<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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28064
-------------------
EXCITE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0378215
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
(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 October 31, 1998 there were 51,595,900 shares of the Registrant's
Common Stock outstanding.
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- --------------------------------------------------------------------------------
EXCITE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 26
</TABLE>
2
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- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,460 $ 15,366
Short-term investments 11,573 16,398
Restricted investments 1,279 302
Accounts receivable 36,922 20,907
Related party receivable 3,105 174
Prepaid Netscape distribution costs and trademarks,
current portion 43,991 --
Prepaid expenses and other current assets 3,617 1,975
--------- ---------
Total current assets 127,947 55,122
Property and equipment 26,471 15,143
Investment in affiliated company 713 --
Prepaid Netscape distribution costs and trademarks 32,758 --
Intangible assets 1,446 1,771
Other assets 2,654 4,657
--------- ---------
$ 191,989 $ 76,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable $ 6,100 $ 6,100
Accounts payable 6,781 5,717
Accrued compensation 8,162 4,794
Capital lease obligations, current portion 5,771 3,178
Non-lease financing, current portion 1,158 1,176
Related party liabilities 2,008 1,575
Other accrued liabilities 13,484 9,612
--------- ---------
Total current liabilities 43,464 32,152
Capital lease obligations 9,967 3,076
Non-lease financing 2,023 1,613
Convertible note 5,000 5,000
Stockholders' equity:
Convertible preferred stock 813 9,518
Common stock 52 39
Additional paid-in-capital 270,130 122,874
Deferred compensation (1,032) (1,440)
Unrealized gain on available-for-sale investments (98) 15
Accumulated deficit (138,330) (96,154)
--------- ---------
Total stockholders' equity 131,535 34,852
--------- ---------
$ 191,989 $ 76,693
========= =========
</TABLE>
(1) Derived from audited financial statements as of December 31, 1997
See notes to condensed consolidated financial statements.
3
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 44,004 $ 15,962 $ 100,010 $ 33,566
Cost of revenues:
Hosting costs 4,447 2,518 10,902 6,054
Royalties and other cost of revenues 3,277 1,145 8,875 2,241
Amortization of purchased technology -- 1,939 -- 6,276
--------- --------- --------- ---------
Total cost of revenues 7,724 5,602 19,777 14,571
--------- --------- --------- ---------
Gross profit 36,280 10,360 80,233 18,995
Operating expenses:
Research and development 8,151 4,332 21,342 11,015
Sales and marketing 16,294 7,858 41,286 21,338
Distribution license fees and data
acquisition costs 5,664 3,216 14,829 4,953
General and administrative 4,264 2,837 10,948 5,969
In-process technology -- -- 16,200 2,346
Merger and acquisition related
costs, including amortization of
goodwill and other purchased
intangibles 424 530 2,568 1,946
Amortization of prepaid Netscape
service 7,574 -- 10,099 --
--------- --------- --------- ---------
Total operating expenses 42,371 18,773 117,272 47,567
--------- --------- --------- ---------
Operating loss (6,091) (8,413) (37,039) (28,572)
Net interest income (expense) and
other (141) 164 (984) 163
Equity share of losses of affiliated
company (614) -- (1,644) --
--------- --------- --------- ---------
Net loss $ (6,846) $ (8,249) $ (39,667) $ (28,409)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.14) $ (0.27) $ (0.86) $ (1.07)
========= ========= ========= =========
Shares used in computing net loss per
share 50,339 31,104 46,130 26,463
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(39,667) $(28,409)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 705 119
Depreciation 8,525 4,215
Amortization of intangibles 1,126 8,222
In-process technology 16,200 2,346
Amortization of Netscape service, distribution
costs and trademarks 13,127 --
Loss on disposal of fixed assets 94 --
Equity share of losses in affiliated company 1,644 --
Changes in assets and liabilities:
Accounts receivable (15,515) (9,986)
Related party receivable (2,498) --
Prepaid Netscape distribution costs and trademarks (69,999) --
Prepaid expenses and other current assets (1,670) (1,170)
Other assets 2,003 (4,159)
Accounts payable 771 (3,695)
Accrued compensation 2,870 2,116
Other accrued liabilities 3,462 (2,122)
-------- --------
Net cash used in operating activities (78,822) (32,523)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,993) (7,103)
Proceeds from disposal of fixed assets 153 --
Purchases of investments (20,121) (33,964)
Sales and maturities of investments 24,973 24,371
Investment in affiliated company (2,357) (290)
-------- --------
Net cash used in investing activities (1,345) (16,986)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease and other financing
obligations (5,790) (606)
Proceeds from bank lines of credit and other notes
payable 6,000 6,000
Payments on bank lines of credit and other notes
payable (6,574) (1,100)
Proceeds from sale of redeemable convertible
preferred stock -- 6,385
Proceeds from issuance of common stock 98,625 39,756
-------- --------
Net cash provided by financing activities 92,261 50,435
-------- --------
Net increase in cash and cash equivalents 12,094 926
Cash and cash equivalents at beginning of period 15,366 3,971
-------- --------
Cash and cash equivalents at end of period $ 27,460 $ 4,897
======== ========
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 15,665 2,045
Conversion of preferred stock to common stock 8,705 3,232
Issuance of preferred stock -- 1,720
</TABLE>
See notes to condensed consolidated financial statements.
5
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software, Inc.,
which was formed in June 1994, is a global Internet media company offering
consumers and advertisers comprehensive Internet navigation services with
extensive personalization capabilities. The Excite Network consists of the
Excite (www.excite.com) and WebCrawler (www.webcrawler.com) brands, which
provide a gateway to the World Wide Web (the "Web") that organizes, aggregates
and delivers information to meet the needs of individual consumers. Designed to
help consumers navigate the Web, the Excite Network contains a suite of
specialized information services, organized under numerous topical channels
which combine proprietary search technology, editorial Web reviews, aggregated
content from third parties, bulletin boards, chat and other community features
and personalization capabilities. Localized versions of Excite are available in
Australia, China, France, Germany, Italy, Japan, Sweden, the Netherlands and the
United Kingdom. The Company conducts its business within two industry segments,
including the selling of banner and sponsorship advertising on the Excite
Network to customers in various industries, and, through the merger with
MatchLogic, Inc. ("MatchLogic") (see Note 2), ad serving and targeting services.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments, which are in the opinion of
management, necessary for a fair presentation of the interim periods presented.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending December 31, 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission's rules and
regulations. A condensed consolidated statement of comprehensive loss has not
been presented because the components of comprehensive loss are not material.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes as included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission on March 31, 1998 and the Company's audited
supplemental consolidated financial statements reflecting the combined
operations of the Company and MatchLogic, a company that the Company acquired in
February 1998 in a transaction accounted for as a pooling of interests, as
included in the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 15, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. Actual results may
differ from those estimates.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. To the extent that
impression deliveries are not met, the Company defers recognition of the
corresponding revenues. The Company has also entered into a number of
longer-term advertising and commerce sponsorship agreements. These agreements
generally involve more integration with Excite services and provide for more
varied sources of revenue to Excite over the term of the agreements, which
average between 2 to 3 years. Under these agreements, Excite earns fees for
generating impressions, which in some instances are guaranteed. These revenues,
as well as other revenues, are generally recognized ratably over the term of the
agreements, provided that the Company does not have any significant remaining
obligations and collection of the resulting receivable is probable. To the
extent that impression deliveries are falling short of the guarantees, the
Company defers recognition of the corresponding revenues. The
6
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Stock Split
In June 1998, the Board of Directors declared a two-for-one stock split
which was in the form of a 100% stock dividend. The dividend was paid on July
20, 1998 to stockholders of record on July 6, 1998. All of the share and per
share data have been adjusted to reflect this stock split.
Per Share Amounts
The Company has excluded all convertible debt, convertible preferred stock,
warrants and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all periods
presented. In February 1998, all of the shares of Preferred Stock that were
outstanding at December 31, 1997 converted into an equivalent number of shares
of Common Stock as part of the merger with MatchLogic (see Note 2). The
following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended September 30, 1998 and 1997 (In
thousands, except per share data; unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (6,846) $ (8,249) $(39,667) $(28,409)
======== ======== ======== ========
Weighted average shares outstanding 50,969 32,470 46,897 27,596
Weighted average common shares issued
subject to repurchase agreements (630) (1,366) (767) (1,133)
-------- -------- -------- --------
Shares used to compute basic and diluted
net loss per share 50,339 31,104 46,130 26,463
======== ======== ======== ========
Basic and diluted net loss per share $ (0.14) $ (0.27) $ (0.86) $ (1.07)
======== ======== ======== ========
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. BUSINESS COMBINATIONS
Excite completed the following acquisitions for the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
SHARES OF EXCITE SHARES OF OPTIONS
COMMON STOCK AND WARRANTS
COMPANY ACQUIRED DATE ACQUIRED ISSUED ASSUMED
- ---------------- ------------- ---------------- -----------------
<S> <C> <C> <C>
MatchLogic, Inc. ("MatchLogic") February 1998 6,122,240 1,048,838
Classifieds2000, Inc.
("Classifieds2000") April 1998 1,729,742 50,238
Throw, Inc. ("Throw") April 1998 329,790 318,018
</TABLE>
In February 1998, the Company acquired MatchLogic, a private company
providing advertisers and agencies with Internet advertising management services
that began operations in May 1997, in a merger transaction accounted for as a
pooling of interests. In connection with the acquisition of MatchLogic, the
Company incurred approximately $700,000 in merger related expenses primarily for
legal and other professional fees in the first quarter of 1998. All consolidated
financial information has been restated to reflect the combined operations of
the Company and MatchLogic.
Separate results of the combined entities through the periods preceding the
merger (February 2, 1998) are as follows (In thousands, unaudited):
7
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED
ENDED SEPTEMBER
FEBRUARY 2, 1998 30, 1997
---------------- ------------
<S> <C> <C>
Revenues:
Excite $ 5,598 $ 31,432
MatchLogic 376 2,134
-------- --------
$ 5,974 $ 33,566
======== ========
Net loss:
Excite $ (1,656) $(22,410)
MatchLogic (1,388) (5,999)
-------- --------
$ (3,044) $(28,409)
======== ========
</TABLE>
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
In April 1998, the Company acquired Classifieds2000, a provider of Web-based
classified ads that began operations in July 1996, in a transaction accounted
for as a pooling of interests. In connection with the acquisition of
Classifieds2000, the Company incurred approximately $743,000 in merger-related
expenses primarily for legal and other professional fees in the second quarter
of 1998. The results of operations and financial position of Classifieds2000
were not material to the Company's consolidated financial statements in any
period, and therefore, amounts prior to the date of acquisition were not
combined with the Company's financial statements.
In April 1998, the Company acquired Throw, a developer of community products
that began operations in April 1996, in a transaction accounted for as a
purchase. The total purchase price was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
acquisition. This includes an allocation of approximately $800,000 to other
intangibles assets, which are being amortized on a straight-line basis through
1999. Approximately, $16.2 million was allocated to in-process technology and
charged to operations at the time of acquisition. To determine the value of the
in-process research and development, the Company considered, among other
factors, the state of development of each project, the time and cost needed to
complete each project, expected income, and associated risks which included the
inherent difficulties and uncertainties in completing the project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes to future target markets. This analysis results in amounts
assigned to in-process research and development projects that had not yet
reached technological feasibility and does not have alternative future uses.
Pro-forma results of operations have not been presented because the effect of
this acquisition was not material to the Company's consolidated financial
position, results of operations and cash flows.
