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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28064
EXCITE, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0378215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip Code)
(650) 568-6000
(Registrant's telephone number, including area code)
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Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 30, 1998 there were 23,439,519 shares of the Registrant's Common
Stock outstanding.
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Item 2 of the Company's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998 is amended to read as follows:
PART I: FINANCIAL INFORMATION
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, without limitation, the failure of the number of
companies advertising on the Excite and WebCrawler brands (the "Excite Network")
to continue to increase; the failure of the Company to achieve increases in
advertising revenues; the failure of the Company to maintain premier positions
on certain high traffic World Wide Web ("Web") access points or to maintain or
enter into additional distribution relationships with Internet Service Providers
("ISPs") or Online Service Providers ("OSPs"); the inability of the Company to
derive substantial revenues in excess of the $29.3 million capitalized
prepayment made to Netscape for its new relationship with Netscape; the
inability of the Company to meet minimum guaranteed impressions under
sponsorship agreements; the inability of the Company to maintain and increase
levels of traffic on the Excite Network; the development of equal or superior
services or products by competitors; the intensely competitive environment for
Web advertising sales; the failure of the market to adopt the Web as an
advertising medium; reductions in market prices for Web-based advertising as a
result of competition or otherwise; the inability of the Company to achieve
higher rates for targeted advertising as well as the inability of the Company to
increase the percentage of its advertising inventory sold; anticipated costs
associated with marketing aimed at increasing consumer awareness of the
Company's brands; the failure of the usage of the Web for commerce or the number
of users engaging in Web commerce through the Company's services to increase;
the inability of the Company to effectively integrate the technology and
operations of Netbot, Inc. ("Netbot"), MatchLogic, Inc. ("MatchLogic") and
Classifieds2000, Inc. ("Classifieds2000") or any other subsequently acquired
businesses or technologies with its operations; increased operating expenses and
negative cash flows resulting from recent acquisitions, particularly increased
costs the Company expects to incur by maintaining MatchLogic as an independent
entity; the inability of the Company to maintain and enhance revenue growth from
sponsorship advertising due to limited availability of exclusive sponsorships on
the Excite Network or otherwise; the inability of the Company to expand its
international operations, particularly in light of the fact that the Company has
limited operating experience in the international market; the inability of the
Company to identify, attract, retain and motivate qualified personnel; general
economic conditions; and those risk factors set forth under "Risk Factors that
May Affect Future Results" included in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. The following discussion also
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, filed with the Securities and Exchange Commission on
March 31, 1998 and the Company's audited supplemental consolidated financial
statements and notes thereto included in the Company's Current Report on Form
8-K as filed with the Securities and Exchange Commission on May 15, 1998.
OVERVIEW
The Company operates the Excite Network (which includes the Excite and
WebCrawler brands) and provides a gateway to the Web that organizes, aggregates
and delivers information to meet the needs of individual consumers. Excite,
Inc., formerly Architext Software, Inc., was formed in June 1994 and, from its
inception to September 1995, its operating activities related primarily to
recruiting personnel, raising capital, purchasing operating assets, providing
custom product development and consulting services. The Company first launched
its Excite search and directory service in October 1995. In April 1997, the
Company launched a channels-based format for its service and content on the
Excite brand to provide consumers with an interface that reflects the way they
navigate through other forms of media and enables advertisers to more
effectively reach target consumers. The Excite brand currently includes 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 that 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
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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
revenue to Excite over the term of the agreements, which average from two to
three years. Under these agreements, Excite earns fees for initial programming,
initiation of service and access to the Excite Network, and for generating
impressions that 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 recognized from such electronic
commerce transactions were insignificant through the first quarter of 1998, and
are expected to be insignificant for the remainder of 1998. Sponsorship
customers accounted for approximately 24% and 31% of advertising revenues for
1997 and the three months ended March 31, 1998, respectively. Revenues are
generally recognized ratably over the term of the agreement, provided that the
Company does not have any significant remaining obligations and collection of
the resulting receivable is probable. To the extent that impression deliveries
are falling short of the guarantees, the Company defers recognition of the
corresponding revenues. See "Risk Factors that May Affect Future Results --
Risks Related to Sponsorships" and " -- Risks Associated with Banner
Advertising."
In April 1998, the Company and Netscape entered into 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 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 10).
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 that May Affect Future Results--Risks Related to Netcenter Agreement."
The Company has acquired a number of businesses, technologies, services,
product lines and content. In April 1998, the Company 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. All of the above
acquisitions were accounted for as pooling of interests transactions, except for
the acquisition in April 1998.
All financial information for dates and periods prior to the merger with
MatchLogic has been restated to reflect the combined operations of the Company
and MatchLogic. Financial information for dates and periods prior to the
acquisition 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. See Note 10.
See "Risk Factors that May Affect Future Results--Acquisition Strategy;
Integration of Past and Future Acquisitions."
The Company has incurred significant operating losses since inception, and
as of March 31, 1998, the Company had an accumulated deficit of approximately
$103.1 million. Although the Company experienced significant revenue growth
during 1997 and the first quarter of 1998, there can be no assurance that this
growth rate will be sustained or that revenues will continue to grow or that
historical operating results will be indicative of future operating results. 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 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.
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RESULTS OF OPERATIONS
REVENUES
Revenues increased by $15.5 million from $7.5 million for the three months
ended March 31, 1997 to $23.0 million for the comparable period in 1998. This
increase is primarily the result of an increase in sales of targeted
advertisements with higher rates, an increase in the number of advertisers
purchasing advertising banners on the Company's Web sites and an increase in
sponsorship advertising revenue. Also contributing to the increase in revenues
was the acquisition of MatchLogic which began operations in May 1997. Revenues
from international operations were not significant during the three months ended
March 31, 1997 and 1998. The Company expects to continue to derive a substantial
majority of its total revenues from selling advertisements. Because the market
for advertising on the Web is intensely competitive, advertising rates could be
subject to pricing pressures in the future. If the Company is forced to reduce
its advertising rates or experiences lower CPMs (price per thousand impressions)
as a result of such competition or otherwise, future revenues could be adversely
affected. Beginning in the second quarter of 1997, the Company started to sell a
combination of sponsorship and banner advertising contracts in addition to the
banner advertising contracts historically sold by the Company. Such sponsorship
advertising contracts have longer terms, involve more integration with Excite's
services and may allow advertisers to be the exclusive sponsor of portions of
the Excite and/or WebCrawler content. The Company does not expect revenues
growth relating to sponsorship advertising revenues to continue at the current
rate in future periods as availability of exclusive sponsorships may be limited.
