<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
555 BROADWAY
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
(650) 568-6000
(Registrant's telephone number, including area code)
----------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 30, 1999 there were 55,127,206 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
EXCITE, INC.
QUARTERY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II OTHER INFORMATION
Item 1. Legal proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
- 2 -
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,407 $ 45,366
Short-term investments 27,334 15,681
Restricted investments 1,637 558
Accounts receivable, net 31,395 36,592
Related party receivable 5,071 1,826
Prepaid Netscape distribution costs and trademarks, current portion 47,039 45,473
Other prepaid and current assets 10,534 3,022
--------- ---------
Total current assets 168,417 148,518
Property and equipment, net 41,351 35,937
Investment in affiliated company 1,667 2,243
Prepaid Netscape distribution costs and trademarks 8,721 20,954
Intangible assets, net 7,703 8,792
Other assets 19,177 4,229
--------- ---------
Total assets $ 247,036 $ 220,673
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable $ 100 $ 6,100
Accounts payable 7,672 13,079
Accrued compensation 8,214 9,038
Deferred revenue, current portion 5,394 2,843
Capital lease obligations, current portion 10,148 7,133
Non-lease financing, current portion 4,373 1,531
Other equipment financing 1,149 7,481
Related party liabilities 4,056 5,092
Other accrued liabilities 6,512 6,741
--------- ---------
Total current liabilities 47,618 59,038
Deferred revenue 2,000 --
Capital lease obligations 18,668 11,668
Non-lease financing 6,581 1,568
Convertible note 5,000 5,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock -- 813
Common stock 55 52
Additional paid-in-capital ("APIC") 309,091 277,759
Deferred compensation (789) (907)
Unrealized gain on available-for-sale investments 1,889 1,319
Accumulated deficit (143,077) (135,637)
--------- ---------
Total stockholders' equity 167,169 143,399
--------- ---------
Total liabilities and stockholders' equity $ 247,036 $ 220,673
========= =========
</TABLE>
(1) Derived from audited financial statements as of December 31, 1998.
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 4
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues (1) $ 54,085 $ 24,256
Cost of revenues:
Hosting costs 6,813 2,788
Royalties and other cost of revenues 3,944 3,219
-------- --------
Total cost of revenues 10,757 6,007
-------- --------
Gross profit 43,328 18,249
Operating expenses:
Research and development 7,533 6,252
Sales and marketing 20,358 10,776
Distribution license fees and data acquisition costs 6,935 3,986
General and administrative 5,037 3,115
Merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles 2,365 977
Amortization of prepaid Netscape service 7,574 --
-------- --------
Total operating expenses 49,802 25,106
-------- --------
Operating loss (6,474) (6,857)
Interest expense and other, net (390) (208)
Equity share of losses of affiliated company (576) (479)
-------- --------
Net loss $ (7,440) $ (7,544)
======== ========
Basic and diluted net loss per share $ (0.14) $ (0.18)
======== ========
Shares used in computing net loss per share 52,807 41,336
======== ========
</TABLE>
(1) Includes related party revenue of $6.6 million and $0.8 million for the
three months ended March 31, 1999 and 1998, respectively.
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 5
EXCITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents, in thousands; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net loss $ (7,440) $ (7,544)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 119 158
Compensation expense from accelerated deferred compensation
charges and stock option vesting -- 122
Depreciation 5,193 2,339
Amortization of intangibles 1,089 278
Amortization of Netscape service, distribution costs and trademarks 10,667 --
Loss on disposal of property and equipment 365 174
Equity share of losses in affiliated company 576 479
Changes in assets and liabilities:
Accounts receivable 5,197 712
Other prepaid expenses and current assets (7,512) (263)
Other assets (6,948) 1,866
Accounts payable (5,407) (1,587)
Accrued compensation (824) (1,481)
Related party liabilities (4,279) (2,008)
Deferred revenue 551 (239)
Other accrued liabilities (229) 1,276
-------- --------
Net cash used by operating activities (8,882) (5,718)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (5,200) (141)
Purchases of investments (19,490) (9,159)
Sales and maturities of investments 3,327 8,794
Investment in affiliated company -- (2,019)
-------- --------
Net cash used in investing activities (21,363) (2,525)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds (payments) on capital lease and other financing obligations 5,764 (1,267)
Net (payments) proceeds on bank line of credit and other notes payable (6,000) 10
Proceeds from issuance of common stock 30,522 2,543
-------- --------
Net cash provided by financing activities 30,286 1,286
-------- --------
Net increase (decrease) in cash and cash equivalents 41 (6,957)
Cash and cash equivalents at beginning of period 45,366 16,073
-------- --------
Cash and cash equivalents at end of period $ 45,407 $ 9,116
======== ========
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible preferred stock to common stock $ -- $ 8,705
Property and equipment acquired under capital leases and other non-
lease financing $ 5,772 $ 3,719
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 756 $ 434
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 6
EXCITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Excite, Inc. ("Excite" or the "Company"), formerly Architext Software, Inc.,
which was formed in June 1994, is a global Internet media company offering
consumers and advertisers comprehensive Internet navigation services with
extensive personalization capabilities. The Excite Network consists of the
Excite (www.excite.com) and WebCrawler (www.webcrawler.com) brands, which
provide a gateway to the World Wide Web (the "Web") that organizes, aggregates
and delivers information to meet the needs of individual consumers. Designed to
help consumers navigate the Web, the Excite Network contains a suite of
specialized information services, organized under numerous topical channels
which combine proprietary search technology, editorial Web reviews, aggregated
content from third parties, bulletin boards, chat and other community features
and personalization capabilities. Localized versions of Excite are available in
Australia, 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 Excite's wholly-owned
subsidiary, MatchLogic, Inc. ("MatchLogic"), ad serving and targeting services.
See "Risk Factors that May Affect Future Results - Acquisition Strategy;
Integration of Past and Future Acquisitions."
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 months ended March 31, 1999 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire year ending December 31, 1999. 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/A for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission on April 26, 1999.
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 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. The Company also
enters into a number of longer-term advertising and commerce sponsorship
agreements. These agreements generally involve more integration with Excite
services and provide for more varied sources of revenue to Excite over the term
of the agreements, which average between 2 to 3 years. Under these agreements,
Excite earns fees for initial programming, initiation of service and access to
the Excite Network, and for generating impressions, which in some instances are
guaranteed. These revenues, as well as contract and other revenues, which
include MatchLogic's ad serving and targeting revenues, are generally recognized
ratably over the term of the agreements, provided that the Company does not have
any significant remaining obligations and collection of the resulting receivable
is probable. To the extent that impression deliveries are falling short of the
guarantees, the Company defers recognition of the corresponding revenues. The
terms of a number of these agreements provide that revenues from advertising and
electronic commerce transactions are to be shared between the advertiser and
Excite as realized.
- 6 -
<PAGE> 7
Per Share Data
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. The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 1999 and
1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED) 1999 1998
-------- --------
<S> <C> <C>
Net loss $ (7,440) $ (7,544)
======== ========
Weighted average shares outstanding 53,241 42,236
Weighted average common shares issued subject
to repurchase agreements (434) (900)
-------- --------
Shares used to compute basic and diluted net loss
per share 52,807 41,336
======== ========
Basic and diluted net loss per share $ (0.14) $ (0.18)
======== ========
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. AT HOME MERGER
On January 19, 1999, Excite, At Home Corporation, or "At Home," a company
that provides Internet services to consumers and businesses over the cable
television infrastructure, and Countdown Acquisition Corporation, a wholly-owned
subsidiary of At Home, entered into a definitive Agreement and Plan of
Reorganization, or the "Merger Agreement."
Pursuant to the Merger Agreement, Excite will become a wholly-owned
subsidiary of At Home. At the effective time of the Merger, all outstanding
shares of Excite's Common Stock will be exchanged for shares of At Home's Series
A Common Stock, and options and warrants to purchase Excite's Common Stock will
be exchanged for options or warrants, as applicable, to purchase shares of
At Home's Series A Common Stock. Each share of Excite's Common Stock will be
exchanged for 1.041902 shares of At Home's Series A Common Stock. At Home has
announced that it intends to effect a 2-for-1 stock split, for the stockholders
of record as of June 2, 1999, which is subject to stockholder approval. If this
stock split occurs before the merger closes, each Excite stockholder will
receive 2.083804 shares of At Home's Series A Common Stock for each share of
Excite Common Stock. The exercise price and number of shares of Excite's Common
Stock subject to options or warrants will be appropriately adjusted to reflect
the exchange ratio. Any outstanding convertible debt at the effective time of
the Merger, will thereafter be convertible into the number of shares of
At Home's Series A Common Stock to which a holder of Excite's Common Stock would
have been entitled to receive if the holder had converted the convertible debt
into Excite's Common Stock prior to the Merger. The transaction is intended to
qualify as a tax-free reorganization and will be accounted for as a purchase.
