<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 2, 1998
EXCITE, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California
------------------------------------------------------
(State or other jurisdiction of incorporation)
0-28064 77-0378215
--------------------------- -------------------------
(Commission (IRS Employer
File Number) Identification No.)
555 Broadway, Redwood City, CA 94063
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(650) 568-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
The undersigned registrant hereby reports the following items related to the
restatement of the Registrant's financial statements to reflect the acquisition
of MatchLogic, Inc. ("MatchLogic") in a transaction accounted for as a pooling
of interests:
ITEM 5: OTHER EVENTS
(a) SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
See Exhibit 99.1 for the supplemental consolidated financial
statements of Excite, Inc.
(b) Exhibits.
The following exhibits are filed herewith:
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Price Waterhouse LLP, independent accountants
99.1 Excite, Inc. supplemental consolidated audited financial
statements
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this amendment to be signed on its behalf by
the undersigned thereunto duly authorized.
EXCITE, INC.
Date: May 15, 1998 By: /s/ Robert C. Hood
------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
-3-
<PAGE> 4
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Price Waterhouse LLP, Independent Accountants
99.1 Excite, Inc. Supplemental Consolidated Audited Financial
Statements
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the use of our report dated January 22, 1998, except for Note 14,
as to which the date is February 2, 1998, with respect to the supplemental
consolidated financial statements of Excite, Inc. included in this Form 8-K.
/s/ Ernst & Young LLP
----------------------------------------
ERNST & YOUNG LLP
Palo Alto, California
May 15, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Current Report on
Form 8-K of our report dated August 6, 1996, with appears on page 42 of the 1996
Annual Report on Form 10-K/A of Excite,Inc. relating to the financial statements
of The McKinley Group, Inc. which do not appear in such Annual Report on Form
10-K/A.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Price Waterhouse LLP
San Jose, California
May 14, 1998
<PAGE> 1
Exhibit 99.1
EXCITE, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Not used.................................................... F-3
Supplemental Consolidated Balance Sheets as of December 31,
1996 and 1997............................................. F-4
Supplemental Consolidated Statements of Operations for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Supplemental Consolidated Statements of Shareholders' Equity
(Net Capital Deficiency) for the years ended December 31,
1995, 1996 and 1997....................................... F-6
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997.............. F-7
Notes to Supplemental Consolidated Financial Statements..... F-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... F-26
</TABLE>
F-1
<PAGE> 2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Excite, Inc.
We have audited the supplemental consolidated balance sheets of Excite,Inc.
(formed as a result of the consolidation of Excite Inc. and MatchLogic, Inc.) as
of December 31, 1996 and 1997 and the related supplemental consolidated
statements of operations, shareholders' equity (net capital deficiency) and cash
flows for each of the three years in the period ended December 31, 1997. The
supplemental consolidated financial statements give retroactive effect to the
merger of Excite Inc. and MatchLogic, Inc. on February 2, 1998, which has been
accounted for using the pooling of interests method as described in the notes to
the supplemental consolidated financial statements. These supplemental
consolidated financial statements are the responsibility of the management of
Excite, Inc. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits. In August 1996, the
Company merged with The McKinley Group, Inc. in a transaction that was accounted
for as a pooling of interests. We did not audit the financial statements of The
McKinley Group, Inc. for the year ended December 31, 1995, which statements
reflect net losses constituting approximately 49% of the related consolidated
financial statement totals for the year ended December 31, 1995. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for The McKinley Group,
Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Excite, Inc. at
December 31, 1996 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, after giving retroactive effect to the merger of MatchLogic, Inc. as
described in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
Palo Alto, California
January 22, 1998
except for Note 14, as to which the date is
February 2, 1998
F-2
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F-3
<PAGE> 4
EXCITE, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,971 $ 15,366
Short-term investments.................................... 16,863 16,398
Restricted investments.................................... 1,496 302
Accounts receivable, net.................................. 3,340 20,907
Prepaid expenses and other current assets................. 1,070 2,149
-------- --------
Total current assets.............................. 26,740 55,122
Property and equipment, net................................. 8,194 15,143
Intangible assets, net...................................... 11,841 1,771
Other assets................................................ 923 4,657
-------- --------
$ 47,698 $ 76,693
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit and other notes
payable................................................ $ 1,200 $ 6,100
Accounts payable.......................................... 6,699 5,717
Capital lease obligations, current portion................ 2,325 3,178
Non-lease financing, current portion...................... -- 1,176
Related party liabilities................................. -- 1,575
Other accrued liabilities................................. 8,392 14,406
-------- --------
Total current liabilities......................... 18,616 32,152
Capital lease obligations................................... 3,985 3,076
Non-lease financing......................................... -- 1,613
Convertible note............................................ -- 5,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock issuable, no par value
Authorized -- 4,000 shares issuable in series
Issuable at December 31, 1996 -- 1,950 shares;
Issued and outstanding at December 31, 1997 -- 2,291
shares,
issuable -- 325 shares for unexercised warrant....... 15,816 9,518
Common stock, no par value
Authorized -- 50,000 shares
Issued and outstanding -- 12,108 and 19,446 shares at
December 31, 1996 and 1997, respectively.............. 59,999 122,913
Deferred compensation..................................... (388) (1,440)
Unrealized gain (loss) on available-for-sale securities... (128) 15
Accumulated deficit....................................... (50,202) (96,154)
-------- --------
Total shareholders' equity........................ 25,097 34,852
-------- --------
$ 47,698 $ 76,693
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE> 5
EXCITE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Advertising revenues...................................... $ 145 $ 14,030 $ 52,049
Contract and other revenues............................... 808 727 2,065
------- -------- --------
Total revenues.................................... 953 14,757 54,114
Cost of revenues:
Hosting costs............................................. 65 3,296 8,586
Royalties and other cost of revenues...................... 163 667 4,235
Amortization of purchased technology...................... -- 186 8,214
------- -------- --------
Total cost of revenues............................ 228 4,149 21,035
------- -------- --------
Gross profit................................................ 725 10,608 33,079
Operating expenses:
Research and development.................................. 2,810 8,030 16,694
Sales and marketing....................................... 1,648 21,103 32,009
Distribution license fees and data acquisition costs...... -- 11,878 9,365
General and administrative................................ 2,326 7,081 9,477
Charge for purchased in-process technology................ 331 3,500 2,346
Other merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles............................................ -- 3,134 3,989
------- -------- --------
Total operating expenses.......................... 7,115 54,726 73,880
------- -------- --------
Operating loss.............................................. (6,390) (44,118) (40,801)
Interest income............................................. 5 1,410 1,303
Interest expense and other.................................. (50) (409) (1,417)
Equity share of losses of affiliated company................ -- -- (477)
------- -------- --------
Net loss.................................................... $(6,435) $(43,117) $(41,392)
======= ======== ========
Basic and diluted net loss per share........................ $ (6.15) $ (4.75) $ (2.94)
======= ======== ========
Shares used in computing net loss per share................. 1,046 9,076 14,077
======= ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE> 6
EXCITE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
OTHER
PREFERRED STOCK COMMON STOCK COMPREHENSIVE
----------------- ----------------- DEFERRED INCOME ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION (LOSS) DEFICIT TOTAL
------ -------- ------ -------- ------------ ------------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... -- $ -- 1,290 $ 108 $ -- $ -- $ (650) $ (542)
--------
Net loss........................ -- -- -- -- -- -- (6,435) (6,435)
Unrealized gain on
available-for-sale
investments................... -- -- -- -- -- 152 -- 152
--------
Comprehensive income
(loss).................. (6,283)
--------
Issuance of common stock for
cash.......................... -- -- 1,024 1,921 -- -- -- 1,921
Exercise of stock options....... -- -- 1 6 -- -- -- 6
Issuance of common stock for
equity securities............. -- -- 33 300 -- -- -- 300
Issuance of common stock for
services...................... -- -- 8 196 -- -- -- 196
Note payable conversion......... -- -- 22 275 -- -- -- 275
Issuance of common stock and
warrant in connection with
asset purchase agreement...... -- -- 70 84 -- -- -- 84
Deferred compensation related to
stock options, net of
amortization.................. -- -- -- 640 (631) -- -- 9
------ -------- ------ -------- ------- ----- -------- --------
Balance at December 31, 1995...... -- -- 2,448 3,530 (631) 152 (7,085) (4,034)
--------
Net loss........................ -- -- -- -- -- -- (43,117) (43,117)
Unrealized loss on
available-for-sale
investments................... -- -- -- -- -- (280) -- (280)
--------
Comprehensive income
(loss).................. -- (43,397)
--------
Issuance of common stock for
cash.......................... -- -- 283 1,412 -- -- -- 1,412
Notes payable conversions....... -- -- 87 400 -- -- -- 400
Issuance of warrant in
connection with distribution
agreement..................... -- -- -- 1,625 -- -- -- 1,625
Issuance of shares, note payable
conversion and exercise of
outstanding warrants in
connection with the Company's
IPO, net of issuance costs of
$3,682........................ -- -- 3,651 36,418 -- -- -- 36,418
Conversion of redeemable
preferred stock in connection
with the Company's IPO........ -- -- 5,324 16,129 -- -- -- 16,129
Exercise of stock options....... -- -- 300 375 -- -- -- 375
Amortization of deferred
compensation, net of
cancellations................. -- -- -- 7 243 -- -- 250
Issuance of common and preferred
stock issuable in connection
with asset purchase
agreements.................... 1,950 15,816 15 103 -- -- -- 15,919
------ -------- ------ -------- ------- ----- -------- --------
