<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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)
(650) 568-6000
(Registrant's telephone number, including area code)
--------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES /X/ NO
----- -----
As of July 31, 1998 there were 50,888,302 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
Items 1 and 2 of the Company's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1998 are amended to read as follows:
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 20,168 $ 15,366
Short-term investments ........................................... 15,804 16,398
Restricted investments ........................................... 287 302
Accounts receivable .............................................. 27,090 20,907
Related party receivable ......................................... 3,809 174
Prepaid expenses and other current assets ........................ 15,780 1,975
--------- ---------
Total current assets .......................................... 82,938 55,122
Property and equipment ............................................... 20,205 15,143
Investment in affiliated company ..................................... 1,326 --
Prepaid distribution fees ............................................ 16,393 --
Intangible assets .................................................... 1,871 1,771
Other assets ......................................................... 2,841 4,657
--------- ---------
$ 125,574 $ 76,693
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Bank line of credit and other notes payable ...................... $ 6,557 $ 6,100
Accounts payable ................................................. 6,123 5,717
Capital lease obligations, current portion ....................... 4,869 3,178
Non-lease financing, current portion ............................. 1,162 1,176
Related party liabilities ........................................ 1,988 1,575
Other accrued liabilities ........................................ 21,196 14,406
--------- ---------
Total current liabilities ..................................... 41,895 32,152
Capital lease obligations ............................................ 7,081 3,076
Non-lease financing .................................................. 1,034 1,613
Convertible note ..................................................... 5,000 5,000
Shareholders' equity:
Convertible preferred stock ...................................... 813 9,518
Common stock ..................................................... 256,594 122,913
Deferred compensation ............................................ (1,157) (1,440)
Unrealized gain on available-for-sale investments ................ 105 15
Accumulated deficit .............................................. (185,791) (96,154)
--------- ---------
Total shareholders' equity .................................... 70,564 34,852
--------- ---------
$ 125,574 $ 76,693
========= =========
</TABLE>
(1) Derived from audited financial statements as of December 31, 1997
See notes to condensed consolidated financial statements.
3
<PAGE> 3
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,
----------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................... $ 33,005 $ 10,089 $ 56,006 $ 17,604
Cost of revenues:
Hosting costs ........................... 3,667 1,684 6,455 3,536
Royalties and other cost of revenues .... 2,792 556 5,598 1,096
Amortization of purchased technology .... -- 1,938 -- 4,337
--------- --------- --------- ---------
Total cost of revenues ............ 6,459 4,178 12,053 8,969
--------- --------- --------- ---------
Gross profit ............................... 26,546 5,911 43,953 8,635
Operating expenses:
Research and development ................ 7,291 3,617 13,191 6,683
Sales and marketing ..................... 14,918 7,199 24,992 13,480
Distribution license fees and data
acquisition costs .................... 62,011 1,707 65,997 1,737
General and administrative .............. 3,928 1,843 6,684 3,132
In-process technology ................... 16,200 2,346 16,200 2,346
Merger and acquisition related costs,
including amortization of goodwill and
other purchased intangibles .......... 1,167 463 2,144 1,416
--------- --------- --------- ---------
Total operating expenses .......... 105,515 17,175 129,208 28,794
--------- --------- --------- ---------
Operating loss ............................. (78,969) (11,264) (85,255) (20,159)
Net interest expense and other ............. (649) (112) (843) (1)
Equity share of losses of affiliated company (551) -- (1,030) --
--------- --------- --------- ---------
Net loss ................................... $ (80,169) $ (11,376) $ (87,128) $ (20,160)
========= ========= ========= =========
Basic and diluted net loss per share ....... $ (1.72) $ (0.46) $ (1.98) $ (0.84)
========= ========= ========= =========
Shares used in computing net loss per share 46,600 24,686 43,967 24,142
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 4
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $(87,128) $(20,160)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation ..................................... 444 80
Depreciation .............................................................. 5,157 2,416
Amortization of intangibles ............................................... 701 5,754
In-process technology ..................................................... 16,200 2,346
Gain on disposal of fixed assets .......................................... (62) --
Issuance of warrants ...................................................... 16,117 --
Changes in assets and liabilities:
Accounts receivable ..................................................... (5,683) (5,372)
Related party receivable ............................................... (3,222) --
Prepaid distribution fees ............................................... (28,429) --
Prepaid expenses and other current assets ............................... (1,797) (990)
Other assets ............................................................ 1,816 (326)
Accounts payable ........................................................ 113 (658)
Accrued compensation .................................................... 406 1,813
Other accrued liabilities ............................................... 5,475 (2,408)
-------- --------
Net cash used in operating activities ................................ (79,892) (17,505)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................................... (2,354) (6,183)
Proceeds from disposal of fixed assets ...................................... 257 --
Purchases of investments .................................................... (13,949) (30,129)
Sales and maturities of investments ......................................... 15,765 19,567
Investment in affiliated company ............................................ (1,326) (290)
-------- --------
Net cash provided by (used in) investing activities .................. (1,607) (17,035)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease and other financing obligations ................... (2,515) (787)
Proceeds from bank lines of credit and other notes payable .................. -- 6,000
Payments on bank lines of credit and other notes payable .................... (117) (1,100)
Proceeds from sale of redeemable convertible preferred stock ................ -- 6,385
Proceeds from issuance of common stock ...................................... 88,933 38,681
-------- --------
Net cash provided by financing activities ............................ 86,301 49,179
-------- --------
Net increase in cash and cash equivalents ....................................... 4,802 14,639
Cash and cash equivalents at beginning of period ................................ 15,366 3,971
-------- --------
Cash and cash equivalents at end of period ...................................... $ 20,168 $ 18,610
======== ========
NON-CASH FINANCING ACTIVITIES:
Amendment of common stock warrant to preferred stock warrant ................ $ -- $ 1,625
Property and equipment acquired under capital leases and other
non-lease financing ...................................................... 7,593 1,967
Conversion of preferred stock to common stock ............................... 8,705 --
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 5
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software,
Inc., which was formed in June 1994, is a global Internet media company offering
consumers and advertisers comprehensive Internet navigation services with
extensive personalization capabilities. The Excite Network consists of the
Excite (www.excite.com) and WebCrawler (www.webcrawler.com) brands, which
provide 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 navigate the Web, the Excite Network contains a suite of
specialized information services, organized under numerous topical channels
which combine proprietary search technology, editorial Web reviews, aggregated
content from third parties, bulletin boards, chat and other community features
and personalization capabilities. Localized versions of Excite are available in
Australia, China, France, Germany, Japan, Sweden, the Netherlands and the United
Kingdom. The Company conducts its business within two industry segments,
including the selling of banner and sponsorship advertising on the Excite
Network to customers in various industries, and, through the merger with
MatchLogic, Inc. ("MatchLogic") (see Note 2), ad serving and targeting services.
Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, which are in the opinion of
management, necessary for a fair presentation of the interim periods presented.
The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending December 31, 1998. 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. A condensed consolidated statement of comprehensive loss has not
been presented because the components of comprehensive loss are not material.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes as included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission on March 31, 1998 and the Company's audited
supplemental consolidated financial statements reflecting the combined
operations of the Company and MatchLogic, a company that the Company acquired in
February 1998 in a transaction accounted for as a pooling of interests, as
included in the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 15, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. Actual results may
differ from those estimates.
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. To the extent that
impression deliveries are not met, the Company defers recognition of the
corresponding revenues. The Company has recently entered into a number of
longer-term advertising and commerce sponsorship agreements. These agreements
generally involve more integration with Excite services and provide for more
varied sources of revenue to Excite over the term of the agreements, which
average between 2 to 3 years. Under these agreements, Excite earns fees for
generating impressions, which in some instances are guaranteed. These revenues,
as well as other revenues, are generally recognized ratably over the term of the
agreements, provided that the Company does not have any significant remaining
obligations and collection of the resulting receivable is probable. To the
extent that impression deliveries are falling short of the guarantees, the
Company defers recognition of the corresponding
6
<PAGE> 6
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenues. The terms of a number of these agreements provide that revenues from
advertising and electronic commerce transactions are to be shared between the
advertiser and Excite as realized.
Per Share Amounts
The Company has excluded all convertible debt, convertible preferred stock,
warrants and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all periods
presented. In February 1998, all of the shares of Preferred Stock that were
outstanding at December 31, 1997 converted into an equivalent number of shares
of Common Stock as part of the merger with MatchLogic (see Note 2). The
following table sets forth the computation of basic and diluted earnings per
share for the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ---------- ---------
(In thousands, except per share data; unaudited)
<S> <C> <C> <C> <C>
Net loss $ (80,169) $ (11,376) $ (87,128) $ (20,160)
=========== =========== ========== =========
Weighted average shares outstanding 47,370 25,889 44,860 25,159
Weighted average common shares issued subject to
repurchase agreements (770) (1,203) (893) (1,017)
----------- ----------- ---------- ---------
Shares used to compute basic and diluted net
loss per share 46,600 24,686 43,967 24,142
=========== =========== ========== =========
Basic and diluted net loss per share $ (1.72) $ (0.46) $ (1.98) $ (0.84)
========== ========== ========== ==========
</TABLE>
Stock Split
In June 1998, the Board of Directors declared a two-for-one stock split
which was in the form of a 100% stock dividend. The dividend was paid on July
20, 1998 to shareholders of record on July 6, 1998. All of the share and per
share data have been adjusted to reflect this stock split.
2. BUSINESS COMBINATIONS
Excite completed the following acquisitions for the six months ended June
30, 1998:
<TABLE>
<CAPTION>
Shares of Excite Shares of Options and
Company Acquired Date Acquired Common Stock Issued Warrants Assumed
- -------------------------------------------- -------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
MatchLogic, Inc. ("MatchLogic") February 1998 6,122,240 1,048,838
Classifieds2000, Inc. ("Classifieds2000") April 1998 1,729,742 50,238
Throw, Inc. ("Throw") April 1998 329,790 318,018
</TABLE>
In February 1998, the Company acquired MatchLogic, a private company
providing advertisers and agencies with Internet advertising management services
that began operations in May 1997, in a merger transaction accounted for as a
pooling of interests. In connection with the acquisition of MatchLogic, the
Company incurred approximately $700,000 in merger related expenses primarily for
legal and other professional fees in the first quarter of 1998. All financial
information has been restated to reflect the combined operations of the Company
and MatchLogic.
7
<PAGE> 7
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Separate results of the combined entities through the periods preceding the
merger (February 2, 1998) are as follows:
<TABLE>
<CAPTION>
PERIOD
ENDED SIX MONTHS ENDED
FEBRUARY 2, 1998 JUNE 30, 1997
------------------ -----------------
(In thousands, unaudited)
<S> <C> <C>
Revenues:
Excite $ 5,598 $ 17,010
MatchLogic 376 594
------------ ------------
$ 5,974 $ 17,604
============ ============
Net loss:
Excite $ (1,656) $ (16,674)
MatchLogic (1,388) (3,486)
------------- -------------
$ (3,044) $ (20,160)
============ ============
</TABLE>
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
In April 1998, the Company acquired Classifieds2000, a provider of
Web-based classified ads that began operations in July 1996, in a transaction
accounted for as a pooling of interests. In connection with the acquisition of
Classifieds2000, the Company incurred approximately $743,000 in merger-related
expenses primarily for legal and other professional fees in the second quarter
of 1998. The results of operations and financial position of Classifieds2000
were not material to the Company's consolidated financial statements in any
period, and therefore, amounts prior to the date of acquisition were not
combined with the Company's financial statements.
In April 1998, the Company acquired Throw, a developer of community
products that began operations in April 1996, in a transaction accounted for as
a purchase. The total purchase price was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
acquisition. This includes an allocation of approximately $800,000 to other
intangibles assets, which are being amortized on a straight-line basis through
1999. Approximately, $16.2 million was allocated to in-process technology and
charged to operations at the time of acquisition. To determine the value of the
in-process research and development, the Company considered, among other
factors, the state of development of each project, the time and cost needed 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. This analysis results in amounts
assigned to in-process research and development projects that had not yet
reached technological feasibility and does not have alternative future uses.
Pro-forma results of operations have not been presented because the effect of
this acquisition was not material to the Company's consolidated financial
position, results of operations, and cash flows.
3. SALE OF COMMON STOCK
In May 1998, the Company filed a registration statement on Form S-3 with
the United States Securities and Exchange Commission for the sale of shares of
the Company's Common Stock in a public offering. The Company sold 3,105,000
shares of the Common Stock in June 1998 at a price of $31.50 per share. Of the
3,105,000 shares sold, 2,870,000 shares (including 405,000 shares which were
purchased on the exercise of the underwriters over-allotment option) were
offered directly by the Company and 325,000 shares were offered by selling
shareholders. The Company did not receive any proceeds from the sale of shares
by selling shareholders. Proceeds to the Company from this offering were
approximately $84.3 million net of offering costs.