In connection with the execution of the Merger Agreement, Excite and At Home
entered into a Stock Option Agreement, or the "Stock Option Agreement," pursuant
to which Excite granted to At Home an option to purchase up to 19.9% of the
outstanding shares of Excite's Common Stock, which is exercisable upon the
occurrence of certain events relating to Excite terminating the Merger Agreement
and entering into a similar agreement with a third party specified in the Stock
Option Agreement.
The Merger, which is expected to close in the second quarter of 1999, is
subject to approval of the Excite and At Home stockholders. The meeting of the
stockholder's of Excite and At Home will take place on May 28, 1999. In April
1999, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
expired. In April 1999, the Securities and Exchange Commission declared
effective the registration statement on Form S-4 with respect to the shares of
At Home's Series A Common Stock to be issued in the Merger.
- 7 -
<PAGE> 8
Excite may be required to pay a substantial termination fee if the Merger
Agreement is terminated for certain specific reasons and Excite is subsequently
acquired by another party. Excite has filed the Merger Agreement with the
Securities and Exchange Commission on January 20, 1999 under its Report on
Form 8-K.
3. CAPITALIZED INTERNAL USE SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. The Company adopted SOP 98-1 effective for the year ended
December 31, 1998.
The Company is in the process of developing and implementing an internal use
software system which will integrate certain modules, such as: an order entry
system; campaign management database; advertising tracking system and customer
billing interface. During the first quarter of 1999, Excite began the
application phase of this software system and as a result, has capitalized
approximately $1.0 million in application programming and testing costs. Upon
the completion of the various modules, the capitalized software costs are to be
amortized ratably on a straight-line basis over a two year period, which is
estimated to begin in the second half of 1999. The actual lives of the Company's
capitalized software for internal use may differ from the Company's estimates,
and such differences may cause carrying amounts of these assets to be reduced.
During 1999, the Company expects to capitalize approximately $3.5 million
relating to this internal use software system.
4. BANK LINE OF CREDIT
During 1997, the Company entered into and borrowed on a $6.0 million line of
credit. The Company repaid the outstanding balance of $6.0 million and canceled
this line of credit during the three months ended March 31, 1999.
In March 1999, the Company entered into a secured revolving credit facility
totaling $20.0 million with a letter of credit limit of $5.0 million, expiring
in March 2000. The interest rate, determined by the level of borrowings, is
based upon either the LIBOR rate plus 2.5% or a base rate established by the
financial institution at the time of borrowing. Accrued interest on outstanding
borrowings is payable monthly in arrears and any unpaid principal is due upon
termination of the credit facility. Borrowings are collateralized by a security
interest in substantially all of the Company's assets, including intellectual
property. There was no outstanding balance under this credit facility at March
31, 1999. Under this credit facility, the Company is subject to certain
commitment and utilization fees on the unused portion of the committed amount.
At March 31, 1999, fees incurred were not material to the financial results of
the Company. The credit facility requires the Company to maintain certain
quarterly financial covenants. At March 31, 1999, the Company was in compliance
with these covenants.
5. JOINT VENTURES
In March 1999, the Company and Retevision SA. ("Retevision") entered into a
joint venture agreement to form Excite Retevision Espana SL ("Excite Espana").
The new company, Excite Espana, which is owned 50% by Excite and 50% by
Retevision, will program certain portions of www.iddeo.es, the Internet site of
Retevision, as well as provide a Spanish language search directory service under
the Excite brand. Retevision has committed to provide the initial start-up
capital for the venture, while Excite will provide the core technology, related
services and brand name. Retevision will contribute a total of $5.0 million to
Excite Espana. Excite will account for its interest in the joint venture under
the equity method.
- 8 -
<PAGE> 9
6. RELATED PARTY TRANSACTIONS
Investment in T E Network, Inc.
In March 1999, the Company signed a stock purchase agreement with an online
gaming Company, T E Network, Inc. ("TEN"). Under the agreement, the Company
purchased 2,000,000 shares of TEN's Series D Preferred Stock for an aggregate
purchase price of $8.0 million in consideration for a $4.0 million cash payment
in March 1999 and a commitment for Excite to provide $4.0 million of
promotional services through April 2002.
America Online
Revenues under the Company's five-year distribution agreement with America
Online, Inc. ("AOL") signed in November 1996, were $1.1 million and $0.8 million
for the three months ended March 31, 1999 and 1998, respectively. Expenses
associated with this agreement for the three months ended March 31, 1999 and
1998 were not material.
In January 1999, AOL sold approximately 4,900,000 shares of Excite Common
Stock. As a result, of this sale, AOL ceased to be the beneficial owner of more
than five percent of Excite's Common Stock on that date.
In February 1999, AOL exercised its warrant to purchase 325,000 shares of
Excite Series E Preferred Stock ("Series E"). AOL elected to receive a lesser
number of shares in exchange for a reduction in the total exercise price,
resulting in the net issuance of 311,970 shares of Series E, which were
converted into 623,940 shares of Excite Common Stock. AOL sold the
623,940 shares of Excite Common Stock in February 1999.
Notes Receivable from an Officer
In January 1999, the Company provided an officer of the Company a loan option
for $1.0 million. In March 1999, the officer exercised this loan option and
borrowed $1.0 million from the Company. This note receivable bears interest at
approximately 4.7% compounded annually and is secured by the officer's stock
options of the Company. The note receivable is due upon termination of
employment with the Company for any reason. Accrued interest as of
March 31, 1999 was not material. In April 1999, $620,000 of the outstanding note
receivable was repaid.
7. NETSCAPE AGREEMENT
In April 1998, the Company and Netscape entered into a two-year agreement
(the "Netcenter Agreement") with respect to Netscape's "Netcenter" online
service. The Company has paid a total of $70.0 million as a prepayment of its
obligations under the Netcenter Agreement. In addition, the Company issued a
warrant to Netscape to purchase 846,158 shares of the Company's Common Stock at
an exercise price of approximately $29.55 per share and a second warrant to
purchase 72,411 shares of the Company's Common Stock at an exercise price of
approximately $138.10 per share. The fair value assigned to the warrants was
$19.9 million. The $89.9 million, representing the combined value of marketing
and distribution rights, trademarks and other exclusive rights, which extend
over the term of the Netcenter Agreement, is being recognized ratably over the
term of the agreement as distribution services are received, commencing with the
launch of the service in June 1998.
- 9 -
<PAGE> 10
Prepaid Netscape Distribution Costs and Trademarks consists of the following:
<TABLE>
<CAPTION>
AMORTIZATION
FOR THE THREE
BALANCE AS OF MONTHS ENDED BALANCE AS OF
DECEMBER 31, MARCH 31, MARCH 31,
(IN THOUSANDS) 1998 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
Prepaid distribution license fees
and data acquisition costs $ 23,509 (3,093) 20,416
Prepaid Netscape service 35,834 (6,324) 29,510
Prepaid trademark license 7,084 (1,250) 5,834
-------- -------- --------
$ 66,427 $(10,667) $ 55,760
======== ======== ========
</TABLE>
During the three months ended March 31, 1999, the Company amortized $10.7 to
operations. The $10.7 million charge to operations was as follows: $3.1 million
was included in Distribution License Fees and Data Acquisition Costs and
$7.6 million was reported separately as Amortization of Prepaid Netscape
Service.
In January and February 1999, Netscape exercised a portion of the first
warrant issued under the Netcenter Agreement and paid approximately
$19.1 million to purchase 646,158 shares of the Company's Common Stock. As of
March 31, 1999, Netscape had exercised the entire portion of the first warrant
issued. The second warrant is exercisable for a two-year period commencing
April 30, 1999.
In March 1999, AOL completed the acquisition of Netscape, with Netscape
becoming a wholly-owned subsidiary of AOL.
In April 1999, Excite announced that it provided notice to Netscape, pursuant
to the terms of the Netcenter Agreement, that it intends to terminate its
agreement with respect to Netcenter as a result of the acquisition of Netscape
by AOL. This agreement will terminate on June 17, 1999.
