<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): MAY 28, 1999
AT HOME CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE
----------------------------------------------
(State or other jurisdiction of incorporation)
000-22697 77-0408542
- ----------------------- ---------------------
(Commission (IRS Employer
File Number) Identification No.)
450 BROADWAY STREET, REDWOOD CITY, CA 94063
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(650) 569-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
On June 14, 1999, At Home Corporation ("EXCITE@HOME") filed a
Form 8-K to report the completion of its acquisition of Excite,
Inc. ("EXCITE") on May 28, 1999. Excite@Home indicated that it
would file the financial information required by Item 7 of Form
8-K no later than the date required by this item. Excite@Home is
filing this Amendment No. 1 to provide this financial
information.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following documents appear as Exhibit 99.03 to this current
report on Form 8-K/A and are incorporated into this document by
reference:
(i) Excite, Inc. unaudited condensed consolidated financial
statements and notes thereto for the three months ended
March 31, 1999; and
(ii) Excite, Inc. audited consolidated financial statements
and notes thereto for the year ended December 31, 1998.
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<PAGE> 3
(b) PRO FORMA FINANCIAL INFORMATION.
The following documents appear as Exhibit 99.04 to this current
report on Form 8-K/A and are incorporated into this document by
reference:
(i) At Home unaudited pro forma condensed combined
consolidated balance sheets as of March 31, 1999;
(ii) At Home unaudited pro forma condensed combined
consolidated statements of operations for the three months
ended March 31, 1999;
(iii) At Home unaudited pro forma condensed combined
consolidated statements of operations for the year ended
December 31, 1998; and
(iv) Notes to the unaudited pro forma condensed combined
consolidated financial information.
(c) EXHIBITS.
<TABLE>
<S> <C>
23.01 Consent of Ernst & Young LLP, Independent Auditors.
99.03 Financial statements of Excite, Inc. for the three months
ended March 31, 1999 and for the year ended December 31, 1998.
99.04 Unaudited pro forma condensed combined consolidated financial
information.
</TABLE>
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<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 AT HOME CORPORATION
By: /s/ DAVID G. PINE
-----------------------------------
David G. Pine,
Vice President, General Counsel
and Secretary
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<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
23.01 Consent of Ernst & Young LLP, Independent Auditors.
99.03 Financial statements of Excite, Inc. for the three months
ended March 31, 1999 and for the year ended December 31, 1998.
99.04 Unaudited pro forma condensed combined consolidated financial
information.
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Form 8-K/A of At Home
Corporation dated August 12, 1999, of our report dated January 19, 1999 with
respect to the consolidated financial statements of Excite, Inc. included in its
Annual Report (Form 10-K/A) for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Palo Alto, California
August 12, 1999
<PAGE> 1
EXHIBIT 99.03
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.
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<PAGE> 2
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.
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<PAGE> 3
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.
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<PAGE> 4
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> 5
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> 6
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.
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<PAGE> 7
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.
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<PAGE> 8
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.
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<PAGE> 9
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Excite, Inc.
We have audited the accompanying consolidated balance sheets of Excite,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Excite, Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 1, the consolidated financial statements of Excite,
Inc. have been restated.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 19, 1999 (March 22, 1999 as to Note 1 - Summary of Significant
Accounting Policies, paragraph 4 and Note 2 - Business Combinations and
Purchased Product Rights, paragraph 3 and 6).
11
<PAGE> 10
EXCITE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
(RESTATED-
SEE NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,366 $ 16,073
Short-term investments 15,681 17,193
Restricted investments 558 302
Accounts receivable, net of allowance for doubtful accounts
of $1,422 in 1998 and $1,120 in 1997 36,592 21,397
Prepaid Netscape distribution costs and trademarks, current portion 45,473 --
Other prepaid and current assets 4,848 2,149
--------- ---------
Total current assets 148,518 57,114
Property and equipment, net 35,937 15,581
Investment in affiliated company 2,243 --
Prepaid Netscape distribution costs and trademarks 20,954 --
Intangible assets, net 8,792 1,771
Other assets 4,229 4,690
--------- ---------
Total assets $ 220,673 $ 79,156
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable $ 6,100 $ 6,589
Accounts payable 13,079 5,838
Accrued compensation 9,038 4,794
Deferred revenue 2,843 4,588
Capital lease obligations, current portion 7,133 3,178
Non-lease financing, current portion 1,531 1,176
Other equipment financing 7,481 --
Related party liabilities 5,092 1,575
Other accrued liabilities 6,741 5,279