Balance at December 31, 1996...... 1,950 15,816 12,108 59,999 (388) (128) (50,202) 25,097
--------
Net loss........................ -- -- -- -- -- -- (41,392) (41,392)
Unrealized gain on
available-for-sale
investments................... -- -- -- -- -- 143 -- 143
--------
Comprehensive income
(loss).................. (41,249)
--------
Issuance of common stock for
cash, net of issuance costs of
$800.......................... -- -- 2,900 38,350 -- -- -- 38,350
Conversion of common stock
warrant to preferred stock
warrant....................... -- 1,625 -- (1,625) -- -- -- --
Exercise of outstanding
warrants...................... 229 -- 43 -- -- -- -- --
Issuance of common stock under
employee plans................ -- -- 592 2,319 -- 2,319
Compensation expense from
accelerated deferred
compensation charges and stock
option vesting................ -- -- -- 1,658 -- -- -- 1,658
Deferred compensation related to
stock options, net of
amortization and
cancellations................. -- -- -- 1,407 (1,052) -- -- 355
Acquisition of Netbot, Inc.:
Issuance of common stock.... -- -- 854 3,731 -- -- -- 3,731
Accumulated deficit......... -- -- -- -- -- -- (4,560) (4,560)
Issuance of preferred stock by
acquired company for cash, net
of issuance costs of $115..... 1,772 6,385 -- -- -- -- -- 6,385
Other equity transactions of
acquired company.............. 519 2,320 770 446 -- -- -- 2,766
Conversion of preferred stock to
common stock.................. (2,179) (16,628) 2,179 16,628 -- -- -- --
------ -------- ------ -------- ------- ----- -------- --------
Balance at December 31, 1997...... 2,291 $ 9,518 19,446 $122,913 $(1,440) $ 15 $(96,154) $ 34,852
====== ======== ====== ======== ======= ===== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<PAGE> 7
EXCITE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(6,435) $(43,117) $(41,392)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation................... 9 243 355
Compensation expense from accelerated deferred
compensation charges and stock option vesting......... -- -- 1,658
Issuance of warrants.................................... -- 1,625 55
Equity securities issued for services................... 196 -- --
Depreciation............................................ 140 2,189 6,360
Amortization of intangible assets....................... 19 954 10,670
Charge for purchased in-process technology.............. 331 3,500 2,346
Loss on disposal of property and equipment.............. -- 96 --
Provision for loan impairment........................... -- 629 --
Changes in assets and liabilities:
Accounts receivable................................... (335) (2,957) (17,567)
Prepaid expenses and other current assets............. (168) (863) (1,001)
Other assets.......................................... (36) (873) (3,726)
Accounts payable...................................... 1,021 5,515 (1,378)
Accrued compensation.................................. 384 425 4,492
Related party liabilities............................. -- -- 1,575
Other accrued liabilities............................. 222 6,512 2,092
------- -------- --------
Net cash used in operating activities.............. (4,652) (26,122) (35,461)
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (811) (892) (6,925)
Purchases of investments.................................. (358) (49,765) (47,433)
Sales and maturities of investments....................... -- 31,936 49,235
Notes and advances to Novo MediaGroup, Inc................ -- (629) --
Payments for acquisitions, net of cash received........... (150) -- (598)
------- -------- --------
Net cash used in investing activities.............. (1,319) (19,350) (5,721)
------- -------- --------
Cash flows from financing activities:
Payments on capital lease and other financing
obligations............................................. (69) (1,875) (3,737)
Proceeds from bank line of credit and other notes
payable................................................. 1,277 3,490 6,000
Proceeds from issuance of convertible note................ -- -- 5,000
Payments on bank line of credit and other notes payable... (263) (2,426) (1,100)
Proceeds from sale of redeemable convertible preferred
stock................................................... 3,847 12,282 6,385
Proceeds from sale of common stock, common stock warrants,
and exercise of stock options........................... 1,927 37,212 40,029
------- -------- --------
Net cash provided by financing activities.......... 6,719 48,683 52,577
------- -------- --------
Net increase in cash and cash equivalents................... 748 3,211 11,395
Cash and cash equivalents at beginning of period............ 12 760 3,971
------- -------- --------
Cash and cash equivalents at end of period.................. $ 760 $ 3,971 $ 15,366
======= ======== ========
Non-cash financing activities:
Conversion of convertible preferred stock to common
stock................................................... $ -- $ 16,129 $ 16,628
Property and equipment acquired under capital leases and
other non-lease financing............................... $ 676 $ 7,564 $ 7,400
Preferred stock issued by acquired company for ownership
interest................................................ $ -- $ -- $ 1,720
Conversion of notes payable to common stock............... $ 275 $ 1,400 $ --
Supplemental cash flow disclosure:
Cash paid for interest.................................... $ 17 $ 379 $ 1,050
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-7
<PAGE> 8
EXCITE, INC.
NOTES TO SUPPLEMENTAL 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 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 and chat and personalization
capabilities. Localized versions of Excite are available in the United Kingdom,
Germany, France, Sweden, Netherlands, Australia and Japan. 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 14) ad serving and targeting services.
The Company has incurred operating losses to date and incurred a net loss
of approximately $41.4 million for the year ended December 31, 1997. Management
believes that available resources will provide sufficient funding to enable the
Company to meet its obligations through at least December 31, 1998. If
anticipated operating results are not achieved, management has the intent and
believes it has the ability to delay or reduce expenditures so as not to require
additional financial resources if such resources were not available.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments in 50% or less owned companies
and joint ventures over which Excite has the ability to exercise significant
influence are accounted for using the equity method.
Foreign Currency
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved are included
in other expense. Such gains and losses have been insignificant in all years to
date. To date the Company has entered into no foreign currency forward exchange
contracts or other such derivative instruments.
Basis of Presentation
In August 1996, the Company acquired The McKinley Group, Inc. ("McKinley")
in a merger transaction accounted for as a pooling of interests (see Note 2).
McKinley was incorporated in December 1993. All financial information has been
restated to reflect the combined operations of the Company and McKinley. In
November 1997, the Company acquired Netbot, Inc. ("Netbot") in a merger
transaction accounted for as a pooling of interests (see Note 2). The results of
operations and financial position of Netbot, which was incorporated in May 1996,
were not significant 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 February 1998, the Company
acquired MatchLogic in a merger transaction accounted for as a pooling of
interests (see Note 14). MatchLogic was incorporated in May 1997. All financial
information has been restated to reflect the combined operations of the Company
and MatchLogic.
F-8
<PAGE> 9
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates, and such
differences may be material to the financial statements.
Cash, Cash Equivalents and Short-Term Investments
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. All of the
Company's cash equivalents and short-term investments, consisting principally of
commercial paper and government securities, are classified as available-for-sale
as of the balance sheet date. These securities are recorded at fair market
value. Unrealized gains and losses on these investments are included in
shareholders' equity. The cost of securities sold is based on specific
identification. There were no material gross realized gains or losses from sales
of securities in the periods presented. The fair value of investments is based
on quoted market prices at December 31, 1996 and 1997. The fair value of
investments presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. All available-for-sale
investments generally mature in one year or less.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------------------- ------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED HISTORICAL UNREALIZED
COST GAIN/(LOSS) FAIR VALUE COST GAIN FAIR VALUE
---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents:
Cash............................. $ 758 $ -- $ 758 $ 5,288 $ -- $ 5,288
Commercial paper................. -- -- -- 1,957 1 1,958
U.S. Government securities....... 1,604 -- 1,604 8,057 1 8,058
Money market funds............... 1,609 -- 1,609 62 -- 62
------- ------ ------- ------- ---- -------
$ 3,971 $ -- $ 3,971 $15,364 $ 2 $15,366
======= ====== ======= ======= ==== =======
Short-term investments:
Commercial paper................. $ 3,882 $ 3 $ 3,885 $ 7,780 $ 11 $ 7,791
Corporate notes.................. 770 -- 770 -- -- --
U.S. Government securities....... 12,203 5 12,208 8,607 -- 8,607
------- ------ ------- ------- ---- -------
$16,855 $ 8 $16,863 $16,387 $ 11 $16,398
======= ====== ======= ======= ==== =======
Restricted investments:
Restricted certificate of
deposit....................... $ 1,332 $ -- $ 1,332 $ -- $ -- $ --
Restricted investment in common
stock......................... 300 (136) 164 300 2 302
------- ------ ------- ------- ---- -------
$ 1,632 $ (136) $ 1,496 $ 300 $ 2 $ 302
======= ====== ======= ======= ==== =======
</TABLE>
The restricted investment in common stock is being held as collateral by a
financial institution against the Company's line of credit borrowings (see Note
4).
The restricted certificate of deposit at December 31, 1996 was being held
as collateral by a financial institution against a letter of credit for tenant
improvements at the Company's new headquarters.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, does not require collateral on accounts receivable.
When required, the Company maintains allowances for
F-9
<PAGE> 10
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
credit losses and such losses have been within management's expectations. The
Company's services are provided to customers in several industries, primarily in
North America.
Provisions for doubtful accounts were $670,000 and $1.4 million for the
years ended December 31, 1996 and 1997, respectively. Accounts receivable are
stated net of allowances for doubtful accounts of $425,000 and $1.1 million at
December 31, 1996 and 1997, respectively. During 1996, the Company advanced
amounts under notes and advances receivable to Novo MediaGroup, Inc. ("Novo") in
the amount of $629,000, of which $330,000 was evidenced by an 8% promissory note
convertible into shares of Novo common stock. Based on management's assessment
of the financial uncertainty with regard to Novo's ability to repay the
outstanding amounts, an impairment reserve of $629,000 was provided for in 1996.
Two customers accounted for approximately 26% and 16% respectively, of
total revenues in 1995. One customer accounted for approximately 12% of total
revenues in 1996. No customers accounted for 10% or more of total revenues in
1997.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization, which includes the amortization of assets recorded under
capital leases. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets (generally one to five years.)
