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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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission file number 0-28064
EXCITE, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378215
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive 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 July 31, 1997, there were 15,375,370 shares of the Registrant's Common
Stock outstanding.
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FORM 10-Q
EXCITE, INC.
INDEX
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<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
<S> <C> <C>
ITEM 1: Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996........................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996................. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996......................... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 11
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 21
ITEM 2: Changes in Securities.......................................... 21
ITEM 3: Defaults Upon Senior Securities................................ 21
ITEM 4: Submission of Matters to a Vote of Security Holders............ 21
ITEM 5: Other Information.............................................. 22
ITEM 6: Exhibits and Reports on Form 8-K............................... 22
Signatures..................................................... 23
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 13,308 $ 3,971
Short-term investments............................... 28,534 16,863
Restricted investments............................... 419 1,496
Accounts receivable, net............................. 8,535 3,340
Prepaid expenses and other current assets............ 1,999 1,070
-------------- --------------
Total current assets.............................. 52,795 26,740
Property and equipment, net............................. 11,212 8,194
Intangible assets, net.................................. 6,237 11,841
Other assets............................................ 1,249 923
-------------- --------------
$ 71,493 $ 47,698
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable.......... $ 6,100 $ 1,200
Accounts payable..................................... 5,197 6,699
Accrued compensation................................. 1,690 861
Accrued distribution license fees.................... 230 2,300
Capital lease obligations, current portion........... 2,519 2,325
Deferred revenues.................................... 1,853 1,784
Other accrued liabilities............................ 2,827 3,447
-------------- --------------
Total current liabilities....................... 20,416 18,616
Capital lease obligations............................... 3,221 3,985
Shareholders' equity
Convertible Preferred stock ......................... 17,441 15,816
Common stock ........................................ 97,695 59,999
Deferred compensation................................ (308) (388)
Unrealized loss on available-for-sale investments.... (96) (128)
Accumulated deficit.................................. (66,876) (50,202)
-------------- --------------
Total shareholders' equity...................... 47,856 25,097
-------------- --------------
$ 71,493 $ 47,698
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................. $ 9,495 $ 2,816 $ 17,010 $ 4,190
Cost of revenues:
Cost of revenues excluding amortization 1,990 427 4,382 816
Amortization of purchased technology ... 1,938 -- 4,337 --
-------- -------- -------- --------
Total cost of revenues ........... 3,928 427 8,719 816
-------- -------- -------- --------
Gross profit 5,567 2,389 8,291 3,374
Operating expenses:
Product development .................... 3,217 2,109 6,283 3,485
Sales and marketing .................... 6,533 3,203 12,814 5,692
Distribution license fees .............. 1,630 10,000 1,660 11,625
General and administrative ............. 1,653 2,782 2,942 3,923
Merger and acquisition related
costs, including amortization of
goodwill and other purchased intangibles 313 73 1,266 73
-------- -------- -------- --------
Total operating expenses ......... 13,346 18,167 24,965 24,798
-------- -------- -------- --------
Operating loss ........................... (7,779) (15,778) (16,674) (21,424)
Interest income .......................... 114 491 344 521
Interest and other expense ............... (225) (121) (344) (149)
-------- -------- -------- --------
Net loss ................................. $ (7,890) $(15,408) $(16,674) $(21,052)
======== ======== ======== ========
Net loss per share ....................... $ (0.63) $ (1.29) $ (1.35) $ (1.81)
======== ======== ======== ========
Shares used in computing net loss per
share ................................. 12,504 11,968 12,359 11,654
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
-------- --------
<S> <C> <C>
Net loss ................................................ $(16,674) $(21,052)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation ................. 80 390
Warrant issued ........................................ -- 1,625
Depreciation .......................................... 2,397 475
Amortization of intangibles ........................... 5,604 --
Loss on disposal of property and equipment ............ -- 116
Provision for loan impairment ......................... -- 629
Changes in assets and liabilities:
Accounts receivable ................................. (5,195) (1,568)
Prepaid expenses and other current assets ........... (929) (397)
Other assets ........................................ (326) (93)
Accounts payable .................................... (1,502) 1,922
Accrued compensation ................................ 1,469 30
Accrued distribution license fees ................... (2,070) 8,500
Other accrued liabilities ........................... (620) 1,513
Deferred revenues ................................... 69 1,824
-------- --------
Net cash used in operating activities ............. (17,697) (6,086)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ..................... (5,198) (1,649)
Purchases of investments ................................ (30,129) --
Sales and maturities of investments ..................... 19,567 353
Notes and advances to Novo MediaGroup, Inc. ............. -- (629)
-------- --------
Net cash used in investing activities ............. (15,760) (1,925)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ................... (787) (201)
Proceeds from bank line of credit and other notes payable 6,000 3,490
Payments on bank line of credit and other notes payable . (1,100) (1,371)
Proceeds from sale of redeemable convertible preferred .. -- 12,282
stock
Proceeds from sale of common stock and common stock ..... 38,681 36,951
warrants
-------- --------
Net cash provided by financing activities ......... 42,794 51,151
-------- --------
Net increase in cash and cash equivalents .................. 9,337 43,140
Cash and cash equivalents at beginning of period ........ 3,971 760
-------- --------
Cash and cash equivalents at end of period .............. $ 13,308 $ 43,900
======== ========
NON-CASH FINANCING ACTIVITIES
Conversion of preferred stock to common stock ........... $ -- $ 16,129
Conversion of notes payable to common stock ............. -- 1,400
Amendment of common stock warrant to preferred stock .... 1,625 --
warrant
Conversion of notes payable to common stock ............. -- 250
Fixed assets acquired under capital leases .............. 1,967 1,011
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Basis of Presentation
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software,
Inc., which was formed in June 1994, provides a gateway to the World Wide Web
("the Web") that organizes, aggregates and delivers information to meet the
needs of individual consumers. Designed to help consumers make sense of the Web,
the Excite Network, including the Excite and WebCrawler brands, contains a suite
of specialized information services 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 company conducts its business within one industry segment.
The unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated. On
August 30, 1996, the Company acquired The McKinley Group, Inc. ("McKinley") in a
merger transaction accounted for as a pooling of interests. McKinley was
incorporated in December 1993. All financial information has been restated to
reflect the combined operations of the Company and McKinley.
The condensed consolidated balance sheet as of June 30, 1997 and the
condensed consolidated statements of operations and cash flows for the six
months ended June 30, 1997 and 1996, have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1997 and for all periods
presented have been made. The condensed consolidated balance sheet at December
31, 1996 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These financial statements should be read in conjunction with the
Company's audited financial statements as included in the Company's Annual
Report on Form 10-K, as amended by Form 10-K/A as filed with the Securities and
Exchange Commission on April 16, 1997. The results of operations for the three
and six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1997.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. The Company has
recently entered into some longer-term advertising sponsorship agreements;
however, revenue from such contracts has not been significant to date.
