<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
------------
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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<PAGE> 2
FORM 10-Q
EXCITE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1: Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998.......................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1998........................ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1998.................. 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk..... 28
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 28
ITEM 2: Changes in Securities and Use of Proceeds...................... 28
ITEM 3: Defaults Upon Senior Securities................................ 28
ITEM 4: Submission of Matters to a Vote of Security Holders............ 28
ITEM 5: Other Information.............................................. 28
ITEM 6: Exhibits and Reports on Form 8-K............................... 28
Signatures..................................................... 29
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 15,366 $ 9,056
Short-term investments ............................... 16,398 16,336
Restricted investments ............................... 302 567
Accounts receivable, net ............................. 20,907 20,185
Prepaid expenses and other current assets ............ 2,149 4,443
--------- ---------
Total current assets .............................. 55,122 50,587
Property and equipment, net ............................. 15,143 16,468
Investment in affiliated company ........................ -- 1,540
Intangible assets, net .................................. 1,771 1,493
Other assets ............................................ 4,657 2,824
--------- ---------
$ 76,693 $ 72,912
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable .......... $ 6,100 $ 6,100
Accounts payable ..................................... 5,717 4,122
Capital lease obligations, current portion ........... 3,178 5,265
Non-lease financing, current portion ................. 1,176 1,164
Related party liabilities ............................ 1,575 1,626
Other accrued liabilities ............................ 14,406 13,779
--------- ---------
Total current liabilities ....................... 32,152 32,056
Capital lease obligations ............................... 3,076 3,715
Non-lease financing ..................................... 1,613 1,326
Convertible note ........................................ 5,000 5,000
Shareholders' equity
Convertible preferred stock .......................... 9,518 813
Common stock ......................................... 122,913 134,283
Deferred compensation ................................ (1,440) (1,282)
Unrealized gain on available-for-sale investments .... 15 114
Accumulated deficit .................................. (96,154) (103,113)
--------- ---------
Total shareholders' equity ...................... 34,852 30,815
--------- ---------
$ 76,693 $ 72,912
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues .................................................... $ 7,515 $ 23,001
Cost of revenues:
Hosting costs ............................................. 1,852 2,788
Royalties and other cost of revenues ...................... 540 2,806
Amortization of purchased technology ...................... 2,399 --
-------- --------
Total cost of revenues .............................. 4,791 5,594
-------- --------
Gross profit ................................................ 2,724 17,407
Operating expenses:
Research and development .................................. 3,066 5,900
Sales and marketing ....................................... 6,281 10,074
Distribution license fees and data acquisition costs ...... 30 3,986
General and administrative ................................ 1,289 2,756
Merger and acquisition related costs, including
amortization of goodwill and other purchased intangibles 953 977
-------- --------
Total operating expenses ............................ 11,619 23,693
-------- --------
Operating loss .............................................. (8,895) (6,286)
Interest income (expense) and other, net .................... 111 (194)
Equity share of losses of affiliated company ................ -- (479)
-------- --------
Net loss .................................................... $ (8,784) $ (6,959)
======== ========
Basic and diluted net loss per share ........................ $ (0.74) $ (0.34)
======== ========
Shares used in computing net loss per share ................. 11,799 20,725
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................... $ (8,784) $ (6,959)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation ................................... 40 280
Depreciation ............................................................ 1,221 2,339
Amortization of intangibles ............................................. 3,352 277
Loss on disposal of fixed assets ........................................ -- 174
Changes in assets and liabilities:
Accounts receivable .................................................. (1,778) 722
Prepaid expenses and other current assets ............................ (234) (2,294)
Other assets ......................................................... (201) 1,833
Accounts payable ..................................................... (1,570) (1,595)
Accrued compensation ................................................. 308 (1,481)
Related party liabilities ............................................ -- 51
Other accrued liabilities ............................................ (2,758) 854
-------- --------
Net cash used in operating activities ............................. (10,404) (5,799)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ........................................ (1,605) (143)
Purchases of investments ................................................... (3,121) (8,898)
Sales and maturities of investments ........................................ 14,183 8,794