Equipment purchased under capital leases is amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and internal use software................ $9,859 $18,168
Furniture and fixtures...................................... 667 2,950
Leasehold improvements...................................... 60 2,607
------ -------
10,586 23,725
Less accumulated depreciation and amortization.............. (2,392) (8,582)
------ -------
$8,194 $15,143
====== =======
</TABLE>
Intangible Assets
Intangible assets consist primarily of goodwill, developed technology,
distribution rights, trademarks, bookmarks and trade names, and are being
amortized generally over periods ranging from four months to three years. These
purchased intangibles and goodwill relate to the acquisitions of certain assets
from other companies.
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE IN ------------------
MONTHS 1996 1997
------- ------- --------
(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............................... (967) (11,037)
------- --------
$11,841 $ 1,771
======= ========
</TABLE>
F-10
<PAGE> 11
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. To date no such impairment has been
indicated. Should there be an impairment in the future, the Company will measure
the amount of the impairment based on undiscounted expected future cash flows
from the impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments,
including accounts receivable and accrued liabilities, approximate fair value
because of their short maturities. Because the interest rates on the Company's
notes payable and convertible debt are adjusted periodically to reflect market
rates, the fair value of these instruments approximates their carrying amounts.
The carrying amount of the Company's capital lease and other equipment financing
obligations approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at December 31, 1997.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. The Company has
recently entered into a number of longer-term advertising and commerce
sponsorship agreements. These agreements generally involve more integration with
Excite services and provide for more varied sources of revenue to Excite over
the term of the agreements, which average between 2 to 3 years. Under these
agreements, Excite earns fees for initial programming, initiation of service and
access to the Excite Network, and for generating impressions which in some
instances are guaranteed. These revenues, as well as contract and 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 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.
Advertising
Costs related to advertising are expensed as incurred. Advertising expense
was approximately $144,000, $10.4 million and $7.1 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company has not incurred
significant direct response advertising costs to date.
Per Share Amounts
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effect of options, warrants,
convertible securities and unvested securities issued subject to repurchase.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been restated to conform to the Statement 128 requirements. The Company has
excluded all convertible debt, convertible preferred stock, warrants and
employee stock options from the computation of
F-11
<PAGE> 12
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
basic and diluted earnings per share because all such securities are
anti-dilutive for all periods presented. See Notes 6, 7, and 8 for further
information on these securities. In February 1998, all of the outstanding shares
of Preferred Stock at December 31, 1997 converted into an equivalent number of
shares of Common Stock as part of the merger with MatchLogic (see Note 14). The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss.................................................... $(6,435) $(43,117) $(41,392)
======= ======== ========
Weighted average shares outstanding....................... 1,664 9,686 14,644
Weighted average common shares issued subject to
repurchase agreements.................................. (618) (610) (567)
------- -------- --------
Shares used to compute basic and diluted net loss per
share..................................................... 1,046 9,076 14,077
======= ======== ========
Basic and diluted net loss per share........................ $ (6.15) $ (4.75) $ (2.94)
======= ======== ========
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current presentation format.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 as of
December 31, 1997 and has presented comprehensive income for all periods
presented in the Statement of Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The Company adopted SFAS No.
131 as of December 31, 1997. Previously reported information has been restated
to reflect the addition of an operating segment resulting from the merger with
MatchLogic. See Notes 10 and 14.
2. BUSINESS COMBINATIONS AND PURCHASED PRODUCT RIGHTS
During the three years ended December 31, 1997, Excite completed the
following acquisitions:
<TABLE>
<CAPTION>
SHARES OF SHARES OF EXCITE SHARES OF
CASH AND EXCITE SERIES E CONVERTIBLE OPTIONS AND
PROMISSORY COMMON PREFERRED STOCK WARRANTS
COMPANY OR TECHNOLOGY ACQUIRED DATE ACQUIRED NOTE PAID STOCK ISSUED ISSUED ASSUMED
- ------------------------------- ------------- ---------- ------------ -------------------- -----------
<S> <C> <C> <C> <C> <C>
Netbot, Inc. ("Netbot")........ November 1997 854,000 211,053
America Online, Inc.'s ("AOL")
WebCrawler search and
directory technology (the
"WebCrawler Assets")......... November 1996 1,950,000
The McKinley Group, Inc.
("McKinley")................. August 1996 850,000 13,742
City.Net Express
("City.Net")................. November 1995 $450,000 70,000
</TABLE>
F-12
<PAGE> 13
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of Netbot, a private company and
developer of advanced search technology utilized for electronic commerce, the
Company incurred approximately $1.5 million in merger related expenses,
including $1.3 million for accelerated deferred compensation charges and
$217,000 in professional fees and other expenses. The acquisition was accounted
for as a pooling of interests. Because the results of operations and financial
position of Netbot were not material to Excite's consolidated financial
statements for any periods, financial information prior to the date of
acquisition has not been restated.
In November 1996, the Company entered into a series of agreements with AOL,
a provider of Internet online services, whereby a co-branded version of Excite
became the exclusive Internet search and directory service for AOL. Under these
agreements, Excite acquired AOL's WebCrawler Assets. The series of agreements
were accounted for as the acquisition of rights to developed and in-process
technologies and distribution rights. The intangible assets were recorded based
on their independently appraised fair values as of December 1, 1996. Of the
total purchase price, $3.5 million was allocated to purchased in-process
technology and the remaining purchase price of approximately $12.6 million was
allocated to trademarks, distribution rights, bookmarks, trade names, goodwill
and other. The amount of the purchase price allocated to purchased in-process
technology was charged to the Company's operations as of December 1, 1996.
The Company determined the amounts to be allocated to developed and
in-process technology based on whether technological feasibility had been
achieved (as defined and utilized by the Company in assessing software
capitalization) and whether there was any alternative future use for the
technology. Other considerations included the time and cost to complete each
project, anticipated gross profit, and associated risks which included the
inherent difficulties and uncertainties in completing the project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes to future target markets. The Company concluded that the
in-process technology had no alternative future use after taking into
consideration the potential for usage of the technology in different products,
resale of the technology and internal usage.
In connection with the McKinley acquisition, which was accounted for as a
pooling of interests, the Company incurred approximately $2.2 million in merger
related expenses, including $1.0 million for legal and other professional fees,
$901,000 for personnel severance and outplacement expenses and $345,000 for
termination of distribution contracts and discontinuation of duplicate
operations and facilities.
Of the total purchase price valued at approximately $534,000 for certain
assets of City.Net, $203,000 was allocated to identified intangible assets and
$331,000 was allocated to purchased in-process technology which was charged to
operations at the time of the acquisition.
3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Deferred revenues........................................... $1,784 $ 4,588
Accrued compensation........................................ 861 4,794
Accrued distribution license fees........................... 2,300 --
Other accrued liabilities................................... 3,447 5,024
------ -------
$8,392 $14,406
====== =======
</TABLE>
F-13
<PAGE> 14
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BORROWINGS UNDER BANK LINE OF CREDIT AND OTHER NOTES PAYABLE
Borrowings under bank line of credit and other notes payable, all of which
are current liabilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under bank line of credit........................ $1,100 $6,000
Other notes payable......................................... 100 100
------ ------
$1,200 $6,100
====== ======
</TABLE>
Borrowings Under Bank Line of Credit
In March 1997, the Company entered into a $6.0 million line of credit,
which replaced the $1.1 million line of credit outstanding at December 31, 1996.
This line of credit, which expires in June 1998, bears interest at rates ranging
from the bank's prime rate to prime plus .25% (approximately 8.5% at December
31, 1997) and is secured by substantially all of the Company's assets. This line
of credit agreement also contains certain financial covenants, including minimum
requirements for tangible net worth, quick ratio and accounts receivable
balances, as well as prohibiting the declaration and payment of cash dividends
on capital stock. The Company was in compliance with these covenants at December
31, 1997. At December 31, 1997, an investment in common stock with a carrying
amount of $302,000 was held by the bank as collateral for borrowings under this
line of credit and is not available to the Company. The Company is currently
negotiating to extend the term of this line of credit.
The Company has an additional line of credit with a bank allowing for
borrowings of up to $3.0 million. As of December 31, 1997 the Company had no
borrowings outstanding against this line. This line is secured by certain assets
of the Company, bears interest at the bank's prime rate plus 1%, and expires on
December 1, 1998.
5. COMMITMENTS
Capital Leases
The Company leases certain computer equipment and office furniture under
capital leases. The leases generally provide for the Company to pay taxes,
maintenance and insurance. Most of the leases contain purchase options as well
as renewal provisions at the end of the initial lease terms, which generally
range from 30 to 36 months. At December 31, 1997 the Company had an additional
$2.2 million available under a lease line of credit expiring on December 31,
1998. Equipment under capital leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and internal use software................ $7,891 $9,914
Furniture and fixtures...................................... 297 785
------ ------
8,188 10,699
Less accumulated depreciation and amortization.............. (1,571) (5,490)
------ ------
$6,617 $5,209
====== ======
</TABLE>
F-14
<PAGE> 15
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Financing Arrangements
During 1997, the Company entered into several non-lease equipment financing
arrangements. These liabilities are secured by specified computer equipment,
internal use software and office furniture of the Company and are payable over
36 months. At December 31, 1997, property and equipment under non-lease
financing arrangements totaled $2.5 million, which is net of $401,000 of
accumulated depreciation.