COST OF REVENUES
Cost of revenues consists primarily of hosting costs, royalties and other
cost of revenues and, in 1997, amortization of purchased technology. Hosting
costs relate to the maintenance and technical support of the Excite Network, and
are comprised principally of personnel costs, telecommunications costs,
equipment depreciation and overhead allocations. Royalties and other cost of
revenues include expenses related to royalties, license agreements and revenue
sharing agreements for content and other services such as email and chat room
services. Total cost of revenues increased in absolute dollars by $803,000 from
$4.8 million, or 64% of revenues, for the three months ended March 31, 1997, to
$5.6 million, or 24% of revenues, for the comparable period in 1998. Hosting
costs increased in absolute dollars by $936,000 from $1.9 million, or 25% of
revenues, for the three months ended March 31, 1997, to $2.8 million, or 12% of
revenues, for the comparable period in 1998. The increase in hosting costs in
absolute dollars is due primarily to increased personnel expenses and equipment
costs relating to maintaining and supporting the Company's Web sites and
services. Royalties and other cost of revenues increased in absolute dollars by
$2.3 million from %540,000, or 7% of revenues, for the three months ended March
31, 1997, to $2.8 million, or 12% of revenues, for the comparable period in
1998. The increase in royalties and other cost of revenues was primarily due to
increased royalties and margin sharing payments from revenue sharing agreements
entered into in 1997.
In the first quarter of 1997, the Company recognized amortization of
purchased technology of $2.4 million related to the WebCrawler acquisition.
There were no corresponding costs in the first quarter of 1998 as the cost of
the technology was fully amortized at December 31, 1997. Excluding amortization
of purchased technology, total cost of revenues increased $3.2 million from $2.4
million, or 32% of revenues, for the three
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months ended March 31, 1997, to $5.6 million, or 24% of revenues, for the
comparable period in 1998. 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 36% for the three month
period ended March 31, 1997 compared to 76% for the comparable period in 1998.
The increase in gross profit as a percentage of revenues was due primarily to
the elimination of amortization of purchased technology discussed above.
Excluding amortization of purchased technology, gross profit as a percentage of
revenues was 68% for the three months ended March 31, 1997. In addition,
revenues grew at a faster rate than hosting costs and royalties and other cost
of revenues. 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 consist
principally of engineering and editorial personnel costs, equipment
depreciation, consulting fees, supplies and allocation of overhead. Costs
related to research, design and development of products have been charged to
research and development expense as incurred. Research and development expenses
increased in absolute dollars by $2.8 million from $3.1 million, or 41% of
revenues, for the three months ended March 31, 1997, to $5.9 million, or 26% of
revenues, for the comparable period in 1998. The increase in absolute dollars
was primarily attributable to increased expenses as a result of the Netbot and
MatchLogic acquisitions as well as an increase in engineering and editorial
headcount to support the Company's channels format and personalization
capabilities for the Excite Network. The Company believes that a significant
level of 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 consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
promotional and advertising expenses and allocation of overhead. Sales and
marketing expenses increased in absolute dollars by $3.8 million from $6.3
million, or 83% of revenues, for the three months ended March 31, 1997 to $10.1
million, or 44% of revenues, for the comparable period in 1998. The increase in
absolute dollars was due primarily to the hiring of additional sales and
marketing personnel and increased expenses resulting from the acquisition of
MatchLogic. Promotional expenses remained relatively constant in the three
months ended March 31, 1998 as compared to the same period of the prior year as
the prior year period included costs associated with a national media campaign
that started in the fourth quarter of 1996. The Company expects to continue to
incur significant promotional and advertising expenses and anticipates that
these costs will increase in absolute dollars in future periods as the Company
promotes its brands 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 consist principally of fees paid to third-party
Internet companies such as Netscape to provide entry points to the excite
Network and starting in 1997, costs to update and maintain the ad targeting and
tracking database which is continually being updated by the Company's MatchLogic
subsidiary. Distribution license fees and data
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acquisition costs were $30,000 in the first quarter of 1997 and $4.0 million in
the first quarter of 1998. The Company expects to expense approximately $56.8
million in the second quarter of 1998. The amount expensed in the second
quarter of 1998 represents the amount by which the sum of the prepayment
guarantees ($70.0 million) and the independent valuation of the warrants issued
($16.1 million) exceeds the anticipated future net revenues from the Netcenter
Agreement over its two year term. Future net revenues were calculated using
estimated gross revenues less the probable future costs of all goods and
services necessary to earn the revenues. The remaining capitalized amount of
approximately $29.3 million will be amortized ratably over the remainder of the
term of the Netcenter Agreement. The first quarter of 1998 reflects distribution
license fees related to agreements entered into with Netscape in March 1997 as
well as data acquisition costs incurred by MatchLogic.
The $29.3 million portion of the Cash Payment and warrant valuation 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. See "Risk Factors that May
Affect Future Results--Risks Related to Netcenter Agreement" and "--Dependence
on Third-Party Relationships."
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General and Administrative. General and administrative expenses consist
principally of administrative and executive personnel costs, provision for
doubtful accounts, fees for professional services and allocation of overhead.
General and administrative expenses increased by $1.5 million from $1.3 million,
or 17% of revenues for the three months ended March 31, 1997, to $2.8 million,
or 12% of revenues for the comparable period in 1998. The increase in general
and administrative expenses from the same quarter of the prior fiscal year was
primarily due to increased personnel to support expansion of the Company's
operations. In particular, growth in the Company's and MatchLogic's finance and
administrative departments contributed to this increase. The Company anticipates
that its general and administrative expenses will continue to increase in
absolute dollars as the Company expands its administrative and executive staff,
adds infrastructure and assimilates acquisitions of acquired technologies and
businesses. In addition, the Company plans to continue to run MatchLogic as an
independent subsidiary with its own administrative function.
Other Merger and Acquisition Related Costs, including Amortization of
Goodwill and Other Intangible Assets. The Company has in the past, and may in
the future, acquire businesses, technologies, services, product lines, content
databases or access to content databases that are complimentary to the Company's
business. During the three months ended March 31, 1998, the Company incurred
merger and acquisition related costs of $700,000 related to the acquisition of
MatchLogic. The remainder of the merger and acquisition related costs for the
first quarter of 1998 and all of the costs for the first quarter of 1997 related
to the amortization of goodwill and other purchased intangibles resulting
primarily from the WebCrawler acquisition in December 1996.