Investment in affiliated company ........................................... -- (1,540)
-------- --------
Net cash provided by (used in) investing activities ............... 9,457 (1,787)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease and other financing obligations .................. (842) (1,267)
Proceeds from bank lines of credit and other notes payable ................. 6,000 --
Payments on bank lines of credit and other notes payable ................... (1,100) --
Proceeds from sale of common stock and exercise of common stock warrants and
options ................................................................ 727 2,543
-------- --------
Net cash provided by financing activities ......................... 4,785 1,276
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... 3,838 (6,310)
Cash and cash equivalents at beginning of period ............................... 3,971 15,366
-------- --------
Cash and cash equivalents at end of period ..................................... $ 7,809 $ 9,056
======== ========
NON-CASH FINANCING ACTIVITIES
Amendment of common stock warrant to preferred stock warrant ............... $ 1,625 $ --
Property and equipment acquired under capital leases and other non-lease
financing .............................................................. 1,084 3,694
Conversion of preferred stock to common stock .............................. -- 8,705
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest ..................................................... 174 434
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software, Inc.,
which was formed in June 1994, is a global Internet media company offering
consumers and advertisers comprehensive Internet navigation services with
extensive personalization capabilities. The Excite Network consists of the
Excite (www.excite.com) and WebCrawler (www.webcrawler.com) brands, which
provide a gateway to the World Wide Web (the "Web") that organizes, aggregates
and delivers information to meet the needs of individual consumers. Designed to
help consumers navigate the Web, the Excite Network contains a suite of
specialized information services, organized under numerous topical channels
which combine proprietary search technology, editorial Web reviews, aggregated
content from third parties, bulletin boards, chat and other community features
and personalization capabilities. Localized versions of Excite are available in
Australia, France, Germany, Japan, the Netherlands, Sweden and the United
Kingdom. The Company conducts its business within two industry segments,
including the selling of banner and sponsorship advertising on the Excite
Network to customers in various industries, and, through the merger with
MatchLogic, Inc. ("MatchLogic") (see Note 2), ad serving and targeting services.
Basis of Presentation
In November 1997, the Company acquired Netbot Inc. ("Netbot") in a merger
transaction accounted for as a pooling of interests. 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.
MatchLogic was incorporated in May 1997. All financial information has been
restated to reflect the combined operations of the Company and MatchLogic (see
Note 2).
The condensed consolidated balance sheet as of March 31, 1998 and the
condensed consolidated statements of operations and cash flows for the three
months ended March 31, 1997 and 1998, have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at March 31, 1998 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. A condensed consolidated statement of
comprehensive loss has not been presented because the components of
comprehensive income (loss) are not material.
These financial statements should be read in conjunction with the Company's
audited financial statements as included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 as filed with the Securities and
Exchange Commission on March 31, 1998 and the Company's audited supplemental
consolidated financial statements reflecting the combined operations of the
Company and MatchLogic, Inc., a company the Company acquired in February 1998 in
a transaction accounted for as a pooling of interests, as included in the
Company's Current Report On Form 8-K as filed with the Securities and Exchange
Commission on May 15, 1998. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
any subsequent quarter or for the entire year ending December 31, 1998.
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<PAGE> 7
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 periods
to date. To date the Company has entered into no foreign currency forward
exchange contracts or other such derivative instruments.
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.
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.
Per Share Amounts
The Company has excluded all convertible debt, convertible preferred stock,
warrants and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all periods
presented. In February 1998, all of the shares of Preferred Stock that were
outstanding at December 31, 1997 converted into an equivalent number of shares
of Common Stock as part of the merger with MatchLogic (see Note 2). The
following table sets forth the computation of basic and diluted earnings per
share:
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<PAGE> 8
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
-------- --------
(In thousands, except per
share data; unaudited)
<S> <C> <C>
Net loss ................................................................ $ (8,784) $ (6,959)
======== ========
Weighted average shares outstanding .................................. 12,214 21,175
Weighted average common shares issued subject to repurchase
agreements........................................................... (415) (450)
-------- --------
Shares used to compute basic and diluted net loss per share ............. 11,799 20,725
======== ========
Basic and diluted net loss per share .................................... $ (0.74) $ (0.34)
======== ========
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current presentation format.