Building Leases
In 1996 and 1997, the Company entered into leases for new corporate offices
located in Redwood City, California. These leases, which have approximately ten
year terms, commenced during the second and fourth quarters of 1997. The Company
has subleased a portion of this space to a third party under a non-cancelable
sublease agreement which will commence in 1998. The Company leases additional
space, primarily for sales offices, in various states as well as the United
Kingdom. Rent expense under operating leases was approximately $152,000,
$722,000 and $2.6 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
Annual minimum commitments under these leases and other financing
arrangements are as follows:
<TABLE>
<CAPTION>
CAPITAL OTHER OPERATING SUBLEASE
LEASES FINANCING LEASES RENT
------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEARS ENDING DECEMBER 31,
1998................................................ $ 3,677 $ 1,378 $ 2,779 $ (856)
1999................................................ 2,165 1,162 2,519 (478)
2000................................................ 1,170 582 2,433 --
2001................................................ -- -- 2,501 --
2002................................................ -- -- 2,463 --
Thereafter.......................................... -- -- 10,272 --
------- ------- ------- -------
Total minimum payments required.......................... 7,012 3,122 $22,967 $(1,334)
======= =======
Less amounts representing interest....................... (758) (333)
------- -------
Present value of future lease payments................... 6,254 2,789
Less current portion..................................... (3,178) (1,176)
------- -------
$ 3,076 $ 1,613
======= =======
</TABLE>
6. CONVERTIBLE NOTE
In 1997, the Company entered into a convertible promissory note with Itochu
Corporation ("Itochu") (see also Note 11) in the principal amount of $5.0
million. The note bears interest at the London Interbank Offered Rate plus 1%
(approximately 6.9% at December 31, 1997), is payable in United States dollars,
and matures on October 17, 2002, although earlier payment is permitted. The
entire unpaid principle amount at the maturity date (or earlier in the event the
Company elects to prepay the note) is convertible, in whole but not in part, at
the option of the holder, into fully paid shares of Excite Common Stock at a
conversion price equal to the average closing price of the shares for the 30
trading day period ending on the date of conversion.
7. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
Of the 4,000,000 authorized shares of Convertible Preferred Stock (no par
value), 3,280,000 shares were designated as Series E in association with the
acquisition of certain assets from AOL in December 1996.
F-15
<PAGE> 16
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1,950,000 of the Series E shares were issuable to AOL at December 31, 1996, and
all of the Series E shares were issued and converted into Common Stock during
1997. The remaining 720,000 shares of Convertible Preferred Stock authorized
remained undesignated at December 31, 1997.
The Company also had 2,291,457 shares of Convertible Preferred Stock
outstanding at December 31, 1997 related to equity transactions of MatchLogic
(see Note 14) prior to its merger with Excite. These shares were converted into
an equivalent number of shares of Excite Common Stock upon the closing of the
merger in February 1998.
Common Stock
In April 1996, the Company completed its initial public offering and issued
2,300,000 shares of its Common Stock at a price of $17.00 per share. The Company
received approximately $35.4 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of the
initial public offering, each outstanding share of Redeemable Convertible
Preferred Stock was automatically converted into two shares of Common Stock,
outstanding warrants were exercised (on a net exercise basis) at an exercise
price of $17.00 per share, resulting in the issuance of 1,191,176 shares of
Common Stock, and $1.0 million principal amount of notes payable was converted
into 160,000 shares of Common Stock.
On March 3, 1997 the Company filed a registration statement on Form S-1
with the United States Securities and Exchange Commission with respect to the
sale of shares of the Company's Common Stock. The Company sold all of the
2,900,000 shares of the Company's Common Stock offered to Intuit Inc. ("Intuit")
on June 26, 1997 at a price of $13.50 per share (see also Note 11). Proceeds to
the Company from this offering were approximately $38.4 million net of offering
costs.
Intuit was also granted a right of first refusal to participate in certain
future issuances of the Company's securities in order to prevent dilution of
Intuit's percentage ownership, as well as registration rights with respect to
the shares originally purchased, and any shares that might be purchased pursuant
to the right of first refusal. The agreements also place certain conditions on
Intuit's ability to dispose of its shares of, or acquire additional shares of,
the Company's Common Stock.
At December 31, 1997, 2,549,680 shares of Common Stock issued by the
Company were subject to stock repurchase agreements whereby the Company has the
option to repurchase the unvested shares upon termination of employment for any
reason, with or without cause, at the original price paid for the shares.
Generally the stock vests 30% immediately with the remaining 70% vesting ratably
over 48 months from the date of issuance. At December 31, 1997, 566,552 shares
of Common Stock were subject to repurchase at the option of the Company at the
original exercise price ranging from $0.00045 to $0.436.
Warrants
During 1995, the Company issued warrants to purchase 30,000 shares of
Series A and 16,000 shares of Series B Redeemable Convertible Preferred Stock at
exercise prices of $0.67 and $1.25 per share, respectively, in connection with
an equipment lease agreement. These warrants converted into warrants to purchase
Common Stock upon the Company's initial public offering in April 1996. In
January 1997, the holder of these warrants elected to exercise the warrants and
receive a lesser number of shares in exchange for a reduction in the exercise
price resulting in the issuance of 43,466 shares of Common Stock.
During 1995, the Company issued warrants to purchase 1,200,000 shares of
Common Stock at an exercise price of $0.125 per share in connection with the
sale of Series B Redeemable Convertible Preferred Stock. These warrants were
exercised in April 1996 in connection with the Company's initial public
offering. Also during 1995, the Company issued warrants to purchase 36,000 and
28,540 shares of Common Stock at exercise prices of $0.67 and $1.25 per share,
respectively, in connection with an employment offer. These warrants were
exercised in 1996.
F-16
<PAGE> 17
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1995, the Company issued warrants to purchase 2,356 shares of Common
Stock at an exercise price of $32.66 per share in connection with obtaining a
working capital line of credit from a bank (see Note 4). These warrants expire
in September 2001.
In February 1996, the Company issued warrants to purchase 7,095 shares of
Common Stock at an exercise price of $101.27 per share in connection with a
consulting services agreement. These warrants fully vest on January 31, 1997 and
expire on January 31, 1999.
In March 1996, the Company entered into an agreement with AOL whereby, in
return for certain distribution rights, the Company issued a warrant to purchase
650,000 shares of Common Stock at an exercise price of $8.00 per share. The
warrant expires in March 2001. The value of the warrant was established through
an independent appraisal. A charge to operations of $1.6 million for the fair
value of the warrant was recorded at the time of issuance. Upon the closing of
the acquisition of the WebCrawler Assets, this warrant was converted into a
warrant to purchase an equivalent number of shares of Series E-3 Convertible
Preferred Stock at the same exercise price per share. The value attributed to
the amendment of the warrant terms from Common Stock to Series E-3 Convertible
Preferred Stock was minimal, as the expiration date of the warrant was also
amended such that 325,000 shares exercisable under this warrant would expire, if
unexercised, on September 30, 1997, instead of in March 2001. In September 1997,
325,000 shares were exercised under this warrant with the holder electing to
receive a lesser number of shares in exchange for a reduction in the exercise
price, resulting in the issuance of 229,271 shares of Series E-3 Convertible
Preferred stock, which were converted into Common Stock in December 1997.
In November 1997, as part of the acquisition of Netbot, the Company assumed
warrants under which the holder can purchase 2,087 shares of Excite Common Stock
at an exercise price of approximately $11.49 per share in connection with an
equipment lease agreement entered into by Netbot prior to the acquisition.
During 1997, the Company issued warrants to purchase 83,584 shares of
Common Stock at exercise prices ranging from $3.67 to $27.49 per share. Theses
warrants were issued in connection with certain financings by MatchLogic, are
exercisable at any time, and expire at various times in 2002.
8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
During 1995, the Company adopted the 1995 Equity Incentive Plan (the "1995
Plan") under which incentive stock options or non-qualified stock options to
purchase Common Stock may be granted to eligible participants. Under the 1995
Plan, options to purchase Common Stock may be granted at prices no less than 85%
of the fair market value on the date of grant (110% of fair value in certain
instances.) Options generally vest over a 48-month period. Options granted under
the 1995 Plan before its termination in April 1996 remain outstanding in
accordance with their terms, but no further options have been granted under the
1995 Plan after the date of its termination.
Additionally, in February 1996 the Company's Board of Directors adopted,
and in March 1996 the Company's shareholders approved, increases to the number
of shares authorized for issuance under the 1995 Plan totaling 550,000 shares,
the 1996 Equity Incentive Plan (the "1996 Plan") and 1996 Directors Stock Option
Plan (the "Directors Plan") which authorized the issuance of 1,500,000 and
150,000 shares of Common Stock, respectively, upon exercise of stock options
granted to eligible participants under the 1996 Plan and to directors under the
Directors Plan. In November 1996 and January 1997, the Board approved, and in
June 1997 the shareholders approved, amendments to the 1996 Plan to increase the
number of shares authorized for issuance thereunder by 800,000 and 2,455,000
shares, respectively.
The 1996 Plan serves as the successor equity incentive program to the
Company's 1995 Plan. The 1996 Plan provides for the grant of either incentive
stock options (as defined in Section 422 of the Internal Revenue
F-17
<PAGE> 18
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Code of 1986, as amended) or non-qualified stock options or the issuance of
restricted stock, at a price no less than 85% of the fair value on the date of
grant as well as stock bonuses by the Company to eligible participants. Options
generally vest over a 48 month period. No person is eligible to receive more
than 500,000 shares in any calendar year pursuant to grants under the 1996 Plan,
other than new employees of the Company who will be eligible to receive up to a
maximum of 800,000 shares in the calendar year in which they commence employment
with the Company. Shares that (i) are subject to issuance upon exercise of an
option but cease to be subject to such stock option for any reason other than
exercise of such stock option, (ii) are subject to an award granted under the
1996 Plan but are forfeited or are repurchased by the Company at the original
issue price or (iii) are subject to an award that otherwise terminates without
shares being issued will again be available for grant and issuance in connection
with future awards under the 1996 Plan. The 1996 Plan will terminate in February
2006, unless terminated earlier in accordance with the provisions of the 1996
Plan.