Upon Excite providing Netscape notice to terminate the Netcenter Agreement,
Excite is obligated to continue to operate the co-branded services for
Netscape's Netcenter through June 17, 1999. Pursuant to the terms of the
Netcenter Agreement, Netscape may be required to refund Excite amounts prepaid
or costs Excite has incurred in performing under the Netcenter Agreement. Upon
termination of the Netcenter Agreement on June 17, 1999, the portion of
unamortized Prepaid Netscape Distribution Costs and Trademarks, which might not
be refunded in full by Netscape, is estimated by management to be up to
approximately $45.0 million and the actual amount will be dependent upon the
negotiated settlement terms between Excite and Netscape.
8. SEGMENT INFORMATION
The Company operates in the Internet navigation industry and the Internet ad
serving and targeting business segments. 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 the Company with its own sales force, research
and development and operations departments.
Information by Operating Segment:
<TABLE>
<CAPTION>
INTERNET AD SERVING
(IN THOUSANDS) NAVIGATION & TARGETING TOTAL
------------ ------------- ---------
<S> <C> <C> <C>
Three Months Ended March 31, 1999
Operating information:
Revenues from external customers $ 39,909 $ 14,176 $ 54,085
Gross profit $ 30,148 $ 13,180 $ 43,328
Distribution license fees and data acquisition costs $ 4,143 $ 2,792 $ 6,935
Segment operating income (loss) $ (11,160) $ 4,686 $ (6,474)
Balance sheet information at March 31, 1999:
Total assets $ 233,014 $ 14,022 $ 247,036
Three Months Ended March 31, 1998
Operating information:
Revenues from external customers $ 22,344 $ 1,912 $ 24,256
Gross profit $ 16,977 $ 1,272 $ 18,249
Distribution license fees and data acquisition costs $ 3,376 $ 610 $ 3,986
Segment operating loss $ (2,488) $ (4,369) $ (6,857)
Balance sheet information at March 31, 1998:
Total assets $ 69,429 $ 5,587 $ 75,016
</TABLE>
9. SUBSEQUENT EVENT
In April 1999, the Company and Rogers Media Inc. ("Rogers") entered into a
Partnership agreement to form Excite Canada Partnership ("Excite Canada"). The
new company, Excite Canada, which is owned 50% by Excite and 50% by Rogers, will
provide an Excite branded, advertising, and commerce supported Web portal for
the Canadian market. Rogers has committed to provide the initial start-up
capital for the venture, while Excite will provide the core technology, related
services and brand name. Rogers will contribute a total of 15.0 million Canadian
dollars to Excite Canada. Excite will account for its interest in the joint
venture under the equity method.
- 10 -
<PAGE> 11
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. Excite's actual results may differ materially from those
anticipated in these forward-looking statements as a result of the Merger with
At Home, which is expected to close during the second quarter of 1999, and other
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 should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1998 filed with the Securities
and Exchange Commission on April 26, 1999.
OVERVIEW
Excite, Inc., or "Excite", 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 was formed in June 1994 and first launched its Excite search and
directory service in October 1995. Excite 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 Excite's
wholly-owned subsidiary, MatchLogic, Inc. ("MatchLogic"), ad serving and
targeting services.
Historically, Excite's advertising revenues have been derived principally
from short-term advertising contracts in which Excite 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, or "CPMs", charged. Excite
generally charges higher rates for advertisements focused on targeted groups,
either by keyword associations or affiliations with specific content, than for
general rotation advertisements. During its limited operating history, Excite
has experienced seasonal fluctuations in the amount of banner advertisements
sold 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.
Excite also enters 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 revenues accounted for approximately 20% and 29% of
revenues for the first three months of 1999 and 1998, respectively. A number of
these agreements also provide that revenues or gross margins from advertising
and electronic commerce transactions are to be shared between the advertiser and
Excite as realized. Revenues or margin sharing recognized from such electronic
commerce transactions were insignificant through the first quarter of 1999, and
are expected to be insignificant through the remainder of 1999. See "Risk
Factors that May Affect Future Results - Excite Depends on Sponsorship
Agreements for Revenues" and " - Risks Associated with Banner Advertising."
These revenues, as well as contract and other revenues, which include
MatchLogic's ad serving and targeting revenues, are generally recognized ratably
over the term of the agreement, provided that Excite 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, Excite defers recognition of the corresponding revenues.
Excite has incurred significant operating losses since inception, and as of
March 31, 1999, Excite had an accumulated deficit of approximately $143.1
million. Although Excite experienced significant revenue growth during 1999 and
1998, Excite may not be able to sustain the growth of its revenues. Excite's
historical operating results may not be indicative of future operating results.
In addition, as Excite has grown, its operating expenses
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<PAGE> 12
have increased, and Excite 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 Excite'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, Excite's financial condition will be materially and adversely
affected. Excite may never attain profitability on a quarterly or annual basis.
AT HOME MERGER
On January 19, 1999, Excite, At Home Corporation, or "At Home," an Internet
service provider to consumers and businesses over the cable television
infrastructure, and Countdown Acquisition Corporation, a wholly-owned subsidiary
of At Home, entered into a definitive Agreement and Plan of Reorganization, or
the "Merger Agreement."
Pursuant to the Merger Agreement, Excite will become a wholly-owned
subsidiary of At Home. At the effective time of the Merger, all outstanding
shares of Excite's Common Stock will be exchanged for shares of At Home's Series
A Common Stock, and options and warrants to purchase Excite's Common Stock will
be exchanged for options or warrants, as applicable, to purchase shares of
At Home's Series A Common Stock. Each share of Excite's Common Stock will be
exchanged for 1.041902 shares of At Home's Series A Common Stock. At Home has
announced that it intends to effect a 2-for-1 stock split, for the stockholders
of record as of June 2, 1999, which is subject to stockholder approval. If this
stock split occurs before the merger closes, each Excite stockholder will
receive 2.083804 shares of At Home's Series A Common Stock for each share of
Excite Common Stock. The exercise price and number of shares of Excite's Common
Stock subject to options or warrants will be appropriately adjusted to reflect
the exchange ratio. Any outstanding convertible debt at the effective time of
the Merger, will thereafter be convertible into the number of shares of
At Home's Series A Common Stock to which a holder of Excite's Common Stock would
have been entitled to receive if the holder had converted the convertible debt
into Excite's Common Stock prior to the Merger. The transaction is intended to
qualify as a tax-free reorganization and will be accounted for as a purchase.
In connection with the execution of the Merger Agreement, Excite and At Home
entered into a Stock Option Agreement, or the "Stock Option Agreement," pursuant
to which Excite granted to At Home an option to purchase up to 19.9% of the
outstanding shares of Excite's Common Stock, which is exercisable upon the
occurrence of certain events relating to Excite terminating the Merger Agreement
and entering into a similar agreement with a third party specified in the Stock
Option Agreement.
The Merger, which is expected to close in the second quarter of 1999, is
subject to approval of the Excite and At Home stockholders. The meeting of the
stockholder's of Excite and At Home will take place on May 28, 1999. In April
1999, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
expired. In April 1999, the Securities and Exchange Commission declared
effective the registration statement on Form S-4 with respect to the shares of
At Home's Series A Common Stock to be issued in the Merger.
Excite may be required to pay a substantial termination fee if the Merger
Agreement is terminated for certain specific reasons and Excite is subsequently
acquired by another party. Excite has filed the Merger Agreement with the
Securities and Exchange Commission on January 20, 1999 under its Report on
Form 8-K.
NETSCAPE AGREEMENT
In April 1998, Excite and Netscape Communications Corporation, or "Netscape",
entered into a two-year agreement, or the "Netcenter Agreement", under which
Excite will, among other things, provide, host and sell advertising for certain
co-branded services for Netscape's Netcenter service. In connection with the
Netcenter Agreement, Excite has paid to Netscape a total of $70.0 million, or
the "Cash Payment". Also in connection with the Netcenter Agreement, Excite has
issued to Netscape a warrant to purchase 846,158 shares of Excite's Common Stock
at an exercise price of approximately $29.55 per share, or the "First Warrant",
and a second warrant to purchase 72,411 shares of Excite's Common Stock at an
exercise price of approximately $138.10 per share, or the "Second Warrant".
As of March 31, 1999, Netscape had exercised the entire portion of the First
Warrant. The Second Warrant will be exercisable for a two-year period commencing
April 30, 1999.
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<PAGE> 13
The fair value of the warrants was valued at $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 ratably over the two-year term of the Netcenter
Agreement. The unamortized amount to be expensed under the Netcenter Agreement
as of March 31, 1999, is separated into two components as follows: the amount
which represents the anticipated future net revenues from the Netcenter
Agreement, or $20.4 million, will be charged to Distribution License Fees and
Data Acquisition Costs; and the remaining amount, or $35.3 million, representing
the combined value of marketing and distribution rights, trademarks and other
exclusive benefits derived from the agreement will be charged ratably over the
term of the agreement to Amortization of Prepaid Netscape Service.