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.
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Intangible Assets
Intangible assets consist primarily of goodwill, developed technology,
distribution rights, trademarks, bookmarks and trade names, and are being
amortized generally over periods ranging from four months to three years. These
purchased intangibles and goodwill relate to the acquisitions of certain assets
from other companies.
<TABLE>
<CAPTION>
LIFE IN JUNE 30, DECEMBER 31,
MONTHS 1997 1996
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Trademarks, trade names, goodwill and other 24 - 36 $ 2,708 $ 2,708
Developed technology ...................... 13 8,400 8,400
Operating agreement ....................... 4 1,200 1,200
Distribution agreement .................... 24 500 500
-------- --------
12,808 12,808
Less accumulated amortization ............. (6,571) (967)
-------- --------
$ 6,237 $ 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," ("Statement No. 128") which is required
to be adopted on December 31, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating 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 six month period
ended June 30, 1996 to $2.85 due to the exclusion of shares relating to Staff
Accounting Bulletins. The impact of Statement No. 128 on the calculation of
historically reported primary or fully diluted earnings per share for the period
subsequent to the Company's initial public offering is not expected to be
material, as the Company has recorded losses and has therefore excluded the
impact of stock options, as these would be anti-dilutive.
2. ASSET PURCHASE
In November 1996, the Company entered into a series of agreements with
America Online, Inc. ("AOL"), a provider of Internet online services, whereby a
co-branded version of the Excite brand became the exclusive Internet search and
directory service for AOL. Under these agreements, Excite acquired AOL's
WebCrawler search and directory technology (the "WebCrawler Assets"), for
1,950,000 shares of the Company's Series E-1 and E-2 Convertible Preferred
Stock, that were issued on March 27, 1997 (see Note 7.) In addition, in
connection with these agreements with AOL, 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.
AOL was also granted the right to exchange the 680,330 shares of Common Stock
beneficially
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owned by it for an equivalent number of shares of the Company's Series E-4
Convertible Preferred Stock. In June 1997, AOL notified the company that it
would exercise this exchange right.
The series of agreements have been accounted for as the acquisition of
rights to developed and purchased 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 goodwill,
distribution rights, trademarks, bookmarks and trade names. The amount of the
purchase price allocated to purchased in-process technology was charged to the
Company's operations as of December 1, 1996.
The Company determined the amounts to be allocated to developed and
purchased in-process technology based on whether technological feasibility had
been achieved (as defined and utilized by the Company in assessing software
capitalization) and whether there was any alternative future use for the
technology. Other considerations included the time and cost to complete each
project, expected income, and associated risks which included the inherent
difficulties and uncertainties in completing the project and thereby achieving
technological feasibility and risks related to the viability of and potential
changes to future target markets. The Company concluded that the in-process
technology had no alternative future use after taking into consideration the
potential for usage of the technology in different products or services, resale
of the technology and internal usage.
3. RESTRICTED INVESTMENTS
The Company has restricted investments at June 30, 1997 of approximately
$419,000. This amount consists of a restricted certificate of deposit of
$233,000 held as collateral by a financial institution against a letter of
credit for tenant improvements at the Company's new headquarters (see Note 8.)
The remaining $186,000 consists of a restricted investment in common stock held
as collateral by a financial institution against the Company's line of credit
borrowings (see Note 6.)
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (between one and ten years.)
Equipment purchased under capital leases is amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------------
(In thousands)
-------- --------
<S> <C> <C>
Purchased computer equipment and internal use software $ 3,092 $ 1,968
Leased computer equipment and internal use software .. 8,039 7,891
Purchased furniture and fixtures ..................... 1,741 370
Leased furniture and fixtures ........................ 522 297
Leasehold improvements ............................... 2,229 60
-------- --------
15,623 10,586
Less accumulated depreciation and amortization ....... (4,411) (2,392)
-------- --------
$ 11,212 $ 8,194
======== ========
</TABLE>
5. SALE OF COMMON STOCK
On March 3, 1997 the Company filed a registration statement on Form S-1
with the United States Securities and Exchange Commission for the sale of shares
of the Company's Common Stock. The company sold all of the 2.9 million shares of
the Company's Common Stock to Intuit Inc. ("Intuit") on June 26, 1997 at a
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price of $13.50 per share (see also Note 9.) Proceeds to the Company from this
offering were approximately $38.4 million net of offering costs.
Intuit was also granted a right of first refusal to participate in certain
future issuances of the Company's securities (in order to prevent dilution of
Intuit's percentage ownership), and registration rights with respect to the
shares, as well as any shares that might be purchased pursuant to the right of
first refusal. The agreements also place certain conditions on Intuit's ability
to dispose of its shares of, or acquire additional shares of, the Company's
common stock. In addition, so long as Intuit continues to hold at least 10% of
the Company's outstanding Common Stock, Intuit has the right to have a
representative attend all Board of Directors meetings in a non-voting observer
capacity, or to designate a nominee for election to the Board.
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 in the amount of $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 June 30, 1997) to the bank's prime
rate plus .25% and is secured by substantially all of the Company's assets. This
line of credit also contains certain financial covenants, including minimum
requirements for tangible net worth, quick ratio and accounts receivable
balances, as well as prohibiting the declaration and payment of cash dividends
on capital stock without the prior written consent of the bank. At June 30,
1997, a short-term investment with a carrying amount of $186,000 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>
JUNE 30, 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 March 27, 1997, the Company issued to AOL a total of 1,950,000
shares of the Company's Series E-1 and E-2 Convertible Preferred Stock in
connection with the closing of the asset purchase agreement relating to the
WebCrawler Assets (see Note 2.)
In March 1996, the Company entered into an agreement with AOL whereby, in
return for certain distribution rights, the Company issued a warrant to purchase
650,000 shares of Common Stock at an exercise price of $8.00 per share (the "AOL
Warrant"). This warrant expires in March 2001. A charge to operations of $1.6
million for the fair value of the warrant was recorded at the time of issuance
as a distribution license fee. The value of the warrant was established through
an independent appraisal. In connection with the agreements with AOL described
in Note 5, upon the closing of the acquisition of the WebCrawler Assets, this
warrant was amended to be exercisable into an equivalent number of shares of
Series E-3 Convertible Preferred Stock at the same exercise price per share. The
value attributed to this amendment of the 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. OPERATING LEASE COMMITMENTS
In August 1996, the Company entered into a lease for new corporate offices
located in Redwood City, California. The lease, which has a ten year term,
commenced in April 1997. In April, the Company moved from its previous locations
in Mountain View, Sausalito and San Jose, California, to the new facility. In
March
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1997, the Company entered into a lease for additional space adjacent to its new
facility in Redwood City, California.