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE ------------------------------- WEIGHTED
FOR NUMBER OF AVERAGE
GRANT SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------- ------------------ --------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Initial shares authorized............... 1,650 -- -- --
Options granted....................... (1,375) 1,375 $0.035 - $34.612 $ 0.31
Options exercised..................... -- (1) $ 8.194 $ 8.19
------ -----
Balance at December 31, 1995............ 275 1,374 $0.035 - $34.612 $ 0.31
Additional shares authorized.......... 3,000 -- -- --
Options granted....................... (2,836) 2,836 $2.500 - $67.757 $ 6.80
Options exercised..................... -- (300) $0.035 - $ 5.750 $ 0.33
Options canceled...................... 263 (263) $0.035 - $67.757 $10.50
Options expired....................... (528) -- -- --
------ -----
Balance at December 31, 1996............ 174 3,647 $0.035 - $67.757 $ 4.66
Additional shares authorized.......... 3,091 -- -- --
Options granted....................... (2,388) 2,388 $0.440 - $28.375 $10.88
Options exercised..................... -- (564) $0.035 - $16.125 $ 2.61
Options canceled...................... 636 (636) $0.035 - $67.757 $ 5.15
Options expired....................... (210) -- -- --
------ -----
Balance at December 31, 1997............ 1,303 4,835 $0.035 - $67.757 $ 7.27
====== =====
</TABLE>
Employee Stock Purchase Plan
In February 1996 the Company's Board of Directors adopted, and in March
1996 the Company's shareholders approved, the 1996 Employee Stock Purchase Plan
(the "ESPP") to provide employees of the Company with an opportunity to purchase
Common Stock through payroll deductions. Under the ESPP, 150,000 shares of
Common Stock have been reserved for issuance, subject to anti-dilution
adjustments. The ESPP became effective in December 1996. The Board of Directors
has the authority to determine the duration of offering periods, up to a maximum
of 24 months. Eligible employees may participate in the ESPP by authorizing
payroll deductions of an amount determined by the Board of Directors. The amount
of authorized payroll deductions may not be less than 2% nor more than 10% of an
employee's compensation, not to exceed $21,250 per year. Amounts withheld are
applied at the end of every six-month accumulation period to purchase shares of
Common Stock, but not more than the number of shares as the Board of Directors
shall determine.
F-18
<PAGE> 19
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Participants may withdraw their contributions at any time prior to fifteen
days before the stock is purchased, and such contributions will be returned to
the participants without interest. The purchase price is equal to 85% of the
lower of (i) the market price of the Company's Common Stock immediately before
the beginning of the applicable period or (ii) the market price of the Company's
Common Stock at the time of the purchase. As of December 31, 1997, 27,230 shares
had been purchased under the ESPP.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock plans because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock plans granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Average risk-free interest rate....................... 5.7% 5.9% 6.1%
Average expected life (in years)...................... 4.5 4.5 3.0
Dividend yield........................................ 0% 0% 0%
Expected volatility factor of the market price of the
Company's Common Stock(1)........................... 0% 75% 75%
</TABLE>
- ---------------
(1) Options granted prior to the Company's initial public offering and by
non-public companies prior to their merger with Excite were valued using the
minimum value method.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported..................... $(6,435) $(43,117) $(41,392)
======= ======== ========
Net loss -- pro forma....................... $(6,437) $(44,104) $(48,681)
======= ======== ========
Basic and diluted net loss per share -- as
reported.................................. $ (6.15) $ (4.75) $ (2.94)
======= ======== ========
Basic and diluted net loss per share -- pro
forma..................................... $ (6.15) $ (4.86) $ (3.46)
======= ======== ========
</TABLE>
F-19
<PAGE> 20
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted during 1995, 1996 and
1997 was approximately $0.03, $3.54, and $5.61 per share, respectively, and was
approximately $7.74 for shares granted under the ESPP in 1997.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER OF AVERAGE WEIGHTED- NUMBER OF WEIGHTED-
SHARES REMAINING AVERAGE SHARES AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- ----------------- -------------- ----------- --------- -------------- ---------
<C> <C> <S> <C> <C> <C>
$ 0.035 - $ 0.440 942 8.5 years $ 0.32 278 $ 0.31
0.580 - 3.540 465 8.8 1.86 219 1.40
5.500 - 9.875 2,332 9.0 6.94 432 6.29
10.250 - 17.125 586 9.2 11.63 80 11.63
20.125 - 28.375 508 9.9 21.46 3 21.20
67.757 - 67.757 2 8.3 67.76 1 67.76
----- -----
4,835 9.0 7.27 1,013 4.08
===== =====
</TABLE>
Employee Benefit Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their pretax earnings up to the Internal Revenue Service's annual
contribution limit. All employees on the United States payroll of the Company
are eligible to participate in the Plan. The Company is not required to
contribute to the Savings Plan and has made no contributions since the inception
of the Savings Plan.
9. INCOME TAXES
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there is no provision for income taxes for 1995, 1996 or
1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 15,200 $ 29,160
Research credits............................................ 400 910
Acquired intangible assets.................................. 1,865 5,670
Depreciation................................................ 390 1,730
Other....................................................... 1,345 710
-------- --------
Total deferred tax assets................................. 19,200 38,180
Valuation allowance for deferred tax assets................. (19,200) (38,180)
-------- --------
Net deferred tax assets................................... $ -- $ --
======== ========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $16.6 million and $19.0 million during the years
F-20
<PAGE> 21
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ended December 31, 1996 and 1997, respectively. Approximately $3.0 million of
the valuation allowance at December 31, 1997 is attributable to stock option
deductions, the benefit of which will be credited to paid in capital when
realized.
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $76.3 million and $53.4 million,
respectively. The federal net operating loss carryforwards will expire at
various dates beginning in 2009 through 2012, and the state net operating loss
carryforwards will expire at various dates beginning in 1999 through 2002. As of
December 31, 1997 the Company also had federal and California research and
development credit carryforwards of approximately $650,000 and $390,000,
respectively. The federal credits will expire in 2009 through 2012 if not
utilized.
Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before full
utilization.
10. 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,
which began operations in May 1997, the Company operated only in the Internet
navigation industry. The Company's management has determined the operating
segments based upon how the business are 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.
Information by Operating Segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
INTERNET AD SERVING
NAVIGATION & TARGETING TOTAL
---------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating information:
Revenues from external customers.......................... $ 50,151 $ 3,963 $54,114
Revenues from internal segments customers................. -- -- --
Distribution license fees and data acquisition costs...... 7,615 1,750 9,365
Depreciation.............................................. 5,727 633 6,360
Amortization of intangible assets......................... 10,070 600 10,670
Charge for purchased in-process technology................ -- 2,346 2,346
Interest income........................................... 1,246 57 1,303
Interest expense and other................................ (1,055) (362) (1,417)
Share of losses of affiliated company..................... (477) -- (477)
Segment income (loss)..................................... (30,159) (11,233) (41,392)
Balance sheet information:
Total assets.............................................. $ 73,430 $ 3,263 $76,693
Purchases of long-lived assets............................ 4,561 2,364 6,925
</TABLE>
F-21
<PAGE> 22
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information by Geographic Area:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
United States operations:
United States customers................................ $ 953 $ 14,721 $ 52,086
International customers................................ -- 36 831
------- -------- --------
953 14,757 52,917
International operations:
International customers................................ -- -- 1,197
------- -------- --------
Total revenues.................................... $ 953 $ 14,757 $ 54,114
======= ======== ========
Operating loss:
United States operations.................................. $(6,390) $(43,989) $(37,405)
International operations.................................. -- (129) (3,396)
------- -------- --------
Total operating loss.............................. $(6,390) $(44,118) $(40,801)
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-lived assets:
United States operations.................................. $1,686 $20,958 $21,258
International operations.................................. -- -- 313
------ ------- -------
$1,686 $20,958 $21,571
====== ======= =======
Total assets:
United States operations.................................. $3,801 $47,668 $75,588
International operations.................................. -- 30 1,105
------ ------- -------
$3,801 $47,698 $76,693
====== ======= =======
</TABLE>
11. RELATED PARTY TRANSACTIONS
Investment in 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, Co. Ltd.
("Excite Japan") in order to provide Web based information services to the
Japanese market. The Company intends to retain a 50% equity interest in Excite
Japan. Advertising sales responsibilities will be assumed by CTC Create
Corporation, a wholly-owned subsidiary of Itochu Corporation. The joint venture
agreement with respect to Excite Japan obligates Excite and Itochu to make
capital contributions in the aggregate amount of $10.0 million by March 31,
1999. Itochu loaned Excite $5.0 million (see Note 6) in 1997 in order to fund
Excite's capital contributions. As of December 31, 1997 Excite had invested
$168,000 in the joint venture, and had recognized 50% of the losses through
December 31, 1997 totaling $477,000. Condensed financial information of Excite
Japan has not been presented as its operating results and financial position are
not material to Excite.
Other Related Party Transactions
In June 1997, the Company sold 2,900,000 shares of the Company's Common
Stock to Intuit at a price of $13.50 per share. Proceeds from this offering were
approximately $38.4 million net of offering costs. Also in
F-22
<PAGE> 23
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 1997, the Company entered into a Joint Activities Agreement with Intuit.