3. JOINT VENTURES
In August 1998, the Company and Telecom Italia S.p.A. ("Telecom Italia")
entered into a joint venture agreement to form Excite Italia BV ("Excite
Italia"). The new company, Excite Italia, which is owned 50% by Excite and 50%
by Telecom Italia, will program certain portions of www.tin.lit, the Internet
site of TIN, a division of Telecom Italia and one of Italy's Internet access
providers, as well as provide an Italian language search directory service under
the Excite brand. Telecom Italia has committed to provide the initial start-up
capital for the venture, while Excite will provide the core technology, related
services and brand name. The cash contributed by Telecom Italia to Excite Italia
is in the form of a loan and is capped at approximately 10.5 billion Lira
(approximately US$6.4 million at September 30, 1998). Excite will account for
its interest in the joint venture under the equity method.
In August 1998, the Company and LibertyOne Limited ("LibertyOne") entered
into a joint venture agreement to form Excite Asia Pacific Pty Ltd ("Excite Asia
Pacific"). The new company, Excite Asia Pacific, is owned 50% by Excite and 50%
by LibertyOne and will build an Excite branded, advertising and commerce
supported Web portal for the Australian and the Asia-Pacific Internet markets.
LibertyOne will contribute a total of 10.0 million Australian Dollars
(approximately US$5.9 million at September 30, 1998) for a 50% equity ownership
in Excite Asia Pacific. Excite will provide the core technology, related
services and brand name for the remaining 50% equity ownership in Excite Asia
Pacific.
8
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Excite will account for its interest in the joint venture under the
equity method.
4. SALE OF COMMON STOCK
In May 1998, the Company filed a registration statement on Form S-3 with the
United States Securities and Exchange Commission for the sale of shares of the
Company's Common Stock in a public offering. The Company sold 3,105,000 shares
of Common Stock in June 1998 at a price of $31.50 per share. Of the 3,105,000
shares sold, 2,870,000 shares (including 405,000 shares which were purchased on
the exercise of the underwriters over-allotment option) were offered directly by
the Company and 325,000 shares were offered by selling shareholders. The Company
did not receive any proceeds from the sale of shares by selling stockholders.
Proceeds to the Company from this offering were approximately $84.3 million net
of offering costs.
5. DELAWARE REINCORPORATION
The Company was incorporated on June 9, 1994 in California and
reincorporated in Delaware on August 27, 1998. The Company's Preferred Stock and
Common Stock have a par value of $0.001 per share. The classification of the
capital accounts reflects the effect of the reincorporation for all periods
presented.
6. SEGMENT INFORMATION
The Company operates in the Internet navigation industry and the Internet ad
serving and targeting business segments. Prior to the merger with MatchLogic,
the Company operated only in the Internet navigation industry. The Company's
management has determined the operating segments based upon how the business is
managed and operated. MatchLogic, which provides Internet ad serving and
targeting services, operates as an independent subsidiary of Excite with its own
sales force, research and development and operations departments.
Information by Operating Segment is as follows (In thousands; unaudited):
<TABLE>
<CAPTION>
INTERNET AD SERVING
NAVIGATION AND TARGETING TOTAL
---------- ------------- ---------
<S> <C> <C> <C>
Three Months Ended September 30, 1998
Operating information:
Revenues from external customers $ 34,633 $ 9,371 $ 44,004
Distribution license fees and data
acquisition costs 3,608 2,056 5,664
Segment operating income (loss) (6,508) 417 (6,091)
Nine Months Ended September 30, 1998
Operating information:
Revenues from external customers $ 84,090 $ 15,920 $ 100,010
Distribution license fees and data
acquisition costs 11,280 3,549 14,829
Segment operating income loss (30,145) (6,894) (37,039)
Balance sheet information:
Total assets $ 176,935 $ 15,054 $ 191,989
</TABLE>
7. RELATED PARTY TRANSACTION
In April 1998, the Company borrowed $50.0 million from a principal
stockholder. The loan bore interest at 5.9% per annum and was due no later than
October 30, 1998. In June 1998, the Company repaid the loan in full, plus
interest of approximately $410,000, with proceeds from the public offering. (See
Note 4).
9
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. NETSCAPE AGREEMENT
In April 1998, the Company and Netscape Communications Corporation
("Netscape") entered into a two-year agreement (the "Netcenter Agreement") with
respect to Netscape's recently announced "Netcenter" online service. Under the
Netcenter Agreement, the Company will provide programming and content for the
Co-Branded channels to be offered on Netscape's Netcenter online service and
will develop a Web search and directory service for Netscape (collectively, the
"Co-Branded Services"). In addition, the Company's Classifieds2000 service will
be featured as the provider of classified advertising (excluding career and job
posting classified ads) for the Netcenter service. The Company will also be
featured as a "premier provider" on the "Net Search" page of Netscape's Web site
and will also be similarly featured on the Netcenter "Netcenter Widget" tool.
The Company will be responsible for advertising sales for, and will pay to
Netscape a percentage of advertising revenues generated from, the Co-Branded
Netcenter channels, the search service and the directory service, and will also
be required to make payments based upon the amount of traffic generated from the
Net Search page and the Netcenter Widget tool. The Company has paid a total of
$70.0 million as a prepayment of its obligations under the Netcenter Agreement.
In addition, the Company has issued a warrant to Netscape to purchase 846,000
shares of the Company's Common Stock at an exercise price of approximately
$29.55 per share and a second warrant to purchase shares of the Company's Common
Stock at an aggregate exercise price of $10.0 million. The original fair value
assigned to the warrants was $16.1 million.
The success of Netcenter, and the Co-Branded Services in particular, will be
substantially dependent on the amount of traffic on Netcenter. Although Netscape
has made certain exposure guarantees with respect to Netcenter over the term of
the Netcenter Agreement, there can be no assurance as to the timing of the
delivery of these guarantees or that these guarantees will be fulfilled. There
are no minimum guaranteed revenues under the Netcenter Agreement, and there can
be no assurance as to the level of revenues that the Company may generate from
the Co-Branded Services. Many of the services to be offered by Netcenter will
compete directly with those offered by the Excite Network. The level of
advertising revenues that may be generated by the Company from the Co-Branded
Services is subject to a number of risks and uncertainties, many of which are
beyond the Company's control. In addition, the Company expects to incur
significant costs to develop, host and sell advertising on the Co-Branded
Services, including the costs of hiring a significant number of additional
technical and sales personnel. The Company will not be reimbursed for any of
these costs.
In the second quarter of 1998 the Company capitalized $29.3 million as
Prepaid Distribution Fees and charged $56.8 million to operations as a
non-recoverable portion of the prepayment to Netscape. The Company had
previously concluded that there was no reasonable basis to assume a probable
recovery of the value of the prepayment and warrants issued to Netscape.
Specifically, the Company had developed a valuation model to calculate the
anticipated incremental net revenues that would be earned from the Netcenter
Agreement over its term of two years. This model determined that an amount of
$56.8 million was not expected to be recovered from anticipated future revenue
streams. Accordingly, the Company expensed this amount in its originally
reported June 30 1998 operating results.
After discussions with the Staff of the Securities and Exchange Commission
(the "SEC"), the Company has revised the original accounting for this
transaction and increased the fair value of the warrants issued to Netscape by
$3.8 million. The total consideration of $89.9 million has been capitalized as
Prepaid Netscape Distribution Costs and Trademarks. The amount capitalized
represents the amount of the sum of the prepayments ($70.0 million) and the
revised independent valuation of the warrants issued ($19.9 million) from the
Netcenter Agreement. The $89.9 million, representing the combined value of
marketing and distribution rights, trademarks and other exclusivities, which
extend over the term of the Netcenter Agreement, will be recognized ratably over
the term of the agreement as distribution services are received, commencing with
the launch of the service in June 1998. Prepaid Netscape Distribution Costs and
Trademarks consists of the following (In thousands; unaudited):
10
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EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZATION
CAPITALIZED JUNE 1, 1998 BALANCE AS
AMOUNTS AS OF TO OF
APRIL 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1998
------------- -------------- -------------
<S> <C> <C> <C>
Prepaid distribution license fees and data
acquisition costs $ 29,285 $ (3,028) $ 26,257
Prepaid Netscape service 50,591 (8,432) 42,159
Prepaid trademark license 10,000 (1,667) 8,333
-------- -------- --------
$ 89,876 $(13,127) $ 76,749
======== ======== ========
</TABLE>
During the nine month period ended September 30, 1998, the Company amortized
$13.1 million to operations. The $13.1 million charge to operations is as
follows: $3.0 million is included in Distribution License Fees and Data
Acquisition Costs and $10.1 million is reported separately as Amortization of
Prepaid Netscape Service.
In July 1998, Netscape exercised a portion of the warrant issued under the
Netcenter Agreement and paid approximately $5.9 million to purchase 200,000
shares of the Company's Common Stock.
11
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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, 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.
was formed in June 1994 and, from its inception to September 1995, its operating
activities related primarily to recruiting personnel, raising capital,
purchasing operating assets, providing custom product development and consulting
services. The Company first launched its Excite search and directory service in
October 1995. In April 1997, the Company launched a channels-based format for
its service and content on the Excite brand to provide consumers with an
interface that reflects the way they navigate through other forms of media and
enables advertisers to more effectively reach target consumers. The Excite brand
currently includes 18 channels of topical interest such as Entertainment, Sports
and Money/Investing. In September 1997, the Company launched a similar
channels-based format for its WebCrawler brand that currently includes 20
channels.
Historically, advertising revenues have been derived principally from
short-term advertising contracts in which the Company guarantees a minimum
number of impressions (a view of an advertisement banner by a consumer) for a
fixed fee. Such banner advertising revenue is dependent upon both the number of
impressions and the rate per thousand impressions ("CPMs") charged. The Company
generally charges higher rates for advertisements focused on targeted groups,
either by key-word associations or affiliations with specific content, than for
general rotation advertisements on the Excite Network. During its limited
operating history, the Company has experienced seasonal fluctuations in the
amount of banner advertisements purchased on its network, with advertisers
historically purchasing fewer advertisements in the first calendar quarter of
each year. Because the market for Web advertising is an emerging market,
additional seasonal patterns in Web advertising may develop in the future as the
market matures.
In 1997, the Company also began entering into longer-term advertising and
commerce sponsorship agreements. These agreements generally involve more
integration with the Excite Network and provide for more varied sources of
revenue to Excite over the term of the agreements, which average from two to
three years. Under these agreements, Excite earns fees for generating
impressions that in some instances are guaranteed. Sponsorship customers
accounted for approximately 24% and 27% of advertising revenues for 1997 and the
nine months ended September 30, 1998, respectively. Revenues are generally
recognized ratably over the term of the agreement, provided that the Company
does not have any significant remaining obligations and collection of the
resulting receivable is probable. To the extent that impression deliveries are
falling short of the guarantees, the Company defers recognition of the
corresponding revenues. A number of these agreements also provide that revenues
or gross margins from advertising and electronic commerce transactions are to be
shared between the advertiser and Excite as realized. Revenues or margin sharing
recognized from such electronic commerce transactions were insignificant through
the third quarter of 1998, and are expected to be insignificant for the
remainder of 1998. The Company does not expect revenue growth relating to
sponsorship advertising revenues to continue at the current rate in future
periods as availability of exclusive
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sponsorships may be limited. See "Risk Factors that May Affect Future Results --
Risks Related to Sponsorships" and " -- Risks Associated with Banner
Advertising."