9. SIGNIFICANT AGREEMENTS AND OTHER COMMITMENTS
In April 1996, the Company (including McKinley) entered into two
agreements with Netscape Communications Corporation ("Netscape") under which the
Company and McKinley were each designated as one of five "Premier Providers" of
search and navigation services accessible from Netscape's "Net Search" page.
Under these agreements, 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 commenced in
May 1997, whereby the Excite brand became one of four "Premier Providers" and
the WebCrawler brand became one of many "Marquee Providers" of search and
navigation services accessible from Netscape's "Net Search" page. Under the
terms of these new agreements, the Company is committed to make minimum
aggregate payments of $8.25 million in exchange for a guaranteed number of
impressions. Of the $8.25 million minimum, $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. The Company recorded expenses
of $1.7 million in the second quarter of 1997 based upon the number of
impressions delivered by Netscape under these agreements in May and June 1997.
In June 1997, the Company sold 2.9 million shares of the Company's Common
Stock to Intuit at a price of $13.50 per share. Proceeds from this offering were
approximately $38.4 million net of offering costs. Also in June 1997, the
Company entered into a Joint Activities Agreement with Intuit. Under this
agreement, Intuit will become the exclusive provider and aggregator of financial
content on all of Excite's services, and Excite will become the exclusive search
and navigation service featured in the U.S. versions of Intuit's Quicken,
Quickbooks and TurboTax products. The two companies will share certain revenues
and expenses at varying amounts throughout the seven year term of this
agreement.
Also in June 1997, the Company entered into a Co-Marketing Services
Agreement and a Trademark License Agreement with Netscape. Under these
agreements, Excite will be responsible for the programming, production,
operations and advertising sales of "International Netscape Guide by Excite"
(the "Guide"), a new service which will be managed by Excite and made available
in Japan, Germany, France, UK and Australian markets, accessible from their
respective Netscape Web sites and from the Guide button on localized versions of
the Netscape Communicator tool bar. These agreements provide that revenue, if
any, from advertising on the Guide, will be shared between the Company and
Netscape. The Company made a one-time non-refundable license fee payment to
Netscape of $4.0 million in July 1997, which will be amortized over the terms of
these agreements.
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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"),
risks associated with the development and timely introduction and consumer
acceptance of the Company's personal finance channel to be jointly developed and
operated by Intuit Inc. ("Intuit"), the ability of the Company to develop and
introduce in a timely manner the International Netscape Guide by Excite and the
ability of such service to achieve consumer and advertiser acceptance for the
International Netscape Guide by Excite, particularly in the international market
where the Company has limited operating experience, the ability of the Company
to successfully integrate sponsored services into the Excite service and the
ability of the Company to meet minimum guaranteed impressions under such
agreements, the failure of the Company to anticipate and adapt to a developing
market, the rejection of the Company's services by Web consumers and/or
advertisers, the inability of the Company to maintain and increase levels of
traffic on the Excite Network, development of equal or superior services or
products by competitors, the failure of the market to adopt the Web as an
advertising medium, reductions in market prices for Web-based advertising as a
result of competition or otherwise, the inability of the Company to effectively
integrate the technology and operations of 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. In addition, because the
Company has limited experience with sponsorship advertising agreements, the
Company is unable to determine what effect such agreements will have on future
gross margins and results of operations. The following discussion also should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as amended by Form 10-K/A, filed with the Securities and Exchange
Commission on April 16, 1997.
OVERVIEW
The Company operates the Excite Network, which includes the Excite and
WebCrawler brands, and provides a gateway to the Web that organizes, aggregates
and delivers information to meet the needs of individual consumers. Excite,
formerly Architext Software, Inc., was formed in June 1994 and, from its
inception to September 1995, its operating activities related primarily to
recruiting personnel, raising capital, purchasing operating assets and providing
custom product development and consulting services. The Company first launched
its Excite search and directory service in October 1995. The Company has
achieved 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.
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The Company acquired the WebCrawler Assets (the "Acquisition") from AOL
for an aggregate of 1,950,000 shares of the Company's Convertible Preferred
Stock. The Acquisition, which was consummated in March 1997 (the "Closing"), was
recorded for accounting purposes as of December 1, 1996. The transaction was
accounted for as the acquisition of rights to developed and purchased in-process
technology and distribution rights. Of the total purchase price, $3.5 million
was allocated to purchased in-process technology and the remaining excess
purchase price of approximately $12.6 million was allocated to goodwill,
distribution rights, trademarks, bookmarks and trade names. The amount of the
purchase price allocated to purchased in-process technology was charged to the
Company's operations as of December 1, 1996. The identified intangible assets
and goodwill are being amortized over periods ranging from four months to three
years. (See Note 1 of Notes to Consolidated Financial Statements.)
In connection with the Acquisition and a distribution agreement, the
Company and AOL have agreed that a co-branded version of the Excite service will
be the exclusive provider of Web search and directory services to AOL's
customers for a minimum of two years. The Company will receive a share of
revenues generated by the co-branded version of the Excite services hosted on
AOL as royalties, and AOL will incur all hosting, advertising and selling
expenses. On March 13, 1997, the co-branded service "NetFind" became available
on AOL, which allows AOL subscribers easier access to Excite Search and Excite
Directory.
In March 1997, the Company entered into new agreements with Netscape to
continue the Premier Provider arrangement for the Excite brand, and entered into
a Marquee Provider agreement for the WebCrawler brand covering the period from
May 1, 1997 through April 30, 1998. Under the terms of these new agreements, the
Company is committed to make minimum payments of $8.25 million in exchange for a
guaranteed number of impressions. Of the $8.25 million minimum, $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.
In April 1997, the Company launched a channels-based format for its
service and content on the Excite brand to provide consumers with an interface
that reflects the way they navigate through other forms of media and enables
advertisers to more effectively reach target consumers. The Excite brand
includes 14 channels of topical interest such as Arts & Entertainment, Sports
and Business & Investing, among others. By combining existing services with
specialized information from content providers, Excite provides channel specific
content including topical news, directories, bulletin boards, chat and search
capabilities.