The Company anticipates that it will incur approximately $683,000 in merger
and acquisition related costs for the acquisition of Classifieds2000 in the
second quarter of 1998. In addition, the Company expects to incur expenses for
purchased in-process technology of approximately $16.2 million related to the
asset purchase in April 1998.
Interest Income (Expense) and Other. Interest income for the three months
ended March 31, 1997 and 1998 was $230,000 and $397,000, respectively. The
increase in interest income was primarily a result of higher cash, cash
equivalent and short-term investment balances in the first quarter of 1998.
Interest expense and other for the three months ended March 31, 1997 and 1998
was $119,000 and $591,000, respectively. This increase was due primarily to
expenses associated with additional capital lease obligations, non-lease
financing obligations and the convertible note issued to Itochu Corporation in
connection with the joint venture with respect to Excite Japan discussed below.
Equity Share of Losses of Affiliated Company. In October 1997, the Company
and Itochu Corporation and certain affiliated entities (collectively "Itochu")
entered into a joint venture agreement with respect to the Company's
wholly-owned subsidiary, Excite Japan, in order to provide Web-based information
services to the Japanese market. The Company currently holds, and intends to
retain, a 50% equity interest in Excite Japan. For the three months ended March
31, 1998, Excite's share of the losses of Excite Japan was $479,000. The Company
expects that it will record increased losses from Excite Japan for at least the
remainder of 1998.
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 that 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, it could have a material adverse effect on the Company's
business, operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had $25.4 million in unrestricted cash, cash
equivalents and short-term investments, a decrease of $6.4 million from December
31, 1997. 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.
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 obtained $5.0 million
from Itochu under a convertible promissory note in order to fund the Company's
capital contribution obligation. This note bears interest at the London
InterBank Offered Rate plus 1% and may be convertible into shares of the
Company's Common Stock at market value at its maturity date in October 2002, or
earlier in the event the Company desires to prepay such note.
The Company's operating activities for the three-month periods ended March
1997 and 1998 used cash of approximately $10.4 million and $5.8 million,
respectively. The decreased use of cash in the three months ended March 31, 1998
as compared to the same period of the prior year was primarily attributable to
higher revenues and resulting higher collections of accounts receivable and
lower payments for other accruals, offset in part by higher payments of accrued
compensation.
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Investing activities for the three months ended March 31, 1997 and 1998
provided cash of $9.5 million and used cash of $1.8 million, respectively. In
the three months ended March 31, 1997, cash was provided by the sale and
maturity of short-term investments, offset in part by purchases of property and
equipment. In the three months ended March 31, 1998, cash was used primarily for
investments in an affiliated company.
Financing activities for the three months ended March 31, 1997 and 1998
generated cash of $4.8 million and $1.3 million, respectively. Financing
activities for the first three months of 1997 primarily consisted of a bank line
of credit borrowing of $6.0 million. Financing activities for the first three
months of 1998 primarily consisted of proceeds from the exercise of common stock
options, offset in part by payments on capital lease and other financing
obligations.
In March 1997, the Company entered into a line of credit for $6.0 million
which will mature in June 1998. This line of credit bears interest at rates
ranging from the bank's prime rate to the bank's prime rate 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, as well as prohibiting the declaration and payment of cash
dividends on capital stock without the prior written consent of the bank. As of
March 31, 1998, 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.
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, which is a principal shareholder of
the Company, 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 March 31,
1998, the Company did not have any material commitments for capital
expenditures, although the Company anticipates that its planned purchases of
capital equipment and leasehold improvements will require additional
expenditures during the remainder of 1998, a portion of which may be financed
through equipment leases and bank borrowings. At March 31, 1998 the Company had
$6.5 million available on equipment lease lines, and the Company believes that
additional lease financing will be available to it if necessary.
The Company has completed a number of mergers and acquisitions in the past,
and expects to make other acquisitions and investments in joint ventures in the
future. While the Company believes that such transactions have been and will
continue to be in the best interests of the Company and its shareholders, these
transactions involve risks and may require additional cash investments by the
Company.
The Company has incurred losses to date of approximately $103.1 million and
has available working capital at March 31, 1998 of $18.5 million. The Company
believes the existing working capital balance together with cash flows generated
from advertising revenues will be sufficient to meet its anticipated cash needs
for working capital, capital expenditures and business expansion for at least
the remainder of 1998. 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. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to fund its
expansion, take advantage of unanticipated acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such inability
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual revenues and results of operations could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the following risk
factors and elsewhere in this Report.
Limited Operating History; No Assurance of Profitability; Certain Forward
Looking-Statements. The Company was founded in June 1994 and generated only
limited revenues prior to 1996. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company and its current business can be
based. In addition, the Company's business model is evolving and relies
substantially upon the sale of advertising on the Web. The Company's business
must be considered in light of the risks, expenses and problems frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the Web and Web-based
advertising. Specifically, such risks include, without limitation, the inability
of the Company to maintain premier positions on high traffic Web access points
or to maintain or enter into additional distribution relationships with Internet
Service Providers ("ISPs") or Online Service Providers ("OSPs"); the inability
of the Company to maintain and increase levels of traffic on the Excite Network;
the inability of the Company to derive sufficient revenues from Netscape's
Netcenter service in order to recoup the $70.0 million cash prepayment made to,
and the value of the warrants issued to, Netscape, and the additional costs the
Company expects to incur in order to perform its obligations under the Netcenter
Agreement; the inability of the Company to effectively integrate the technology
and operations of acquired businesses or technologies with its operations,
including, without limitation, those of Classifieds2000, Inc.