Under the Netcenter Agreement, Excite 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 Excite's revenue-sharing obligation to
Netscape until Excite recoups a specified amount of the Cash Payment.
Thereafter, Excite must pay Netscape a portion of additional revenues generated
from the co-branded services. Excite does not expect that the revenue generated
from the co-branded services will exceed 10% of Excite's total revenue over the
term of the Netcenter Agreement. Excite has incurred 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 Netcenter. Unless Netscape generates impressions
significantly greater than the guaranteed amount as specified in the agreement,
the increased revenues to Excite 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 Excite as a result of the agreement. On this basis, Excite
anticipates that the Netcenter Agreement will serve to generate losses for
Excite during its term.
Netscape has made guarantees for the number of times a link to Excite is
displayed on the NetSearch page. The actual delivery of impressions since the
launch of the Netcenter co-branded service in June 1998 has been significantly
below expectations. During the fourth quarter of 1998, the delivery of
impressions improved from the previous quarter due to the implementation of
certain changes made by Netscape and Excite, however, actual delivery of
impressions continued to fall short of original expectations. During the first
quarter of 1999, Excite Search and the co-branded Netscape Search services
benefited from increases in search rotation, however, those improvements were
temporary, and impressions continued to fall short of original expectations.
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, Excite's ability to recover the prepayment within the
term of the agreement may be impaired.
In March 1999, American Online, Inc., or "AOL", completed the acquisition of
Netscape, with Netscape becoming a wholly-owned subsidiary of AOL.
In April 1999, Excite announced that it provided notice to Netscape, pursuant
to the terms of the Netcenter Agreement, that it intends to terminate its
agreement with respect to Netcenter as a result of the acquisition of Netscape
by AOL. This agreement will terminate on June 17, 1999.
Upon Excite providing Netscape notice to terminate the Netcenter Agreement,
Excite is obligated to continue to operate the co-branded services for
Netscape's Netcenter through June 17, 1999. Pursuant to the terms of the
Netcenter Agreement, Netscape may be required to refund Excite amounts prepaid
or costs Excite has incurred in performing under the Netcenter Agreement. Upon
termination of the Netcenter Agreement on June 17, 1999, the portion of
unamortized Prepaid Netscape Distribution Costs and Trademarks, which might not
be refunded in full by Netscape, is estimated by management to be up to
approximately $45.0 million and the actual amount will be dependent upon the
negotiated settlement terms between Excite and Netscape.
Under the existing agreement, Excite receives revenues from the portions of
Netcenter that are co-branded with Excite. For the three months ended March 31,
1999 and the year ended December 31, 1998, these revenues did not exceed 10% of
Excite's total revenues. Upon termination of the Netcenter Agreement, Excite may
no longer generate revenues from the co-branded services of Netcenter, except
that under the terms of the agreement, Excite may be entitled to 50% of revenues
attributable to advertising contracts that have terms extending beyond the
termination date of the Netcenter Agreement. If any revenues are received,
Excite believes that any such amounts will be immaterial to Excite's revenues.
Aside from any potential accelerated amortization of the related unamortized
costs, management does not expect that Excite's future level of operating
expenses will decrease as a result of the termination of the Netcenter
Agreement. For example, research and development and sales and marketing
resources related to the Netcenter Agreement have been re-deployed to other
aspects of Excite's business. For the three months ended March 31, 1999,
research and development and sales and marketing expense relating to the
Netcenter Agreement have not been material to Excite's results of operations.
See "Risk Factors that May Affect Future Results - Significant Risks
Associated with the Netcenter Agreement" and see Note 7 of Notes to Condensed
Consolidated Financial Statements.
RESULTS OF OPERATIONS
REVENUES
Revenues increased 123% to $54.1 million in the first quarter of 1999 as
compared to $24.3 million in the first quarter of 1997. The increase in revenues
resulted primarily from a $13.3 million increase in advertising revenues, which
was due to both an increase in the number of advertisers purchasing advertising
banners on Excite's Web sites and an increase in sales of targeted
advertisements with higher rates. Also contributing to the increase was a $3.9
million increase in sponsorship advertising revenue and a $12.3 million increase
in revenues attributable to MatchLogic.
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<PAGE> 14
Excite expects to continue to derive a substantial majority of its total
revenues from selling advertisements. Because the market for advertising on the
Web is intensely competitive, advertising rates may be subject to pricing
pressures in the future. If Excite is forced to reduce its advertising rates or
experiences lower CPMs as a result of such competition or otherwise, future
revenues may be adversely affected. Excite sells a combination of sponsorship
and banner advertising contracts in addition to the banner advertising contracts
historically sold by Excite. Excite does not expect revenue growth relating to
sponsorship advertising revenues to continue at the current rate in future
periods as availability of exclusive sponsorships may be limited.
COST OF REVENUES
Cost of revenues consists primarily of hosting costs and royalties and other
cost of revenues. 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 e-mail and chat room services.
Total cost of revenues increased in absolute dollars by $4.8 million to
$10.8 million, or 20% of revenues for the first quarter of 1999 from
$6.0 million, or 25% of revenues for the first quarter of 1998. Hosting costs
for the first quarter of 1999 increased in absolute dollars to $6.8 million, or
13% of revenues, from $2.8 million, or 11% of revenues for the first quarter of
1998. The increase in hosting costs is due primarily to an increase in equipment
costs and to a lesser extent, personnel expenses relating to maintenance and
support of Excite's Web sites and services. Royalties and other cost of revenues
increased in absolute dollars to $3.9 million, or 7% of revenues for the first
quarter of 1999, from $3.2 million, or 13% of revenues for first quarter 1998.
The increase in royalties and other cost of revenues was primarily due to
increased royalties and margin sharing payments from revenue sharing agreements.
Cost of revenues in future periods is expected to increase in absolute
dollars and may increase as a percentage of revenues as Excite increases costs
to support expanded services and content.
GROSS PROFIT
Gross profit was $43.3 million or 80% of revenues and $18.2 million or 75% of
revenues for the first quarter of 1999 and 1998, respectively. The increase in
gross profit in absolute dollars and as a percentage of revenues in the first
quarter of 1999 compared to 1998, was primarily due to the fact that revenues
grew at a faster rate than hosting costs, royalties and other cost of revenues
and a favorable mix of advertising services. 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, Excite 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 Excite's advertising revenue sharing
obligations may adversely affect gross margins in the future.
OPERATING EXPENSES
Excite's operating expenses have generally increased in absolute dollar
amounts since inception. This trend reflects Excite's rapid transition from the
product development stage to marketing and offering its services. Excite
believes that continued expansion of its operations is essential to achieving
and maintaining market leadership. As a consequence, Excite intends to continue
to increase expenditures in all operating areas for the foreseeable future.
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 increased to $7.5 million or 14% of revenue for the first
quarter of 1999, from
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<PAGE> 15
$6.3 million or 26% of revenues for the first quarter of 1998. The increase in
absolute dollars in the first quarter of 1999 compared to the first quarter of
1998 was primarily due to an increase in engineering and editorial headcount to
support Excite's channels format and personalization capabilities for the Excite
Network. Research and development headcount increased to 270 employees at
March 31, 1999 from 159 at March 31, 1998.
Excite believes that a significant level of research and development expense
is required to remain competitive and, accordingly, Excite anticipates that it
will continue to devote substantial resources to research and development and
that these costs will increase in absolute dollars in future periods. Excite
also expects to continue to experience increased research and development
expenses in order to integrate any technologies acquired in the future.
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 were $20.4 million or 38% of revenue for the first quarter of
1999, compared to $10.8 million or 44% of revenue for the first quarter of 1998.
The increase in absolute dollars for the first quarter of 1999 compared to the
first quarter of 1998 was primarily due to the hiring of additional sales and
marketing personnel and increased sales and marketing expenses. Sales and
marketing headcount increased by 148 employees to 339 at March 31, 1999 from
191 at March 31, 1998. In addition, other sales and marketing expenses
increased, such as commissions, advertising expenses in the first quarter of
1999 compared to the first quarter of 1998.
Excite expects to continue to incur significant promotional and advertising
expenses and anticipates that these costs will increase in absolute dollars in
future periods as Excite promotes its brands and introduces new services in
order to create and maintain brand loyalty among consumers. Excite 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.
Excite may also seek to enter into additional third party relationships which it
believes will help promote its brand. As a result, Excite may need to divert
resources from other areas. These brand building efforts may not be successful,
which may adversely affect Excite's business.