Under this agreement, Intuit became the exclusive provider and aggregator of
financial content on all of Excite's services, and Excite became the exclusive
search and navigation service featured in the U.S. versions of Intuit's Quicken,
Quickbooks and TurboTax products. Under this agreement, the two companies share
certain revenues and expenses at varying amounts throughout the seven year term
of this agreement. For the year ended December 31, 1997, the Company recorded
approximately $1.5 million in payments due to Intuit under this agreement, of
which approximately $836,000 was unpaid as of December 31, 1997.
In November 1996, the Company entered into a five-year distribution
agreement with AOL pursuant to which the Company will provide to AOL a
co-branded version of Excite and, for a minimum of a two year period, be the
exclusive provider of Web search and directory services for AOL. AOL and Excite
will share advertising revenues derived from the use of these services by AOL
subscribers. If either of the parties does not elect to continue the exclusivity
period for the remaining three year period of the agreement, AOL will be
permitted to offer other Web navigation services on its online service; however,
Excite will remain as the "default" Web navigation service and Excite will
receive a larger percentage of the advertising revenues derived from the use of
Excite through AOL. Excite will also advertise AOL's service on Excite and AOL
will pay a commission to the Company for new AOL subscribers referred from these
advertisements. The Company is also required to satisfy certain technical,
product feature and editorial criteria. In addition, the Company completed the
purchase of the WebCrawler Assets from AOL in March 1997. Revenues and expenses
to date associated with this agreement have not been significant.
12. SIGNIFICANT AGREEMENTS
In April 1996, Excite and McKinley each entered into agreements with
Netscape Communications Corporation ("Netscape") under which they were each
designated as one of five "Premier Providers" of search and navigation services
accessible from the "Net Search" button on the Netscape home page. These
agreements provided that the "Premier Provider" status was established for one
year from April 1, 1996, in exchange for which the Company made payments in cash
and delivery of advertising impressions totaling $10.0 million over the course
of the year. These contracts were subsequently extended to April 30, 1997.
In March 1997, the Company entered into an agreement to continue the
Premier Provider arrangement for the Excite brand, and a Marquee Provider
agreement for the WebCrawler brand covering the period from May 1, 1997 through
April 30, 1998. Under the terms of these 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, a portion is being applied towards
advertising by Netscape on the Excite Network over the one year term of the
agreements based upon delivery of such advertisements, with the remainder being
paid in cash at intervals over the term of the agreements. 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 June 1997, the Company entered into a Co-Marketing Services Agreement
and a Trademark License Agreement with Netscape. Under these agreements, the
Company is responsible for the programming, production, operations and
advertising sales of "International Netscape Guide by Excite," a new service
being made available in Japan, Germany, France, the United Kingdom and
Australia. In connection with these agreements, the Company made a payment of
$4.0 million to Netscape in July 1997, which is being amortized over the terms
of these agreements to distribution license fees expense. At December 31, 1997,
the unamortized portion of this payment of $3.4 million was included in other
assets.
F-23
<PAGE> 24
EXCITE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LITIGATION
On November 18, 1996, Kristine Paaso and Laura Lindsey filed a complaint in
the California Superior Court, Santa Clara County, against the Company and
certain of its founders alleging breach of an alleged oral agreement, breach of
fiduciary duty and fraud. The plaintiffs allege that they participated in the
creation of the Company's business plan and were entitled to participate as
officers and shareholders of the Company. The complaint seeks an unspecified
amount of damages, including punitive damages. The Company has won a motion for
summary judgement to this complaint and is awaiting entry of judgement. In the
event of an appeal by the defendants on the motion for summary judgement, the
Company intends to continue to defend this action vigorously. Although it not
possible to ascertain the definitive outcome of this litigation at this time, an
unfavorable outcome could have an adverse effect on the Company's business,
results of operations and financial condition.
The Company is subject to other legal proceedings and claims that arise in
the ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
14. SUBSEQUENT EVENTS
On February 2, 1998 the Company acquired MatchLogic, Inc. ("MatchLogic"), a
private company providing advertisers and agencies with Internet advertising
management services which began operations in May 1997. The transaction was
effected through the issuance of approximately 3.1 million shares of the
Company's Common Stock and assumption of options and warrants to purchase
524,419 shares of Common Stock, and was accounted for as a pooling of interests.
In connection with the transaction, the Company incurred approximately $700,000
in merger related expenses primarily for legal and other professional fees in
the first quarter of 1998.
Separate results of the combined entities for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS; UNAUDITED)
<S> <C> <C> <C>
Revenues:
Excite.................................................... $ 953 $ 14,757 $ 50,151
MatchLogic................................................ -- -- 3,963
------- -------- --------
$ 953 $ 14,757 $ 54,114
======= ======== ========
Net loss:
Excite.................................................... $(6,435) $(43,117) $(30,159)
MatchLogic................................................ -- -- (11,233)
------- -------- --------
$(6,435) $(43,117) $(41,392)
======= ======== ========
</TABLE>
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
F-24
<PAGE> 25
15. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
Acquisition of Classifieds2000, Inc.
In April 1998, the Company acquired Classifieds2000, Inc., a provider of
Web-based classified ads, in a transaction accounted for as a pooling of
interests. In connection with this acquisition, the Company issued
approximately 865,000 shares of Common Stock, assumed options and warrants to
purchase approximately 25,000 shares of Common Stock, and incurred
approximately $683,000 in merger-related expenses primarily for legal and other
professional fees. Because the results of operations and financial position of
Classifieds2000 were not material to Excite's consolidated financial statements
prior to March 31, 1998, financial information prior to the date of acquisition
will not be restated.
Acquisition of Assets
In April 1998, the Company acquired certain assets, including in-process
technology of approximately $16.2 million that will be expensed in the second
quarter of 1998, for a total purchase price of approximately $16.5 million in a
transaction accounted for as an asset purchase. In connection with this
acquisition, the Company issued approximately 165,000 shares of Common Stock,
assumed options and warrants to purchase approximately 159,000 shares of Common
Stock, assumed net liabilities of approximately $540,000 and incurred
approximately $175,000 in merger-related expenses primarily for legal and other
professional fees.
Agreement with Netscape
In April 1998, the Company and 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 Services, 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 $50.0 million and will
pay an additional $20.0 million by June 30, 1998 as a prepayment of its
obligations under the Netcenter Agreement. In addition, the Company has issued a
warrant to Netscape to purchase 423,079 shares of the Company's Common Stock at
an exercise price of approximately $59.09 per share and a second warrant to
purchase shares of the Company's Common Stock at an aggregate exercise price of
up to $25.0 million. The aggregate exercise price of the second warrant will be
reduced to $10.0 million if certain terms and conditions relating to a contract
between Netscape and the Company's MatchLogic subsidiary are not met by May 22,
1998. The fair value of the first warrant and the aggregate $10.0 million
exercise price of the second warrant that is not subject to contingencies
initially has been estimated to be $16.1 million.
A portion of the prepayment and the initial value assigned to the warrants
issued totaling $56.8 million is anticipated to be expensed in the second
quarter of 1998. The amount to be 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 ($29.3 million) will be amortized ratably over the remainder
of the term of the Netcenter Agreement. The Company may record additional
charges related to the warrants in the second quarter of 1998 and future periods
due to the resolution of contingencies regarding the remaining $15.0 million
aggregate exercise price of the second warrant and under certain other
conditions.
Loan from Intuit
In April 1998, the Company borrowed $50.0 million from Intuit. The loan
bears interest at 5.9% per annum and is due no later than October 30, 1998.
F-25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors.
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 12
channels of topical interest such as Entertainment, Sports and Business &
Investing. In September 1997, the Company launched a similar channels-based
format for its WebCrawler brand which currently includes 16 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.
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
potential revenue to Excite over the term of the agreements, which generally
average from two to three years. Under these agreements, Excite earns fees for
initial programming, for initiation of service and access to the Excite
Network, and for generating impressions, which in some instances are guaranteed
by the Company. 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 recognizable from such transactions were insignificant in 1997, and are
expected to be insignificant in 1998 as well. Sponsorship customers accounted
for approximately 24% of advertising revenues for 1997. 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.
In April 1998, the Company and Netscape entered into the Netcenter
Agreement, under which the Company will, among other things, provide, host and
sell advertising for the Co-Branded Services for Netscape's recently announced
Netcenter Service. In connection with the Netscape Agreement,the Company has
paid to Netscape $50.0 million and is obligated to pay by June 30, 1998 an
additional $20.0 million (together, the "Cash Payment"). Also in connection with
the Netcenter Agreement, the Company has issued to Netscape a warrant to
purchase 423,079 shares of the Company's Common Stock at an exercise price of
approximately $59.09 per share and a second warrant to purchase shares of the
Company's Common Stock at an aggregate exercise price of up to $25.0 million
(together, the "Warrants"). The aggregate exercise price of the second warrant
will be reduced to $10.0 million if certain terms and conditions relating to a
contract between Netscape and the Company's MatchLogic subsidiary are not met by
May 22, 1998. The fair value of the first warrant and the aggregate $10.0
million exercise price of the second warrant that is not subject to
contingencies initially 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 is
anticipated to be expensed to distribution license fees and data acquisition
costs during the second quarter of 1998. The remaining $29.3 million of the Cash
Payment and warrant valuation will be amortized over the two-year term of the
Netcenter Agreement. The Company may record additional charges related to the
warrants in the second quarter of 1998 and future periods due to the resolution
of contingencies regarding the remaining $15.0 million aggregate exercise price
of the second warrant and under certain other conditions. (See Note 15).
The Company will recognize all revenues generated from the Co-Branded
Services. 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 -- Risks Related to Netcenter Agreement."