("Classifieds2000"); increased operating expenses as a result of the Company's
recent acquisitions, particularly increased costs the Company expects to incur
by maintaining MatchLogic as an independent entity; the inability of the Company
to expand its international operations, particularly in light of the Company's
limited operating experience in the international market; the failure by the
Company to continue to develop and extend the Excite and WebCrawler brands; the
inability of the Company to successfully integrate sponsored services or to meet
minimum guaranteed impressions under sponsorship agreements; the inability of
the Company to develop or acquire content for its services; the failure of
consumers to accept the Company's personalized Web services, such as My Excite
Channel, email services or chatroom services; the inability of the Company to
generate commerce-related revenues; the failure of the Company to anticipate and
adapt to a developing market; the introduction and development of equal or
superior services or products by competitors, particularly in light of the fact
that Microsoft and Netscape, operators of two of the most heavily-trafficked Web
sites, have announced that they will be offering competitive services; the
failure of the market to adopt the Web as an advertising and commercial medium;
reductions in market prices for Web-based advertising as a result of competition
or otherwise; the inability of the Company to achieve higher cost per thousand
impressions ("CPM") rates for targeted advertising or to increase the percentage
of its advertising inventory sold; the inability of the Company to identify,
attract, retain and motivate qualified personnel; and general economic
conditions. There can be no assurance that the Company will be successful in
addressing such risks, and any failure to do so could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company has incurred significant operating losses since inception, and as
of March 31, 1998, the Company had an accumulated deficit of approximately
$103.1 million. Although the Company experienced significant revenue growth
during 1997 and the first quarter of 1998, there can be no assurance that this
growth rate will be sustained or that revenues will continue to grow or that
historical operating results will be indicative of future operating results.
During the second quarter of 1998, the Company expects to incur charges of
approximately $16.2 million for purchased in-process technology as a result of
an acquisition by the Company during April 1998 and charges of $56.8 million
related to the Netcenter Agreement which the Company entered into with Netscape
in April 1998. The Company may record additional charges, which may be
significant, related to the Netcenter Agreement in the second quarter of 1998
and future periods under certain conditions. As a result, the Company expects
that its results of operations for the second quarter of 1998 will be, and in
future periods may be, materially
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<PAGE> 11
affected and that the Company will incur a net loss for the 1998 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 and in performing its obligations under the Netcenter
Agreement, its increased sales and marketing efforts, its increased funding for
development activities and the increased general and administrative staff needed
to support the Company's growth. To the extent that revenues do not grow at
anticipated rates or that increases in such operating expenses precede or are
not subsequently followed by commensurate increases in revenues, or that the
Company is unable to adjust operating expense levels accordingly, the Company's
business, results of operations and financial condition will be materially and
adversely affected. There can be no assurance that in the future the Company
will be profitable on a quarterly or annual basis.
Certain executive officers of the Company have made certain forward-looking
statements regarding the Company's future prospects, which statements have been
published in a variety of news articles. These statements include statements
regarding the Company's prospects for increased revenues and profitability in
the future, the amount of revenues that may be generated by MatchLogic and
Classifieds2000, which the Company acquired in February 1998 and April 1998,
respectively, the rate at which the Company's revenues will increase and the
ability of the Company to increase its advertising rates. The occurrence or
achievement of any of the events described in these statements is subject to
numerous risks and uncertainties. In particular, risks and uncertainties
relating to forward-looking statements as to the Company's revenues,
profitability and advertising rates include, without limitation: the need for
continued increases in the number of companies advertising on the Excite Network
as well as on the Web generally; the Netcenter Agreement, particularly in light
of the substantial prepayment made to Netscape and the significant additional
costs that the Company expects to incur in order to perform its obligations
under the Netcenter Agreement; the Company's ability to increase sales of
targeted advertisements and advertisers' willingness to pay higher CPM rates for
advertisements on the Excite Network; the ability of the Company to realize
substantial revenues from the increasingly competitive environment for Web
advertising sales; the need for increases in the amount of traffic on the Excite
Network; the increased amount of expenses and negative cash flows resulting from
the Company's acquisitions of Classifieds2000, MatchLogic, and Netbot, Inc.
("Netbot"); the Company's dependence on third parties to attract traffic to the
Excite Network, including payments to be made for distribution fees; the ability
of the Company to develop and achieve consumer and advertiser acceptance for the
Excite Network in the international market; general economic conditions; and the
risks relating to the acquisition of MatchLogic described below. See
"--Acquisition Strategy; Integration of Past and Future Acquisitions," and
"--Dependence on Continued Growth in Use of the Web."
Risks and uncertainties relating to forward-looking statements regarding
MatchLogic's contribution to revenues and other operating results of Excite in
1998 include without limitation: risks involved in assimilating MatchLogic while
maintaining MatchLogic as a separate operating unit; risks that MatchLogic
personnel, who are not subject to noncompetition agreements, will leave
MatchLogic; risks inherent in MatchLogic's business, including privacy concerns
arising out of MatchLogic's database marketing activities, which account for a
majority of MatchLogic's revenues; risks in the extremely limited operating
history of MatchLogic on which to base any revenue projections; the likely
fluctuations in operating results of MatchLogic due to factors beyond
MatchLogic's or Excite's control; reliance by MatchLogic on a very limited
number of customers for a substantial percentage of its projected revenues; the
acceptance by MatchLogic's advertising customers of MatchLogic being owned by
Excite (one of the Web sites from which MatchLogic purchases advertising); and
the willingness by other Web sites from which MatchLogic purchases advertising
(particularly those which are direct competitors of Excite) to accept future
advertising placements from MatchLogic as a result of the acquisition by Excite.
Potential Fluctuations in Quarterly Results; Unpredictability of Future
Revenues. As a result of the Company's limited operating history, the evolving
nature of its business and its acquisitions, the Company has limited meaningful
historical financial data upon which to base planned operating expenses.
Accordingly, the Company's expense levels are based in part on its expectations
as to future advertising revenues and to a large extent are fixed. The Company
expects in the future to derive revenues from a mix of advertising sales
(including banner advertisements and sponsorships), commerce transactions and
direct and database marketing activities. To date, the Company has not received
any material amounts of revenues from commerce transactions, and the Company
only recently acquired MatchLogic, which the Company expects to be its primary
source of revenues from database and direct marketing revenues. There can be no
assurance that the Company will be successful in deriving substantial revenues
from these areas. There can also be no assurance that the Company will be able
to accurately predict the levels of future advertising revenues, particularly in
light of the intense competition for the sale of Web-based advertisements, the
Company's limited operating history and the uncertainty as to the viability of
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<PAGE> 12
the Web as an advertising medium. The failure by the Company to accurately make
such predictions would have a materially adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company derives a significant portion of its revenues from the sale of
advertising under short-term advertising contracts. The cancellation or deferral
of existing advertising contracts or the failure to obtain new advertising
contracts in any quarter could materially and adversely affect the Company's
business, results of operations and financial condition for that quarter.