8
<PAGE> 8
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION
The Company operates in the Internet navigation industry and the Internet
ad serving and targeting business segments. Prior to the merger with MatchLogic,
the Company operated only in the Internet navigation industry. The Company's
management has determined the operating segments based upon how the business is
managed and operated. MatchLogic, which provides Internet ad serving and
targeting services, operates as an independent subsidiary of Excite with its own
sales force, research and development and operations departments. This asset
will be subject to regular review to ensure that the actual financial effects
experienced under the arrangement approximate those anticipated at the time of
the transaction. Additional adjustments to write down the asset may be required
if subsequent analysis shows that the remaining asset is not supported by the
revised estimates.
Information by Operating Segment:
<TABLE>
<CAPTION>
INTERNET AD SERVING
NAVIGATION & TARGETING TOTAL
----------- ----------- -----
(In thousands; unaudited)
<S> <C> <C> <C>
Three Months Ended June 30, 1998
Operating information:
Revenues from external customers $ 28,368 $ 4,637 $ 33,005
Distribution license fees and data acquisition costs 61,127 884 62,011
Segment operating income (loss) (76,027) (2,942) (78,969)
Six Months Ended June 30, 1998
Operating information:
Revenues from external customers $ 49,457 $ 6,549 $ 56,006
Distribution license fees and data acquisition costs 64,504 1,493 65,997
Segment operating income (loss) (77,944) (7,311) (85,255)
Balance sheet information:
Total assets $ 116,801 $ 8,773 $ 125,574
</TABLE>
5. RELATED PARTY TRANSACTION
In April 1998, the Company borrowed $50.0 million from a principal
shareholder. The loan bore interest at 5.9% per annum and was due no later than
October 30, 1998. In June 1998, the Company repaid the loan in full, plus
interest of approximately $410,000, with proceeds from the public offering. (See
Note 3).
6. SIGNIFICANT AGREEMENTS
In April 1998, the Company and Netscape Communications Corporation
("Netscape") entered into a two-year agreement (the "Netcenter Agreement") with
respect to Netscape's recently announced "Netcenter" online service. Under the
Netcenter Agreement, the Company will provide programming and content for the
co-branded channels to be offered on Netscape's Netcenter online service and
will develop a Web search and directory service for Netscape (collectively, the
"Co-Branded Services"). In addition, the Company's Classifieds2000 service will
be featured as the provider of classified advertising (excluding career and job
posting classified ads) for the Netcenter service. The Company will also be
featured as a "premier provider" on the "Net Search" page of Netscape's Web site
and will also be similarly featured on the Netcenter "Netcenter Widget" tool.
The Company will be responsible for advertising sales for, and will pay to
Netscape a percentage of advertising revenues generated from, the co-branded
Netcenter channels, the search service and the directory service, and will also
be required to make payments based upon the amount of traffic generated from the
Net Search page and the Netcenter Widget tool. The Company has paid a total of
$70.0 million as a prepayment of its obligations under the Netcenter Agreement.
In addition, the Company has issued a warrant to Netscape to purchase 846,158
shares of the Company's Common Stock at an exercise price of approximately
$29.55 per share and a second warrant to purchase shares of the Company's Common
Stock at an aggregate exercise price of $10.0 million. The fair value of the
warrants issued was $16.1 million.
The success of Netcenter, and the Co-Branded Services in particular, will
be substantially dependent on the amount of traffic on Netcenter. Although
Netscape has made certain exposure guarantees with respect to Netcenter over the
term of the Netcenter Agreement, there can be no assurance that these guarantees
will be fulfilled. There are no minimum guaranteed revenues under the Netcenter
Agreement, and there can be no assurance as to the level of revenues that the
Company may generate from the Co-Branded Services. Many of the services to be
offered by Netcenter will compete directly with those offered by the Excite
Network. The level of advertising revenues that may be generated by the Company
from the Co-Branded Services is subject to a number of risks and uncertainties,
many of which are beyond the Company's control. In addition, the Company expects
to incur significant costs to develop, host and sell advertising on the
Co-Branded Services, including the costs of hiring a significant number of
additional technical and sales personnel. The Company will not be reimbursed for
any of these costs.
9
<PAGE> 9
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the second quarter of 1998 the Company charged a total of $56.8 million
to operations. The amount expensed represents the amount by which the sum of the
prepayment guarantees ($70.0 million) and the independent valuation of the
warrants issued ($16.1 million) exceeds the anticipated future net revenues from
the Netcenter Agreement over its two year term. Future net revenues were
calculated using estimated gross revenues less the probable future costs of all
goods and services necessary to earn the revenues. The remaining capitalized
amount of $29.3 million will be amortized ratably over the remainder of the term
of the Netcenter Agreement. This asset will be subject to regular review to
ensure that the actual financial effects experienced under the arrangement
approximate those anticipated at the time of the transaction. Additional
adjustments to write down the asset may be required if subsequent analysis
shows that the remaining asset is not supported by the revised estimates.
7. SUBSEQUENT EVENTS
In July 1998, Netscape exercised a portion of the warrant issued under the
Netcenter Agreement (see Note 6) and paid approximately $5.9 million to purchase
200,000 shares of the Company's Common stock.
In 1997, the Company entered into and borrowed on a $6.0 million line of
credit. In July 1998, the Company repaid this line in full. The Company is
currently negotiating a new line of credit.
10
<PAGE> 10
- --------------------------------------------------------------------------------
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, 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, 1997, filed with the
Securities and Exchange Commission on March 31, 1998 and the Company's audited
supplemental consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K as filed with the Securities and Exchange
Commission on May 15, 1998.
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,
Inc., 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 services. The Company first launched
its Excite search and directory service in October 1995. 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 currently includes 18
channels of topical interest such as Entertainment, Sports and Money/Investing.
In September 1997, the Company launched a similar channels-based format for its
WebCrawler brand that currently includes 19 channels.
Historically, advertising revenues have been derived principally from
short-term advertising contracts in which the Company guarantees a minimum
number of impressions (a view of an advertisement banner by a consumer) for a
fixed fee. Such banner advertising revenue is dependent upon both the number of
impressions and the rate per thousand impressions ("CPMs") charged. The Company
generally charges higher rates for advertisements focused on targeted groups,
either by key-word associations or affiliations with specific content, than for
general rotation advertisements on the Excite Network.
During its limited operating history, the Company has experienced seasonal
fluctuations in the amount of banner advertisements purchased on its network,
with advertisers historically purchasing fewer advertisements in the first
calendar quarter of each year. Because the market for Web advertising is an
emerging market, additional seasonal patterns in Web advertising may develop in
the future as the market matures.