F-26
<PAGE> 27
Since August 1996, the Company has acquired a number of businesses,
technologies, services, product lines and content. In April 1998, the Company
issued approximately 165,000 shares of its Common Stock and assumed options and
warrants to purchase up to an aggregate of approximately 159,000 shares of its
Common Stock in exchange for certain assets including in-process technology of
approximately $16.2 million which will be expensed in the second quarter of
1998. Also in April 1998, the Company acquired Classifieds2000, a provider of
online classified ads. The Company issued approximately 865,000 shares of its
Common Stock to former stockholders of Classifieds2000 and assumed options and
warrants to purchase up to approximately 25,000 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 3.1 million shares of its Common Stock to former
stockholders of MatchLogic and assumed options and warrants to purchase up to
approximately 524,000 shares of its Common Stock. In November 1997, the Company
acquired Netbot, a Seattle-based Internet software developer of advanced search
technology. The Company issued approximately 854,000 shares of its Common Stock
to former stockholders of Netbot and assumed options and warrants to purchase up
to approximately 211,000 shares of its Common Stock. In March 1997, the Company
completed its acquisition of the WebCrawler search and directory technology (the
"WebCrawler Acquisition") from America Online, Inc. ("AOL") for an aggregate of
1,950,000 shares of its Convertible Preferred Stock. In August 1996, the Company
acquired McKinley, the creator of the Magellan Internet Guide. The Company
issued 850,000 shares of its Common Stock and assumed options and warrants to
purchase up to approximately 14,000 shares of its Common Stock. All of the above
acquisitions were accounted for as pooling of interests transactions, except for
the acquisition in April 1998 and the WebCrawler Acquisition.
All financial information for dates and periods prior to the mergers with
MatchLogic and McKinley have been restated to reflect the combined operations of
the Company, MatchLogic and McKinley. Financial information for dates and
periods prior to the acquisition Netbot has not been restated to reflect the
combined operations of the Company and Netbot, as Netbot's results of operations
were not material to the Company's consolidated financial statements. Because
the results of operations and financial position of Classifieds2000 were not
material to Excite's consolidated financial statements prior to March 31, 1998,
financial information prior to the date of acquisition will not be restated. For
accounting purposes, the Company recorded the WebCrawler Acquisition as of
December 1, 1996. See Notes 1, 2, 14 and 15 of Notes to Supplemental
Consolidated Financial Statements.
The Company has incurred significant operating losses since inception,
and as of December 31, 1997, the Company had an accumulated deficit of
approximately $96.2 million. Although the Company experienced significant
revenue growth during 1996 and 1997, 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. As
a result of an acquisition during April 1998, the Company expects to incur a
charge of approximately $16.2 million for purchased in-process technology
during the second quarter of 1998. As a result of this charge and charges
relating to the Netcenter Agreement, the Company expects that it will incur a
net loss for the second quarter of 1998 and for the entire year. 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
F-27
<PAGE> 28
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of total revenues represented by certain items from the Company's
Supplemental Consolidated Statement of Operations. The Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful because of its limited operating history, the evolving nature of its
business and its acquisitions. Results for 1995 are not comparable to those for
1996 and 1997 because the Company did not begin selling advertising space on
its network until October 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Advertising revenues................ 15% 95% 96%
Contract and other revenues......... 85 5 4
---- ---- ---
Total revenues.............. 100 100 100
---- ---- ---
Cost of revenues:
Hosting costs....................... 7 22 16
Royalties and other cost of
revenues......................... 17 5 8
Amortization of purchased
technology....................... -- 1 15
---- ---- ---
Total cost of revenues...... 24 28 39
---- ---- ---
Gross profit.......................... 76 72 61
Operating expenses:
Research and development......... 295 54 31
Sales and marketing.............. 173 143 59
Distribution license fees and
data acquisition costs......... -- 81 17
General and administrative....... 244 48 18
Charge for purchased in-process
technology..................... 35 24 4
Other merger and acquisition
related costs, including
amortization of goodwill and
other purchased intangibles.... -- 21 7
---- ---- ---
Total operating expenses.... 747 371 136
---- ---- ---
Operating loss........................ (671) (299) (75)
Interest income (expense) and other... (4) 7 --
Equity share of losses of affiliated
company............................. -- -- (1)
---- ---- ---
Net loss.............................. (675)% (292)% (76)%
==== ==== ===
</TABLE>
F-28
<PAGE> 29
Revenues
The Company began selling advertising space on its network in October
1995. Revenues increased from $953,000 for 1995 to $14.8 million for 1996, and
to $54.1 million for 1997. These increases were primarily the result of
increases in the number of advertisements sold, increases in sales of
targeted advertisements with higher rates, increases in the number of
advertisers purchasing advertisements on the Company's Web sites and, in 1997,
an increase in sponsorship advertising revenues.
Included in revenues for 1995, 1996 and 1997 were contract and other
revenues of $808,000, $727,000 and $2.1 million for 1995, 1996 and 1997,
respectively. Prior to 1997, contract and other revenues consisted primarily of
revenues derived from custom product development, licensing of the McKinley
database, royalties from sales of the McKinley Internet Yellow pages and
consulting fees. The Company does not currently derive significant revenues from
these sources. The increase in 1997 was primarily attributable to the sale of
Internet consumer database information to direct marketers by the Company's
MatchLogic subsidiary.
Two customers accounted for 26% and 16%, respectively, of revenues in 1995.
One customer accounted for approximately 12% of revenues for 1996. No customer
accounted for more than 10% of revenues for 1997. Revenues generated from
international operations in 1997 were not significant. See Note 10 of Notes to
Supplemental Consolidated Financial Statements.
Cost of Revenues
In 1996 and 1997, the Company recognized, as a component of total cost of
revenues, amortization of purchased technology of $186,000 and $8.2 million,
respectively, related to the WebCrawler Acquisition. As of December 31, 1997,
this purchased technology has been fully amortized. Total cost of revenues
increased $16.9 million, from $4.1 million, or 28% of revenues for 1996, to
$21.0 million, or 39% of revenues for 1997. Cost of revenues for 1995 was not
comparable to that for 1996 and 1997 as the nature of the Company's revenues
changed significantly with the launch of the Company's services in October 1995.
Excluding amortization of purchased technology, cost of revenues increased
in absolute dollars by $8.8 million, from $4.0 million, or 27% of revenues for
1996, to $12.8 million, or 24% of revenues for 1997. This increase in absolute
dollars was due primarily to increased personnel expenses and equipment costs
relating to hosting the Company's Web sites and increased royalties and revenue
sharing costs. 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.
Gross Profit
Gross profit as a percentage of revenues was 76%, 72% and 61% for 1995,
1996 and 1997, respectively. The decline in the gross profit as a percentage of
revenues was due primarily to the amortization of purchased technology discussed
above, as well as increased hosting costs to support expanded Web site offerings
and increased royalties and margin sharing costs, offset in part by increased
revenues. Excluding the amortization of purchased technology, gross profit as a
percentage of revenues for those periods was 73% and 76%, respectively. In the
future, gross margins 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
The Company's operating expenses have generally increased in absolute
dollar amounts since inception. 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 its 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. The Company also expects operating expenses to increase
ratably as a result of its recent acquisitions.
Research and Development. Research and development expenses increased from
$2.8 million, or 295% of revenues for 1995, to $8.0 million, or 54% of revenues
for 1996, and to $16.7 million, or 31% of total revenues for 1997. The increase
in absolute dollars in 1996 was primarily due to increased engineering and
editorial staff required to develop and enhance the Company's services as well
as increased research and development activities resulting from the WebCrawler
Acquisition and the merger with McKinley. The increase in absolute dollars for
1997 was due to an increase in engineering headcount to support the Company's
channels format and personalization capabilities for the Excite Network as well
as the commencement of operations of MatchLogic in May 1997. 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. The Company expects
to experience increased research and development expenses in order to provide
programming and content for the Co-Branded Services of Netcenter.
Sales and Marketing. Sales and marketing expenses increased in absolute
dollars from $1.6 million, or 173% of revenues for 1995, to $21.1 million, or
143% of revenues for 1996, and to $32.0 million, or 59% of revenues for 1997.
The 1996 increase was mainly due to the launch of a significant media
advertising campaign during the fourth quarter of 1996, and to increased sales
personnel costs as a result of the transition from the use of outside
advertising sales agencies for the sales of advertisements to a direct sales
force. The 1997 increase was primarily due to the continuation of the media
campaign discussed above into the first
F-29
<PAGE> 30
quarter of 1997, the hiring of additional sales and marketing personnel and the
launching of the WebCrawler brand. 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 in order to create and maintain brand loyalty among
customers. The Company also expects to experience increased sales and marketing
expenses as it will be responsible for all advertising sales on the Co-Branded
Services.
Distribution License Fees and Data Acquisition Costs. Distribution license
fees and data acquisition costs decreased from $11.9 million for 1996 to $9.4
million for 1997. There were no distribution license fees or data acquisition
costs for 1995. In 1996, distribution license fees included a one-time, non-cash
charge of approximately $1.6 million related to the issuance of a warrant to AOL
during the first quarter of 1996, and a $10.0 million charge relating to the
Company's Premier Provider Agreements with Netscape in the second quarter of
1996. In March 1997, the Company entered into a new agreement with Netscape to
continue the Premier Provider arrangement for the Excite brand, and entered into
a Marquee Provider Agreement for the WebCrawler brand. Under the terms of these
agreements, the Company was committed to make minimum payments of approximately
$8.3 million in exchange for a guaranteed number of impressions. Of the $8.3
million minimum, a portion was applied towards advertising by Netscape on the
Excite Network over the term of the agreements based upon delivery of such
advertising, and the remainder was paid in cash at intervals over the term of
the agreements.