In April 1998, the Company and Netscape entered into a two-year agreement
(the "Netcenter Agreement"), under which the Company will, among other things,
provide, host and sell advertising for certain Co-Branded Services for
Netscape's Netcenter Service (the "Co-Branded Services"). In connection with the
Netcenter Agreement, the Company has paid to Netscape a total of $70.0 million
(the "Cash Payment"). Also in connection with the Netcenter Agreement, the
Company has issued to Netscape a warrant to purchase 846,000 shares of the
Company's Common Stock at an exercise price of approximately $29.55 per share
and a second warrant to purchase shares of the Company's Common Stock at an
aggregate exercise price of $10.0 million (together, the "Warrants"). The fair
value of the first warrant and the aggregate $10.0 million exercise price of the
second warrant has been estimated to be $19.9 million. The Cash Payment and the
value assigned to the Warrants totaling $89.9 million were capitalized as
Prepaid Netscape Distribution Costs and Trademarks during the second quarter of
1998 and are being amortized over the two-year term of the Netcenter Agreement.
The remaining amount to be expensed under the Netcenter Agreement as of
September 30, 1998, is separated into two components as follows: the amount
which represents the anticipated future net revenues from the Netcenter
Agreement ($26.3 million) will be charged to Distribution License Fees and Data
Acquisition Costs, and the remaining amount ($50.5 million) representing the
combined value of marketing and distribution rights, trademarks and other
exclusivities will be charged ratably over the term of the Agreement to
Amortization of Prepaid Netscape Service.
Under the Netcenter Agreement, the Company will only recognize revenues
generated from the Co-Branded Services and not from any other part of Netcenter.
A portion of the revenues will be credited against the Company's revenue-sharing
obligation to Netscape until the Company recoups a specified amount of the Cash
Payment. Thereafter, the Company must pay Netscape a portion of additional
revenues generated from the Co-Branded Services. The Company does not expect
that the revenue generated from the Co-Branded Services will exceed 10% of the
Company's total revenue over the term of the Netcenter Agreement. The Company
has incurred and anticipates that it will continue to incur expenses for the
start-up and development of the services contemplated in the Netcenter
Agreement, including the costs of personnel, content creation, facilities and
depreciation of assets purchased for the Netcenter Service. Unless Netscape
generates impressions significantly greater than the guaranteed amount as
specified in the Agreement, the increased revenues to the Company resulting from
the Co-Branded services under the Netcenter Agreement will not be sufficient to
recover the combined costs of the prepayment, the warrant value and the
incremental operating costs that will be incurred by the Company as a result of
the Agreement. On this basis, the Company anticipates that the Netcenter
Agreement will serve to generate losses for the Company during its term.
Netscape has made guarantees for the number of times a link to Excite is
displayed on the NetSearch page. Since the launch of the Netcenter Co-Branded
Service in June 1998, the actual delivery of impressions has been significantly
below expectations. However, Netscape and the Company have agreed to implement
certain changes that may result in an improvement in impression delivery and are
exploring other various ways to correct the impression shortfall. There are no
interim, month to month or quarterly performance milestones to the Agreement. If
Netscape does not achieve its impression guarantees within the two year term of
the Agreement, then the term would be extended until the guarantees are met. To
the extent the impression flow from Netscape falls short of the guaranteed
level, the Company's ability to recover the prepayment within the term of the
Agreement may be impaired. See "Risk Factors that May Affect Future
Results--Risks Related to Netcenter Agreement."
During 1998, the Company has acquired a number of businesses, technologies,
services and content. In April 1998, the Company acquired Throw, a developer of
community products, issued approximately 330,000 shares of its Common Stock,
assumed options and warrants to purchase up to an aggregate of approximately
318,000 shares of its Common Stock. Also in April 1998, the Company acquired
Classifieds2000, a provider of online classified ads. The Company issued
approximately 1,730,000 shares of its Common Stock to former stockholders of
Classifieds2000 and assumed options and warrants to purchase up to approximately
50,000 shares of its Common Stock. In February 1998, the Company acquired
MatchLogic, a provider of solutions for the management and optimization of
Internet advertising campaigns. The Company issued approximately 6,100,000
shares of its Common Stock to former stockholders of MatchLogic and assumed
options and warrants to purchase up to approximately 1,049,000 shares of its
Common Stock. The
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acquisition of MatchLogic and Classifieds2000 were accounted for as a pooling of
interests and the acquisition of Throw was accounted for as a purchase.
All financial information for dates and periods prior to the merger with
MatchLogic has been restated to reflect the combined operations of the Company
and MatchLogic. Financial information for dates and periods prior to the
acquisition of Classifieds2000 has not been restated to reflect the combined
operations of the Company and Classifieds2000, as Classifieds2000's results of
operations were not material to the Company's consolidated financial statements
in any historical period. The Company's financial information reflects the
combined operations of the Company and Throw subsequent to the acquisition. See
Note 2 and "Risk Factors that May Affect Future Results--Acquisition Strategy;
Integration of Past and Future Acquisitions."
The Company has incurred significant operating losses since inception, and
as of September 30, 1998, the Company had an accumulated deficit of
approximately $138.3 million. Although the Company experienced significant
revenue growth during 1997 and the first nine months of 1998, there can be no
assurance that this growth rate will be sustained or that revenues will continue
to grow or that historical operating results will be indicative of future
operating results. In addition, as the Company has grown, its operating expenses
have increased, and the Company expects that its operating expenses will
continue to increase as a result of its acquisitions, the performance of its
obligations under the Netcenter Agreement, its increased sales and marketing
efforts, its increased funding for development activities and the increased
general and administrative staff needed to support the Company's growth. To the
extent that revenues do not grow at anticipated rates or that increases in such
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or that the Company is unable to adjust operating expense
levels accordingly, the Company's business, results of operations and financial
condition will be materially and adversely affected. There can be no assurance
that in the future the Company will be profitable on a quarterly or annual
basis.
RESULTS OF OPERATIONS
REVENUES
Revenues were $44.0 million for the third quarter of 1998, as compared to
$16.0 million for the third quarter of 1997, an increase of $28.0 million or
176%. For the first nine months of 1998 and 1997, revenues were $100.0 million
and $33.6 million, respectively, an increase of $66.4 million or 198%. This
increase in both periods is primarily the result of an increase in the number of
advertisers purchasing advertising banners on the Company's Web sites, an
increase in sponsorship advertising revenue, and to a lesser extent, an increase
in sales of targeted advertisements with higher rates. Also contributing to the
increase in revenues was the increased revenues attributable to MatchLogic,
which began operations in May 1997. Revenues from international operations were
not significant during the three and nine months ended September 30, 1998 and
1997.
The Company expects to continue to derive a substantial amount of its total
revenues from selling advertisements. Because the market for advertising on the
Web is intensely competitive, advertising rates could be subject to pricing
pressures in the future. If the Company is forced to reduce its advertising
rates or experiences lower CPMs (price per thousand impressions) as a result of
such competition or otherwise, future revenues could be adversely affected.
COST OF REVENUES
Cost of revenues consists primarily of: hosting costs; royalties and other
cost of revenues; and amortization of purchased technology. Hosting costs relate
to the maintenance and technical support of the Excite Network, and are
comprised principally of personnel costs, telecommunications costs, equipment
depreciation and overhead allocations. Royalties and other cost of revenues
include expenses related to royalties, license agreements and revenue sharing
agreements for content and other services such as email and chat room services.
For the third quarter and first nine months of 1997, the Company recognized
amortization of purchased technology of $1.9 million and $6.3 million,
respectively, related to the WebCrawler acquisition. There were no corresponding
costs for the comparable periods in 1998 as the cost of the technology was fully
amortized at December 31, 1997.
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Total cost of revenues increased in absolute dollars by $2.1 million to $7.7
million, or 18% of revenues for the third quarter of 1998, from $5.6 million, or
35% of revenues for the comparable period in the prior year. For the current
year to date, total cost of revenues increased by $5.2 million to $19.8 million,
or 20% of revenues, from $14.6 million, or 43% of revenues for the comparable
period in the prior year. Hosting costs for the third quarter of 1998 increased
in absolute dollars by $1.9 million to $4.4 million, or 10% of revenues, from
$2.5 million, or 16% of revenues for the comparable period in the prior year.
For the current year to date, hosting costs increased by $4.8 million to $10.9
million, or 11% of revenues, from $6.1 million, or 18% of revenues for the
comparable period in the prior year. The increase in hosting costs is due
primarily to increased personnel expenses and equipment costs relating to
maintaining and supporting the Company's Web sites and services. Royalties and
other cost of revenues increased in absolute dollars by $2.1 million to $3.3
million, or 7% of revenues, for the third quarter 1998 from $1.2 million, or 7%
of revenues for the comparable period in the prior year. For the current year to
date, royalties and other cost of revenues increased by $6.7 million to $8.9
million, or 9% of revenues, from $2.2 million, or 7% of revenues for the
comparable period in the prior year. The increase in royalties and other cost of
revenues was primarily due to increased royalties and margin sharing payments
from revenue sharing agreements.
Excluding amortization of purchased technology, total cost of revenues
increased by $4.1 million to $7.7 million, or 18% of revenues for the third
quarter of 1998, from $3.6 million, or 23% of revenues for the comparable period
in the prior year. Excluding amortization of purchased technology, total cost of
revenues for the first nine months of 1998 increased by $11.5 million to $19.8
million, or 20% of revenues from $8.3 million, or 25% of revenues for the
comparable period in the prior year.
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 increased by $25.9 million or 250% to $36.3 million or 82% of
revenues for the third quarter of 1998, from $10.4 million or 65% of revenue for
the comparable period in the prior year. For the first nine months of 1998,
gross profit increased by $61.2 million or 322% to $80.2 million or 80% of
revenues, from $19.0 million or 57% of revenue for the comparable period in
1997. The increase in gross profit in absolute dollars and as a percentage of
revenues was primarily due to the fact that revenues grew at a faster rate than
hosting costs and royalties and other cost of revenues, a favorable mix of
advertising services, and the elimination of amortization of purchased
technology discussed above. In the future, gross profit may be affected by the
types of advertisements sold and revenue sharing provisions of distribution and
content agreements. These items have negatively affected gross profit in the
past and may continue to negatively affect it in the future. Furthermore,
pursuant to the provisions of certain agreements with operators of Web access
points and with content providers, the Company shares advertising revenues based
upon the number of consumers directed to its network. A low level of targeted
advertising as a percentage of total advertising sold, a decrease in targeted or
mass Web advertising rates or an increase in the Company's advertising revenue
sharing obligations could adversely affect gross margins in the future.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
principally of engineering and editorial personnel costs, equipment
depreciation, consulting fees, supplies and allocation of overhead. Research and
development expenses for the third quarter of 1998 increased to $8.2 million, or
19% of revenues, from $4.3 million, or 27% of revenues in the comparable period
of the prior year. Research and development expenses for the first nine months
of 1998 increased to $21.3 million, or 21% or revenues, from $11.0 million, or
33% of revenues in the comparable period of the prior year. The increase in
absolute dollars was primarily attributable to increased expenses as a result of
the Classifieds2000 and Throw acquisitions, as well as an increase in
engineering and editorial headcount to support the Company's channels format and
personalization capabilities for the Excite Network. The Company believes that a
significant level of research and development expense is required to remain
competitive and, accordingly, the Company anticipates that it will continue to
devote substantial resources to research and development and that these costs
will increase in absolute dollars
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in future periods. The Company also expects to continue to experience increased
research and development expenses in order to integrate any technologies
acquired in the future and provide programming and content for the Co-Branded
Services of Netcenter.
Sales and Marketing. Sales and marketing expenses consist principally of
sales and marketing personnel costs, agency and consulting fees, commissions,
promotional and advertising expenses and allocation of overhead. Sales and
marketing expenses for the third quarter of 1998 increased to $16.3 million, or
37% of revenues, from $7.9 million, or 49% of revenues, in the comparable period
of the prior year. For the current year to date, sales and marketing expenses
increased to $41.3 million, or 41% of revenues, from $21.3 million, or 64% of
revenues in the comparable period for the prior year. The increase in absolute
dollars was primarily due to the hiring of additional sales and marketing
personnel and increased sales and marketing expenses resulting from the
acquisition of Classifieds2000. Promotional expenses remained relatively
constant in the third quarter and first nine months of 1998, as compared to the
same period of the prior year as the prior year period included costs associated
with a national media campaign that started in the fourth quarter of 1996. The
Company expects to continue to incur significant promotional and advertising
expenses and anticipates that these costs will increase in absolute dollars in
future periods as the Company promotes its brands and introduces new services in
order to create and maintain brand loyalty among customers. The Company also
expects to continue to experience increased sales and marketing expenses as it
is responsible for all advertising sales on the Co-Branded Services of
Netcenter.