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 Excite's MatchLogic subsidiary.
Distribution license fees and data acquisition costs increased to $6.9
million for the first quarter of 1999 from $4.0 million for the first quarter of
1998. The increase in absolute dollars for the first quarter of 1999 compared to
the first quarter of 1998 was primarily due to the $3.1 million amortized to
Distribution License Fees and Data Acquisition Costs relating to the April 1998
Netcenter Agreement and an increase in data acquisition costs incurred by
MatchLogic. Upon termination of the Netcenter Agreement on June 17, 1999, Excite
will re-evaluate the remaining life of the prepaid Distribution License Fees
and Data Acquisition Costs relating to the Netcenter Agreement.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of administrative and executive personnel costs, provision for
doubtful accounts, fees for professional services and allocation of overhead.
General and administrative expenses increased in absolute dollars to
$5.0 million or 9% of revenue for the first quarter of 1999, from $3.1 million
or 13% of revenue for the first quarter 1998. The increase in absolute dollars
for the first quarter 1999 compared to the first quarter of 1998 is primarily
due to increased personnel costs to support the expansion and infrastructure of
Excite's operations and international expansion efforts. In particular, the
growth in Excite's finance and administrative departments contributed to this
increase. General and administrative headcount increased to 84 employees at
March 31, 1999 from 65 at March 31, 1998.
Excite anticipates that its general and administrative expenses may continue
to increase in absolute dollars as Excite expands its administrative and
executive staff, adds infrastructure and integrates acquired technologies and
businesses. In addition, Excite plans to continue to run MatchLogic as an
independent subsidiary with its own administrative function.
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<PAGE> 16
IN-PROCESS TECHNOLOGY. During the first quarter of 1999 and 1998 Excite did
not incur any charges for in-process technology.
In April 1998, Excite acquired all of the assets of Throw, Inc., including an
Internet-based community technology that creates environments, centered around
common themes, where users can interact on both an asynchronous as well as a
synchronous basis. These communities are being developed to contain numerous
linked features that facilitate communication amongst multiple users, including
event calendars, photo albums, address books, chat rooms and
threaded discussions.
In response to recent Securities and Exchange Commission, or the "SEC",
interpretative guidance surrounding acquisition-related in-process research and
development, Excite revised the original accounting for the purchase price
allocation related to the April 1998 acquisition of Throw and the related
amortization of intangibles. As a result, Excite restated its operating results
and amended its Report on Form 10-Q for the periods ended June 30, 1998 and
September 30, 1998 previously filed with the SEC.
The purchase price approximated $17.0 million, which consisted of
$16.2 million of stock issued and $800,000 of direct acquisition costs. In
connection with the acquisition, Excite accounted for the transaction as a
purchase and allocated $6.2 million to in-process technology and $10.8 million
to goodwill in April 1998. Purchased in-process technology represents the
present value of the estimated after-tax cash flows expected to be generated by
the purchased technology, which, at the acquisition date, had not yet reached
technological feasibility and does not have alternative future uses. The
goodwill is being amortized on a straight-line basis over three years.
The technology projects in-process as of the acquisition date consisted of
the development of the system's Solaris 2.6 platform, the Oracle database, and
the objects, areas and applications that will comprise the templates and
supporting feature applets.
These projects were grouped into three categories as of the acquisition date:
<TABLE>
<CAPTION>
PROJECT PERCENT COMPLETE
- ---------------------------------------- ----------------
<S> <C>
Standard templates and features 35%
First generation templates and features 65%
Second generation templates and features 55%
</TABLE>
The expected costs to complete these projects in aggregate as of the
acquisition date totaled approximately $1.5 million. The standard templates and
features were completed in the third quarter of 1998 and had reached
technological feasibility.
As of March 31, 1999, management has not made any significant modifications
to the expected costs to compete these projects or the estimated after-tax cash
flows to be generated by the purchased technology. As of March 31, 1999, the
first and second generation templates and features were approximately 90%
complete and are projected by Excite's management to be completed by the third
quarter of 1999 The expected costs to complete the first and second generation
templates and features are estimated to be approximately $700,000. These costs
primarily relate to personnel costs for the remaining engineering and quality
assurance efforts necessary to complete and test the first and second generation
templates and features.
OTHER MERGER AND ACQUISITION RELATED COSTS, INCLUDING AMORTIZATION OF
GOODWILL AND OTHER INTANGIBLE ASSETS. During the first quarter of 1999 and 1998,
Excite incurred merger and acquisition related costs of $2.4 million and
$977,000 respectively. During the first quarter of 1999, Excite incurred charges
of approximately $1.3 million relating primarily to legal and other professional
fees associated with the At Home merger. In addition, Excite incurred charges
during the first quarter of 1999 of $900,000 relating to the amortization of
goodwill and other purchased intangibles resulting from the acquisition of Throw
in April 1998. During the first quarter of 1998, Excite incurred charges of
approximately $700,000 for the acquisition of MatchLogic, which primarily
related to legal and other professional fees. The remainder of the merger and
acquisition related costs for the first quarter of 1999 and 1998 related to the
amortization of goodwill and other purchased intangibles resulting from the
WebCrawler acquisition in December 1996.
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<PAGE> 17
AMORTIZATION OF PREPAID NETSCAPE SERVICE. During the first quarter of 1999,
Excite incurred costs of $7.6 million related to the amortization of the Prepaid
Netscape Service associated with the April 1998 Netcenter Agreement, which has
an original term of two-years. Excite 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 was scheduled to expire in
June 2000. Upon termination of the Netcenter Agreement on June 17, 1999, Excite
will re-evaluate the remaining life of the prepaid Netscape Service relating to
the Netcenter Agreement.
NET INTEREST INCOME (EXPENSE) AND OTHER. Net interest income (expense) and
other increased to an overall net expense of $390,000 for the first quarter of
1999, compared to an overall net expense of $208,000 for the first quarter of
1998. This increase in 1999 was due primarily to an increase in interest expense
resulting from additional capital lease and non-lease financing obligations. The
overall increase in interest expense was partially offset by an increase in
interest income earned on higher cash, cash equivalents and short-term
investment balances.
INVESTMENT PORTFOLIO. Excite does not use derivative financial instruments in
its investment portfolio. Excite considers investments in highly liquid
instruments purchased with an original maturity of 90 days or less to be cash
equivalents. Excite places its investments in instruments that meet high credit
quality standards, as specified in Excite's investment policy guidelines; the
policy also limits the amount of credit exposure to any one issue, issuer, and
type of instrument. All of Excite's cash equivalents and short-term investments,
consisting principally of commercial paper, equity securities and governmental
securities, are classified as available-for-sale as of March 31, 1999. Excite
does not expect any material loss with respect to its investment portfolio.
The table below provides information about Excite's investment portfolio. For
investment securities, the table presents principal cash flows for the remainder
of 1999 and the related average interest rates. Excite maintains its cash and
cash equivalents in short-term investment-grade interest-bearing securities
until required for other purposes. Excite's investment policy requires that all
investments mature in one year or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
<TABLE>
<CAPTION>
FAIR VALUE AT
(IN THOUSANDS, EXCEPT INTEREST RATES) 1999 MARCH 31, 1999
------- ----------------
<S> <C> <C>
Cash Equivalents $ 281 $ 281
Average Interest Rate 4.00%
Investments $22,923 $22,934
Average Interest Rate 6.58%
Total Portfolio, excluding Equity Securities $23,204 $23,215
Average Interest Rate 6.32%
Equity Securities $ 4,400
</TABLE>
EQUITY SHARE OF LOSSES OF AFFILIATED COMPANY. In October 1997, Excite and
Itochu Corporation and certain affiliated entities, or collectively "Itochu",
entered into a joint venture agreement with respect to Excite's wholly-owned
subsidiary, Excite Japan, in order to provide Web-based information services to
the Japanese market. Excite currently holds, and intends to retain, a 50% equity
interest in Excite Japan. Excite's share of the losses of Excite Japan for the
first quarter of 1999 and 1998 was $576,000 and $479,000 respectively. Excite
expects that it will record increased losses from Excite Japan during the
remainder of 1999.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems, hardware 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. Excite's
business is dependent on the operation of numerous systems that may potentially
be adversely impacted by Year 2000 related problems. Those systems include,
among others:
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<PAGE> 18
- - hardware and software systems used by Excite to deliver services to its
consumers, including Excite's proprietary software systems as well as
hardware and software supplied by third parties;
- - communications networks, such as the Internet, which Excite depends on to
provide services;
- - the internal systems of Excite's consumers, users and suppliers;
- - the hardware and software systems used internally by Excite in the
management of its business;
- - and non-information technology systems and devices used by Excite in its
business, such as telephone and building systems.