In June 1997, the Company entered into a Co-Marketing Services Agreement
and a Trademark License Agreement with Netscape. Under these agreements, the
Company is responsible for the programming, production, operations and
advertising sales of "International Netscape Guide by Excite," a service being
made available in Japan, Germany, France, the United Kingdom and Australia. In
connection with these agreements, the Company made a payment of $4.0 million to
Netscape in July 1997, which is being amortized over the terms of these
agreements to distribution license fees expense.
The $29.3 million portion of the Cash Payment and valuation of the Warrants
under the Netcenter Agreement not written off in the second quarter of 1998 will
be amortized over the two-year term of the Netcenter Agreement. 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.
General and Administrative. General and administrative expenses increased
in absolute dollars from $2.3 million, or 244% of revenues for 1995, to $7.1
million, or 48% of revenues for 1996, and to $9.5 million, or 18% of revenues
for 1997. The increase in absolute dollars was primarily due to increased
personnel, professional service fees, provision for doubtful accounts and, in
1997, relocation to new facilities to support the Company's growth.
Charge for Purchased In-Process Technology. The Company recognized a charge
of $331,000 for 1995 related to the acquisition of City.Net Express
("City.Net"). The $3.5 million charge for purchased in-process technology in
1996 related to the WebCrawler Acquisition. The $2.3 million charge in 1997
related to the value of acquired in-process research and development that had
not reached technological feasibility at the time of MatchLogic's formation in
May 1997. See Notes 2 and 14 of Notes to Supplemental Consolidated Financial
Statements. 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 in independent subsidiary with its own
administrative function.
Other Merger and Acquisition Related Costs, including Amortization of
Goodwill and Other Purchased Intangibles. Other merger and acquisition related
costs, including amortization of goodwill and other purchased intangibles,
totaled $3.1 million and $4.0 million for 1996 and 1997, respectively. The 1996
charge included approximately $2.2 million associated with the merger with
McKinley, and approximately $769,000 related to the amortization of goodwill and
other intangible assets resulting from the WebCrawler Acquisition and the
acquisition of City.Net. In 1997, the Company incurred other merger and
acquisition costs of $1.8 million resulting from the amortization of other
WebCrawler intangible assets, $1.5 million from the Netbot merger and $700,000
from the amortization of other acquired intangible assets. There were no other
merger and acquisition related costs for 1995.
Interest Income (Expense) and Other. Interest income was $5,000, $1.4
million and $1.3 million for 1995, 1996 and 1997, respectively. The increase in
1996 reflected interest earned on investments from cash received from the
Company's Series D Preferred Stock financing and its initial public offering.
The decrease in 1997 was primarily the result of the use of cash received from
the initial public offering to fund operations, offset in part by interest
earned on the proceeds of approximately $38.4 million from the sale of Common
Stock to Intuit in the second quarter of 1997. Interest expense increased from
$50,000 for 1995 to $409,000 for 1996, and to $1.4 million for 1997. This
increase was due primarily to increased expenses associated with an increased
amount of capital lease obligations and bank borrowings.
F-30
<PAGE> 31
Equity Share of Losses of Affiliated Company. As of December 31, 1997, the
Company held a 50% equity interest in Excite Japan. Excite's share of the losses
of Excite Japan for 1997 was $477,000. See Notes 6 and 11 of Notes to
Supplemental Consolidated Financial Statements.
Income Taxes
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $76.3 million and $53.4 million, respectively.
The federal net operating loss carryforwards will expire beginning in 2009
through 2012, if not utilized. The state net operating loss carryforwards will
expire at various dates beginning in 1999 through 2002. An ownership change, as
defined in the Tax Reform Act of 1986, may restrict the utilization of
carryforwards. A valuation allowance has been recorded for the entire deferred
tax asset as a result of uncertainties regarding the realization of the asset
due to the lack of earnings history of the Company. See Note 9 of Notes to
Supplemental Consolidated Financial Statements.
YEAR 2000 IMPLICATIONS
Many existing computer programs use only two digits to identify a year in
the date field. These programs, which were developed without considering the
impact of the upcoming change in the century, could fail or create erroneous
results by or at the year 2000. The Company has reviewed its internal systems
and programs, and believes its results of operations will not be materially
adversely affected by year 2000 issues with respect thereto. However, the
Company cannot be certain that its customers, vendors or financial services
providers will not have year 2000 issues. Should such issues arise with any of
these parties, there could be a material adverse effect on the Company's
business, operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had $31.8 million in unrestricted
cash, cash equivalents and short-term investments, an increase of $10.9 million
from December 31, 1996. During the first quarter of 1998, the Company completed
its merger with MatchLogic. This merger 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 agreement for $6.0
million that will mature in June 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 of the Company's
assets. This line of credit agreement contains certain financial covenants,
including minimum requirements for tangible net worth, quick ratio and accounts
receivable balances, and prohibits the declaration and payment of cash dividends
on capital stock without the prior written consent of the bank. As of December
31, 1997, the Company had outstanding borrowings against this line of credit of
$6.0 million, and was in compliance with all financial covenants. The Company is
currently in negotiations to renew this line of credit. The Company has obtained
an additional line of credit with a bank allowing for borrowings of up to $3.0
million. As of December 31, 1997 the Company had no borrowings outstanding
against this additional line of credit. This additional line is secured by
certain assets of the Company, bears interest at the bank's prime rate plus 1%,
and expires on December 1, 1998.
The joint venture agreement with respect to Excite Japan obligates Excite
and Itochu to make capital contributions in the aggregate amount of $10.0
million by March 31, 1999. In October 1997, the Company borrowed $5.0 million
from Itochu under a convertible promissory note in order to fund its share of
these capital contribution obligations. This note bears interest at the London
InterBank Offered Rate plus 1% and is convertible into shares of the Company's
Common Stock based upon the market value of the Common Stock at its maturity
date in October 2002, or earlier in the event the Company desires to prepay such
note.
The Company's operating activities used cash of $4.7 million, $26.1
million and $35.5 million in 1995, 1996 and 1997, respectively. The increased
use of cash in 1996 was primarily attributable to increased operating expenses
and increases in accounts receivable and prepaid expenses, reduced in part by
increases in accrued distribution license fees, accounts payable and other
accrued liabilities. The increased use of cash in 1997 was primarily
attributable to the payment of previously accrued expenses, including but not
limited to payments to Netscape and to the Company's advertising agency for an
advertising campaign launched during the fourth quarter of 1996, a $4.0 million
license fee payment to Netscape in July 1997 (see Note 12 of the Notes to
Supplemental Consolidated Financial Statements) and an increase in accounts
receivable resulting from the sales of sponsorship advertising contracts,
offset in part by a decrease in net losses and an increase in accrued
liabilities. The Company has in the past, and may in the future, acquire
businesses which result in significant increases in headcount and overhead, as
well as the assumption and payment of additional liabilities, resulting in an
increase in the use of cash to support operations.
Investing activities used cash of $1.3 million, $19.4 million and $5.7
million in 1995, 1996, 1997, respectively. The 1996 increase was primarily
attributable to net purchases of short-term investments as well as property and
equipment from cash proceeds of the Company's initial public offering in April
1996. The decreased cash used in 1997 was primarily the result of cash being
invested in cash equivalents rather than short-term investments and net sales
of short-term investments, partially offset by increased purchases of property
and equipment.
F-31
<PAGE> 32
Financing activities generated cash of $6.7 million, $48.7 million and
$52.6 million in 1995, 1996 and 1997, respectively. Financing activities in
1996 primarily consisted of the sale of Redeemable Convertible Preferred Stock
and debt securities totaling $12.3 million and the sale of the Company's Common
Stock for net proceeds of $37.2 million, of which $35.4 million represented net
proceeds from the Company's initial public offering. Financing activities in
1997 primarily consisted of a bank line of credit borrowing of $6.0 million, a
convertible promissory note of $5.0 million, the sale of convertible preferred
stock by an acquired company for net proceeds of $6.4 million, and the sale of
Common Stock for net proceeds of $40.0 million, of which $38.4 million
represented net proceeds from the sale of Common Stock to Intuit.
The Company's principal commitments at December 31, 1997 consisted of
obligations under operating leases, capital leases and other non-lease
financings of $23.0 million, $7.0 million and $3.1 million, respectively, as
well as bank and other borrowings. See Notes 4, 5, 6 and 15 of Notes to
Supplemental Consolidated Financial Statements. In April 1998, the Company paid
$50.0 million to Netscape as part of its cash prepayment obligations under the
Netcenter Agreement, and the Company is obligated to pay Netscape an additional
$20.0 million by June 30, 1998. The Company borrowed $50.0 million from Intuit
in April 1998 to fund the $50.0 million payment to Netscape. The loan bears
interest at 5.9% per annum and is due no later than October 30, 1998.
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.
Capital expenditures have been, and future expenditures are anticipated
to be, primarily for facilities and equipment to support expansion of the
Company's operations and management information systems. The Company expects
that its capital expenditures will increase as its employee base grows. As of
December 31, 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 in 1998, a substantial portion of which is expected to
be financed through equipment leases. At December 31, 1997, the Company had
$2.2 million available on an equipment lease line, and the Company believes
that additional lease financing will be available to it if necessary.
The Company believes that its existing working capital balance and 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 12 months. Thereafter, the Company may need to
raise additional funds. 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 percentage ownership of
the shareholders 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company adopted SFAS No. 130 as of
December 31, 1997 and has presented comprehensive income for all periods
presented in the Statement of Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The Company adopted SFAS No.
131 as of December 31, 1997. Previously reported information has been restated
to reflect the addition of an operating segment resulting from the merger with
MatchLogic. See Notes 10 and 14 of Notes to Supplemental Consolidated Financial
Statements.
F-32