Distribution License Fees and Data Acquisition Costs. Distribution license
fees and data acquisition costs consist principally of fees paid to third-party
Internet companies such as Netscape to provide entry points to the Excite
Network and costs to update and maintain the ad targeting and tracking database
which is continually being updated by the Company's MatchLogic subsidiary.
Distribution license fees and data acquisition costs were $5.7 million for the
third quarter of 1998, as compared to $3.2 million for the comparable period in
1997. For the current year to date, distribution license fees and data
acquisition costs were $14.8 million, compared to $5.0 million for the
comparable period in the prior year. The 1998 costs included distribution
license fees related to agreements previously entered into with Netscape in
March 1997, which have expired, as well as data acquisition costs incurred by
MatchLogic during the period. In addition, in the third quarter of 1998, a total
of $2.2 million was amortized to Distribution License Fees and Data Acquisition
Costs relating to the April 1998 Netcenter Agreement. See "Risk Factors that May
Affect Future Results--Risks Related to Netcenter Agreement."
In the future, high traffic Web sites, Internet service providers, providers
of Web browsers or other distribution channels could require cash payments or
other types of consideration as compensation for listing or promoting the Excite
Network, which could result in increased distribution license fees.
General and Administrative. General and administrative expenses consist
principally of administrative and executive personnel costs, provision for
doubtful accounts, fees for professional services and allocation of overhead.
General and administrative expenses for the third quarter of 1998 increased to
$4.3 million, or 10% of revenues, from $2.8 million, or 18% of revenues, in the
comparable period of the prior year. General and administrative expenses for the
first nine months of 1998 increased to $10.9 million, or 11% of revenues, from
$6.0 million, or 18% of revenues, in the comparable period of the prior year.
The increase in absolute dollars is primarily due to increased personnel costs
to support the expansion and infrastructure of the Company's operations and
international expansion efforts. In particular, the acquisition of
Classifieds2000 and the growth in the Company's finance and administrative
departments contributed to this increase. The Company anticipates that its
general and administrative expenses may continue to increase in absolute dollars
as the Company expands its administrative and executive staff, adds
infrastructure and integrates acquired technologies and businesses. In addition,
the Company plans to continue to run MatchLogic as an independent subsidiary
with its own administrative function.
In-Process Technology. During the first nine months of 1998 and 1997, the
Company incurred charges for in-process technology of $16.2 million and $2.3
million, respectively. The Company acquired Throw in April 1998, accounted for
the transaction as a purchase, and of the total purchase price, $16.2 million
was allocated to in-process technology and charged to operations in the second
quarter of 1998. The 1997 charge of $2.3 million related to the value of
acquired in-process technology that had not reached technological feasibility at
the time of MatchLogic's formation in May 1997. To determine the value of the
in-process technology, the
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Company considered, among other factors, the state of development of each
project, the time and cost needed to complete each project, expected income, and
associated risks which included the inherent difficulties and uncertainties in
completing the project and thereby achieving technological feasibility and risks
related to the viability of and potential changes to future target markets. This
analysis results in amounts assigned to in-process research and development
projects that had not yet reached technological feasibility and do not have
alternative future uses.
Other Merger and Acquisition Related Costs, including Amortization of
Goodwill and Other Intangible Assets. During the third quarter of 1998 and 1997,
the Company incurred merger and acquisition related costs of $424,000 and
$530,000, respectively. During the first nine months of 1998 and 1997, the
Company incurred merger and acquisition related costs of $2.6 million and $1.9
million, respectively. In 1998, the Company incurred charges of approximately
$743,000 and $700,000 for the acquisition of Classifieds2000 and MatchLogic,
respectively. The remainder of the merger and acquisition related costs for the
first nine months of 1998 and all of the costs for the comparable period of the
prior year related to the amortization of goodwill and other purchased
intangibles resulting primarily from the WebCrawler acquisition.
Amortization of Prepaid Netscape Service. During the three and nine month
periods ended September 30,1998, the Company incurred costs of $7.6 million and
$10.1 million, respectively, related to the amortization of the Prepaid Netscape
Service associated with the April 1998 Netcenter Agreement, which has an
original term of two years. The Company anticipates incurring a total
amortization charge of approximately $7.6 million per quarter relating to the
Netcenter Agreement for the duration of the Agreement, which is currently
scheduled to expire in June 2000.
Net Interest Income (Expense) and Other. Net interest income (expense) and
other decreased to an overall net expense of $141,000 for the third quarter of
1998, compared to an overall net income of $164,000 for the comparable period of
the prior year. Current year to date, net interest income (expense) and other
decreased to an overall net expense of $984,000 compared to an overall net
income of $163,000 for the comparable period of the prior year. This decline is
due primarily to an increase in interest expense resulting from the $50 million
note payable due to Intuit, as well as additional capital lease obligations,
non-lease financing obligations and the convertible note issued to Itochu
Corporation. The overall increase in interest expense was partially offset by an
increase in interest income earned on cash received in June 1998 from the
Company's public offering, which was used to fund operations and its obligations
under the Netcenter Agreement.
Equity Share of Losses of Affiliated Company. In October 1997, the Company
and Itochu Corporation and certain affiliated entities (collectively "Itochu")
entered into a joint venture agreement with respect to the Company's
wholly-owned subsidiary, Excite Japan, in order to provide Web-based information
services to the Japanese market. The Company currently holds, and intends to
retain, a 50% equity interest in Excite Japan. For the three and nine months
ended September 30, 1998, the Company's share of the losses of Excite Japan was
$614,000 and $1.6 million, respectively. The Company expects that it will record
increased losses from Excite Japan for at least the remainder of 1998.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company's business is
dependent on the operation of numerous systems that could potentially be
adversely impacted by Year 2000 related problems. Those systems include, among
others: hardware and software systems used by the Company to deliver services to
its customers (including the Company's proprietary software systems as well as
hardware and software supplied by third parties); communications networks, such
as the Internet, which the Company depends on to provide services;
the internal systems of the Company's customers, users and suppliers; the
hardware and software systems used internally by the Company in the management
of its business; and non-information technology systems and devices used by the
Company in its business, such as telephone and building systems.
The Company has conducted an initial review of its proprietary software
systems, and has determined that there are no significant Year 2000 issues
within the Company's proprietary systems or services. Although the Company
believes that its proprietary software systems are Year 2000 compliant, the
Company utilizes third-party equipment and software in the management of its
business that may not be Year 2000
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compliant. Failure of such third-party equipment or software to operate properly
with regard to the Year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which may have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, the Company has not fully determined its vendors, joint venture
partners and content partners progress in identifying and addressing systems
that could potentially be impacted by Year 2000 related problems. The Company
intends to continue its efforts to monitor the Year 2000 compliance of vendors,
joint venture partners and content partners. In the event any third parties
cannot timely provide the Company with content, products, services or systems
that meet the Year 2000 requirements, the content on the Company's services,
access to the Company's services, the ability to offer page views, products,
services and the ability to recognize or process sales may be materially
adversely affected. This may also have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for Internet advertising or sponsorship of Internet services, which
may have a material adverse effect on the Company's business, results of
operations and financial condition.
While Year 2000 costs incurred to date have not been material, the Company
does expect to incur internal staff costs as well as consulting and other
expenses to remedy any Year 2000 related problems. The Company has no reasonable
estimate of the costs associated with achieving Year 2000 readiness nor if these
costs will be material. Additional costs incurred may include, but are not
limited to, the cost of correcting our internal systems and the cost of
implementing necessary contingency plans.
While the Company is dedicating resources toward attaining Year 2000
readiness, there is no assurance that the Company will be successful in our
efforts to address all Year 2000 issues. The Company does not presently have a
contingency plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence. Any failure of the Company to address
unforeseen Year 2000 issues may have a material adverse effect on the Company's
business, results of operations and financial condition.
The above discussion regarding costs, risks and estimated completion dates
for the Year 2000 is based on the Company's best estimates given information
that is currently available, and is subject to change.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had $39.0 million in unrestricted cash,
cash equivalents and short-term investments, an increase of $7.3 million from
December 31, 1997. The Company maintains its cash and cash equivalents in
short-term and medium-term investment-grade interest-bearing securities until
required for other purposes.
The Company's operating activities for the first nine months of 1998 and
1997 used cash of approximately $78.8 million and $32.5 million, respectively.
The increased use of cash in 1998 was mainly attributable to the $70.0 million
cash prepayment to Netscape under the Netcenter Agreement. The Company borrowed
$50.0 million from Intuit, which is a principal stockholder of the Company, in
April 1998 to fund a portion of this payment to Netscape. In June 1998, the
Company repaid the loan in full, plus interest of approximately $410,000, with
proceeds from the Company's public offering, which closed in June 1998.
Investing activities for the first nine months of 1998 and 1997 used cash of
$1.3 million and $17.0 million, respectively. In the first nine months of 1998
and 1997, cash was used for purchases of short-term investments, property and
equipment, and contributions towards its investment in Excite Japan, offset by
the sales of short-term investments. Capital expenditures have been, and future
expenditures are anticipated to be, primarily for facilities and equipment to
support expansion of the Company's operations and management information
systems. The Company expects that its capital expenditures will increase as its
employee base grows. As of September 30, 1998, the Company did not have any
material commitments for capital expenditures, although the Company anticipates
that its planned purchases of capital equipment and leasehold improvements will
require additional expenditures during the remainder of 1998, a portion of which
may be financed through equipment leases and bank borrowings. At September 30,
1998 the Company had $3.1 million available on equipment lease lines, and the
Company believes that additional lease financing will be available to it if
necessary.
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Financing activities for the first nine months of 1998 and 1997 generated
cash of $92.3 million and $50.4 million, respectively. Financing activities for
the first nine months of 1998 primarily consisted of cash received in connection
with the issuance of stock through the Company's public offering which was
completed in June 1998 and, to a lesser extent, option exercises under the
Company's equity incentive plan and warrants exercised by Netscape in July 1998.
Financing activities for the first nine months of 1997 primarily consisted of a
bank line of credit borrowing of $6.0 million and the sale of Common Stock to
Intuit.
In 1997, the Company entered into and borrowed on a $6.0 million line of
credit. The Company is currently negotiating a new line of credit.
To date, the Company has had limited international operations and its
exposure to foreign currency exchange rate fluctuations has been minimal. The
Company evaluates its foreign currency exchange rate exposure on an ongoing
basis.
The Company has completed a number of mergers and acquisitions in the past,
and expects to make other acquisitions and investments in joint ventures in the
future. These mergers resulted in significant increases in headcount and
overhead, as well as the assumption and payment of additional liabilities. While
the Company believes that such transactions have been and will continue to be in
the best interests of the Company and its stockholders, these transactions
involve risks and may require additional cash investments by the Company.
