million and $14.9 million, respectively. The
decrease in cash provided was due primarily from the sale of Preferred Stock
and Common Stock totaling $13.8 million during the three month period ended
March 31, 1996, which did not recur in 1997. This was partially offset by note
payable borrowings of $6.0 million during the three month period ended March
31, 1997.
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
March 31, 1997, the Company did not have any material commitments for capital
expenditures, although the Company anticipates that its planned purchases of
capital equipment and leasehold improvements will require additional
expenditures of approximately $5.0 million for the remainder of 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 of approximately $59.0
million and has available working capital at March 31, 1997 of $1.6 million.
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, and on April 29, 1997 filed
Amendment No. 1 to the 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.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company has an extremely limited operating history upon which an
evaluation of the Company and its current business can be based. In addition,
there is a lack of proven business models for companies like Excite which rely
substantially upon the sale of advertising on the Web. The Company's business
must be considered in light of the risks, expenses and problems frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as the Web and Web-based
advertising markets. See risks described above in "Forward Looking Statements."
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There can be no assurance that the Company will be successful in addressing such
risks. The Company has achieved only limited revenues to date, has incurred
significant operating losses since inception and as of March 31, 1997, the
Company had an accumulated deficit of approximately $59.0 million. The Company
has also generally experienced significant increases in operating losses on an
annual and quarterly basis since inception. Although the Company has recently
experienced significant revenue growth, there can be no assurance that this
growth rate will be sustained or that revenues will continue to grow. There can
also be no assurance that any revenue growth that the Company experiences will
be indicative of future operating results. To the extent that revenues do not
grow at anticipated rates or that increases in 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, the
Company anticipates that it will continue to incur operating losses through at
least the end of 1997. The extent of these losses will be contingent on the
amount of growth in the Company's advertising revenues. Although the Company
does not anticipate that its operating loss will continue to increase, there can
be no assurance that operating losses will not increase in the future or that
the Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; UNPREDICTABILITY OF FUTURE
REVENUES AND DEPENDENCE ON ADVERTISING REVENUES
As a result of the Company's extremely limited operating history, the
Company has limited meaningful historical financial data upon which to base
planned operating expenses. Accordingly, the Company's expense levels are
based in part on its expectations as to future advertising revenues, and to a
large extent are fixed. There can be no assurance that the Company will be
able to accurately predict the levels of future advertising revenues,
particularly in light of the intense competition for the sale of Web-based
advertisements and the uncertainty as to the viability of the Web as an
advertising medium, and the failure to do so would have a materially adverse
effect on the Company's business, results of operations and financial
condition. In addition, the Company derives substantially all of its revenues
from the sale of advertising pursuant to short-term advertising contracts. As
a result, quarterly revenues and operating results are 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.
In addition, the Company's ability to generate significant advertising revenues
will depend, among other things, on advertisers' acceptance of the Web as an
effective and sustainable advertising medium, the development of a large base
of users of the Company's services possessing demographic characteristics
attractive to advertisers and the ability of the Company to develop and update
effective advertising delivery and measurement systems. The Company
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<PAGE> 17
believes that the number of companies relying on fees from Web-based
advertising has increased substantially during the past year. Accordingly, the
Company may face increased pricing pressure for the sale of advertisements on
its network. Moreover, "filter" software programs that limit or remove
advertising from a Web user's desktop are available. Widespread adoption of
such software by users could have a material adverse effect upon the viability
of advertising on the Web. Accordingly, there can be no assurance that the
Company will be successful in generating significant future advertising
revenues, and a failure to do so would have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's operating results have varied on a quarterly basis during
its limited operating history and the Company expects to experience significant
fluctuations in future quarterly operating results. Such fluctuations have been
and may in the future be caused by numerous factors, many of which are outside
the Company's control, including, without limitation, specific economic
conditions relating to the Internet and the Web, usage of the Web, demand for
advertising on the Excite Network as well as demand for Web-based advertising
in general, changes in advertising rates as a result of competition or
otherwise, seasonal trends in advertising sales, the advertising budgeting
cycles of advertisers, incurrence of charges in connection with the Company's
distribution relationships with Netscape, AOL and other Internet service
providers ("ISPs") and online service providers ("OSPs") or other third
parties, demand for the Company's services, incurrence of costs relating to
acquisitions of businesses or technologies, introduction or enhancement of
services the Company and its competitors, market acceptance of new services,
delays in the introduction of services or enhancements by the Company or its
competitors, changes in the Company's pricing policies or those of its
competitors, mix of types of advertisements sold, such as the amount of
targeted advertising sold as a percentage of total advertising sold, capacity
constraints and dependencies on computer infrastructure and general economic
conditions. In order to promote and maintain awareness of the Company's brands,
the Company has in the past and may in the future significantly increase its
advertising and/or promotion budgets for a particular quarter which could
materially and adversely affect the Company's business, results of operations
and financial condition for such period. As a strategic response to a changing
competitive environment, the Company may elect from time to time to make
certain other pricing, service or marketing decisions or acquisitions that
could have a material adverse effect on the Company's business, results of
operations and financial condition. As a result, the Company believes that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as an indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter or quarters the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially and adversely
affected.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that the net proceeds of its proposed offering of
common stock, together with its bank line of credit and available funds will be
sufficient to meet its anticipated needs for working capital, capital
expenditures and business expansion for at least the next 12 months. The
Company may need to raise additional funds sooner in order to fund more rapid
expansion, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all.