In June 1997, the Company sold 2.9 million shares of the Company's Common
Stock to Intuit at a price of $13.50 per share. Proceeds from this offering were
approximately $38.4 million net of offering costs. Also in June 1997, the
Company entered into a Joint Activities Agreement with Intuit. Under this
agreement, Intuit will become the exclusive provider and aggregator of financial
content on all of Excite's services, and Excite will become the exclusive search
and navigation service featured in the U.S. versions of Intuit's Quicken,
Quickbooks and TurboTax products. The two companies will share certain revenues
and expenses at varying amounts throughout the seven year term of this
agreement.
Also in June 1997, the Company entered into a Co-Marketing Services
Agreement and a Trademark License Agreement with Netscape. Under these
agreements, Excite will be responsible for the programming, production,
operations and advertising sales of "International Netscape Guide by Excite"
(the "Guide"), a new service which will be managed by Excite and made available
in Japan, Germany, France, UK and Australian markets, accessible from their
respective Netscape Web sites and from the Guide button on localized versions of
the Netscape Communicator tool bar. These agreements provide that revenue, if
any, from advertising on the Guide, will be shared between the Company and
Netscape. The Company made a one-time non-refundable trademark license fee
payment to Netscape of $4.0 million in July 1997, which will be amortized over
the terms of these agreements.
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Acquisitions involve a number of special risks. For example, the
assimilation of McKinley's and the Company's operations required, among other
things, the integration of service offerings, coordination of the research and
development and sales and marketing efforts of the two companies, the assumption
by the Company of approximately $10.0 million in liabilities, the addition of
approximately 50 personnel and the distraction of the Company's management from
the day-to-day business of the Company. There can also be no assurance that any
future acquisition, if consummated, would not have a material adverse effect on
the Company's business, results of operations and financial condition.
RESULTS OF OPERATIONS
REVENUES
Revenues increased by $6.7 million and $12.8 million from $2.8 million and
$4.2 million for the three and six months ended June 30, 1996, respectively, to
$9.5 million and $17.0 million for the comparable periods in 1997, respectively.
This increase is primarily the result of increased sales of advertisements, an
increase in sales of targeted advertising with higher rates charged to
advertisers, an increase in the number of advertisers purchasing advertising
banners on the Company's Web sites and an increase in sponsorship advertising
revenue. The Company expects to continue to derive substantially all of its
total revenue from selling advertisements on its network. Because the market for
advertising on the Web is intensely competitive, advertising rates could be
subject to pricing pressures in the future. If the Company is forced to reduce
its advertising rates or experiences lower CPM's (price per thousand
impressions) as a result of such competition or otherwise, future revenues could
be adversely affected. During the second quarter of 1997, the Company started to
sell a combination of sponsorship and banner advertising contracts in addition
to the banner advertising contracts historically sold by the Company. In
general, such sponsorship advertising contracts have longer terms than standard
banner advertising contracts, and also involve more integration with Excite's
services, such as the placement of buttons to draw attention to the users and
move such users from the Excite Network to the advertiser's Web site. For
example, late in the second quarter of 1997 the Company entered into sponsorship
and advertising agreements with Amazon.com, Inc. ("Amazon.com") and Ticketmaster
Online. Amazon.com will become the Excite brand's exclusive bookseller and will
be integrated throughout Excite's channels for the term of the agreement, which
is subject to termination by Amazon.com after the first year in the event
certain minimum guaranteed impression levels are not met.
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, costs related to revenue sharing agreements and
amortization of purchased technology. Including amortization of purchased
technology, total cost of revenues increased $3.5 million and $7.9 million from
$427,000 or 15% of revenues, and $816,000, or 19% of revenues, for the three and
six months ended June 30, 1996, respectively to $3.9 million, or 41% of
revenues, and $8.7 million, or 49% of revenues, for the three and six months
ended June 30, 1997, respectively. Cost of revenues, excluding the amortization
of purchased technology, increased $1.6 million and $3.6 million from $427,000,
or 15% of revenues and $816,000, or 19% of revenues for the three and six months
ended June 30, 1996, respectively, to $2.0 million or 21% of revenues and $4.4
million or 26% of revenues for the comparable periods in 1997, respectively. The
increase in absolute dollars is due primarily to increased personnel expenses
and equipment costs relating to maintaining and supporting the Company's Web
sites and increasing revenue sharing costs for the distribution of the Company's
services and the acquisition of content. Cost of revenues, excluding
amortization, in future periods are expected to increase in absolute dollars and
may increase as a percentage of revenues as the Company increases costs to
support expanded services.
In the three and six month periods ended June 30, 1997, the Company also
recognized, as a component of total cost of revenues, amortization of purchased
technology of $1.9 million and $4.3 million, respectively, related to the
purchase of the WebCrawler Assets. Amortization expense is expected to be
approximately $1.9
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million in each of the remaining two quarters of 1997, assuming no additional
acquisitions and no significant adjustments to the economic lives of the
underlying purchased technology.
GROSS MARGIN
Gross margin as a percentage of revenues was 85% and 81% for the three and
six month periods ended June 30, 1996, respectively, as compared to 59% and 49%
for the comparable periods of 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 the acquisition of the WebCrawler
Assets, and expansion of operations to support expanded Web site offerings also
contributed to the decrease. In the future, gross margins may be affected by the
types of advertisements sold and revenue-sharing provisions of certain
distributions and content agreements, including but not limited to the
agreements with Amazon.com and Intuit. 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 June 30, 1997. This trend reflects the
Company's rapid transition from the product development stage to marketing and
offering its services. The Company believes that continued expansion of
operations is essential to achieving and maintaining market leadership. As a
consequence, the Company intends to continue to increase expenditures in all
operating areas for the foreseeable future.
PRODUCT DEVELOPMENT. Product development expenses consist principally of
engineering and editorial personnel costs, allocation of overhead, equipment
depreciation, consulting fees and supplies. Costs related to research, design
and development of products have been charged to product development expense as
incurred. Product development expenses increased in absolute dollars by $1.1
million and $2.8 million from $2.1 million, or 75% of revenues and $3.5 million,
or 83% of revenues for the three and six months ended June 30, 1996,
respectively, to $3.2 million or 34% of revenues and $6.3 million or 37% of
revenues for the comparable periods in 1997, respectively. The increase in
absolute dollars was primarily attributable to an increase in engineering and
editorial headcount to support the move to a channels format for the Excite
service as well as increased product development activities resulting from the
acquisition of the WebCrawler Assets and the merger with McKinley. The Company
believes that a significant level of product development expense is required to
remain competitive and, accordingly, the Company anticipates that it will
continue to devote substantial resources to product development and that these
costs will increase in absolute dollars in future periods.
SALES AND MARKETING. Sales and marketing expenses consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
allocation of overhead, creative services, promotional and advertising expenses.