Furthermore, the Company derives banner advertising revenues and believes it
attracts sponsors and advertisers based on the amount of traffic, or page views,
on the Excite Network. Accordingly, any significant shortfall of traffic on the
Excite Network in relation to the Company's expectations or the expectations of
existing or potential advertisers, would have an immediate material adverse
effect on the Company's business, results of operations and financial condition.
See "--Risks Associated with Banner Advertising."
The Company's operating results have varied on a quarterly basis during its
limited operating history and the Company expects to experience significant
fluctuations in future quarterly operating results. Such fluctuations have been
and may in the future be caused by numerous factors, many of which are outside
the Company's control, including but not limited to: specific economic
conditions relating to the Internet and the Web; usage of the Web; demand for
advertising on the Excite Network as well as demand for Web-based advertising in
general; changes in advertising rates as a result of competition or otherwise;
seasonal trends in advertising sales; the advertising budgeting cycles of
advertisers; incurrence of charges in connection with the Netcenter Agreement
and the Company's distribution relationships with Netscape and other ISPs and
OSPs or other third parties; demand for the Company's services; incurrence of
costs relating to acquisitions of businesses or technologies; introduction or
enhancement of new or existing services by the Company and its competitors;
market acceptance of new services; delays in the introduction of services or
enhancements by the Company or its competitors; mix of types of advertisements
sold, such as the amount of targeted advertising, which generally has higher CPM
rates, sold as a percentage of total advertising sold; capacity constraints and
dependencies on computer infrastructure; and general economic conditions.
During its limited operating history, the Company has experienced seasonal
fluctuations in the amount of banner advertisements purchased on its network,
with advertisers historically purchasing fewer advertisements in the first
calendar quarter of each year. Because the market for Web advertising is an
emerging market, additional seasonal patterns in Web advertising may develop in
the future as the market matures.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. The Company believes that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as an indication of future
performance. Also, it is likely that in some future quarter or quarters the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would be materially and adversely affected.
Risks Related to Netcenter Agreement. In April 1998, the Company and
Netscape entered into the Netcenter Agreement. This agreement subjects the
Company to numerous and substantial risks and uncertainties, including, without
limitation, those discussed below.
Under the Netcenter Agreement, the Company will only receive revenues
generated from the Co-Branded Services and not from any other part of Netcenter.
In addition, the Company must pay Netscape a portion of such revenues after
recouping part of the Cash Payment. Thereafter, the Company must pay Netscape a
percentage of the revenues received from the Co-Branded Services. There are no
minimum guaranteed revenues under the Netcenter Agreement, and there can be no
assurance as to the level of revenues that the Company will generate from the
Co-Branded Services. The level of advertising revenues generated by the Company
from the Co-Branded Services is subject to a number of risks and uncertainties,
many of which are beyond the Company's control. These include general risks
associated with providing an advertising-supported Internet Service, uncertainty
as to whether the Company can increase its sales and marketing capabilities in
order to sell sufficient advertising on the Co-Branded Services, pricing
competition from Netscape as a result of advertising sold on the parts of
Netcenter other than the Co-Branded Services, and risks that channels on
Netcenter other than the Co-Branded Channels (which channels will include a
business channel and a sports channel) may be potentially more attractive to
advertisers than the Co-Branded Channels. Because Netscape is responsible for
programming the Netcenter home page and other portions of Netcenter that are
not co-branded, Excite is relying upon Netscape's programming of the Netcenter
home page and other portions of Netcenter to create a demographic mix of
traffic flows that is similar to that experienced by the Company. Netscape has
no experience in such activities. As a result, the Company has no means of
controlling the programming on these pages so as to maximize the exposure of
the co-branded channels and search services. As a result, the Company also has
little means of controlling the mix of traffic to the co-branded channels and
search service, which could have different revenue opportunities to the Company
as advertisers may be willing to pay more to advertise on certain content
channels. As a result, there can be no assurance that the Company can generate
sufficient revenues from the Co-Branded Services to recoup the portion of the
Cash Payment against which the Company's revenue sharing obligations will be
offset, or to recoup costs incurred by the Company under the Netcenter
Agreement.
The Company will be required to hire a significant number of technical and
sales personnel and to incur additional overhead costs in order to develop, host
and sell advertising on the Co-Branded Services. The Company will not be
reimbursed for these costs. The failure to generate revenues from the Co-Branded
Services sufficient to recoup these additional costs would have a material
adverse effect on the Company's business, results of operations and financial
condition.
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The success of Netcenter and the Co-Branded Services in particular, will be
substantially dependent on the amount of traffic on Netcenter. Although Netscape
has made certain exposure guarantees to the Company over the term of the
Netcenter Agreement, there can be no assurance that such guarantees will be
fulfilled. There is intense competition for attracting Web users, which
competition may be exacerbated by the upcoming release of Microsoft's Windows 98
operating system. Furthermore, many current Web users may not choose to utilize
Netcenter over the Internet services they currently use. Any failure of
Netcenter to attract substantial user traffic would materially and adversely
affect the Company's business, results of operations and financial condition.
The Netcenter Agreement provides that all page views generated from the
Co-Branded Services shall be deemed to be traffic attributable to Netscape. As a
result, the Company may not receive credit under certain audience measurement
statistics which are commonly used by advertisers in making their advertising
placements for traffic generated through the Co-Branded Services.
As part of the Netcenter Agreement, the Excite Network will also be
featured as a "premier provider" on Netscape's Net Search page, and will be
similarly featured on the "Netcenter Widget" tool which will be accessible from
Netcenter. Because Netscape only guarantees a specified number of impressions
from its Net Search page (as compared to a number of users who "click through"
to the Excite Network), there can be no assurance that this new "premier
provider" arrangement will result in significant increases in traffic on the
Excite Network. Although Netscape has guaranteed a minimum number of users who
"click through" to the Excite Network from the Netcenter Widget, Netscape is not
obligated to keep this tool on Netcenter after the first six months of the term
of the Netcenter Agreement. Accordingly, there can also be no assurance that
this tool will provide the Excite Network with significant amounts of traffic.
In entering into the Netcenter Agreement, Excite has assumed that "click
throughs" from the Netsearch page will be similar to the historical performance
of the Netsearch page experienced by Excite over the prior two agreements with
Netscape. The "click through" rate is influenced by brand strength of the search
provider, and by the layout and programming of the Netsearch page itself. Thus,
Excite's projections for the co-branded search service are dependent on
Netscape's ability to establish its brand as a search provider and its ability
to program the site to maintain the historical level of "click throughs." Under
performance, in terms of users clicking through from the home page to the
co-branded channels or to Excite services, would negatively impact Excite's
expectations for the Agreement.