STATE OF READINESS
Excite has implemented a six-phase plan to mitigate possible Year 2000
affects on Excite's business and systems. Excite has designated a Year 2000
project team to develop and implement that plan. This plan has executive
sponsorship and is regularly reviewed by senior management. This six-phase plan
includes the following:
- - Phase one, awareness: involves increasing company awareness by educating and
involving all appropriate levels of management regarding the need to address
Year 2000 issues.
- - Phase two, inventory: consists of identifying all of Excite's systems,
technology, services and relationships that may be impacted by Year 2000.
- - Phase three, assessment: involves determining Excite's current state of Year
2000 readiness for those areas identified in the inventory phase and
prioritizing areas that need to be addressed.
- - Phase four, remediation: consists of developing a plan and repairing,
replacing or retiring those systems identified as needing correction in the
assessment phase.
- - Phase five, validation: involves developing test plans, conducting tests and
analyzing the results of these tests to assure all key systems are
Year 2000 compliant.
- - Phase six, implementation and contingency planning: consists of moving
compliant systems back into the production environment and to assure
systems' Year 2000 status remains unaffected by subsequent changes. The
contingency plan includes developing Excite's response to failure of mission
critical systems, and other major risks related to Year 2000 compliance.
Excite has completed phase one, awareness and phase two, inventory and
currently is in phase three, assessment, which is scheduled to be substantially
complete by the end of the second quarter of 1999. Phase four, remediation, and
phase five, validation, are scheduled to be substantially complete by the third
quarter of 1999. Phase six, implementation and contingency planning, are
scheduled to be substantially complete early in the fourth quarter of 1999.
In addition to the systems used by Excite in its business, Excite utilizes
third-party equipment and software in the delivery of its services and in the
management of its business that may not be Year 2000 compliant. Excite has made
preliminary contacts with some of its key vendors, which have informally
indicated that their products are Year 2000 compliant. As part of phase two,
inventory, Excite made formal inquiries of other equipment and software vendors
and will continue to monitor vendor compliance. Failure of such third-party
equipment or software, or of non-information technology systems and devices used
by Excite, to operate properly with regard to the Year 2000 and thereafter may
require Excite to incur unanticipated expenses to remedy problems, which may
have a material adverse affect on Excite's financial condition.
Excite also relies, both domestically and internationally, upon various
vendors, governmental agencies, utility companies, telecommunication service
companies, including Internet service and online service providers, delivery
service companies and other service providers who are outside Excite's control.
Further, Excite has not fully determined the progress of its joint venture
partners and content partners in identifying and addressing systems that may
potentially be impacted by Year 2000 related problems. Failure of such parties
to operate properly with regards to the onset of Year 2000 and thereafter, may
have a material adverse affect on Excite's business.
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<PAGE> 19
CONTINGENCY PLAN
Excite's business planning for year 2000 is currently being implemented. The
plan includes the creation of contingency plans in the second half of 1999.
Excite currently has no contingency plans.
RISKS RELATED TO YEAR 2000 ISSUES
In the event any third parties cannot timely provide Excite with content,
products, services or systems that are Year 2000 ready or if there are
unremediated problems with Excite's proprietary systems, the content on Excite's
services, access to Excite's services, the ability to offer page views,
products, services and the ability to recognize or process sales may be
materially adversely affected. Further, consumers may experience outages, delays
and other difficulties due to system failures unrelated to Excite's services or
systems which may have a material adverse affect on the satisfaction of Excite's
consumers and advertisers. In addition, any failure of the equipment or systems
utilized by consumers of Excite's services as a result of failure to be Year
2000 compliant may result in decreased utilization of Excite's services and
adversely affect Excite's advertising relationships.
Any failure of Excite to address Year 2000 issues may have a material adverse
affect on Excite's business. These affects may include, but are not be
limited to:
- - a reduction in Excite's ability to provide services for Excite's customers
such as having specific content or services available;
- - a reduction in Excite's ability to deliver, track and measure Internet
advertisements;
- - outservice could experience outages, delays and other difficulties due to
system failures, which may make the Excite Network unavailable
for consumers.
Excite is also subject to external forces that generally affect similarly
situated business over which it has no control, such as possible interruptions
of utility or Internet-related data network services as a result of Year 2000
failures, any of which may have similar material affects.
Furthermore, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 readiness. These expenditures may result in reduced funds
available for Internet advertising or sponsorship of Internet services, which
may have a material adverse affect on Excite's financial condition.
The results of Excite's Year 2000 compliance plan's testing and
implementation phase activities and responses received from third-party vendors
and service providers will be taken into account in determining the nature and
extent of any contingency plans.
COSTS
While Year 2000 costs incurred by Excite have not been material, Excite does
expect to incur internal staff costs and expenditures to remedy any Year 2000
related problems. Based on current and partial information derived from
pre-inventory/assessment activities, Excite estimates for 1999 it will incur
approximately $2.5 million in support of its Year 2000 compliance initiative.
Excite does not expect to incur additional material operational costs such as
diverted employee time. Such costs have been and will be funded through current
operations or available lines of credit and Excite has not separately accounted
for these costs. There is risk that additional costs could be incurred, but
based on management's current knowledge it is unable to fully ascertain those
costs. Excite believes that its further research through inventory, assessment,
remediation and testing activities will enable it to determine the costs with
greater certainty.
The above discussion regarding costs, risks and estimated completion dates
for the Year 2000 is based on Excite's best estimates given information that is
currently available, and is subject to change.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 Excite had $72.7 million in unrestricted cash, cash
equivalents and short-term investments, an increase of $11.7 million from
December 31, 1998. Excite maintains its cash and cash
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<PAGE> 20
equivalents in short-term and medium-term investment-grade interest-bearing
securities until required for other purposes.
Excite's operating activities for the first quarter of 1999 and 1998 used
cash of $8.9 million and $5.7 million, respectively. The increased use of cash
in 1999 was mainly attributable to the increase in operating expenses and
increases in prepaids and other assets, accounts payable and related party
liabilities, reduced in part by decreases in accounts receivable and deferred
revenue. Excite has in the past, and may in the future, acquire businesses which
result in significant increases in headcount and overhead, as well as the
assumption and payment of additional liabilities, resulting in an increase in
the use of cash to support operations.
Investing activities for the first quarter of 1999 and 1998 used cash of
$21.4 million and $2.5 million, respectively. The increased use of cash in 1999
was attributable to purchases of short-term investments and purchases of
property and equipment. Capital expenditures have been, and future expenditures
are anticipated to be, primarily for facilities and equipment to support
expansion of Excite's operations and management information systems. Excite
expects that its capital expenditures will increase as its employee base grows.
As of March 31, 1999, Excite did not have any material commitments for capital
expenditures, although Excite anticipates that its planned purchases of capital
equipment and leasehold improvements will require additional expenditures during
the remainder of 1999, a portion of which may be financed through equipment
leases and bank borrowings.
Financing activities for the first quarter of 1999 and 1998 generated cash of
$30.3 million and $1.3 million, respectively. Financing activities for the first
quarter of 1999 primarily consisted of $19.1 million from the exercise of
warrants by Netscape, $11.4 million from the issuance of stock under Excite's
equity incentive plans and, to a lesser extent, net capital lease and other
financing of $5.8 million, offset by the repayment of the $6.0 million
outstanding line of credit. Financing activities for the first three months of
1998 primarily consisted of cash received from option exercises under Excite's
equity incentive plans, which was partially offset by the payments on capital
lease and other financing arrangements.
During 1997, Excite entered into and borrowed on a $6.0 million line of
credit. Excite repaid the outstanding balance of $6.0 million and canceled this
line of credit during the three months ended March 31, 1999. In March 1999,
Excite entered into a secured revolving credit facility totaling $20.0 million
with a letter of credit limit of $5.0 million, expiring in March 2000. There was
no outstanding balance under this credit facility at March 31, 1999. See Note 4
of Notes to Condensed Consolidated Financial Statements.
To date, Excite has had limited international operations and its exposure to
foreign currency exchange rate fluctuations has been minimal. Excite evaluates
its foreign currency exchange rate exposure on an
ongoing basis.