The Company believes the existing working capital balance together with cash
flows generated from advertising revenues will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion for at least the next twelve months. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentages ownership of the stockholder of the Company will be reduced,
stockholders may experience additional dilution and such securities may have
rights, preferences or privileges senior to those of the holders of the
Company's common stock.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Limited Operating History; No Assurance of Profitability. The Company was
founded in June 1994 and generated only limited revenues prior to 1996.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its current business can be based. In addition,
the Company's business model is evolving and relies substantially upon the sale
of Web advertising. The Company's business must be considered in light of the
risks, expenses and problems frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as Web advertising. Specifically, such risks include, without
limitation: the inability of the Company to maintain and increase levels of
traffic on the Excite Network; the inability of the Company to derive sufficient
revenues from the Co-Branded Services of Netscape's Netcenter service and the
additional costs the Company expects to incur in order to perform its
obligations under the Netcenter Agreement; the inability of the Company to
effectively integrate the technology and operations of acquired businesses or
technologies with its operations, increased operating expenses as a result of
the Company's recent acquisitions, the inability of the Company to expand its
international operations, particularly in light of the Company's limited
operating experience in the international market; the failure by the Company to
continue to develop and extend the Excite and WebCrawler brands; the inability
of the Company to meet minimum guaranteed impressions under sponsorship
agreements; the inability of the Company to develop or acquire content for its
services; the inability of the Company to generate commerce-related revenues;
the failure of the Company to anticipate and adapt to a developing market; the
introduction and development of equal or superior services or products by
competitors, particularly in light of the fact that Microsoft and Netscape,
operators of two of the most heavily-trafficked Web sites, offer competitive
services; the failure of the market to adopt the Web as an advertising and
commercial medium; reductions in market prices for Web advertising as a result
of competition or otherwise; the inability of the Company to achieve higher cost
per thousand impressions ("CPM") rates for targeted advertising or to increase
the percentage of its advertising inventory sold; government regulation; the
inability of the Company to identify, attract, retain and motivate qualified
personnel; and general economic conditions. There can be no assurance that the
Company will be successful in addressing such risks.
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<PAGE> 20
Potential Fluctuations in Quarterly Results; Unpredictability of Future
Revenues. The Company's operating results have varied on a quarterly basis
during its limited operating history and the Company expects to experience
significant fluctuations in future quarterly operating results. Such
fluctuations have been and may in the future be caused by numerous factors, many
of which are outside the Company's control, including but not limited to:
specific economic conditions relating to the Internet and the Web; usage of the
Web; demand for advertising on the Excite Network as well as demand for
Web-based advertising in general; changes in advertising rates as a result of
competition or otherwise; seasonal trends in advertising sales; the advertising
budgeting cycles of advertisers; incurrence of charges in connection with the
Netcenter Agreement, the Company's distribution relationships and acquisitions;
demand for the Company's services; incurrence of costs relating to acquisitions
of businesses or technologies; introduction or enhancement of new or existing
services by the Company and its competitors; market acceptance of new services;
delays in the introduction of services or enhancements by the Company or its
competitors; mix of types of advertisements sold, such as the amount of targeted
advertising, which generally has higher CPM rates, sold as a percentage of total
advertising sold; capacity constraints and dependencies on computer
infrastructure; and general economic conditions.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. The Company believes that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as an indication of future
performance. Also, it is likely that in some future quarter or quarters the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would be materially and adversely affected.
Risks Related to Netcenter Agreement. Under the Netcenter Agreement, the
Company will only receive revenues generated from the Co-Branded Services and
not from any other part of the Netcenter Service. In addition, the Company must
pay Netscape a portion of such revenues after it recoups a majority 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 (such as a business channel and a sports channel) may be potentially
more attractive to advertisers than the Co-Branded Services. Because Netscape is
responsible for programming the Netcenter home page and other portions of
Netcenter that are not Co-Branded, Excite is relying upon Netscape's programming
of the Netcenter home page and other portions of Netcenter to create a
demographic mix of traffic flows that is similar to that experienced by the
Company. Netscape has no experience in such activities. As a result, the Company
has no means of controlling the programming on these pages so as to maximize the
exposure of the Co-Branded channels and search services. The Company also has
little means of controlling the mix of traffic to the Co-Branded channels and
search service, which could have different revenue opportunities to the Company
as advertisers may be willing to pay more to advertise on certain content
channels. There can be no assurance that the Company can generate substantial
revenues from the Co-Branded Services to recoup the portion of the Cash Payment
against which the Company's revenue sharing obligations will be offset, or to
recoup costs incurred by the Company under the Netcenter Agreement.
The Company has hired a significant number of technical and sales personnel
and is incurring additional overhead costs in order to develop, host and sell
advertising on the Co-Branded Services. The Company will not be reimbursed for
these costs. The failure to generate revenues from the Co-Branded Services
sufficient to recoup these additional costs would have a material adverse effect
on the Company's business, results of operations and financial condition.
The success of Netcenter, and the Co-Branded Services in particular, will be
substantially dependent on the amount of traffic on Netcenter. Although Netscape
has made certain exposure guarantees with respect to Netcenter over the term of
the Netcenter Agreement, there can be no assurance that these guarantees will be
fulfilled. There is intense competition for attracting Web users, which
competition may be exacerbated by the upcoming release of Microsoft's Windows 98
operating system. Furthermore, many current Web users may not
20
<PAGE> 21
choose to utilize Netcenter over other available Internet services. Any failure
of Netcenter to attract substantial user traffic would materially and adversely
affect the Company's business, results of operations and financial condition.
Additionally, the Netcenter Agreement provides that all page views generated
from the Co-Branded Services shall be deemed to be traffic attributable to
Netscape. As a result, the Company may not receive credit, under certain
audience measurement statistics, which are commonly used by advertisers in
making their advertising placements, for traffic generated through the
Co-Branded Services.
As part of the Netcenter Agreement, the Excite Network will also be featured
as a "premier provider" on Netscape's Net Search page, and will be similarly
featured on the "Netcenter Widget" tool, which will be accessible from
Netcenter. Because Netscape only guarantees a specified number of impressions
from its Net Search page (as compared to a number of users who "click through"
to the Excite Network), there can be no assurance that this new "premier
provider" arrangement will result in significant increases in traffic on the
Excite Network. Although Netscape has guaranteed a minimum number of users who
"click through" to the Excite Network from the Netcenter Widget, Netscape is not
obligated to keep this tool on Netcenter after the first six months of the term
of the Netcenter Agreement. Accordingly, there can also be no assurance that
this tool will provide the Excite Network with significant amounts of traffic.
In entering into the Netcenter Agreement, Excite has assumed that "click
throughs" from the Netsearch page will be similar to the historical performance
of the Netsearch page experienced by Excite over the prior two agreements with
Netscape. The "click through" rate is influenced by brand strength of the search
provider, and by the layout and programming of the Netsearch page itself. Thus,
Excite's projections for the Co-Branded search service are dependent on
Netscape's ability to establish its brand as a search provider and its ability
to program the site to maintain the historical level of "click throughs." Under
performance, in terms of users clicking through from the home page to the
Co-Branded channels or to Excite services, would negatively impact Excite's
expectations for the Agreement.
The distribution of traffic from Netscape to Excite throughout the term of
the Netcenter Agreement significantly impacts Excite's ability to recoup the
amount it has prepaid under the Netcenter Agreement. Although Netscape has made
certain traffic exposure guarantees, there can be no assurance that these
guarantees will be fulfilled within the two-year term of this contract. Nor is
there a guarantee that the timing of the delivery of these impressions during
this period will be consistent with the assumptions made in the Company's
determination of the value of the Netcenter Agreement, as Netscape is not
obligated to meet these guarantees on any specific schedule and, if the delivery
of Netscape's traffic guarantees is more heavily weighted toward the end of the
contract term than projected, Excite's expectations as to the net present value
of the Agreement would be negatively impacted.
Upon the termination of the Netcenter Agreement (other than a termination in
connection with certain acquisitions of or by Netscape), Netscape will have a
perpetual, irrevocable license to utilize certain technology used by Excite to
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
royalty or payment obligations to Excite. In addition, if Netscape sublicenses
this technology to a third party, the Excite Network could face additional
competition, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Netcenter Agreement is subject to termination if the Company materially
breaches its obligations under the Netcenter Agreement. In addition, if Netscape
believes that the Company's Excite service or that the content provided by
Excite for the Netcenter service contains any content that Netscape deems likely
to cause it material harm, Netscape may terminate the Netcenter Agreement if the
Company has not revised such objectionable content within five days after notice
from Netscape. 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. Moreover, many of the
Company's obligations to be performed under the Netcenter Agreement must be
performed according to standards determined by Netscape at its sole discretion.
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.
21
<PAGE> 22
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. 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.
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.
Risks Related to Sponsorships. The Company derives a substantial portion of
its revenues from sponsorship arrangements with third parties to provide
sponsored services and placements on the Excite Network. 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 sponsors from users originated through the
Excite Network. 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 can require
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 with respect to portions of a
channel or service, an entire channel, across an entire service or over the
entire Excite Network. The inability of the Company to enter into further
sponsorship or advertising arrangements as a result of its exclusivity
arrangements or otherwise 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 a substantial
portion of its revenues from the sale of banner advertisements 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 banner 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, lack of availability of cost-effective, high-speed service and
government regulations. To the extent that use of the Web continues to grow,
there can be no assurance that the Internet infrastructure will continue to
support the demands placed on it by such growth or that the performance or
reliability of the Internet will not be adversely affected. In addition, the Web
as an advertising medium has not been available for a sufficient period of time
to gauge its effectiveness as compared with traditional advertising media, and
therefore the Web is an unproven medium for advertising-supported services.
Accordingly, the Company's future operating results will depend substantially
upon the increased use of the Web for information, publication, distribution and
commerce and the emergence of the Web as an effective advertising medium.
22
<PAGE> 23
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Not applicable.
23
<PAGE> 24
- --------------------------------------------------------------------------------
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
Not applicable.
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
On September 24, 1998, the Board of Directors of the Company approved a
Stockholders Rights Plan, which declared a dividend of one Preferred Share
purchase right (a "Right") for each outstanding share of Common Stock, par value
$0.001 per share (the "Common Shares"), of the Company. The dividend is payable
to stockholders of record on October 30, 1998 (the "Record Date"). In addition,
one Right shall be issued with each Common Share that becomes outstanding (i)
between the Record Date and the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date (as such terms are defined in the
Rights Agreement) or (ii) following the Distribution Date and prior to the
Redemption Date or Final Expiration Date, pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company, which options or
securities were outstanding prior to the Distribution Date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a share
of Series F Junior Participating Preferred Stock, par value $0.001 per share
(the "Preferred Shares"), of the Company, at a price of $175.00, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and BankBoston, as Rights
Agent. A summary of the Rights and Rights Agreement is included as Exhibit C to
the Rights Agreement, which is included as Exhibit 4.1 to the Company's Form 8-K
filed with the SEC on October 22, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index are filed as part
of this report.
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 1998:
On September 9, 1998, the Company filed a Form 8-K/A under Item 5 which
amended the Company's Current Report on Form 8-K originally filed on May
11, 1998 under Item 5
24
<PAGE> 25
announcing that the Company entered into a Netcenter Services Agreement
with Netscape Communications Corporation.
25
<PAGE> 26
- --------------------------------------------------------------------------------
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: November 13, 1998 By: /s/ Robert C. Hood
-------------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.01 Registrant's Agreement and Plan of Merger for the
reincorporation into Delaware dated August 27, 1998.
3.01 Registrant's Amended and Restated Articles of Incorporation
dated June 11, 1998.
3.02 Registrant's amended Bylaws dated June 11, 1998.
10.01* Employment agreement with John Polumbo, President and Chief
Operating Officer dated August 3, 1998.
27.01 Financial Data Schedule. (EDGAR version only)
</TABLE>
- -----------------
* Indicates compensatory plan or arrangement.
27
<PAGE> 1
EXHIBIT 2.01
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") is made as of
August 27, 1998 by and between Excite, Inc., a California corporation ("Excite
California"), and Excite, Inc., a Delaware corporation ("Excite Delaware").