The distribution of traffic from Netscape to Excite throughout the term of
the Netcenter Agreement significantly impacts Excite's ability to recoup the
amount it has prepaid under the Netcenter Agreement. Although Netscape has made
certain traffic exposure guarantees, there can be no assurance that these
guarantees will be fulfilled within the two-year term of this contract. Nor is
there a guarantee that the timing of the delivery of these impressions during
this period will be consistent with the assumptions made in the Company's
determination of the value of the Netcenter Agreement, as Netscape is not
obligated to meet these guarantees on any specific schedule and, if the delivery
of Netscape's traffic guarantees is more heavily weighted toward the end of the
contract term than projected, Excite's expectations as to the net present value
of the Agreement would be negatively impacted.
Upon the termination of the Netcenter Agreement (other than a termination in
connection with certain acquisitions of or by Netscape), Netscape will have a
perpetual, irrevocable license to utilize certain technology used by Excite to
provide the Co-Branded Services. Netscape will also have the right to sublicense
this technology to third parties. As a result, upon termination of the Netcenter
Agreement, Netscape will be able to operate Netcenter independently, without any
significant royalty or payment obligations to Excite. In addition, if Netscape
sublicenses this technology to a third party, the Excite Network could face
additional competition, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Netscape Agreement is subject to termination in the event that the
Company materially breaches its obligations under the Netscape Agreement. In
addition, if Netscape believes that the Company's Excite service or that the
content provided by Excite for the Netcenter service contains any material that
Netscape deems likely to cause it material harm, Netscape may terminate the
Netcenter Agreement if the Company has not revised such objectionable content.
In the event of such terminations, Netscape will not be obligated to refund any
portion of the amounts prepaid by the Company and the Company will not be
entitled to receive any reimbursement for its costs incurred in performing its
obligations under the Netcenter Agreement.
Many of the services to be offered by Netcenter will compete directly with
those offered by the Excite Network. There can be no assurance that this
increased competition for Web users or advertisers will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
Acquisition Strategy; Integration of Past and Future Acquisitions. The
Company has in the past acquired, and may in the future acquire, businesses,
technologies, services, product lines, content databases, or access to content
databases that are complementary to the Company's business. Since August 1996,
the Company has made a number of acquisitions. The Company acquired
Classifieds2000 in April 1998, MatchLogic in February 1998, Netbot in November
1997, the assets relating to the WebCrawler service in November 1996 and The
McKinley Group, Inc. ("McKinley") in August 1996. In addition, in April 1998 the
Company acquired a small company whose financial results are immaterial to the
Company's operations. Acquisitions involve a number of special risks, including,
among other things, the difficulty of assimilating the technologies, operations
and personnel of acquired companies with those of the Company, the potential
disruption of the Company's business, the diversion of resources, the incurrence
of acquisition-related expenses, the write-off or amortization of intangible
assets, the assumption of unknown liabilities, the inability to maintain uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and strategic partners as a result of such acquisitions or the
integration of new personnel. For example, the assimilation of prior
acquisitions required, among other things, the integration of service offerings,
coordination of the research and development and sales and marketing efforts,
the assumption by the Company of liabilities under distribution agreements and
loan agreements, and the addition of a significant number of additional
personnel. The Company could face similar integration issues with respect to its
recent or future acquisitions, and there can be no assurance that the Company
will be successful in addressing these risks. Any failure to successfully
address these acquisition-related risks could have a material adverse effect on
the Company's business, results of operations and financial condition.
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<PAGE> 14
Risks Related to Sponsorships. The Company has recently entered into
sponsorship arrangements with third parties to provide sponsored services and
placements on the Excite Network in addition to traditional banner advertising.
In connection with these arrangements, the Company may receive sponsorship fees,
and in connection with certain of its more recent arrangements it may receive a
portion of transaction revenues received by such third party sponsors from users
originated through the Excite Network. To the extent implemented, these
arrangements expose the Company to potentially significant financial risks,
including the risk that the Company fails to deliver required minimum levels of
user impressions (in which case, these agreements are typically subject to
termination) and that third party sponsors do not renew the agreements at the
end of their term. These arrangements also require the Company to integrate
sponsors' content with the Company's services, which requires the dedication of
resources and significant programming and design efforts to accomplish. There
can be no assurance that the Company will be able to attract additional sponsors
or that it will be able to renew existing sponsorship arrangements when they
expire. In addition, the Company has granted exclusivity provisions to certain
of its sponsors, and may in the future grant additional exclusivity provisions.
Such exclusivity provisions may have the effect of preventing the Company, for
the duration of such exclusivity arrangements, from accepting advertising or
sponsorship arrangements within a particular subject matter with respect to
portions of a channel, an entire channel, across an entire service or over the
whole Excite Network. The inability of the Company to enter into further
sponsorship or advertising arrangements as a result of its exclusivity
arrangements could have a material adverse effect on the Company's business,
results of operations and financial condition.
Risks Associated with Banner Advertising. The Company derives substantially
all of its revenues from the sale of advertising, including banner
advertisements and sponsorship arrangements, on the Excite Network. A majority
of the Company's customers purchasing banner advertisements purchase these
advertisements on a short-term basis, and many of these customers may terminate
their advertising commitments at any time without penalty. Consequently, there
can be no assurance that these customers will continue or increase their level
of advertising on the Excite Network or that these customers will not move their
advertising to competing Web sites or to other traditional media. Therefore,
there can be no assurance that the Company will be successful in maintaining or
increasing the amount of advertising on the Excite Network, and the failure to
do so would have a material adverse effect on the Company's business, results of
operations and financial condition.
Developing Market; Dependence on Continued Growth in Use of the Web. The
market for the Company's services has recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed services and products for use on the Web or who
seek to derive significant revenues from the sale of advertisements on the Web.