In 1997, the Company began entering into longer-term advertising and
commerce sponsorship agreements. These agreements generally involve more
integration with the Excite Network and provide for more varied sources of
revenue to Excite over the term of the agreements, which average from two to
three years. Under these agreements, Excite earns fees for generating
impressions that in some instances are guaranteed. Sponsorship customers
accounted for approximately 24% and 27% of advertising revenues for 1997 and the
six months ended June 30, 1998, respectively. Revenues are generally recognized
ratably over the term of the agreement, provided that the Company does not have
any significant remaining obligations and collection of the resulting receivable
is probable. To the extent that impression deliveries are falling short of the
guarantees, the Company defers recognition of the corresponding revenues. A
number of these agreements also provide that revenues or gross margins from
advertising and electronic commerce transactions are to be shared between the
advertiser and Excite as realized. Revenues or margin sharing recognized from
such electronic commerce transactions were insignificant through the second
quarter of 1998, and are expected to be insignificant for the
11
<PAGE> 11
remainder of 1998. The Company does not expect revenue growth relating to
sponsorship advertising revenues to continue at the current rate in future
periods as availability of exclusive sponsorships may be limited. See "Risk
Factors that May Affect Future Results -- Risks Related to Sponsorships"
and "--Risks Associated with Banner Advertising."
In April 1998, the Company and Netscape entered into a two-year agreement
(the "Netcenter Agreement"), under which the Company will, among other things,
provide, host and sell advertising for certain Co-Branded Services for
Netscape's recently announced Netcenter Service (the "Co-Branded Services"). In
connection with the Netscape Agreement, the Company has paid to Netscape a total
of $70.0 million (the "Cash Payment"). Also in connection with the Netcenter
Agreement, the Company has issued to Netscape a warrant to purchase 846,158
shares of the Company's Common Stock at an exercise price of approximately
$29.55 per share and a second warrant to purchase shares of the Company's Common
Stock at an aggregate exercise price of $10.0 million (together, the
"Warrants"). The fair value of the first warrant and the aggregate $10.0 million
exercise price of the second warrant has been estimated to be $16.1 million. A
portion of the Cash Payment and the value assigned to the Warrants totaling
$56.8 million were expensed to distribution license fees and data acquisition
costs during the second quarter of 1998. The remaining $29.3 million of the Cash
Payment was capitalized and will be amortized over the two-year term of the
Netcenter Agreement. Under the Netcenter Agreement, the Company will only
recognize revenues generated from the Co-Branded Services and not from any other
part of Netcenter. A portion of the revenues will be credited against the
Company's revenue-sharing obligation to Netscape until the Company recoups a
specified amount of the Cash Payment. Thereafter, the Company must pay Netscape
a portion of additional revenues generated from the Co-Branded Services. There
can be no assurance that the Co-Branded Services will generate future revenues.
See "Risk Factors that May Affect Future Results--Risks Related to Netcenter
Agreement."
The Company has acquired a number of businesses, technologies, services,
product lines and content. In April 1998, the Company acquired Throw, a
developer of community products, issued approximately 330,000 shares of its
Common Stock, assumed options and warrants to purchase up to an aggregate of
approximately 318,000 shares of its Common Stock. Also in April 1998, the
Company acquired Classifieds2000, a provider of online classified ads. The
Company issued approximately 1,730,000 shares of its Common Stock to former
stockholders of Classifieds2000 and assumed options and warrants to purchase up
to approximately 50,000 shares of its Common Stock. In February 1998, the
Company acquired MatchLogic, a provider of solutions for the management and
optimization of Internet advertising campaigns. The Company issued approximately
6.1 million shares of its Common Stock to former stockholders of MatchLogic and
assumed options and warrants to purchase up to approximately 1,049,000 shares of
its Common Stock. The acquisition of MatchLogic and Classifieds2000 were
accounted for as a pooling of interests and the acquisition of Throw was
accounted for as a purchase.
All financial information for dates and periods prior to the merger with
MatchLogic has been restated to reflect the combined operations of the Company
and MatchLogic. Financial information for dates and periods prior to the
acquisition of Classifieds2000 has not been restated to reflect the combined
operations of the Company and Classifieds2000, as Classifieds2000's results of
operations were not material to the Company's consolidated financial statements
in any historical period. See Note 2 and "Risk Factors that May Affect Future
Results--Acquisition Strategy; Integration of Past and Future Acquisitions."
The Company has incurred significant operating losses since inception, and
as of June 30, 1998, the Company had an accumulated deficit of approximately
$185.8 million. Although the Company experienced significant revenue growth
during 1997 and the first half of 1998, there can be no assurance that this
growth rate will be sustained or that revenues will continue to grow or that
historical operating results will be indicative of future operating results. In
addition, as the Company has grown, its operating expenses have increased, and
the Company expects that its operating expenses will continue to increase as a
result of its acquisitions, the performance of its obligations under the
Netcenter Agreement, its increased sales and marketing efforts, its increased
funding for development activities and the increased general and administrative
staff needed to support the Company's growth. 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. There can be no assurance that in the future
the Company will be profitable on a quarterly or annual basis.
12
<PAGE> 12
RESULTS OF OPERATIONS
REVENUES
Revenues were $33.0 million for the second quarter of 1998, as compared to
$10.1 million for the second quarter of 1997, an increase of $22.9 million or
227%. For the first half of 1998 and 1997, revenues were $56.0 million and $17.6
million, respectively, an increase of $38.4 million or 218%. This increase in
both periods is primarily the result of an increase in the number of advertisers
purchasing advertising banners on the Company's Web sites, an increase in
sponsorship advertising revenue, and to a lesser extent, an increase in sales of
targeted advertisements with higher rates. Also contributing to the increase in
revenues was the increased revenues attributable to MatchLogic, which began
operations in May 1997. Revenues from international operations were not
significant during the three and six months ended June 30, 1998 and 1997.
The Company expects to continue to derive a substantial amount of its total
revenues from selling advertisements. Because the market for advertising on the
Web is intensely competitive, advertising rates could be subject to pricing
pressures in the future. If the Company is forced to reduce its advertising
rates or experiences lower CPMs (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: hosting costs; royalties and other
cost of revenues; and amortization of purchased technology. Hosting costs relate
to the maintenance and technical support of the Excite Network, and are
comprised principally of personnel costs, telecommunications costs, equipment
depreciation and overhead allocations. Royalties and other cost of revenues
include expenses related to royalties, license agreements and revenue sharing
agreements for content and other services such as email and chat room services.