Sales and marketing expenses increased in absolute dollars by $3.3 million and
$7.1 million from $3.2 million, or 114% of revenues and $5.7 million, or 136% of
revenues for the three and six months ended June 30, 1996, respectively, to $6.5
million or 69% of revenues and $12.8 million or 75% of revenues for the
comparable periods in 1997, respectively. The increase in absolute dollars was
due primarily to the hiring of additional sales and marketing personnel. In
addition, the six months ended June 30, 1997 included increased advertising and
promotional expenses associated with the continuation of the Company's media
campaign that was launched during the fourth quarter of 1996 into the first
quarter of 1997. The Company expects to incur significant promotional and
advertising expenses and anticipates that these costs will increase in absolute
dollars although the Company has no current plans to undertake any promotional
and advertising campaign similar to that undertaken during the fourth quarter of
1996.
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DISTRIBUTION LICENSE FEES. Distribution license fees decreased from $10.0
million and $11.6 million for the three and six months ended June 30, 1996,
respectively, to $1.6 million and $1.7 million for the comparable periods in
1997, respectively. The first quarter of 1996 included a one-time, non-cash
charge of approximately $1.6 million related to the issuance of the AOL Warrant
in connection with a nonexclusive distribution agreement entered into in March
1996, which was amended on March 27, 1997 in connection with the acquisition of
the WebCrawler Assets and the entering into of a new distribution agreement to
be exercisable into an equivalent number of shares of Series E-3 Convertible
Preferred Stock. The second quarter of 1996 included a $10.0 million charge
relating to the Company's Premier Provider agreements with Netscape. In March
1997, the Company entered into new agreements, which commenced in May 1997,
whereby the Excite brand became one of four "Premier Providers" and the
WebCrawler brand became one of many "Marquee Providers" of search and navigation
services accessible from Netscape's "Net Search" page. Therefore, the second
quarter of 1997 includes distribution license fee expenses associated with these
new contracts for the Months of May and June only. The Company expects
distribution license fees to increase in future quarters as such periods will
include a full three months of expense, as well as potential increases based on
page view volumes. In addition, in June 1997 the Company entered into a
Co-Marketing Services Agreement and a Trademark License Agreement with Netscape.
Under these agreements, the Company will be responsible for the programming,
production, operations and advertising sales of "International Netscape Guide by
Excite," a new service which will be made available in Japan, Germany, France,
UK and Australian markets. In connection therewith, the Company made a payment
of $4.0 million to Netscape in July 1997, which will be amortized over the terms
of these agreements. (See Note 9 of Notes to Condensed Consolidated Financial
Statements for further discussion of each of the above contracts with Netscape.)
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 decreased in absolute dollars by $1.1
million and $1.0 million from $2.8 million, or 99% of revenues and $3.9 million,
or 94% of revenues for the three and six months ended June 30, 1996,
respectively, to $1.7 million or 17% of revenues and $2.9 million or 17% of
revenues for the comparable periods in 1997, respectively. The decrease in
general and administrative expenses in absolute dollars as a percentage of
revenues was primarily the result of approximately $594,000 of non-recurring
costs associated with McKinley's unsuccessful efforts to raise equity capital
through an initial public offering in the second quarter of 1996, as well as a
$629,000 note impairment reserve recorded in the second quarter of 1996. These
decreases were offset in part by costs associated with increased personnel,
professional service fees, provision for doubtful accounts and relocation to new
facilities to support the Company's growth. The Company anticipates that its
general and administrative expenses will increase in absolute dollars as the
Company expands its administrative and executive staff, adds infrastructure,
negotiates and assimilates acquisitions of acquired technologies and businesses
and continues to incur costs related to operating as a public company, such as
expenses related to directors' and officers' insurance, investor relations
programs and professional fees.
MERGER AND ACQUISITION COSTS. The Company has in the past, and may in
the future, acquire businesses, technologies, services, product lines, content
databases or access to content databases that are complimentary to the Company's
business. During the three and six months ended June 30, 1997, the Company
incurred merger and acquisition costs of $313,000 and $1.3 million,
respectively, relating to the amortization of goodwill and other purchased
intangibles resulting primarily from the acquisition of the WebCrawler Assets in
December 1996.
INTEREST INCOME (EXPENSE) AND OTHER. Interest income for the three and six
months ended June 30, 1997 was $114,000 and $344,000, respectively, as compared
to $491,000 and $521,000 for the three and six months ended June 30, 1996,
respectively. Interest income was higher in the 1996 periods as compared to the
same periods of 1997 primarily as a result of interest earned on the cash
received from the Company's initial public offering in April 1996, which has
since been used to fund operations. Interest and other expense increased from
$121,000 and $149,000 in the three and six months ended June 30, 1996,
respectively, to $225,000 and $344,000 for the three and six months ended June
30, 1997, respectively. This increase was due primarily to increased expenses
associated with capital lease obligations and interest paid on bank borrowings.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company had $41.8 million in unrestricted cash,
cash equivalents and short-term investments, an increase of $21.0 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. In June 1997, the Company sold 2.9 million
shares of the Company's Common Stock to Intuit at a price of $13.50 per share.
Proceeds from this offering were approximately $38.4 million net of offering
costs. During the third quarter of 1996, the Company completed its merger with
McKinley, and during the first quarter of 1997, completed its acquisition of the
WebCrawler Assets. These mergers and acquisitions resulted in significant
increases in headcount and overhead, as well as the assumption and payment of
additional liabilities. The Company maintains its cash and cash equivalents in
short-term and medium-term investment-grade interest-bearing securities until
required for other purposes.
In March 1997, the Company entered into a line of credit for $6.0 million
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 substantially 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 of June 30, 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 six month periods ended June
30, 1997 and 1996 used cash of approximately $17.7 million and $6.1 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 an advertising campaign launched during the
fourth quarter of 1996.
Investing activities for the six months ended June 30, 1997 and 1996 used
cash of $15.8 million and $1.9 million, respectively. The increased cash used
was primarily the result of net purchases of short-term investments and
purchases of property and equipment.
Financing activities for the six months ended June 30, 1997 and 1996
generated cash of $42.8 million and $51.2 million, respectively. Financing
activities for the first half of 1996 primarily consisted of the sale of
Redeemable Convertible Preferred Stock and debt securities totaling $12.3
million and the Company's initial public offering. Financing activities for the
first half of 1997 primarily consisted of a bank line of credit borrowing of
$6.0 million and the sale of Common Stock to Intuit. Capital expenditures have
been, and future expenditures are anticipated to be, primarily for facilities
and equipment to support expansion of the Company's operations and management
information systems. The Company expects that its capital expenditures will
increase as its employee base grows. As of June 30, 1997, the Company did not
have any material commitments for capital expenditures, although the Company
anticipates that its planned purchases of capital equipment and leasehold
improvements will require additional expenditures during the remainder of 1997,
a portion of which may be financed through equipment leases and bank borrowings.