The Company is highly dependent upon the increased use of the Web for
information, publication, distribution and commerce, and there can be no
assurance that the use of the Web for these purposes will continue to grow at
its current rate or at all. The growth of the use of the Web may be inhibited
for a number of reasons, including, but not limited to, potentially inadequate
development of network infrastructure, security concerns, inconsistent quality
of service and lack of availability of cost-effective, high-speed service. To
the extent that use of the Web does continue to grow, there can be no assurance
that the Internet infrastructure will continue to support the demands placed on
it by such continued growth or that the performance or reliability of the
Internet will not be adversely affected. In addition, the Web as an advertising
medium has not been available for a sufficient period of time to gauge its
effectiveness as compared with traditional advertising media, and therefore the
Web is an unproven medium for advertising-supported services. Accordingly, the
Company's future operating results will depend substantially upon the increased
use of the Web for information, publication, distribution and commerce and the
emergence of the Web as an effective advertising medium.
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<PAGE> 15
The Company's ability to generate significant advertising revenues will also
depend on, among other things, the development of a large base of users of the
Company's services possessing demographic characteristics attractive to
advertisers, the ability of the Company to accurately measure its user base and
the ability of the Company to develop or acquire effective advertising delivery
and measurement systems. Many of the Company's advertisers have only limited
experience with the Web as an advertising medium, have not yet devoted a
significant portion of their advertising expenditures to Web-based advertising,
and may not find such advertising to be effective for promoting their products
and services relative to traditional print and broadcast media. The adoption of
Web advertising, particularly by those entities that have historically relied
upon traditional media for advertising, requires the acceptance of a new way of
conducting business and exchanging information. Entities that already have
invested substantial resources in other methods of conducting business may be
reluctant to adopt a new strategy that may limit or compete with their existing
efforts. There can be no assurance that the market for Web advertising will
continue to emerge or become sustainable. If the market fails to develop or
develops more slowly than expected, the Company's business, results of
operations and financial condition could be materially and adversely affected.
No standards have been widely accepted for the measurement of the effectiveness
of Web-based advertising, and there can be no assurance that such standards will
develop sufficiently to support the Web as an effective advertising medium.
There can be no assurance that advertisers will continue to accept the Company's
or other third-party measurements of impressions, or that such measurements will
not contain errors. In such event, the Company's advertising revenues could be
materially adversely affected, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, there is intense competition in the sale of advertising on the
Web, resulting in a wide range of rates quoted and a variety of pricing models
offered by different vendors for a variety of advertising services, which makes
it difficult to project future levels of advertising revenues and rates. It is
also difficult to predict which pricing models will be adopted by the industry
or advertisers. For example, advertising rates based on the number of "click
throughs," or user requests for additional information made by clicking on the
advertisement from the Company's network to the advertiser's Web pages, instead
of rates based solely on the number of impressions displayed on users' computer
screens, would materially adversely affect the Company's revenues. As a result
of these risks, there can be no assurance that the Company will be successful in
generating significant future advertising revenues from Web-based advertising,
and the failure to do so would have a material adverse effect on the Company's
business, results of operations and financial condition.
Further, there can be no assurance that advertisers will determine that
banner advertising, the delivery of which currently comprises a substantial
portion of the Company's revenues, is an effective or attractive advertising
medium, and there can be no assurance that the Company will effectively
transition to any other forms of Web advertising should they develop and achieve
market acceptance. Moreover, "filter" software programs that limit or prevent
advertising from being delivered to a Web user's computer are available.
Widespread adoption of such software by users could have a material adverse
effect upon the commercial viability of Web advertising, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on Third-Party Relationships. The Company is currently, and will
be in the future, dependent on a number of third-party relationships for user
traffic and to provide content and services on the Excite Network and to make it
more attractive to advertisers and consumers. These relationships include
arrangements relating to the positioning of the Excite Network on Web browsers
such as those offered by Netscape and Microsoft, agreements with ISPs and OSPs
such as AOL and Microsoft and arrangements for providing content or services for
the Excite Network such as email services, stock quotes and news stories. The
termination of, or the failure of the Company to renew on reasonable terms, its
position on a Web browser or its relationship with an ISP, OSP or key content
provider could significantly reduce traffic on the Excite Network, have an
effect of increasing traffic on a competing service or could otherwise adversely
affect the Company's advertising revenues, which would also have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company could also incur expenses relating to distribution
license fees as a result of its distribution agreements. These distribution
license fees could have a material adverse effect on the Company's business,
results of operations and financial condition.
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<PAGE> 16
The Company is also generally dependent on other Web site operators that
provide links to the Excite Network. Most of these arrangements do not require
future minimum commitments to use the Company's services to provide access or
links to the Excite Network or to provide content to the Company, are often not
exclusive and are often short-term or may be terminated at the convenience of
the other party. There can be no assurance that these third parties regard their
relationship with the Company as important to their own respective businesses
and operations, that they will not reassess their commitment to the Excite
Network at any time in the future, or that they will not develop their own
competitive services or products. Further, there can be no assurance that the
services of those companies that provide access to the Excite Network will
achieve market acceptance or commercial success and therefore there can be no
assurance that any significant amount of traffic will be directed to the Excite
Network as a result of these third party relationships. Accordingly, there can
be no assurance that the Company's existing relationships will result in
sustained business partnerships, successful service offerings, the generation of
significant traffic on the Excite Network or significant revenues for the
Company.
The Company also has a five-year distribution agreement with AOL which
expires in November 2001 under which a co-branded version of the Excite search
and directory service is designated as the exclusive Web search and directory
service for the AOL service for an initial two-year period ending in November
1998. If the exclusivity period is not extended by AOL, the co-branded service
would become the "default" search and directory service of AOL. However, AOL
could enter into a strategic relationship with a competitor of the Company or
offer its own competing services, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Management of Growth. The Company's rapid growth has placed, and is expected
to continue to place, a significant strain on the Company's managerial,
operational and financial resources. As of March 31, 1998, the Company had grown
to 455 employees from 188 employees at December 31, 1996. Further, as the number
of the Company's users, advertisers and other business partners has grown, the
Company has been required to manage multiple relationships with various
customers, strategic partners and other third parties. These requirements will
be exacerbated in the event of further growth in the Company or in the number of
its strategic relationships or sponsorship arrangements. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that Company management will be able to
achieve the rapid execution necessary to successfully offer its services and
implement its business plan. The Company's future operating results will also
depend on its ability to expand its sales and marketing organization and expand
its support organization commensurate with the growth of its business and the
Web. If the Company is unable to manage growth effectively, the Company's
business, results of operations and financial condition will be materially and
adversely affected. See "--Acquisition Strategy; Integration of Past and Future
Acquisitions."