Excite California and Excite Delaware are hereinafter sometimes collectively
referred to as the "Constituent Corporations."
R E C I T A L S
A. Excite California was incorporated on June 9, 1994. Its current
authorized capital stock consists of: (1) 100,000,000 shares of Common Stock, no
par value ("Excite California Common Stock"), of which 50,917,241 shares are
issued and outstanding; and (2) 4,000,000 shares of Preferred Stock, no par
value ("Excite California Preferred Stock") none of which shares are issued and
outstanding.
B. Excite Delaware was incorporated on June 11, 1998. Its authorized
capital stock consists of: (1) 100,000,000 shares of Common Stock, with a par
value of $0.001 per share ("Excite Delaware Common Stock"), of which 1,000
shares are issued and outstanding; and (2) 4,000,000 shares of Preferred Stock,
$0.001 par value ("Excite Delaware Preferred Stock"), none of which shares are
issued and outstanding.
C. The respective Boards of Directors of Excite California and Excite
Delaware deem it advisable and to the advantage of each of the Constituent
Corporations that Excite California merge with and into Excite Delaware upon the
terms and subject to the conditions set forth in this Merger Agreement for the
purpose of effecting a change of the state of incorporation of Excite California
from California to Delaware.
D. The Boards of Directors of each of the Constituent Corporations have
approved this Merger Agreement.
NOW, THEREFORE, the parties do hereby adopt the plan of reorganization set
forth in this Merger Agreement and do hereby agree that Excite California shall
merge with and into Excite Delaware on the following terms, conditions and other
provisions:
1. MERGER AND EFFECTIVE TIME. At the Effective Time (as defined below),
Excite California shall be merged with and into Excite Delaware (the "Merger"),
and Excite Delaware shall be the surviving corporation of the Merger (the
"Surviving Corporation"). The Merger shall become effective upon the close of
business on the date when a duly executed copy of this Merger Agreement, along
with all required officers' certificates, is filed with the Secretary of State
of the State of Delaware, (the "Effective Time").
2. EFFECT OF MERGER. At the Effective Time, the separate corporate
existence of Excite California shall cease; the corporate identity, existence,
powers, rights and immunities of Excite Delaware as the Surviving Corporation
shall continue unimpaired by the Merger; and Excite Delaware shall succeed to
and shall possess all the assets, properties, rights, privileges, powers,
franchises, immunities and purposes, and be subject to all the debts,
liabilities, obligations, restrictions and duties of Excite California, all
without further act or deed. The
<PAGE> 2
Certificate of Incorporation of the Surviving Corporation shall be the
Certificate of Incorporation.
3. GOVERNING DOCUMENTS. At the Effective Time, the Certificate of
Incorporation of Excite Delaware in effect immediately prior to the Effective
Time shall become the Certificate of Incorporation of the Surviving Corporation
and the Bylaws of Excite Delaware in effect immediately prior to the Effective
Time shall become the Bylaws of the Surviving Corporation.
4. DIRECTORS AND OFFICERS. At the Effective Time, the directors and
officers of Excite Delaware shall be and become the directors and officers
(holding the same titles and positions) of the Surviving Corporation and after
the Effective Time shall serve in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
5. CONVERSION OF SHARES OF EXCITE CALIFORNIA. Subject to the terms and
conditions of this Agreement, at the Effective Time, each share of Excite
California Common Stock outstanding immediately prior thereto shall be
automatically changed and converted into one fully paid and nonassessable,
issued and outstanding share of Excite Delaware Common Stock.
6. CANCELLATION OF SHARES OF EXCITE DELAWARE. At the Effective Time, all
of the previously issued and outstanding shares of Excite Delaware Common Stock
that were issued and outstanding immediately prior to the Effective Time shall
be automatically retired and canceled.
7. STOCK CERTIFICATES. At and after the Effective Time, all of the
outstanding certificates that, prior to that date, represented shares of Excite
California Common Stock shall be deemed for all purposes to evidence ownership
of and to represent the number of shares of Excite Delaware Common Stock into
which such shares of Excite California Common Stock are converted as provided
herein. The registered owner on the books and records of Excite California of
any such outstanding stock certificate for Excite California Common Stock shall,
until such certificate shall have been surrendered for transfer or otherwise
accounted for to Excite Delaware or its transfer agent, be entitled to exercise
any voting and other rights with respect to, and to receive any dividend and
other distributions upon, the shares of Excite Delaware Common Stock evidenced
by such outstanding certificate as above provided.
8. CONVERSION OF OPTIONS AND WARRANTS. At the Effective Time, all
outstanding and unexercised portions of all options to purchase a share of
Excite California Common Stock under the (i) Excite California 1995 Equity
Incentive Plan, (ii) Excite California 1996 Equity Incentive Plan, (iii) Excite
California 1996 Director's Stock Option Plan, (iv) Excite California Employee
Stock Purchase Plan and (iv) stock options assumed by Excite California in
connection with the acquisitions of Netbot, Inc., MatchLogic, Inc., Throw, Inc.
and Classifieds2000, Inc. (the "Excite California Assumed Stock Option Plans"
and together with the Excite California 1995 Equity Incentive Plan, the Excite
California 1996 Equity Incentive Plan, the Excite California 1996 Director's
Stock Option Plan and the Excite California 1996 Employee Stock Purchase Plan,
the "Excite California Stock Plans") shall become options to purchase a share of
Excite Delaware Common Stock (subject to the elimination of fractional
<PAGE> 3
shares as provided in Section 9 below) at the original exercise price per share
and shall, to the extent permitted by law and otherwise reasonably practicable,
have the same term, exercisability, vesting schedule, status as an "incentive
stock option" under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), if applicable, and all other material terms and conditions
(including but not limited to the terms and conditions applicable to such
options by virtue of the Excite California Stock Plans). Continuous employment
with Excite California will be credited to an optionee for purposes of
determining the vesting of the number of shares of Excite Delaware Common Stock
under a converted Excite California option at the Effective Time. Additionally,
at the Effective Time, Excite Delaware shall adopt and assume the Excite
California Stock Plans. At the Effective Time, all outstanding and unexercised
portions of all warrants to purchase or acquire Excite California Common Stock
or Preferred Stock shall become warrants to purchase or acquire, on the same
terms and conditions, the same number of shares of the same series of Excite
Delaware Common Stock or Preferred Stock.
9. FRACTIONAL SHARES. No fractional shares of Excite Delaware Common
Stock or Preferred Stock will be issued in connection with the Merger. In lieu
thereof, Excite Delaware shall pay each shareholder of Excite California who
would otherwise be entitled to receive a fractional share of Excite Delaware
Common Stock or Preferred Stock (assuming the aggregation of all shares held by
the same holder of more than one stock certificate representing shares of Excite
California Common Stock or Preferred Stock, as the case may be) a cash amount
equal to the applicable fraction multiplied by the fair market value (the "Fair
Market Value") of a share of Excite Delaware Common Stock or Preferred Stock, as
the case may be. Fair Market Value means, as of any date, the value of one share
of Excite Delaware Common Stock determined as follows:
(i) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the date of
determination.
(ii) if such Common Stock is publicly traded and is then listed on a
national securities market or exchange, its closing price on the date of
determination on the principal national securities exchange on which the stock
is listed or admitted to trading.
(iii) if such stock is publicly traded but is not quoted on the Nasdaq
National Market nor listed or admitted to trading on a national securities
exchange, the average of the closing bid and asked prices on the date of
determination as reported by The Wall Street Journal (or, if not so reported, as
otherwise reported by any newspaper or other source as the Board of Directors of
the Company may determine in good faith); or
(iv) if none of the foregoing is applicable, Fair Market Value shall
be determined by the Board of Directors of Excite Delaware in good faith (the
"Fair Market Value Per Share").
Upon exercise of each assumed option of Excite California to purchase
Excite Delaware Common Stock, cash will be paid by Excite Delaware in lieu of
any fractional share of Excite Delaware Common Stock, respectively, issuable
upon exercise of such option, and the amount of cash received for such
fractional share shall be the Fair Market Value Per Share upon exercise
<PAGE> 4
thereof multiplied by the applicable fraction, less the unpaid exercise price
per share for such fraction.
10. EMPLOYEE BENEFIT PLANS. At the Effective Time, the obligations of
Excite California under or with respect to every plan, trust, program and
benefit then in effect or administered by Excite California for the benefit of
the directors, officers and employees of Excite California or any of its
subsidiaries shall become the lawful obligations of Excite Delaware and shall be
implemented and administered in the same manner and without interruption until
the same are amended or otherwise lawfully altered or terminated. Effective at
the Effective Time, Excite Delaware hereby expressly adopts and assumes all
obligations of Excite California under such employee benefit plans.
11. FURTHER ASSURANCES. From time to time, as and when required by the
Surviving Corporation or by its successors or assigns, there shall be executed
and delivered on behalf of Excite California such deeds, assignments and other
instruments, and there shall be taken or caused to be taken by it all such
further action as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation the
title to and possession of all property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Excite California, and otherwise
to carry out the purposes of this Merger Agreement. The officers and directors
of the Surviving Corporation are fully authorized in the name of and on behalf
of Excite California, or otherwise, to take any and all such actions and to
execute and deliver any and all such deeds and other instruments as may be
necessary or appropriate to accomplish the foregoing.
12. TAX-FREE REORGANIZATION. The Merger is intended to be a tax-free plan
of reorganization within the meaning of Section 368(a)(1)(F) of the Code.
13. GOVERNING LAW. This Agreement shall be governed by and construed under
the internal laws of the State of Delaware as applied to agreements among
California residents entered into and to be performed entirely within
California, without reference to the principles of conflicts of law or choice of
laws, except to the extent that the laws of the State of Delaware would apply in
matters relating to the internal affairs of Excite Delaware and the Merger.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 5
14. COUNTERPARTS. In order to facilitate the filing and recording of this
Merger Agreement, it may be executed in any number of counterparts, each of
which shall be deemed to be an original.
IN WITNESS WHEREOF, this Merger Agreement is hereby executed on behalf of
each of the Constituent Corporations and attested by their respective officers
hereunto duly authorized.
EXCITE, INC. EXCITE, INC.
a California corporation a Delaware corporation
By: /s/ Robert C. Hood By: /s/ Robert C. Hood
------------------------ ------------------------
Robert C. Hood Robert C. Hood
Executive Vice President Executive Vice President
ATTEST: ATTEST:
By: /s/ Chris M. Vail By: /s/ Chris M. Vail
------------------------ ------------------------
Chris M. Vail, Secretary Chris M. Vail, Secretary
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
<PAGE> 6
CERTIFICATE OF APPROVAL
OF
AGREEMENT AND PLAN OF MERGER
Robert C. Hood and Chris M. Vail hereby certify that:
1. They are the Executive Vice President and Secretary, respectively, of
Excite, Inc., a Delaware corporation ("Excite Delaware").
2. The Agreement and Plan of Merger (the "Merger Agreement") to which
this certificate is attached, after having been first duly approved by the Board
of Directors and the sole stockholder of Excite Delaware, was duly signed on
behalf of Excite Delaware by the undersigned and by the Executive Vice President
of Excite Delaware.
3. Excite Delaware has two authorized classes of shares designated as
Common Stock and Preferred Stock. The Preferred Stock is further designated as
Series E-3 Preferred Stock. The total number of issued and outstanding shares of
Common Stock of Excite Delaware entitled to vote on the Merger Agreement was 100
shares. Excite Delaware has no issued and outstanding shares of Series E-3
Preferred Stock.
4. The percentage vote required to approve the Merger Agreement was more
than 50% of the outstanding shares of Excite Delaware's Common Stock and Series
E-3 Preferred Stock voting together on an as-converted to Common Stock basis.