Excite 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. Excite may need to raise additional funds
sooner in order to fund more rapid expansion, to develop new or enhanced
services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of the stockholders of Excite will be reduced, stockholders
may experience additional dilution and such securities may have rights,
preferences or privileges senior to those of the holders of Excite's
Common Stock.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
LIMITED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY. Excite generated
only limited revenues prior to 1996. Accordingly, Excite has a limited operating
history upon which to evaluate its current business. In addition, Excite's
business model is evolving and relies substantially upon the sale of advertising
on the Web, which is a developing industry. Excite'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 Excite to maintain and increase levels of traffic on the
Excite Network;
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<PAGE> 21
- - 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 Excite to achieve higher cost per thousand impression, or
"CPM", rates for targeted advertising or to increase the percentage of its
advertising inventory sold;
- - the inability of Excite to derive sufficient revenues from the co-branded
services of Netcenter and the additional costs Excite expects to incur in
order to perform its obligations under the Netcenter Agreement;
- - the inability of Excite to effectively integrate the technology and
operations of acquired businesses or technologies with its operations,
increased operating expenses as a result of Excite's recent acquisitions;
- - the inability of Excite to expand its international operations, particularly
in light of Excite's limited operating experience in the
international market;
- - the failure by Excite to continue to develop and extend the Excite
Network brands;
- - the inability of Excite to meet minimum guaranteed impressions under
sponsorship agreements;
- - the inability of Excite to develop or acquire content for its services;
- - the inability of Excite to generate commerce-related revenues;
- - the inability of MatchLogic to continue to generate increased revenues;
- - the failure of Excite 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;
- - government regulation;
- - the inability of Excite to identify, attract, retain and motivate
qualified personnel;
- - and general economic conditions.
Excite may not be able to succeed in addressing such risks.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Excite's operating results have
varied on a quarterly basis during its limited operating history and Excite
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 Excite's control, including but not limited
to:
- - specific economic conditions relating to the Internet and the Web;
- - usage of the Web and demand for Excite and MatchLogic services;
- - 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 and the advertising budgeting cycles
of advertisers;
- - 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;
- - Excite's distribution relationships and acquisitions;
- - incurrence of costs relating to acquisitions of businesses or technologies;
introduction or enhancement of new or existing services by Excite and
its competitors;
- - market acceptance of new services;
- - delays in the introduction of services or enhancements by Excite or
its competitors;
- - capacity constraints and dependencies on computer infrastructure;
- - and general economic conditions.
Due to all of the foregoing factors, Excite's quarterly revenues and
operating results are difficult to forecast. In addition, MatchLogic has
recently increased revenues. Therefore, if MatchLogic continues to contribute a
significant percentage of Excite's total revenues, Excite's results for a
quarterly period may be significantly affected by MatchLogic's results during
that period. Excite 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 Excite's operating results will be below the
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<PAGE> 22
expectations of public market analysts and investors. In such event, the price
of Excite's Common Stock would be materially and adversely affected.
SIGNIFICANT RISKS ASSOCIATED WITH THE NETCENTER AGREEMENT. In March 1999, AOL
completed the acquisition of Netscape, with Netscape becoming a wholly-owned
subsidiary of AOL. In April 1999, Excite announced that it provided notice to
Netscape that it intends to terminate its agreement with respect to Netcenter as
a result of the acquisition of Netscape by AOL. This agreement will terminate on
June 17, 1999. The termination of the Netcenter Agreement has many substantial
risks and uncertainties including:
EXCITE WOULD NO LONGER RECEIVE REVENUES AND USERS FROM NETCENTER
Under the existing agreement, Excite receives revenues from the portions of
Netcenter that are co-branded with Excite. For the three months ended March 31,
1999 and the year ended December 31, 1998, these revenues did not exceed 10%
Excite's total revenues, Excite's revenues may be harmed if it does not
successfully generate revenues to replace those it was receiving from Netcenter.
In addition, under the existing agreement, Netscape directs users of Excite's
search and other services from Netcenter to Excite's Web sites. Excite's
revenues and user registrations may be harmed if it does not successfully
generate users to replace those it was receiving from Netcenter.
NETCENTER COMPETES WITH EXCITE
Most of the services offered on Netcenter compete directly with Excite's
services. Therefore, Excite faces additional competition for both users and
advertisers from Netcenter. If Excite and Netscape agree to renew or renegotiate
the existing agreement and Excite continues to devote significant resources
towards programming or selling and marketing the co-branded portions of
Netcenter, these efforts may harm Excite's ability to perform similar activities
for the Excite services. These efforts by Excite may also have the effect of
helping to support a competing business.
ACQUISITIONS MAY AFFECT EXCITE'S BUSINESS. Excite has in the past acquired,
and may in the future acquire, businesses, technologies, services, product
lines, content databases, or access to content databases. 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 Excite;
- - the potential disruption of Excite's business;
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<PAGE> 23
- - the diversion of resources, the incurrence of acquisition-related expenses,
the write-off or amortization of intangible assets, the assumption of
unknown liabilities;
- - and 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 may have
a material adverse affect on Excite's business.
EXCITE DEPENDS ON SPONSORSHIP AGREEMENTS FOR REVENUES. Excite derives a
substantial portion of its revenues from third parties to provide sponsored
services and placements on Excite's Web sites. These sponsorships typically last
for a longer period of time than traditional banner advertisement purchases. If
these sponsorship arrangements do not meet the advertisers' expectations as to
new customers or increased sales or brand awareness, the sponsors may not renew
their arrangements with Excite. If Excite does not renew its existing
sponsorships or obtain new sponsors, for any reason, its business would be
adversely affected.
Excite also typically grants exclusivity provisions to certain of its
sponsors. These provisions may prevent Excite from accepting additional sponsors
or advertisers with respect to all or a portion of a channel or across the
entire Excite Network. Certain of these provisions could also conflict with
similar provisions in At Home's sponsorship agreements.
RISKS ASSOCIATED WITH BANNER ADVERTISING. Excite derives a significant
portion of its revenues from the sale of banner advertisements on the Excite
Network. A majority of Excite'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 Excite 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 affect on
Excite's business.
EXCITE'S BUSINESS DEPENDS ON THE CONTINUED GROWTH IN INTERNET USE. Excite
operates in a new and rapidly evolving market. Excite's business may be
adversely affected if usage of the Internet or other online services does not
continue to grow. This growth could be hindered by a number of factors
including: the adequacy of the Internet's infrastructure to meet increased usage
demands; privacy and security concerns; and availability of cost-effective
service. Any of these issues could cause Internet's performance or level of
usage to decline.
RISKS ASSOCIATED WITH DEVELOPING WEB ADVERTISING MARKETS. 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.
Therefore the Web is an unproven medium for advertising-supported services.
Accordingly, Excite'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.
Excite's ability to generate significant advertising revenues will also
depend on, among other things, the development of a large base of users of
Excite's services possessing demographic characteristics attractive to
advertisers, the ability of Excite to accurately measure its user base and the
ability of Excite to develop or acquire effective advertising delivery and
measurement systems. In addition, MatchLogic's ability to generate revenues will
depend on the continued use of the Web for advertising. Many 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. The market for Web advertising may not
continue to emerge or become sustainable. If the market fails to develop or
develops more slowly than expected, Excite's business may 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
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<PAGE> 24
will develop sufficiently to support the Web as an effective advertising medium.
Advertisers may not continue to accept Excite's or other third-party
measurements of impressions, and such measurements may contain errors. In such
event, Excite's advertising revenues may be materially adversely affected, which
may have a material adverse affect on Excite's business.
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.
This 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 Excite'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 Excite's revenues. As
a result of these risks, Excite may not succeed in generating significant future
advertising revenues from Web-based advertising. The failure to do so may have a
material adverse affect on Excite's business.
Advertisers may also determine that banner advertising, is not an effective
or attractive advertising medium. Excite may not be able to 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 may have a material adverse affect
upon the commercial viability of Web advertising.
EXCITE WILL DEPEND ON A NUMBER OF THIRD PARTY RELATIONSHIPS. Excite will
depend on a number of third party relationships to provide users and content for
its services. Examples of some of these important relationships include:
- - relationships with respect to the positioning of Excite's service on Web
browsers or other high-traffic Web sites or;
- - arrangements under which third parties provide content for
Excite's services;
- - arrangements under which third parties provide services such as games
or e-mail;
- - and relationships with Internet and online service providers and other third
parties to provide communications infrastructure for Excite.
If Excite cannot renew these relationships on favorable terms, or if these
relationships terminate, Excite would have to enter into new relationships.
Excite may not be able to replace any of its important third party relationships
on reasonable terms, if at all. If Excite cannot replace any important
relationship, it could lose users or advertisers, which may adversely affect
Excite's revenues. Even if Excite replaces any relationships or enters into new
relationships, Excite may incur increased costs such as distribution license
fees or selling and marketing expenses in order to pay for these relationships.