For the second quarter and first half of 1997, the Company recognized
amortization of purchased technology of $1.9 million and $4.3 million,
respectively, related to the WebCrawler acquisition. There were no corresponding
costs for the comparable periods in 1998 as the cost of the technology was fully
amortized at December 31, 1997.
Total cost of revenues increased in absolute dollars by $2.3 million to
$6.5 million, or 20% of revenues for the second quarter of 1998, from $4.2
million, or 41% of revenues for the comparable period in the prior year. For the
current year to date, total cost of revenues increased by $3.1 million to $12.1
million, or 22% of revenues, from $9.0 million, or 51% of revenues for the
comparable period in the prior year. Hosting costs for the second quarter of
1998 increased in absolute dollars by $2.0 million to $3.7 million, or 11% of
revenues, from $1.7 million, or 17% of revenues for the comparable period in the
prior year. For the current year to date, hosting costs increased by $2.9
million to $6.5 million, or 12% of revenues, from $3.5 million, or 20% of
revenues for the comparable period in the prior year. The increase in hosting
costs is due primarily to increased personnel expenses and equipment costs
relating to maintaining and supporting the Company's Web sites and services.
Royalties and other cost of revenues increased in absolute dollars by $2.2
million to $2.8 million, or 8% of revenues, for the second quarter 1998 from
$556,000, or 6% of revenues for the comparable period in the prior year. For the
current year to date, royalties and other cost of revenues increased by $4.5
million to $5.6 million, or 10% of revenues, from $1.1 million, or 6% of
revenues for the comparable period in the prior year. The increase in royalties
and other cost of revenues was primarily due to increased royalties and margin
sharing payments from revenue sharing agreements.
Excluding amortization of purchased technology, total cost of revenues
increased by $4.2 million to $6.5 million, or 20% of revenues for the second
quarter of 1998, from $2.2 million, or 22% of revenues for the comparable period
in the prior year. Excluding amortization of purchased technology, total cost of
revenues for the first half of 1998 increased by $7.4 million to $12.1 million,
or 22% of revenues from $4.6 million, or 26% of revenues for the comparable
period in the prior year.
Excluding amortization, cost of revenues in future periods is expected to
increase in absolute dollars and may increase as a percentage of revenues as the
Company increases costs to support expanded services and content. The Company
also expects to experience increased hosting costs in connection with performing
its obligations under the Netcenter Agreement and to experience increased
royalties and other cost of revenues as a result of the revenue sharing
provisions of the Netcenter Agreement.
13
<PAGE> 13
GROSS PROFIT
Gross profit increased by $20.6 million or 349% to $26.5 million or 80% of
revenues for the second quarter of 1998, from $5.9 million or 59% of revenue for
the comparable period in the prior year. For the first half of 1998, gross
profit increased by $35.3 million or 409% to $44.0 million or 78% of revenues,
from $8.6 million or 49% of revenue for the comparable period in 1997. The
increase in gross profit in absolute dollars and as a percentage of revenues was
primarily due to the fact that revenues grew at a faster rate than hosting costs
and royalties and other cost of revenues, a favorable product mix, and the
elimination of amortization of purchased technology discussed above. In the
future, gross profit may be affected by the types of advertisements sold and
revenue sharing provisions of distribution and content agreements. These items
have negatively affected gross profit in the past and may continue to negatively
affect it in the future. 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 in the future.
Operating Expenses
Research and Development. Research and development expenses consist
principally of engineering and editorial personnel costs, equipment
depreciation, consulting fees, supplies and allocation of overhead. Research and
development expenses for the second quarter of 1998 increased to $7.3 million,
or 22% of revenues, from $3.6 million, or 36% of revenues in the comparable
period of the prior year. Research and development expenses for the first six
months of 1998 increased to $13.2 million, or 24% or revenues, from $6.7
million, or 38% of revenues in the comparable period of the prior year. The
increase in absolute dollars was primarily attributable to increased expenses as
a result of the Classifieds2000 and Throw acquisitions, as well as an increase
in engineering and editorial headcount to support the Company's channels format
and personalization capabilities for the Excite Network. The Company believes
that a significant level of research and development expense is required to
remain competitive and, accordingly, the Company anticipates that it will
continue to devote substantial resources to research and development and that
these costs will increase in absolute dollars in future periods. The Company
also expects to continue to experience increased research and development
expenses in order to integrate acquired technologies and provide programming and
content for the Co-Branded Services of Netcenter.
Sales and Marketing. Sales and marketing expenses consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
promotional and advertising expenses and allocation of overhead. Sales and
marketing expenses for the second quarter of 1998 increased to $14.9 million, or
45% of revenues, from $7.2 million, or 71% of revenues, in the comparable period
of the prior year. For the current year to date, sales and marketing expenses
increased to $25.0 million, or 45% of revenues, from $13.5 million, or 77% of
revenues in the comparable period for the prior year. The increase in absolute
dollars was primarily due to the hiring of additional sales and marketing
personnel and increased expenses resulting from the acquisition of Classifieds
and Throw. Promotional expenses remained relatively constant in the second
quarter and first half of 1998, as compared to the same period of the prior year
as the prior year period included costs associated with a national media
campaign that started in the fourth quarter of 1996. The Company expects to
continue to incur significant promotional and advertising expenses and
anticipates that these costs will increase in absolute dollars in future periods
as the Company promotes its brands and introduces new services in order to
create and maintain brand loyalty among customers. The Company also expects to
continue to experience increased sales and marketing expenses as it is
responsible for all advertising sales on the Co-Branded Services of Netcenter.
Distribution License Fees and Data Acquisition Costs. Distribution license
fees and data acquisition costs consist principally of fees paid to third-party
Internet companies such as Netscape to provide entry points to the Excite
Network and costs to update and maintain the ad targeting and tracking database
which is continually being updated by the Company's MatchLogic subsidiary.
Distribution license fees and data acquisition costs were $62.0 million for the
second quarter of 1998, as compared to $1.7 million for the comparable period in
1997. For the current year to date, distribution license fees and data
acquisition costs were $66.0 million,
14
<PAGE> 14
compared to $1.7 million for the comparable period in the prior year. The 1998
costs included a $56.8 million charge related to the Netcenter Agreement. The
approximately $56.8 million amount expensed in the second quarter of 1998
represents the amount by which the sum of the prepayment guarantees ($70.0
million) and the independent valuation of the warrants issued ($16.1 million)
exceeds the anticipated future net revenues from the Netcenter Agreement over
its two year term. Future net revenues were calculated using estimated gross
revenues less the probable future costs of all goods and services necessary to
earn the revenues. The remaining capitalized amount of approximately $29.3
million will be amortized ratably over the remainder of the term of the
Netcenter Agreement. The 1998 costs also include distribution license fees
related to agreements entered into with Netscape in March 1997 as well as data
acquisition costs incurred by MatchLogic during the period.