5. Pursuant to Section 228 of the Delaware General Corporation Law, the
Agreement of Merger was approved by the written consent of Excite Delaware's
stockholders holding that number of shares of Common Stock of Excite Delaware
which equaled or exceeded the vote required.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this certificate are true and correct of
our own knowledge.
Executed at Redwood City, California this 27th day of August, 1998.
/s/ Robert C. Hood /s/ Chris M. Vail
- ------------------------ ------------------------
Robert C. Hood Chris M. Vail
Executive Vice President Secretary
<PAGE> 1
EXHIBIT 3.01
CERTIFICATE OF INCORPORATION
OF
EXCITE, INC.
ARTICLE I
The name of the corporation is Excite, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The name
of its registered agent at that address is Corporation Service Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
has authority to issue is one hundred four million (104,000,000) shares,
consisting of two classes: one hundred million (100,000,000) shares of Common
Stock, $0.001 par value per share, and four million (4,000,000) shares of
Preferred Stock, $0.001 par value per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a Certificate of
Designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding). The number of
authorized shares of Preferred Stock may also be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the corporation entitled to vote,
unless a vote of any other holders is required pursuant to a Certificate or
Certificates establishing a series of Preferred Stock.
Except as otherwise expressly provided in any Certificate of Designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights,
including, without limitation, voting rights, dividend rights, liquidation
rights, redemption rights and
<PAGE> 2
conversion rights, senior to, junior to or pari passu with the rights of the
Common Stock, the Preferred Stock, or any future class or series of Preferred
Stock or Common Stock.
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal Bylaws of the corporation.
ARTICLE VI
Pursuant to the provisions of Section 228 of the Delaware General
Corporation Law, actions which are required to be or which may be taken at taken
at any annual or special meeting of stockholders may not be taken without a
meeting by the consent in writing of the stockholders of the corporation.
ARTICLE VII
Election of directors need not be by written ballot unless the Bylaws of
the corporation shall so provide.
ARTICLE VIII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this Article VIII, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VIII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such amendment, repeal or adoption of such an inconsistent
provision.
ARTICLE IX
The name and mailing address of the incorporator is Michael J. McAdam, c/o
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306.
The undersigned incorporator hereby acknowledges that the foregoing
certificate is his act and deed and that the facts stated herein are true.
Date: June 11, 1998 /s/ Michael J. McAdam
------------------------------
Michael J. McAdam, Incorporator
2
<PAGE> 1
EXHIBIT 3.02
BYLAWS
OF
EXCITE, INC.
(a Delaware corporation)
As Adopted June 11, 1998
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, or by the Board of Directors or two or more members thereof. Special
meetings may not be called by any other person or persons. If a special meeting
of stockholders is called by any person or persons other than by a majority of
the members of the Board of Directors, then such person or persons shall call
such meeting by delivering a written request to call such meeting to each member
of the Board of Directors, and the Board of Directors shall then determine the
time, date and place of such special meeting, which shall be held not more than
one hundred twenty (120) nor less than thirty-five (35) days after the written
request to call such special meeting was delivered to each member of the Board
of Directors.
Section 1.3: Notice of Meetings. Written notice of all meetings of
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, then a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting. At the adjourned meeting the Corporation may transact
any business that might have been transacted at the original meeting.
<PAGE> 2
Section 1.5: Quorum. At each meeting of stockholders the holders of a
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall fail
to attend any meeting, the chairman of the meeting or the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, at the
meeting may adjourn the meeting. Shares of the Corporation's stock belonging to
the Corporation (or to another corporation, if a majority of the shares entitled
to vote in the election of directors of such other corporation are held,
directly or indirectly, by the Corporation), shall neither be entitled to vote
nor be counted for quorum purposes; provided, however, that the foregoing shall
not limit the right of the Corporation or any other corporation to vote any
shares of the Corporation's stock held by it in a fiduciary capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided over
by such person as the Board of Directors may designate, or, in the absence of
such a person, the Chairman of the Board, or, in the absence of such person, the
President of the Corporation, or, in the absence of such person, such person as
may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, at the meeting. Such person shall be
chairman of the meeting and, subject to Section 1.11 hereof, shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seems to him or her to be
in order. The Secretary of the Corporation shall act as secretary of the
meeting, but in his or her absence the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
Certificate of Incorporation, and subject to the provisions of Section 1.8 of
these Bylaws, each stockholder shall be entitled to one (1) vote for each share
of stock held by such stockholder. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in
any manner permitted by applicable law. Voting at meetings of stockholders need
not be by written ballot unless such is demanded at the meeting before voting
begins by a stockholder or stockholders holding shares representing at least one
percent (1%) of the votes entitled to vote at such meeting, or by such
stockholder's or stockholders' proxy; provided, however, that an election of
directors shall be by written ballot if demand is so made by any stockholder at
the meeting before voting begins. If a vote is to be taken by written ballot,
then each such ballot shall state the name of the stockholder or proxy voting
and such other information as the chairman of the meeting deems appropriate.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors. Unless otherwise provided by applicable law, the
Certificate of Incorporation or these Bylaws, every matter other than the
election of directors shall be decided by the affirmative vote of the holders of
a majority of the shares of stock entitled to vote thereon that are present in
person or represented by proxy at the meeting and are voted for or against the
matter.
<PAGE> 3
Section 1.8: Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. If no record date is fixed by the Board of Directors,
then the record date shall be as provided by applicable law. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.9: List of Stockholders Entitled to Vote. A complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
Section 1.10: Inspectors of Elections.
(a) Applicability. Unless otherwise provided in the Corporation's
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.10 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association; or (iii) held of record
by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.10 shall be optional, and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors of election to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting.
(c) Inspector's Oath. Each inspector of election, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
<PAGE> 4
(d) Duties of Inspectors. At a meeting of stockholders, the inspectors of
election shall (i) ascertain the number of shares outstanding and the voting
power of each share, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period of time a record of the disposition
of any challenges made to any determination by the inspectors, and (v) certify
their determination of the number of shares represented at the meeting, and
their count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced by the inspectors at the meeting. No ballot, proxies
or votes, nor any revocations thereof or changes thereto, shall be accepted by
the inspectors after the closing of the polls unless the Court of Chancery upon
application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of proxies
and ballots, the inspectors shall be limited to an examination of the proxies,
any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, ballots and the regular books and records of the
Corporation, except that the inspectors may consider other reliable information
for the limited purpose of reconciling proxies and ballots submitted by or on
behalf of banks, brokers, their nominees or similar persons which represent more
votes than the holder of a proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspectors consider
other reliable information for the limited purpose permitted herein, the
inspectors at the time they make their certification of their determinations
pursuant to this Section 1.10 shall specify the precise information considered
by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.11: Notice of Stockholder Business; Nominations.
(a) Annual Meeting of Stockholders.
(i) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders shall be made at
an annual meeting of stockholders (A) pursuant to the Corporation's notice of
such meeting, (B) by or at the direction of the Board of Directors or (C) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of the notice provided for in this Section 1.11, who is entitled to vote
at such meeting and who complies with the notice procedures set forth in this
Section 1.11.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i)
of this Section 1.11, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the
<PAGE> 5
Corporation not later than the close of business on the sixtieth (60th) day nor
earlier than the close of business on the ninetieth (90th) day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than thirty (30)
days before or more than sixty (60) days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice shall set forth: (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, and (2) the class and number of shares of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of subparagraph
(a)(ii) of this Section 1.11 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of such meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of such meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.11. In the event
the
<PAGE> 6
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be) for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by subparagraph (a)(ii) of this Section 1.11 shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.11. Except as otherwise provided by law or these
bylaws, the chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 1.11 and, if any proposed nomination or business is not in
compliance herewith, to declare that such defective proposal or nomination shall
be disregarded.
(ii) For purposes of this Section 1.11, the term "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 1.11, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
of one or more members. The initial number of directors shall be four (4), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. The Board of
Directors shall initially consist of the person or persons elected by the
incorporator or named in the Corporation's initial Certificate of Incorporation.
Each director shall hold office until the next
<PAGE> 7
annual meeting of stockholders and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal. Any
director may resign at any time upon written notice to the Corporation. Subject
to the rights of any holders of Preferred Stock then outstanding: (i) any
director or the entire Board of Directors may be removed, with or without cause,
by the holders of a majority of the shares then entitled to vote at an election
of directors and (ii) any vacancy occurring in the Board of Directors for any
cause, and any newly created directorship resulting from any increase in the
authorized number of directors to be elected by all stockholders having the
right to vote as a single class, may be filled by the stockholders, by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President, any Vice President,
the Secretary or any two or more directors then in office and may be held at any
time, date or place, within or without the State of Delaware, as the person or
persons calling the meeting shall fix. Notice of the time, date and place of
such meeting shall be given, orally or in writing, by the person or persons
calling the meeting to all directors at least four (4) days before the meeting
if the notice is mailed, or at least twenty-four (24) hours before the meeting
if such notice is given by telephone, hand delivery, telegram, telex, mailgram,
facsimile or similar communication method. Unless otherwise indicated in the
notice, any and all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee of the Board, may participate in a meeting of the
Board or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
Section 2.6: Quorum; Vote Required for Action. At all meetings of the Board
of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation, or required by law, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or in his or her absence by the
President, or in his or her absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
<PAGE> 8
Section 2.8: Written Action by Directors. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board or such
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee,
respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meeting of such committee who are not
disqualified from voting, whether or not he, she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in a resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Sections 251 or 252 of the Delaware
General Corporation Law, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the Bylaws of the Corporation; and
unless the resolution of the Board of Directors expressly so provides, no such
committee shall have the power or authority to declare a dividend, authorize the
issuance of stock or adopt
<PAGE> 9
a certificate of ownership and merger pursuant to section 253 of the Delaware
General Corporation Law.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of a
Chief Executive Officer and/or a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers, including a Chairman of the
Board of Directors and/or Chief Financial Officer, as may from time to time be
appointed by the Board of Directors. All officers shall be elected by the Board
of Directors; provided, however, that the Board of Directors may empower the
Chief Executive Officer of the Corporation to appoint officers other than the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Treasurer. Each officer shall hold office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any number of offices may be held by the same person. Any officer
may resign at any time upon written notice to the Corporation. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled by the Board of Directors.
Section 4.2: Chief Executive Officer. Subject to the control of the Board
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
(a) To act as the general manager and, subject to the control of the Board
of Directors, to have general supervision, direction and control of the business
and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds, conveyances,
mortgages, guarantees, leases, obligations, bonds, certificates and other papers
and instruments in writing which have been authorized by the Board of Directors
or which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of the Corporation and to supervise and control
all officers, agents and employees of the Corporation.
<PAGE> 10
The President shall be the Chief Executive Officer of the Corporation unless the
Board of Directors shall designate another officer to be the Chief Executive
Officer. If there is no President, and the Board of Directors has not designated
any other officer to be the Chief Executive Officer, then the Chairman of the
Board shall be the Chief Executive Officer.
Section 4.3: Chairman of the Board. The Chairman of the Board shall have
the power to preside at all meetings of the Board of Directors and shall have
such other powers and duties as provided in these bylaws and as the Board of
Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive Officer
of the Corporation unless the Board of Directors shall have designated another
officer as the Chief Executive Officer of the Corporation. Subject to the
provisions of these Bylaws and to the direction of the Board of Directors, and
subject to the supervisory powers of the Chief Executive Officer (if the Chief
Executive Officer is an officer other than the President), and subject to such
supervisory powers and authority as may be given by the Board of Directors to
the Chairman of the Board, and/or to any other officer, the President shall have
the responsibility for the general management the control of the business and
affairs of the Corporation and the general supervision and direction of all of
the officers, employees and agents of the Corporation (other than the Chief
Executive Officer, if the Chief Executive Officer is an officer other than the
President) and shall perform all duties and have all powers that are commonly
incident to the office of President or that are delegated to the President by
the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such powers
and duties as are commonly incident to the office of Vice President, or that are
delegated to him or her by the Board of Directors or the Chief Executive
Officer. A Vice President may be designated by the Board to perform the duties
and exercise the powers of the Chief Executive Officer in the event of the Chief
Executive Officer's absence or disability. Section 4.6: Chief Financial Officer.