2. BUSINESS COMBINATIONS AND PURCHASED PRODUCT RIGHTS
Excite completed the following acquisitions through March 31, 1998:
<TABLE>
<CAPTION>
Shares of Shares of Excite Shares of
Cash and Excite Common Series E Convertible Options and
Promissory Stock Issued Preferred Stock Warrants
Company or Technology Acquired Date Acquired Note Paid Issued Assumed
- -------------------------------------------- ------------------ -------------- -------------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
MatchLogic, Inc. ("MatchLogic")........... February 1998 3,061,120 524,419
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>
In connection with the acquisition of MatchLogic, a private company
providing advertisers and agencies with Internet advertising management services
which began operations in May 1997, the Company incurred approximately $700,000
in merger related expenses primarily for legal and other professional fees in
the first quarter of 1998. The acquisition was accounted for as a pooling of
interests.
Separate results of the combined entities for the three months ended March
31, 1997 and for the approximate one month period ended February 2, 1998 (date
of merger) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS PERIOD ENDED
ENDED MARCH FEBRUARY 2,
31, 1997 1998
------------ -----------
(In thousands, unaudited)
<S> <C> <C>
Revenues:
Excite .......................... $ 7,515 $ 5,598
MatchLogic ...................... -- 376
------- -------
$ 7,515 $ 5,974
======= =======
Net loss:
Excite .......................... $(8,784) $(1,656)
MatchLogic ...................... -- (1,388)
------- -------
$(8,784) $(3,044)
======= =======
</TABLE>
There were no significant intercompany transactions between the two
companies and no significant conforming accounting adjustments.
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<PAGE> 9
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------- -------------
(In thousands, unaudited)
<S> <C> <C>
Deferred revenues................................. $ 4,588 $ 4,349
Accrued compensation.............................. 4,794 3,313
Accrued distribution license fees................. -- 1,071
Other accrued liabilities......................... 5,024 5,046
------------- -------------
$ 14,406 $ 13,779
============= =============
</TABLE>
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, MARCH 31,
1997 1998
------------- -------------
(In thousands; unaudited)
<S> <C> <C>
Borrowings under bank line of credit.................. $ 6,000 $ 6,000
Other notes payable................................... 100 100
------------- -------------
$ 6,100 $ 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%, 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 March 31, 1998. At March 31, 1998, an
investment in common stock with a carrying amount of approximately $404,000 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 March 31, 1998 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. CONVERTIBLE NOTE
In 1997, the Company entered into a convertible promissory note with
Itochu Corporation ("Itochu") (see also Note 9) in the principal amount of $5.0
million. The note bears interest at the London Interbank Offered Rate plus 1%,
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
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<PAGE> 10
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
6. CONVERTIBLE PREFERRED STOCK
The Company had 2,291,457 shares of Convertible Preferred Stock
outstanding at December 31, 1997 related to equity transactions of MatchLogic
(see Note 2) 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.
7. EMPLOYEE BENEFIT PLANS
In March 1998, the Board of Directors approved an amendment to the
Company's 1996 Equity Incentive Plan to increase the number of shares authorized
for issuance thereunder by 3,300,000. Also in March 1998, the Board of Directors
approved an amendment to the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares authorized for issuance thereunder by 300,000.
Both of these amendments are subject to shareholder approval.
8. 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 is managed and operated. MatchLogic, which
provides Internet ad serving and targeting services, operates as an independent
subsidiary of Excite with its own sales force, research and development and
operations departments.
Information by Operating Segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------
INTERNET AD SERVING
NAVIGATION & TARGETING TOTAL
---------- ----------- --------
(In thousands; unaudited)
<S> <C> <C> <C>
Operating information:
Revenues from external customers ................... $ 21,089 $ 1,912 $ 23,001
Revenues from internal segments customers .......... -- -- --
Distribution license fees and data acquisition costs 3,376 610 3,986
Segment operating income (loss) .................... (1,917) (4,369) (6,286)
Balance sheet information:
Total assets ....................................... $ 67,325 $ 5,587 $ 72,912
</TABLE>
9. 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 5) in 1997 in order to fund
Excite's capital contributions. As of March 31, 1998 Excite had invested
approximately $2.5 million in the joint venture, and had recognized 50% of the
losses through March
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<PAGE> 11
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31, 1997 totaling approximately $956,000. 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 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 three months ended March 31, 1998, the Company recorded
approximately $1.6 million in payments due to Intuit under this agreement, which
was unpaid as of March 31, 1998.