In the future, high traffic Web sites, Internet service providers,
providers of Web browsers or other distribution channels could require cash
payments or other types of consideration as compensation for listing or
promoting the Excite Network, which could result in increased distribution
license fees. See "Risk Factors that May Affect Future Results--Risks Related to
Netcenter Agreement."
General and Administrative. General and administrative expenses consist
principally of administrative and executive personnel costs, provision for
doubtful accounts, fees for professional services and allocation of overhead.
General and administrative expenses for the second quarter of 1998 increased to
$3.9 million, or 12% of revenues, from $1.8 million, or 18% of revenues, in the
comparable period of the prior year. General and administrative expenses for the
first half of 1998 increased to $6.7 million, or 12% of revenues, from $3.1
million, or 18% of revenues, in the comparable period of the prior year. The
increase in absolute dollars is primarily due to increased personnel costs to
support the expansion and infrastructure of the Company's operations and global
business strategy. In particular, the acquisition of Classifieds2000 and the
growth in the Company's finance and administrative departments contributed to
this increase. 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 and assimilates
acquisitions of acquired technologies and businesses. In addition, the Company
plans to continue to run MatchLogic as an independent subsidiary with its own
administrative function.
In-Process Technology. During the first half of 1998 and 1997, the Company
incurred charges for in-process technology of $16.2 million and $2.3 million,
respectively. The Company acquired Throw in April 1998, accounted for the
transaction as a purchase, and of the total purchase price, $16.2 million was
allocated to in-process technology and charged to operations in the second
quarter of 1998. The 1997 charge of $2.3 million related to the value of
acquired in-process technology that had not reached technological feasibility at
the time of MathLogic's formation in May 1997. To determine the value of the
in-process technology, the Company considered, among other factors, the state of
development of each project, the time and cost needed 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. This analysis results in amounts assigned to in-process
research and development projects that had not yet reached technological
feasibility and does not have alternative future uses.
Other Merger and Acquisition Related Costs, including Amortization of
Goodwill and Other Intangible Assets. During the second quarter of 1998 and
1997, the Company incurred merger and acquisition related costs of $1.2 million
and $463,000, respectively. During the first half of 1998 and 1997, the Company
incurred merger and acquisition related costs of $2.1 million and $1.4 million,
respectively. In 1998, the Company incurred charges of approximately $743,000
and $700,000 for the acquisition of Classifieds2000 and MatchLogic,
respectively. The remainder of the merger and acquisition related costs for the
first half of 1998 and all of the costs for the comparable period of the prior
year related to the amortization of goodwill and other purchased intangibles
resulting primarily from the WebCrawler acquisition.
Net Interest Expense and Other. Net interest expense and other increased to
$649,000 for the second quarter of 1998, compared to $112,000 for the comparable
period of the prior year. Current year to date, net interest expense and other
increased to $843,000 compared to $1,000 for the comparable period of the prior
year. This increase in net interest expense and other was due primarily to an
increase in interest expense resulting from the $50 million note payable due to
Intuit, as well as additional capital lease obligations, non-lease financing
obligations and the convertible note issued to Itochu Corporation. The overall
increase in net interest expense and other was partially offset by an increase
in interest income earned on cash received in June 1998 from the Company's
public offering, which was used to fund operations and its obligations under the
Netcenter Agreement.
Equity Share of Losses of Affiliated Company. In October 1997, the Company
and Itochu Corporation and certain affiliated entities (collectively "Itochu")
entered into a joint venture agreement with respect to the Company's
wholly-owned subsidiary, Excite Japan, in order to provide Web-based information
services to the
15
<PAGE> 15
Japanese market. The Company currently holds, and intends to
retain, a 50% equity interest in Excite Japan. For the three and six months
ended June 30, 1998, Excite's share of the losses of Excite Japan was $551,000
and $1.0 million, respectively. The Company expects that it will record
increased losses from Excite Japan for at least the remainder of 1998.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company has reviewed its
internal programs, and has determined that there are no significant Year 2000
issues within the Company's systems or services. However, although the Company
believes that its systems are Year 2000 compliant, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Furthermore, the purchasing patterns of advertisers may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for Web advertising or sponsorship of Web services, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had $36.0 million in unrestricted cash, cash
equivalents and short-term investments, an increase of $4.2 million from
December 31, 1997. During the six months ended June 30, 1998, the Company
completed its merger with MatchLogic, Classifieds and Throw. The Company
maintains its cash and cash equivalents in short-term and medium-term
investment-grade interest-bearing securities until required for other purposes.
The Company's operating activities for the first half of 1998 and 1997 used
cash of approximately $79.9 million and $17.5 million, respectively. The
increased use of cash in 1998 was mainly attributable to the $70 million cash
prepayment to Netscape under the Netcenter Agreement. The Company borrowed $50.0
million from Intuit, which is a principal shareholder of the Company, in April
1998 to fund a portion of this payment to Netscape. In June 1998, the Company
repaid the loan in full, plus interest of approximately $410,000, with proceeds
from the Company's public offering which closed in June 1998.
Investing activities for the first half of 1998 and 1997 used cash of $1.6
million and $17.0 million, respectively. In the first half of 1998 and 1997,
cash was used for purchases of short-term investments, property and equipment,
and contributions towards its investment in Excite Japan, offset by the sales of
short-term investments. 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, 1998, 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 1998, a portion of which may be
financed through equipment leases and bank borrowings. At June 30, 1998 the
Company had $7.7 million available on equipment lease lines, and the Company
believes that additional lease financing will be available to it if necessary.
Financing activities for the first half of 1998 and 1997 generated cash of
$86.3 million and $49.2 million, respectively. Financing activities for the
first half of 1998 primarily consisted of cash received in connection with the
issuance of stock through the Company's public offering which was completed in
June 1998 and, to a lesser extent, option exercises under the Company's equity
incentive plan. 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.
16
<PAGE> 16
In 1997, the Company entered into and borrowed on a $6.0 million line of
credit. In July 1998, the Company repaid this line in full. The Company is
currently negotiating a new line of credit.
To date, the Company has had limited international operations and its
exposure to foreign currency exchange rate fluctuations has been minimal. The
Company evaluates its foreign currency exchange rate exposure on an ongoing
basis.