Risks Associated with International Operations. A key component of the
Company's strategy is to expand its international operations and its
international sales and marketing activities by offering localized versions of
the Excite Network. Expansion into these markets has required and will continue
to require management attention and resources. The Company has limited
experience in localizing its services and many of the Company's competitors are
also undertaking to expand into foreign markets. There can be no assurance that
the Company will be successful in expanding into international markets. In
addition to the uncertainty regarding the Company's ability to generate revenues
from foreign operations and expand its international presence, there are certain
risks inherent in doing business on an international basis, including, among
others, regulatory requirements, legal uncertainty regarding liability, tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, different accounting practices, problems in
collecting accounts receivable, political instability, seasonal reductions in
business activity and potentially adverse tax consequences, any of which could
adversely affect the success of the Company's international operations. To the
extent the Company expands its international operations and has additional
portions of its international revenues denominated in foreign currencies, the
Company could become subject to increased risks relating to foreign currency
exchange rate fluctuations. There can be no assurance that one or more of the
factors discussed above will not have a material adverse effect on the Company's
future international operations and, consequently, on the Company's business,
results of operations and financial condition.
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<PAGE> 17
Risk of Capacity Constraints; System Failures. The Company is dependent on
its ability to generate a high volume of traffic to the Excite Network.
Accordingly, the performance of the Excite Network is critical to the Company's
reputation, its ability to attract advertisers and to achieve market acceptance
of the Excite Network. Any system failure that causes interruptions in the
availability of or that increases response time of the Company's services could
reduce user satisfaction and traffic to the Excite Network and, if sustained or
repeated, would reduce the attractiveness of the Excite Network to advertisers
and consumers. An increase in the volume of searches conducted through the
Excite Network could strain the capacity of the software or hardware deployed by
the Company, which could lead to slower response time or system failures. In
addition, as the amount of Web pages and traffic increases, there can be no
assurance that the Excite Network will be able to scale proportionately. The
Company is also dependent upon timely feeds and downloads of information from
content providers and is dependent upon providers of Web browsers and on ISPs,
OSPs and other Web site operators, which have experienced significant outages in
the past, for access to its network. In the past, Web consumers have experienced
outages, delays and other difficulties due to system failures unrelated to the
Company's systems and services. Additional difficulties could also materially
and adversely affect consumer and advertiser satisfaction. To the extent that
the capacity constraints described above are not effectively addressed by the
Company, such constraints would have a material adverse effect on the Company's
business, results of operations and financial condition.
Substantially all of the Company's communications hardware and certain of
its computer hardware operations are located at leased facilities in Redwood
City, California, an area susceptible to earthquakes. The Company has
experienced system failures or outages from time to time in the past, which have
disrupted the operation of the Excite Network. There can be no assurance that a
system failure at this location would not adversely affect the performance of
the Excite Network. These systems are also vulnerable to damage from fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. The Company does not presently have a formal disaster recovery
plan. In the event that the Company seeks to replicate its systems at other
locations, it would face a number of technical challenges, particularly with
respect to database replication and the need to constantly update distributed
databases, and there can be no assurance that the Company would be able to
successfully address these challenges. Although the Company carries property and
business interruption insurance, its low coverage limits likely will not be
adequate to compensate the Company for all losses that may occur. The Company's
servers are also vulnerable to computer viruses, physical or electronic
break-ins and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays or
cessations in service to users of the Excite Network. The occurrence of any of
these risks could have a material adverse effect on the Company's business,
results of operations and financial condition.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Web. However,
due to the increasing popularity and use of the Web, it is possible that a
number of laws and regulations may be adopted with respect to the Web, covering
issues such as user privacy, pricing, characteristics and quality of products
and services. For example, although it was held unconstitutional, the
Telecommunications Act of 1996 prohibited the transmission over the Internet of
certain types of information and content and other nations, including Germany,
have taken actions to restrict the free flow of material deemed to be
objectionable on the Web. In addition, several telecommunications carriers are
seeking to have telecommunications over the Web regulated by the Federal
Communications Commission (the "FCC") in the same manner as other
telecommunications services. In addition, because the growing popularity and use
of the Web has burdened the existing telecommunications infrastructure and many
areas with high Web use have begun to experience interruptions in phone service,
local telephone carriers, such as Pacific Bell, have petitioned the FCC to
regulate ISPs and OSPs in a manner similar to long distance telephone carriers
and to impose access fees on the ISPs and OSPs. If any such petition is granted,
or the relief sought therein is otherwise granted, the costs of communicating on
the Web could increase substantially, potentially slowing the growth in use of
the Web, which could in turn decrease the demand for the Company's services. The
adoption of any additional laws or regulations may also decrease the growth of
the Web, which could in turn decrease the demand for the Excite Network or could
increase the Company's cost of doing business. Moreover, the applicability to
the Web of existing laws in various jurisdictions governing issues such as
property ownership, libel and personal privacy is uncertain and will take years
to resolve. Any such new legislation or regulation or application or
interpretation of existing laws could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's contests may be subject to state and federal laws governing
lotteries and gambling. Although the Company seeks to design its contest rules
to fall within exemptions from such laws, there can be no assurance that these
contests will be exempt from such laws or that the applicability of such laws
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
Due to the global nature of the Web, it is possible that, although
transmissions of the Excite Network originate in the State of California, the
governments of other states and foreign countries might attempt to regulate the
Company's transmissions or prosecute the Company for violations of their laws.
There can be no assurance that violations of local laws will not be alleged or
charged by state or foreign governments, that the Company might not
unintentionally violate such law or that such laws will not be modified, or new
laws enacted, in the future. Although there has been recently introduced the
proposed Internet Tax Freedom Act, which, if adopted, will place a temporary ban
on states and localities from passing new tax laws aimed at online transactions,
it is possible that, in the future, states or foreign countries may seek to
impose sales taxes on out-of-state companies that engage in commerce over the
Web or otherwise require the Company to qualify to do business in such
jurisdictions, with the failure to so qualify subjecting the Company to taxes or
penalties. In the event that states or foreign countries succeed in imposing
sales or other taxes on Web commerce, the growth of the use of the Web for
commerce could slow substantially. Any of the foregoing developments could have
a material adverse effect on the Company's business, results of operations and
financial condition.
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<PAGE> 18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXCITE, INC.
Date: September 9, 1998 By: /s/ ROBERT C. HOOD
---------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
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