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DEPENDENCE ON NETSCAPE, AOL AND OTHER THIRD-PARTY RELATIONSHIPS
The Company is currently and will be in the future significantly
dependent on a number of third-party relationships to create traffic and
provide content on the Excite Network, and to make it more attractive to
advertisers and consumers. These relationships include arrangements relating to
the positioning of the Excite Network on Web browsers such as those offered by
Netscape and Microsoft and agreements with ISPs and OSPs such as AOL and
Microsoft and also include arrangements for providing content for certain
services offered by the Company. The Company is also generally dependent on
other Web site operators that provide links to the Excite Network. Most of
these arrangements do not require future minimum commitments to use the
Company's services, to provide access or links to the Excite Network or to
provide content to the Company, are not exclusive and are short-term or may be
terminated at the convenience of the other party. There can be no assurance
that the Company's existing relationships will result in sustained business
partnerships, successful service offerings, or the generation of significant
traffic on the Excite Network or significant revenues for the Company.
Under its new Premier Provider and Marquee Provider Agreements with
Netscape, the Company's Excite service is designated as one of four "Premier
Providers" and the Company's WebCrawler brand is designated as one of many
"Marquee Providers" of search and navigation services accessible from the
Netscape "Net Search" page. The Company believes that a substantial portion of
its aggregate historical user traffic is attributable to Netscape. The Company
believes that it will continue to be substantially dependent on its relationship
with Netscape for a significant percentage of its traffic. See Note 9 of Notes
to Condensed Consolidated Financial Statements.
The Company has also entered into a five-year distribution agreement with
AOL pursuant to which a co-branded version of the Excite search and directory
service is designated as the exclusive Web search and retrieval service for AOL
for at least a two year period. After the expiration of this initial two year
exclusivity period, the parties can extend the exclusive arrangement only by
mutual agreement. If the exclusivity period does not extend beyond the initial
two year term, the co-branded service would become the "default" search and
directory service on AOL, however, AOL could enter into a strategic relationship
with a competitor of the Company or offer its own competing services. In such an
event, the amount the Company's advertising revenues could be materially and
adversely affected. In addition, if the Company fails to satisfy certain
technical, product feature and editorial criteria during the term of the
agreement, if the Company and AOL fail to renew this agreement upon the
expiration of the five year term, or if any renewal is on materially worse terms
than the initial agreement with AOL, there could be a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, any decline in the number of AOL subscribers could adversely affect
the amount of traffic on the Excite Network.
RISK OF CAPACITY CONSTRAINTS; DEPENDENCE ON COMPUTER INFRASTRUCTURE
The Company is dependent on its ability to generate a high volume of
traffic to the Excite Network. Accordingly, the performance of the Excite
Network is critical to the Company's reputation, its ability to attract
advertisers and to achieve market acceptance of the network. Any system failure
that causes interruptions in the availability or increases response time of the
Company's services could reduce user satisfaction and traffic to the Excite
Network and, if sustained or repeated, would reduce the attractiveness of the
Excite Network to advertisers and consumers. The Company is also dependent
upon Web browsers, ISPs, OSPs and other Web site operators, which have
experienced significant outages in the past, for access to its
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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. To
the extent that the capacity restraints described above are not effectively
addressed by the Company, such constraints would have a material adverse effect
on the Company's business, results of operations and financial condition.
Substantially all of the Company's communications hardware and certain of
its computer hardware operations are located at leased facilities in Redwood
City, California, an area susceptible to earthquakes. The Company has
experienced system failures or outages from time to time in the past, which
have disrupted the operation of the Excite Network. There can be no assurance
that a system failure at 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 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.
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 six months ended March
31, 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.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. Management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions,
either individually or in the aggregate, will not materially affect the
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact could be material. Furthermore, any litigation,
regardless of the outcome, can have an adverse impact on the Company's results
of operations as a result of defense costs, diversion of management resources,
and other factors.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report:
11.01 Statement of Earnings Per Share(1)
27.01 Financial Data Schedule (EDGAR version only)(1)
________________
(1) Previously filed with the Commission on April 29,
1997 as an exhibit to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(File No. 333-22669)
(B) There were no reports on Form 8-K during the quarter ended
March 31, 1997.
________________
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SIGNATURES
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In accordance with the requirements of the Securities Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXCITE, INC.
Date: May 8, 1997 By: /s/ Robert C. Hood
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Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
By: /s/ George Bell
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George Bell
President and Chief Executive Officer
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