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. Revenues and expenses to date associated
with this agreement have not been significant.
10. EVENTS SUBSEQUENT TO QUARTER END
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.
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<PAGE> 12
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
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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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<PAGE> 16
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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<PAGE> 17
acquisition costs were $30,000 in the first quarter of 1997 and $4.0 million in
the first quarter of 1998. 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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<PAGE> 18
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 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> 21
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> 22
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. 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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<PAGE> 23
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.
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> 24
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> 25
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> 26
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> 27
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-27-
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 2, 1998, the Company acquired all of the issued and
outstanding capital stock of MatchLogic in exchange for 3,061,120 shares of the
Company's Common Stock. In addition, the Company assumed options and warrants to
purchase capital stock of MatchLogic, which options and warrants are now
exercisable for 524,419 shares of the Company's Common Stock.
The issuance of shares of Common Stock and the assumption of options and
warrants were made in reliance on Section 4(2) and/or Regulation D promulgated
under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.01 Financial Data Schedule (EDGAR version only)
(b) The following report on Form 8-K was filed during the quarter ended
March 31, 1998:
On February 17, 1998, the Company filed a Form 8-K (as amended by
Form 8-K/A filed on April 1, 1998) pursuant to Items 2 and 7 of
such Form regarding its acquisition of MatchLogic, Inc. and
pursuant to Item 5 of such Form regarding recent press releases.
-28-
<PAGE> 29
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EXCITE, INC.
Date: May 15, 1998 By: /s/ GEORGE BELL
---------------------------------------
George Bell
President and Chief Executive Officer
By: /s/ ROBERT C. HOOD
---------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
-29-
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.01 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXCITE,
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE
SUMMARY FINANCIAL INFORMATION FOR THE PERIODS ENDED JUNE 30, 1997, SEPTEMBER 30,
1997 AND DECEMBER 31, 1997 HAS BEEN RESTATED TO REFLECT THE EFFECT OF THE
POOLING OF INTERESTS BETWEEN EXCITE AND MATCHLOGIC, INC., WHICH OCCURRED ON
FEBRUARY 2, 1998, MATCHLOGIC'S DATE OF INCEPTION WAS MAY 8, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1998
<PERIOD-END> JUN-30-1997 SEP-30-1997 DEC-31-1997 MAR-31-1998
<CASH> 18,610 4,897 15,366 9,056
<SECURITIES> 28,953 27,944 16,700 16,336
<RECEIVABLES> 8,724 13,349 20,907 20,185
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 58,335 48,407 55,122 50,587
<PP&E> 16,160 19,461 23,725 27,245
<DEPRECIATION> (3,982) (6,229) (8,582) (10,777)
<TOTAL-ASSETS> 78,449 70,940 76,693 72,912
<CURRENT-LIABILITIES> 21,818 20,358 32,152 32,056
<BONDS> 0 0 0 0
0 0 0 0
17,441 14,209 9,518 813
<COMMON> 106,736 111,043 122,913 134,283
<OTHER-SE> (70,766) (79,016) (97,579) (104,281)
<TOTAL-LIABILITY-AND-EQUITY> 78,449 70,940 76,693 72,912
<SALES> 0 0 0 0
<TOTAL-REVENUES> 17,604 33,566 54,114 23,001
<CGS> 0 0 0 0
<TOTAL-COSTS> 8,969 14,571 21,035 5,594
<OTHER-EXPENSES> 28,794 47,567 73,880 23,693
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 367 715 1,417 591
<INCOME-PRETAX> (20,160) (28,409) (41,392) (6,959)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (20,160) (28,409) (41,392) (6,959)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (20,160) (28,409) (41,392) (6,959)
<EPS-PRIMARY> (1.67)<F1> (2.15) (2.94) (0.34)
<EPS-DILUTED> (1.67) (2.15) (2.94) (0.34)
<FN>
<F1>For the Purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