These third parties may not regard their relationship with Excite as
important to their business. Therefore, they could elect to reassess their
commitment to their relationship with Excite in the future or develop
competitive services. Furthermore, the services offered by third parties with
whom Excite has relationships may not be successful. Therefore, Excite's
existing or future relationships may not result in increased user traffic
or revenues.
RISK OF CAPACITY CONSTRAINTS; SYSTEM FAILURES. Excite is dependent on its
ability to generate a high volume of traffic to the Excite Network. Accordingly,
the performance of the Excite Network is critical to Excite's reputation, its
ability to attract advertisers and to achieve market acceptance of the Excite
Network. Any system failure that causes interruptions in the availability of or
that increases response time of Excite's services could reduce user satisfaction
and traffic to the Excite Network and, if sustained or repeated, would reduce
the attractiveness of the Excite Network to advertisers and consumers. An
increase in the volume of searches conducted through the Excite Network could
strain the capacity of the software or hardware deployed by Excite, which could
lead to slower response time or system failures. In addition, as the amount of
Web pages and traffic on Excite's services increases, there can be no assurance
that the Excite Network will be able to scale proportionately. Excite is also
dependent upon timely feeds and downloads of information from content providers
and is dependent upon providers of Web browsers and on Internet and online
service providers and other Web site operators, which have experienced
significant outages in the past, for access to its network. In
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<PAGE> 25
the past, Web consumers have experienced outages, delays and other difficulties
due to system failures unrelated to Excite's systems and services. Additional
difficulties may also materially and adversely affect consumer and advertiser
satisfaction. To the extent that the capacity constraints described above are
not effectively addressed by Excite, such constraints may have a material
adverse affect on Excite's business.
Substantially all of Excite's communications hardware and certain of its
computer hardware operations are located at leased facilities in Redwood City,
California, an area susceptible to earthquakes. Excite has experienced system
failures or outages from time to time in the past, which have disrupted the
operation of Excite's services. A system failure at this location may adversely
affect the performance of Excite's services. These systems are also vulnerable
to damage from fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events. In the event that Excite seeks to
replicate its systems at other locations, it would face a number of technical
challenges, particularly with respect to database replication and the need to
constantly update distributed databases, Excite may not be able to successfully
address these challenges. Although Excite carries property and business
interruption insurance, its low coverage limits likely will not be adequate to
compensate Excite for all losses that may occur. Excite's servers are also
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays or cessations in service to
users of Excite's services. The occurrence of any of these risks may have a
material adverse affect on Excite's business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Investment Portfolio" in Item 2,
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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<PAGE> 26
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
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits.
The Exhibits listed in the accompanying Exhibit Index are filed as part
of this report.
(b) Reports on Form 8-K.
On January 20, 1999, the Company filed a Form 8-K under Item 5
announcing its financial results for the three and twelve months ended
December 31, 1998.
On January 25, 1999, the Company filed a Form 8-K under Item 5
announcing that it had entered into a definitive Agreement and Plan of
Reorganization with At Home Corporation and Countdown
Acquisition Corporation.
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<PAGE> 27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EXCITE, INC.
Date: May 17, 1999 By: /s/ Robert C. Hood
-----------------------------------
Robert C. Hood
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
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<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.01 Agreement and Plan of Reorganization dated as of January 19, 1999
between the Registrant, At Home Corporation and Countdown
Acquisition Corporation, which is incorporated herein by reference
to the Registrant's Report on Form 8-K (File No. 000-28064) filed
with the Commission on January 20, 1999.
10.01* Employment Agreement with Mark Stevens, Executive Vice President,
Business Affairs, dated as of January 15, 1999.
27.01 Financial Data Schedule for three months ended March 31, 1999
(EDGAR version only.)
</TABLE>
- -----------
* Indicates a management contract or compensatory plan or arrangement.
- 28 -
<PAGE> 1
EXHIBIT 10.01
[EXCITE LETTERHEAD]
January 15, 1999
TO MARK STEVENS
VIA HAND DELIVERY
Dear Mark:
I have been authorized to offer you the position of Executive Vice President,
Business Affairs, reporting directly to George Bell at the present time and,
after the consummation of the proposed Excite/@Home merger, reporting directly
to Tom Jermoluk.
Your base salary will be $200,000 per year, payable semi-monthly. Your 1999
performance bonus target percentage will be 35% of the base salary actually paid
to you by Excite in 1999; payment of your bonus and the ultimate percentage of
paid base salary used to calculate the bonus will be based upon achievement of
company, department and individual goals.
In addition to your salary and any bonuses, Excite's management will recommend
that the Compensation Committee of Excite's Board of Directors approve an
employee stock option grant of 250,000 shares of Excite's Common Stock. The
Compensation Committee will set the exercise price of the options at fair market
value, as determined by the Compensation Committee at the time of the grant. The
options will be subject to vesting at a rate of one-forty eighth (1/48) of the
full amount of the grant for each full succeeding month of your employment over
a period of four years. However, the recommended option grant described in this
letter is not a promise of compensation nor is it intended to create any
obligation on the part of Excite. Further details on Excite's Option Plan and
any specific grant to you will be provided upon approval of such grant by the
Compensation Committee.
In addition, as long as you remain a full-time employee of the company, Excite
will provide you with a $1,000,000 loan, 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 term of employment with
Excite. If you elect to exercise this loan, you must give Excite thirty (30)
days written notice. Your stock options will serve as collateral for the loan.
Unless repaid earlier by you as described below, the principal amount will be
due and payable as follows: (i) if you elect to end your employment with Excite
for any reason and any amount of the principal remains unpaid at the conclusion
of your employment with Excite, you will immediately repay the unpaid loan
principal balance, and (iii) if Excite elects to end your employment for any
reason and any amount of the principal remains unpaid at the conclusion of your
employment with Excite, your repayment of the unpaid loan principal balance will
be due within three (3) months thereafter. You may repay the principal balance
prior to the end of your employment with Excite as follows: (i) in cash or (ii)
on each 12-month anniversary of the loan date, one-fourth (1/4) of the unpaid
loan principal balance will be forgiven, except to the extent that you exercise
and sell any of your stock options during such year, in which case all post-tax
proceeds from any such sale will be immediately applied to the outstanding
principal amount until the principal amount is repaid in full. Interest on the
loan will be due and payable to Excite on the last day of each 12-month period
on any loan principal amount outstanding during that 12-month period.
<PAGE> 2
Mark Stevens
January 15, 1999
Page 2
You will be eligible to participate in Excite's group medical, dental, vision,
life insurance and 401(k) plan as offered to all full time employees. You will
also be eligible to participate in the employee stock purchase plan during the
next enrollment period. 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 an express
writing signed by the President of Excite.
As a comprehensive Internet search and navigation network, Excite is involved in
a wide variety of projects involving content from as many different sources on
the Internet as possible. As a result, Excite cannot guarantee employees that
they will not be exposed to some adult material, either through specific work
assignments or due to the presence of such material in the work environment.
Any representations contrary to those contained in this letter which may have
been made to you are superseded by this offer. If you accept this offer, the
terms described in this letter constitute the terms of your employment with
Excite.
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.
Please indicate your acceptance of this offer by signing below. You should
retain a copy of this offer letter for your records and return the original to
me on or before your first day of employment. This offer expires on January 15,
1999.
Let me close by reaffirming our belief that the skills and background you bring
to Excite will be instrumental to its future success. We look forward to you
joining Excite.
Sincerely,
/s/ Chris M. Vail
- -----------------
Chris M. Vail
General Counsel
Excite, Inc.
I accept the offer of employment with Excite:
Signed: /s/ Mark Stevens Date: January 15, 1999
---------------- ----------------
Mark Stevens
Start Date: January 15, 1999
<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 March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 45,407
<SECURITIES> 28,971
<RECEIVABLES> 33,210
<ALLOWANCES> (1,815)
<INVENTORY> 0
<CURRENT-ASSETS> 168,417
<PP&E> 67,665
<DEPRECIATION> (26,314)
<TOTAL-ASSETS> 247,036
<CURRENT-LIABILITIES> 47,618
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 167,114
<TOTAL-LIABILITY-AND-EQUITY> 247,036
<SALES> 0
<TOTAL-REVENUES> 54,085
<CGS> 0
<TOTAL-COSTS> 10,757
<OTHER-EXPENSES> 49,802
<LOSS-PROVISION> (549)
<INTEREST-EXPENSE> (863)
<INCOME-PRETAX> (7,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,440)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