Subject to the direction of the Board of Directors and the President, the Chief
Financial Officer shall perform all duties and have all powers that are commonly
incident to the office of chief financial officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all monies and
securities of the Corporation. The Treasurer shall make such disbursements of
the funds of the Corporation as are authorized and shall render from time to
time an account of all such transactions. The Treasurer shall also perform such
other duties and have such other powers as are commonly incident to the office
of Treasurer, or as the Board of Directors or the President may from time to
time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued all
authorized notices for, and shall keep, or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of Secretary, or as the Board of Directors or the President may from time
to time prescribe.
<PAGE> 11
Section 4.9: Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve at the
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to have
a certificate signed by or in the name of the Corporation by the Chairman or
Vice-Chairman of the Board of Directors, or the President or a Vice President,
and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary, of the Corporation, certifying the number of shares owned by such
stockholder in the Corporation. Any or all of the signatures on the certificate
may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to agree to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it, against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification of Officers and Directors. Each person who was
or is made a party to, or is threatened to be made a party to, or is involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he or she (or a
person of whom he or she is the legal representative), is or was a director or
officer of the Corporation or a Reincorporated Predecessor (as defined below) or
is or was serving at the request of the Corporation or a Reincorporated
Predecessor (as defined below) as a director or officer of another corporation,
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, shall be indemnified and held harmless
by the Corporation to the fullest extent permitted by the Delaware General
Corporation Law, against all expenses, liability and loss (including attorneys'
fees, judgments,
<PAGE> 12
fines, ERISA excise taxes and penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that the Corporation shall
indemnify any such person seeking indemnity in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. As used herein, the
term "Reincorporated Predecessor" means a corporation that is merged with and
into the Corporation in a statutory merger where (a) the Corporation is the
surviving corporation of such merger; (b) the primary purpose of such merger is
to change the corporate domicile of the Reincorporated Predecessor to Delaware.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
(including attorneys' fees) incurred by such a director or officer in defending
any such proceeding as they are incurred in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law then so
requires, the payment of such expenses incurred by such a director or officer in
advance of the final disposition of such proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
not be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a proceeding, alleging that such person has breached
his or her duty of loyalty to the Corporation, committed an act or omission not
in good faith or that involves intentional misconduct or a knowing violation of
law, or derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any person
in this Article VI shall not be exclusive of any other right that such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. Additionally, nothing in this Article VI shall limit
the ability of the Corporation, in its discretion, to indemnify or advance
expenses to persons whom the Corporation is not obligated to indemnify or
advance expenses pursuant to this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification rights
to such person. Such rights may be greater than those provided in this Article
VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification of
any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
<PAGE> 13
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, on the first business day after such
notice is dispatched, and (iv) in the case of delivery via telegram, telex,
mailgram, or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
under any provision of these bylaws, a written waiver of notice, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board or committee thereof that authorizes
the contract or transaction, or solely because his, her or their votes are
counted for such purpose, if: (i) the material facts as to his, her or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the affirmative votes of
a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; (ii) the material facts as to his, her or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
<PAGE> 14
committee thereof, or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate seal,
which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
Section 9.3: Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of any
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be held
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
<PAGE> 15
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Stockholders of the Corporation holding a
majority of the Corporation's outstanding voting stock shall have the power to
adopt, amend or repeal Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal Bylaws of the Corporation, except
insofar as Bylaws adopted by the stockholders shall otherwise provide.
<PAGE> 1
EXHIBIT 10.01
[EXCITE LETTERHEAD]
August 3, 1998
Mr. John Polumbo
(HOME ADDRESS REDACTED)
Dear John:
Though this letter is an offer of employment, if I launched into the
particulars immediately they would not tell the story of the enormous
enthusiasm that all of us in management, and on the board, have developed for
you during the course of the interview process. I have a strong sense that you
and I will work very well together, that we can lift Excite to new levels, and
that you will be an accepted leader in our culture. These have been important
issues for me to probe with you and I hold great promise for our partnership.
In this spirit, I'm pleased to offer you the job of President and Chief
Operating Officer, reporting to me. Upon your acceptance of this offer, I will
convert your current consulting role as appropriate and continue your observer
status on the board at our next board meeting on June 26, 1998 and hope to
recommend you as a full board member after your first year of employment.
Your starting annual salary will be $200,000, payable semi-monthly. You will
have a bonus target of $175,000 annually, based on company and individual goals
to be agreed upon shortly after your start date. In your first two years of
employment, this bonus target will be guaranteed. It will be prorated for the
relevant portions of the next 24 months which fall within the current and 2
subsequent calendar years. At that time, you will then participate in the then
current bonus program. You will be reimbursed for all reasonable business
expenses associated with your duties at Excite.
In addition to your salary and annual bonus, I have recommended that the
Compensation Committee of Excite's Board of Directors approve an employee stock
option grant of 275,000 shares (on a pre-split basis) of Excite's Common Stock.
The exercise price of the options will be fair market value, as determined by
the Compensation Committee at the time of the grant, which I have previously
communicated to you. The options will vest at a rate of one-forth-eighths
(1/48) each full succeeding month over a period of four years. However, the
option granted by Excite is subject to the Compensation Committee's approval,
it is not a promise of compensation, and is not intended to create any
obligation on the part of Excite. These restrictions will be set forth in a
legend on your option grant agreement.
<PAGE> 2
The Compensation Committee will provide further details on Excite's Option Plan
and any specific grant to you upon approval of such grant. You will be eligible
to participate in future grants that are recommended by the Compensation
Committee consistent with other executive officers.
As long as you remain a full-time employee of the company, and only in your
first four years of employment, at your discretion, you may elect once annually
to exercise a "put-back" option. The option will annually allow you to "put
back" to the company options in accordance with the following schedule:
Year One: 68,750 options (which vest in months 1-12) = $800K
Year Two: 68,750 options (which vest in months 13-24) = $900K
Year Three: 68,750 options (which vest in months 25-36) = $1.0M
Year Four: 68,750 options (which vest in months 27-48) = $1.2M
The amount shown is the net cash to be received, after any exercise price, but
before any applicable income and employment withholding taxes imposed. The
payment shall be made not later than 14 days after the anniversary date for the
applicable option.
The election must be made in writing no later than 60 days prior to each of
your anniversary dates. The payment is due on the applicable anniversary dates.
The election option is not cumulative; once your annual election has been made,
it retires the company's obligation for the "put-back" options or cash in that
particular year. If there is any "lock up" during the put back period, the
election will "suspend" until it can be exercised with a corresponding interest
factor paid for the delay in payment. Nothing shall be construed as extending
the "put-back" election period in the event of a "lock up".
In addition, as long as you remain a full-time employee of the company, Excite
will provide you with a $750K loan option, at the lowest prevailing applicable
federal rate provided by the Internal Revenue Service at the time of the loan,
which you can exercise at your discretion during your first two years of
employment with Excite. If you choose to exercise your loan option, you must
give Excite 30 days written notice. Your stock options will serve as collateral
for the loan. Excite will call the loan due at the earlier of: A "the end of
your 3rd year of employment"; B "when the value of your stock collateral falls
below $750K"; C "the date your employment with Excite ends for any reason."
Interest will be due and payable to Excite at the end of each calendar quarter
for any loans outstanding during the applicable quarter.
<PAGE> 3
To the extent in the future (and you are clear that no such corporate authority
currently exists) that I have the authority to accelerate any of the above
option vesting under such situations as corporate reorganizations, a change in
control (however broadly defined), or other related business changes including a
material diminishment or your corporate responsibilities, you will be treated no
less favorably than any of the current or future executive officers of Excite,
effective as a part of the consideration for the execution employment agreement.
You will be eligible to participate in Excite's group medical, dental, vision,
life insurance, 401(k) plan and employee stock purchase plan during next
enrollment period offered to all full time employees. If you accept this offer
of employment, you will be given benefit plan documents, which will describe
more fully these and other benefits of your employment with Excite.
If you accept this offer, your employment with Excite shall be "at will" which
means that it is not for any specified period of time and can be terminated by
yourself or Excite for any or no particular reason or cause and at any time with
or without advance notice. Even though your job duties, title, compensation and
benefits, as well as Excite's human resources policies and procedures, may
change from time to time during your tenure with Excite, the "at will" nature of
your employment is one aspect which may not be changed, except in writing signed
by the Chief Executive Officer of Excite.
If you are terminated for reasons other than cause during your first two years
of employment with the company, you will receive severance equal to: six months
of your then current base salary, pro rated bonus and six months stock vesting,
and six months of benefits payments on your behalf. However, if you are employed
during the six month period immediately after your severance, Excite will pay
only the differential between your total cash compensation in your new job
during the period in question and your total cash compensation at Excite, if you
had remained employed by Excite during that six month period.
If you become disabled during the term of your employment, it is our current
intention to continue your option vesting during the period of your disability.
We will make reasonable efforts to adopt a written policy which will confirm
this intention.
Any representations contrary to those contained in this letter which may have
been made to your are superseded by this offer. If you accept this offer, the
terms described in this letter constitute the terms of your employment with
Excite.
<PAGE> 4
This offer of employment is contingent upon receipt of satisfactory proof of
identification and work authorization as required by the Immigration Reform and
Control Act, the return of a signed copy of this letter indicating your
acceptance of our offer, and receipt of a signed copy of Excite's Employee
Invention Agreement and Confidentiality Agreement on the first day of your
employment. I would appreciate your confirming the acceptance of this offer by
signing on the space provided. This offer will expire if not signed and
received by August 7, 1998.
Let me close by reaffirming my belief that you and I will be a winning team,
and that you will be a great addition to Excite. I look forward to our future
success together.
Sincerely,
/s/ GEORGE BELL
- -------------------------
George Bell
President and CEO
Excite Inc.
I accept the offer of employment with Excite.
Signed: /s/ JOHN POLUMBO Date: August 3, 1998
--------------------------- -------------------------
John Polumbo
<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 QUARTER ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-01-1998
<CASH> 27,460
<SECURITIES> 12,852
<RECEIVABLES> 41,012
<ALLOWANCES> (4,090)
<INVENTORY> 0
<CURRENT-ASSETS> 127,947
<PP&E> 43,629
<DEPRECIATION> (17,158)
<TOTAL-ASSETS> 191,989
<CURRENT-LIABILITIES> 43,464
<BONDS> 0
0
813
<COMMON> 52
<OTHER-SE> 130,670
<TOTAL-LIABILITY-AND-EQUITY> 191,989
<SALES> 0
<TOTAL-REVENUES> 100,010
<CGS> 0
<TOTAL-COSTS> 19,777
<OTHER-EXPENSES> 117,272
<LOSS-PROVISION> 1,205
<INTEREST-EXPENSE> 984
<INCOME-PRETAX> (39,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,667)
<EPS-PRIMARY> (0.86)<F1>
<EPS-DILUTED> (0.86)<F2>
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEAN BASIC.
<F2>IN JUNE 1998, THE BOARD OF DIRECTORS DECLARED A TWO-FOR-ONE STOCK SPLIT
WHICH WAS IN THE FORM OF A 100% STOCK DIVIDEND. IN ACCORDANCE WITH REGULATION
S-K ITEM 601, PRIOR PERIOD FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR
THE STOCK SPLIT.
</FN>
</TABLE>