The Company has completed a number of mergers and acquisitions in the past,
and expects to make other acquisitions and investments in joint ventures in the
future. These mergers resulted in significant increases in headcount and
overhead, as well as the assumption and payment of additional liabilities. While
the Company believes that such transactions have been and will continue to be in
the best interests of the Company and its shareholders, these transactions
involve risks and may require additional cash investments by the Company.
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. 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. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentages ownership of the shareholder of the Company will be reduced,
shareholders may experience additional dilution and such securities may have
rights, preferences or privileges senior to those of the holders of the
Company's common stock.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Limited Operating History; No Assurance of Profitability. The Company was
founded in June 1994 and generated only limited revenues prior to 1996.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its current business can be based. In addition,
the Company's business model is evolving and relies substantially upon the sale
of Web advertising. The Company's business must be considered in light of the
risks, expenses and problems frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as Web advertising. Specifically, such risks include, without
limitation: the inability of the Company to maintain and increase levels of
traffic on the Excite Network; the inability of the Company to derive sufficient
revenues from the Co-Branded Services of Netscape's Netcenter service and the
additional costs the Company expects to incur in order to perform its
obligations under the Netcenter Agreement; the inability of the Company to
effectively integrate the technology and operations of acquired businesses or
technologies with its operations, increased operating expenses as a result of
the Company's recent acquisitions, the inability of the Company to expand its
international operations, particularly in light of the Company's limited
operating experience in the international market; the failure by the Company to
continue to develop and extend the Excite and WebCrawler brands; the inability
of the Company to meet minimum guaranteed impressions under sponsorship
agreements; the inability of the Company to develop or acquire content for its
services; the inability of the Company to generate commerce-related revenues;
the failure of the Company to anticipate and adapt to a developing market; the
introduction and development of equal or superior services or products by
competitors, particularly in light of the fact that Microsoft and Netscape,
operators of two of the most heavily-trafficked Web sites, offer competitive
services; the failure of the market to adopt the Web as an advertising and
commercial medium; reductions in market prices for Web advertising as a result
of competition or otherwise; the inability of the Company to achieve higher cost
per thousand impressions ("CPM") rates for targeted advertising or to increase
the percentage of its advertising inventory sold; government regulation; the
inability of the Company to identify, attract, retain and motivate qualified
personnel; and general economic conditions. There can be no assurance that the
Company will be successful in addressing such risks.
Potential Fluctuations in Quarterly Results; Unpredictability of Future
Revenues. The Company's operating results have varied on a quarterly basis
during its limited operating history and the Company expects to experience
significant fluctuations in future quarterly operating results. Such
fluctuations have been and may in the future be caused by numerous factors, many
of which are outside the Company's control, including but not limited to:
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
17
<PAGE> 17
budgeting cycles of advertisers; incurrence of charges in connection with the
Netcenter Agreement, the Company's distribution relationships and acquisitions;
demand for the Company's services; incurrence of costs relating to acquisitions
of businesses or technologies; introduction or enhancement of new or existing
services by the Company and its competitors; market acceptance of new services;
delays in the introduction of services or enhancements by the Company or its
competitors; mix of types of advertisements sold, such as the amount of targeted
advertising, which generally has higher CPM rates, sold as a percentage of total
advertising sold; capacity constraints and dependencies on computer
infrastructure; and general economic conditions.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. 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. Also, 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 be materially and adversely affected. See "Volatility of Stock Price".
Risks Related to Netcenter Agreement. Under the Netcenter Agreement, the
Company will only receive revenues generated from the Co-Branded Services and
not from any other part of the Netcenter. In addition, the Company must pay
Netscape a portion of such revenues after recouping part of the Cash Payment.
Thereafter, the Company must pay Netscape a percentage of the revenues received
from the Co-Branded Services. The amount to be expensed under the Netcenter
Agreement represents the amount by which the sum of the prepayment guarantees
($70.0 million) and the independent valuation of the warrants issued ($16.1
million) exceeds the anticipated future net revenues from the Netcenter
Agreement over its two year term. There are no minimum guaranteed revenues under
the Netcenter Agreement, and there can be no assurance as to the level of
revenues that the Company will generate from the Co-Branded Services. The level
of advertising revenues generated by the Company from the Co-Branded Services is
subject to a number of risks and uncertainties, many of which are beyond the
Company's control. These include general risks associated with providing an
advertising-supported Internet service, uncertainty as to whether the Company
can increase its sales and marketing capabilities in order to sell sufficient
advertising on the Co-Branded Services, pricing competition from Netscape as a
result of advertising sold on the parts of Netcenter other than the Co-Branded
Services, and risks that channels on Netcenter other than the Co-Branded
Channels (such as a business channel and a sports channel) may be potentially
more attractive to advertisers than the Co-Branded Services. Because Netscape is
responsible for programming the Netcenter home page and other portions of
Netcenter that are not co-branded, Excite is relying upon Netscape's programming
of the Netcenter home page and other portions of Netcenter to create a
demographic mix of traffic flows that is similar to that experienced by the
Company. Netscape has no experience in such activities. As a result, the Company
has no means of controlling the programming on these pages so as to maximize
the exposure of the co-branded channels and search services. As a result, the
Company also has little means of controlling the mix of traffic to the
co-branded channels and search service, which could have different revenue
opportunities to the Company as advertisers may be willing to pay more to
advertise on certain content channels. As a result, there can be no assurance
that the Company can generate substantial revenues from the Co-Branded Services
to recoup the portion of the Cash Payment against which the Company's revenue
sharing obligations will be offset, or to recoup costs incurred by the Company
under the Netcenter Agreement.
The Company has hired a significant number of technical and sales personnel
and is incurring additional overhead costs in order to develop, host and sell
advertising on the Co-Branded Services. The Company will not be reimbursed for
these costs. The failure to generate revenues from the Co-Branded Services
sufficient to recoup these additional costs would have a material adverse effect
on the Company's business, results of operations and financial condition.
The success of Netcenter, and the Co-Branded Services in particular, will
be substantially dependent on the amount of traffic on Netcenter. Although
Netscape has made certain exposure guarantees with respect to Netcenter over the
term of the Netcenter Agreement, there can be no assurance that these guarantees
will be fulfilled. There is intense competition for attracting Web users, which
competition may be exacerbated by the upcoming release of Microsoft's Windows 98
operating system. Furthermore, many current Web users may not choose to utilize
Netcenter over other available Internet services. Any failure of Netcenter to
attract substantial user traffic would materially and adversely affect the
Company's business, results of operations and financial condition. Additionally,
the Netcenter Agreement provides that all page views generated from the
Co-Branded Services shall be deemed to be traffic attributable to Netscape. As a
result, the Company may not receive credit, under certain audience measurement
statistics, which are commonly used by advertisers in making their advertising
placements, for traffic generated through the Co-Branded Services.