Under the terms of the Premier Provider and the Marquee Provider
Agreements with Netscape (see Note 9 of Notes to Condensed Consolidated
Financial Statements,) the Company is committed to make minimum payments of
$8.25 million in exchange for a guaranteed number of impressions. Of the $8.25
million minimum, $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. In addition,
under the terms of a Co-Marketing Services Agreement and a Trademark License
Agreement with Netscape entered into in
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June 1997, the Company made a one-time non-refundable license fee payment of
$4.0 million to Netscape in July 1997.
The Company has completed a number of acquisitions and purchased a number
of investments in the past, and expects to make other acquisitions and
investments in the future. While the Company believes that such transactions
have been and will continue to be in the best interest of the Company and its
stockholders, these transactions involve risks and may require additional cash
investments by the Company.
The Company has incurred operating losses to date of approximately $66.9
million and has available working capital at June 30, 1997 of $32.4 million. The
Company believes the existing working capital balance together with cash flows
generated from advertising revenues will be sufficient to meet its anticipated
cash needs for working capital, capital expenditures and business expansion for
at least the next twelve months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company has an extremely limited operating history upon which an
evaluation of the Company and its current business can be based. In addition,
there is a lack of proven business models for companies like Excite which rely
substantially upon the sale of advertising on the Web. The Company's business
must be considered in light of the risks, expenses and problems frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as the Web and Web-based
advertising markets. See risks described above under "Forward Looking
Statements". There can be no assurance that the Company will be successful in
addressing such risks. The Company has achieved only limited revenues to date,
has incurred significant operating losses since inception and as of June 30,
1997, the Company had an accumulated deficit of approximately $66.9 million. The
Company has also generally experienced significant increases in operating losses
on an annual and quarterly basis since inception. Although the Company has
recently experienced significant revenue growth, there can be no assurance that
this growth rate will be sustained or that revenues will continue to grow. There
can also be no assurance that any revenue growth that the Company experiences
will be indicative of future operating results. To the extent that revenues do
not grow at anticipated rates or that increases in operating expenses precede or
are not subsequently followed by commensurate increases in revenues, or that the
Company is unable to adjust operating expense levels accordingly, the Company's
business, results of operations and financial condition will be materially and
adversely affected. Given the level of planned expenditures, the Company
anticipates that it will continue to incur operating losses through at least the
end of 1997. The extent of these losses will be contingent on the amount of
growth in the Company's advertising revenues. Although the Company does not
anticipate that its operating loss will continue to increase, there can be no
assurance that operating losses will not increase in the future or that the
Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; UNPREDICTABILITY OF FUTURE REVENUES
AND DEPENDENCE ON ADVERTISING REVENUES
As a result of the Company's extremely limited operating history, the
Company has limited meaningful historical financial data upon which to base
planned operating expenses. Accordingly, the Company's expense levels are based
in part on its expectations as to future advertising revenues, and to a large
extent are fixed. There can be no assurance that the Company will be able to
accurately predict the levels of future advertising revenues, particularly in
light of the intense competition for the sale of Web-based advertisements and
the uncertainty as to the viability of the Web as an advertising medium, and the
failure to do so would have a materially adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company derives substantially all of its revenues from the sale of advertising
pursuant to short-term advertising contracts. As a result, quarterly revenues
and operating results are dependent on advertising revenues received within the
quarter, which are difficult to forecast, and are also dependent on the
Company's ability to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. The cancellation or deferral of a small number of
existing advertising contracts, the termination of any longer term sponsorship
agreements, or the failure to obtain new advertising contracts in any quarter
could materially and
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adversely affect the Company's business, results of operations and financial
condition for such quarter. Furthermore, the Company derives advertising revenue
based on the amount of traffic, or page views, on the Excite Network.
Accordingly, any significant shortfall of traffic on the Excite Network in
relation to the Company's expectations, or the expectations of existing or
potential advertisers, would have an immediate material adverse effect on the
Company's business, results of operations and financial condition. In addition,
certain of the Company's short-term advertising contracts as well as its newer
sponsorship agreements require the Company to guarantee a minimum number of
impressions. In the event that these minimum impressions are not met, the
Company could be required to refund a portion of the fees from such advertisers,
or certain sponsorship agreements may be terminated. If the Company fails to
meet this guaranteed number of impressions, the ability of the Company to sell
advertising to new or existing advertisers or continue its sponsorship
agreements could be adversely affected. In addition, the Company's ability to
generate significant advertising revenues will depend, among other things, on
advertisers' acceptance of the Web as an effective and sustainable advertising
medium, the development of a large base of users of the Company's services
possessing demographic characteristics attractive to advertisers and the ability
of the Company to develop and update effective advertising delivery and
measurement systems. The Company believes that the number of companies relying
on fees from Web-based advertising has increased substantially during the past
year. Accordingly, the Company may face increased pricing pressure for the sale
of advertisements on its network. Moreover, "filter" software programs that
limit or remove advertising from a Web user's desktop are available. Widespread
adoption of such software by users could have a material adverse effect upon the
viability of advertising on the Web. Accordingly, there can be no assurance that
the Company will be successful in generating significant future advertising
revenues, and a failure to do so would have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's operating results have varied on a quarterly basis during
its limited operating history and the Company expects to experience significant
fluctuations in future quarterly operating results. Such fluctuations have been
and may in the future be caused by numerous factors, many of which are outside
the Company's control, including, without limitation, specific economic
conditions relating to the Internet and the Web, usage of the Web, demand for
advertising on the Excite Network as well as demand for Web-based advertising in
general, changes in advertising rates as a result of competition or otherwise,
seasonal trends in advertising sales, the advertising budgeting cycles of
advertisers, incurrence of charges in connection with the Company's distribution
relationships with Netscape, AOL and other Internet service providers ("ISPs")
and online service providers ("OSPs") or other third parties, demand for the
Company's services, incurrence of costs relating to acquisitions of businesses
or technologies, introduction or enhancement of services the Company and its
competitors, market acceptance of new services, delays in the introduction of
services or enhancements by the Company or its competitors, changes in the
Company's pricing policies or those of its competitors, mix of types of
advertisements sold, such as the amount of targeted advertising sold as a
percentage of total advertising sold or the number of sponsorship agreements
entered into, capacity constraints and dependencies on computer infrastructure
and general economic conditions. In order to promote and maintain awareness of
the Company's brands, the Company has in the past and may in the future
significantly increase its advertising and/or promotion budgets for a particular
quarter which could materially and adversely affect the Company's business,
results of operations and financial condition for such period. As a strategic
response to a changing competitive environment, the Company may elect from time
to time to make certain other pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on the Company's
business, results of operations and financial condition. As a result, the
Company believes that period-to-period comparisons of its results of operations
will not necessarily be meaningful and should not be relied upon as an
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter or quarters the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
DEPENDENCE ON NETSCAPE, AOL AND OTHER THIRD-PARTY RELATIONSHIPS
The Company is currently and will be in the future significantly dependent
on a number of third-party relationships to create traffic and provide content
on the Excite Network, and to make it more attractive to advertisers and
consumers. These relationships include arrangements relating to the positioning
of the Excite Network on Web browsers such as those offered by Netscape and
Microsoft and agreements with ISPs and
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OSPs such as AOL and Microsoft and also include arrangements for providing
content for certain services offered by the Company, such as the Joint
Activities Agreement with Intuit. The Company is also generally dependent on
other Web site operators that provide links to the Excite Network. Most of these
arrangements do not require future minimum commitments to use the Company's
services, to provide access or links to the Excite Network or to provide content
to the Company, are not exclusive and are short-term or may be terminated at the
convenience of the other party. There can be no assurance that the Company's
existing relationships will result in sustained business partnerships,
successful service offerings, or the generation of significant traffic on the
Excite Network or significant revenues for the Company.
Under its new Premier Provider and Marquee Provider Agreements with
Netscape, the Company's Excite service is designated as one of four "Premier
Providers" and the Company's WebCrawler brand is designated as one of many
"Marquee Providers" of search and navigation services accessible from the
Netscape "Net Search" page. The Company believes that a substantial portion of
its aggregate historical user traffic is attributable to Netscape. The Company
believes that it will continue to be substantially dependent on its relationship
with Netscape for a significant percentage of its domestic and international
traffic. See Note 9 of Notes to Condensed Consolidated Financial Statements.
The Company has also entered into a five-year distribution agreement with
AOL pursuant to which a co-branded version of the Excite search and directory
service is designated as the exclusive Web search and retrieval service for AOL
for at least a two year period. After the expiration of this initial two year
exclusivity period, the parties can extend the exclusive arrangement only by
mutual agreement. If the exclusivity period does not extend beyond the initial
two year term, the co-branded service would become the "default" search and
directory service on AOL, however, AOL could enter into a strategic relationship
with a competitor of the Company or offer its own competing services. In such an
event, the amount the Company's advertising revenues could be materially and
adversely affected. In addition, if the Company fails to satisfy certain
technical, product feature and editorial criteria during the term of the
agreement, if the Company and AOL fail to renew this agreement upon the
expiration of the five year term, or if any renewal is on materially worse terms
than the initial agreement with AOL, there could be a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, any decline in the number of AOL subscribers could adversely affect
the amount of traffic on the Excite Network.
RISK OF CAPACITY CONSTRAINTS; DEPENDENCE ON COMPUTER INFRASTRUCTURE
The Company is dependent on its ability to generate a high volume of
traffic to the Excite Network. Accordingly, the performance of the Excite
Network is critical to the Company's reputation, its ability to attract
advertisers and to achieve market acceptance of the network. Any system failure
that causes interruptions in the availability or increases response time of the
Company's services could reduce user satisfaction and traffic to the Excite
Network and, if sustained or repeated, would reduce the attractiveness of the
Excite Network to advertisers and consumers. The Company is also dependent upon
the communications infrastructure of the Internet Web browsers, ISPs,
OSPs and other Web site operators, all of which have experienced significant
outages in the past, for access to its network, and Web consumers have
experienced outages, delays and other difficulties due to system failures
unrelated to the Company's systems and services. Additional difficulties could
also materially and adversely affect consumer and advertiser satisfaction. To
the extent that the capacity restraints described above are not effectively
addressed by the Company, such constraints would have a material adverse effect
on the Company's business, results of operations and financial condition.
Substantially all of the Company's communications hardware and certain of
its computer hardware operations are located at leased facilities in Redwood
City, California, an area susceptible to earthquakes. The Company has
experienced system failures or outages from time to time in the past, which have
disrupted the operation of the Excite Network. There can be no assurance that a
system failure at this locations would not adversely affect the performance of
the Excite Network. These systems are also vulnerable to damage from fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. The Company does not presently have a disaster recovery plan.
Although the Company carries property and business interruption insurance with
low coverage limits, its coverage may not be adequate to compensate the Company
for all losses that may occur. Despite the implementation of network security
measures by the Company, its servers are also vulnerable to computer viruses,
physical or electronic break-ins and similar disruptive problems. Computer
-19-
<PAGE> 20
viruses, break-ins or other problems caused by third parties could lead to
interruptions, delays or cessations in service to users of the Excite Network.
The occurrence of any of these risks could have a material adverse effect on the
Company's business, results of operations and financial condition.
INTERNATIONAL EXPANSION
While the Company believes that expansion of its services into
international markets is important to its growth and while the Company has
recently entered into an agreement with Netscape to provide the International
Netscape Guide by Excite for certain countries, the Company has limited
experience in localization of its products and in marketing and distributing its
products internationally. There can be no assurance that the Company will be
successful in creating localized versions of its products, that such products
will be accepted by users and advertisers, or that the resulting revenues
generated will be adequate to offset the expense of establishing and maintaining
international operations. In addition, operating in international markets
exposes the Company to additional risks such as, but not limited to, compliance
with regulatory requirements and changes in these requirements, export controls
relating to technology, tariffs and other trade barriers, protection of
intellectual property rights, difficulties in staffing and managing
international operations, longer payment cycles and other collection problems,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences. The occurrence of any of these risks could have a
material adverse effect on any international operations established by the
Company and, consequently, on the Company's business, results of operations and
financial condition.
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 June 30,
1997, the high and low closing prices of the Common Stock were $21.13 and $7.88,
respectively) in response to quarterly variations in operating results,
announcements of technological innovations or new services by the Company or its
competitors, changes in financial estimates by securities analysts, or other
events or factors. In addition, the stock market has 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.
-20-
<PAGE> 21
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 1997, at the Company's Annual Meeting of Shareholders,
Excite's shareholders approved the following proposals. Proxies were solicited
by the Company pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended. As of April 28, 1997, the record date for the Annual Meeting,
there were approximately 12,359,402 shares of Excite Common Stock outstanding
and entitled to vote and 1,950,000 shares of Preferred Stock outstanding and
entitled to vote, of which 10,776,120 shares of Common Stock and 1,950,000
shares of Preferred Stock were present in person or by proxy and voted at the
meeting.