As part of the Netcenter Agreement, the Excite Network will also be
featured as a "premier provider" on Netscape's Net Search page, and will be
similarly featured on the "Netcenter Widget" tool, which will be accessible from
Netcenter. Because Netscape only guarantees a specified number of impressions
from its Net Search page (as compared to a number of users who "click through"
to the Excite Network), there can be no assurance that this new "premier
provider" arrangement will result in significant increases in traffic on the
Excite Network. Although Netscape has guaranteed a minimum number of users who
"click through" to the Excite Network from the Netcenter Widget, Netscape is not
obligated to keep this tool on Netcenter after the first six months of the term
of the Netcenter Agreement. Accordingly, there can also be no assurance that
this tool will provide the Excite Network with significant amounts of traffic.
In entering into the Netcenter Agreement, Excite has assumed that "click
throughs" from the Netsearch page will be similar to the historical performance
of the Netsearch page experienced by Excite over the prior two agreements with
Netscape. The "click through" rate is influenced by brand strength of the search
provider, and by the layout and programming of the Netsearch page itself. Thus,
Excite's projections for the co-branded search service are dependent on
Netscape's ability to establish its brand as a search provider and its ability
to program the site to maintain the historical level of "click throughs." Under
performance, in terms of users clicking through from the home page to the
co-branded channels or to Excite services, would negatively impact Excite's
expectations for the Agreement.
The distribution of traffic from Netscape to Excite throughout the term of
the Netcenter Agreement significantly impacts Excite's ability to recoup the
amount it has prepaid under the Netcenter Agreement. Although Netscape has made
certain traffic exposure guarantees, there can be no assurance that these
guarantees will be fulfilled within the two-year term of this contract. Nor is
there a guarantee that the timing of the delivery of these impressions during
this period will be consistent with the assumptions made in the Company's
determination of the value of the Netcenter Agreement, as Netscape is not
obligated to meet these guarantees on any specific schedule and, if the delivery
of Netscape's traffic guarantees is more heavily weighted toward the end of the
contract term than projected, Excite's expectations as to the net present value
of the Agreement would be negatively impacted.
Upon the termination of the Netcenter Agreement (other than a termination
in connection with certain acquisitions of or by Netscape), Netscape will have a
perpetual, irrevocable license to utilize certain technology used by Excite to
provide the Co-Branded Services. Netscape will also have the right to sublicense
this technology to third parties. As a result, upon termination of the Netcenter
Agreement, Netscape will be able to operate Netcenter independently, without any
significant royalty or payment obligations to Excite. In addition, if Netscape
sublicenses this technology to a third party, the Excite Network could face
additional competition, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Netcenter Agreement is subject to termination if the Company materially
breaches its obligations under the Netcenter Agreement. In addition, if Netscape
believes that the Company's Excite service or that the content provided by
Excite for the Netcenter service contains any content that Netscape deems likely
to cause
18
<PAGE> 18
growth of the use of the Web may be inhibited for a number of reasons,
including, but not limited to, potentially inadequate development of network
infrastructure, security concerns, inconsistent quality of service, lack of
availability of cost-effective, high-speed service and government regulations.
To the extent that use of the Web continues to grow, there can be no assurance
that the Internet infrastructure will continue to support the demands placed on
it by such growth or that the performance or reliability of the Internet will
not be adversely affected. In addition, the Web as an advertising medium has not
been available for a sufficient period of time to gauge its effectiveness as
compared with traditional advertising media, and therefore the Web is an
unproven medium for advertising-supported services. Accordingly, the Company's
future operating results will depend substantially upon the increased use of the
Web for information, publication, distribution and commerce and the emergence of
the Web as an effective advertising medium.
The Company's ability to generate significant advertising revenues will also
depend on, among other things, the development of a large base of users of the
Company's services possessing demographic characteristics attractive to
advertisers, the ability of the Company to accurately measure its user base and
the ability of the Company to develop or acquire effective advertising delivery
and measurement systems. Many of the Company's advertisers have only limited
experience with the Web as an advertising medium, have not yet devoted a
significant portion of their advertising expenditures to Web-based advertising,
and may not find such advertising to be effective for promoting their products
and services relative to traditional print and broadcast media. The adoption of
Web advertising, particularly by those entities that have historically relied
upon traditional media for advertising, requires the acceptance of a new way of
conducting business and exchanging information. Entities that already have
invested substantial resources in other methods of conducting business may be
reluctant to adopt a new strategy that may limit or compete with their existing
efforts. There can be no assurance that the market for Web advertising will
continue to emerge or become sustainable. If the market fails to develop or
develops more slowly than expected, the Company's business, results of
operations and financial condition could be materially and adversely affected.
No standards have been widely accepted for the measurement of the effectiveness
of Web-based advertising, and there can be no assurance that such standards will
develop sufficiently to support the Web as an effective advertising medium.
There can be no assurance that advertisers will continue to accept the Company's
or other third-party measurements of impressions, or that such measurements will
not contain errors. In such event, the Company's advertising revenues could be
materially adversely affected, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, there is intense competition in the sale of advertising on the
Web, resulting in a wide range of rates quoted and a variety of pricing models
offered by different vendors for a variety of advertising services, which makes
it difficult to project future levels of advertising revenues and rates. It is
also difficult to predict which pricing models will be adopted by the industry
or advertisers. For example, advertising rates based on the number of "click
throughs," or user requests for additional information made by clicking on the
advertisement from the Company's network to the advertiser's Web pages, instead
of rates based solely on the number of impressions displayed on users' computer
screens, would materially adversely affect the Company's revenues. As a result
of these risks, there can be no assurance that the Company will be successful in
generating significant future advertising revenues from Web-based advertising,
and the failure to do so would have a material adverse effect on the Company's
business, results of operations and financial condition.
Further, there can be no assurance that advertisers will determine that
banner advertising, the delivery of which currently comprises a substantial
portion of the Company's revenues, is an effective or attractive advertising
medium, and there can be no assurance that the Company will effectively
transition to any other forms of Web advertising should they develop and achieve
market acceptance. Moreover, "filter" software programs that limit or prevent
advertising from being delivered to a Web user's computer are available.
Widespread adoption of such software by users could have a material adverse
effect upon the commercial viability of Web advertising, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
20
<PAGE> 19
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXCITE, INC.
Date: September 9, 1998 By: /s/ Robert C. Hood
---------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
24