1. Proposal to elect six directors of the Company, each to serve until the next
Annual Meeting of Shareholders and until his successor is duly elected and
qualified or until his earlier resignation or removal.
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ------
<S> <C> <C>
George Bell ....... 10,730,390 45,730
Joseph R. Kraus, IV 10,729,790 46,330
Donn M. Davis ..... 10,730,990 45,130
Vinod Khosla ...... 10,730,390 45,730
Geoffrey Y. Yang .. 10,730,290 45,830
Stephen M. Case * . 1,950,000 --
</TABLE>
* - Mr. Case will serve as the Director appointed by the Company's
outstanding Preferred Stock holder pursuant to the Company's Article of
Incorporation.
2. Proposal to approve two amendments to the Company's 1996 Equity Incentive
Plan to increase the number of shares issuable thereunder by an aggregate of
3,255,000 shares.
<TABLE>
<CAPTION>
Common Stock
------------
<S> <C>
For........................................... 8,409,645
Against....................................... 710,797
Abstain....................................... 170,166
Broker Non-votes.............................. 1,485,512
</TABLE>
-21-
<PAGE> 22
<TABLE>
<CAPTION>
Preferred Stock
---------------
<S> <C>
For........................................... 1,950,000
</TABLE>
3. Proposal to approve an amendment to the Company's Amended and Restated
Articles of Incorporation to increase the authorized shares of Common Stock
from 25,000,000 to 50,000,000.
<TABLE>
<CAPTION>
Common Stock
------------
<S> <C>
For........................................... 10,530,567
Against....................................... 34,822
Abstain....................................... 171,840
Broker Non-votes.............................. 38,891
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
---------------
<S> <C>
For........................................... 1,950,000
</TABLE>
4. Proposal to ratify the selection of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
Common Stock
------------
<S> <C>
For........................................... 10,602,762
Against....................................... 6,385
Abstain....................................... 166,973
Broker Non-votes.............................. --
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
---------------
<S> <C>
For........................................... 1,950,000
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report:
11.01 Statement of Earnings Per Share
27.01 Financial Data Schedule (EDGAR version only)
99.01 Income Statement for the 12 months ended June 30, 1997
(b)The following reports on Form 8-K were filed during the quarter
ended June 30, 1997:
On April 2, 1997 the Company filed a Form 8-K (as amended by Form
8-K/A filed on May 9, 1997) pursuant to Items 2 and 7 of such Form
regarding the closing of the acquisition of the WebCrawler Assets
from AOL.
On June 19, 1997 the Company filed a Form 8-K pursuant to Item 5 of
such Form regarding the proposed sale of 2.9 million shares of
Excite Common Stock to Intuit Inc.
On July 9, 1997 the Company filed a Form 8-K pursuant to Item 5 of
such Form regarding the closing of the sale of 2.9 million shares
of Excite Common Stock to Intuit Inc. and the signing of a Joint
Activities Agreement with Intuit Inc.
-22-
<PAGE> 23
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EXCITE, INC.
Date: August 12, 1997 By: /s/ Robert C. Hood
---------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
By: /s/ George Bell
---------------------------------------
George Bell
President and Chief Executive Officer
-23-
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NUMBER EXHIBITS
- ------ --------
<S> <C>
11.01 Statement of Earnings Per Share
27.01 Financial Data Schedule
99.01 Income Statements for the 12
months ended June 30, 1997.
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
EXCITE, INC. EXHIBIT 11.01
STATEMENT OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
--------- --------- -------- --------
(In thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Shares used in computation of net loss per share:
PRIMARY:
Average common shares outstanding
during the period................ 12,504 11,968 12,359 7,390
Shares relating to SAB No. 64 and 83 -- -- -- 4,264
========= ========= ======== ========
Shares used in computing per share
amounts .......................... 12,504 11,968 12,359 11,654
========= ========= ======== ========
FULLY DILUTED:
Average common share outstanding
during the period ................ 12,504 11,968 12,359 7,390
Shares relating to SAB No. 64 and 83 -- -- -- 4,264
--------- --------- -------- --------
Shares used in computing per share
amounts .......................... 12,504 11,968 12,359 11,654
========= ========= ======== ========
Net loss ............................. $ (7,890) $ (15,408) $(16,674) $(21,052)
========= ========= ======== ========
NET LOSS PER SHARE:
Primary ............................ $ (0.63) $ (1.29) $ (1.35) $ (1.81)
========= ========= ======== ========
Fully Diluted ...................... $ (0.63) $ (1.29) $ (1.35) $ (1.81)
========= ========= ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXCITE,
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,308
<SECURITIES> 28,953
<RECEIVABLES> 8,535
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,795
<PP&E> 15,623
<DEPRECIATION> (4,411)
<TOTAL-ASSETS> 71,493
<CURRENT-LIABILITIES> 20,416
<BONDS> 0
0
17,441
<COMMON> 97,695
<OTHER-SE> (67,280)
<TOTAL-LIABILITY-AND-EQUITY> 47,856
<SALES> 0
<TOTAL-REVENUES> 17,010
<CGS> 0
<TOTAL-COSTS> 8,719
<OTHER-EXPENSES> 24,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> (16,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,674)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
EXCITE, INC. EXHIBIT 99.01
INCOME STATEMENT FOR THE 12 MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
Pursuant to Rule 158 of the Securities Act of 1933, set forth below is an
earnings statement covering the twelve month period ending June 30, 1997.
<TABLE>
<CAPTION>
12 MONTHS ENDED
JUNE 30, 1997
--------
<S> <C>
Revenues ................................... $ 27,577
Cost of revenues:
Cost of revenues excluding amortization .. 7,529
Amortization of purchased technology ..... 4,523
--------
Total cost of revenues ............. 12,052
--------
Gross profit ............................... 15,525
Operating expenses:
Product development ...................... 10,828
Sales and marketing ...................... 28,225
Distribution license fees ................ 1,913
General and administrative ............... 6,100
Charge for purchased in-process technology 3,500
Merger and acquisition related costs,
including amortization of goodwill and
other purchased intangibles ........... 4,327
--------
Total operating expenses ........... 54,893
--------
Operating loss ............................. (39,368)
--------
Interest income ............................ 1,233
Interest and other expense ................. (604)
--------
Net loss ................................... $(38,739)
========
Net loss per share ......................... $ (3.18)
========
Shares used in computing net loss per share 12,170
========
</TABLE>