--------- ---------
Total current liabilities 59,038 33,017
Capital lease obligations 11,668 3,076
Non-lease financing 1,568 1,613
Convertible note 5,000 5,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized - 4,000 shares
issuable in series
Issuable and outstanding - none and 2,702 shares at
December 31, 1998 and 1997, respectively 813 12,948
Common stock, $0.001 par value
Authorized - 100,000 shares
Issued and outstanding - 52,660 and 39,800 shares at
December 31, 1998 and 1997, respectively 52 39
Additional paid-in-capital ("APIC") 277,759 122,966
Deferred compensation (907) (1,440)
Unrealized gain on available-for-sale securities 1,319 15
Accumulated deficit (135,637) (98,078)
--------- ---------
Total stockholders' equity 143,399 36,450
--------- ---------
Total liabilities and stockholders' equity $ 220,673 $ 79,156
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
12
<PAGE> 11
EXCITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
--------- -------- --------
(RESTATED - SEE NOTE 1)
<S> <C> <C> <C>
Revenues(1) $155,360 $ 55,826 $ 14,823
Cost of revenues:
Hosting costs 16,161 8,647 3,296
Royalties and other cost of revenues 13,325 4,740 687
Amortization of purchased technology -- 8,214 186
--------- -------- --------
Total cost of revenues 29,486 21,601 4,169
--------- -------- --------
Gross profit 125,874 34,225 10,654
Operating expenses:
Research and development 29,557 18,200 8,263
Sales and marketing 63,074 34,311 21,358
Distribution license fees and data acquisition costs 21,723 9,365 11,878
General and administrative 16,932 12,218 7,755
In-process technology 6,200 2,346 3,500
Merger and acquisition related costs, including
amortization of goodwill and other purchased intangibles 4,903 3,989 3,134
Amortization of prepaid Netscape service 17,673 -- --
--------- -------- --------
Total operating expenses 160,062 80,429 55,888
--------- -------- --------
Operating loss (34,188) (46,204) (45,234)
Interest income 1,625 1,317 1,464
Interest expense and other (2,862) (1,450) (409)
Equity share of losses of affiliated company (2,134) (477) --
--------- -------- --------
Net loss $(37,559) $(46,814) $(44,179)
========= ======== ========
Basic and diluted net loss per share $ (0.79) $ (1.57) $ (2.37)
========= ======== ========
Shares used in computing net loss per share 47,475 29,729 18,648
========= ======== ========
</TABLE>
(1) Includes $4.8 million from America Online and $3.5 million from another
related party for the year ended December 31, 1998. See Note 12.
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE> 12
EXCITE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK AND APIC DEFERRED
SHARES AMOUNT SHARES AMOUNT COMPENSATION
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 -- $ -- 4,896 $ 3,530 $ (631)
Net loss -- -- -- -- --
Unrealized loss on available-for-sale investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of common stock for cash -- -- 566 1,412 --
Notes payable conversions -- -- 174 400 --
Issuance of warrants in connection with
distribution agreement -- -- -- 1,625 --
Issuance of shares, note payable conversion and
exercise of outstanding warrants in connection
with the Company's IPO, net of issuance costs
of $3,682 -- -- 7,302 36,418 --
Conversion of redeemable preferred stock in
in connection with the Company's IPO -- -- 10,648 16,129 --
Issuance of common stock under employee plans -- -- 600 375 --
Amortization of deferred compensation, net
of cancellations -- -- -- 7 243
Other equity transactions of acquired companies 320 1,890 861 7 --
Issuance of common and preferred stock in
connection with asset purchase agreements 1,950 15,816 30 103 --
------ --------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1996 (RESTATED) 2,270 17,706 25,077 60,006 (388)
Net loss -- -- -- -- --
Unrealized gain on available-for-sale investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of common stock for cash, net of
issuance costs of $800 -- -- 5,800 38,350 --
Conversion of common stock warrant to
preferred stock warrant -- 1,625 -- (1,625) --
Exercise of outstanding warrants 229 -- 86 -- --
Issuance of common stock under employee plans -- -- 1,184 2,319 --
Compensation expense from accelerated deferred
compensation and stock option vesting -- -- -- 1,658 --
Deferred compensation related to stock options,
net of amortization and cancellations -- -- -- 1,407 (1,052)
Acquisition of Netbot, Inc.:
Conversion of preferred stock to common stock (409) (3,730) 820 3,730 --
Issuance of preferred stock by acquired companies
for cash, net of issuance costs of $115 1,772 6,385 -- -- --
Other equity transactions of acquired company 1,019 7,590 2,475 532 --
Conversion of preferred stock to common stock (2,179) (16,628) 4,358 16,628 --
------ --------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1997 (RESTATED) 2,702 12,948 39,800 123,005 (1,440)
Net loss -- -- -- -- --
Unrealized gain on available-for-sale investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
Acquisition of MatchLogic, Inc.:
Conversion of preferred stock to common stock (2,291) (8,705) 4,582 8,705 --
Acquisition of Classifieds2000, Inc.:
Conversion of preferred stock to common stock (411) (3,430) 822 3,430 --
Acquisition of Throw, Inc.:
Issuance of common stock -- -- 330 16,242 --
Issuance of common stock for cash, net of
issuance costs of $650 -- -- 2,870 84,331 --
Issuance of warrants -- -- -- 19,876 --
Exercise of outstanding warrants -- -- 432 6,130 --
Issuance of common stock under employee plans -- -- 3,774 13,269 --
Compensation expense from accelerated deferred
compensation and stock option vesting -- -- -- 298 --
Amortization of deferred compensation, net
of cancellations -- -- -- -- 533
Issuance of common stock for equity securities -- -- 50 2,525 --
------ --------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1998 -- $ 813 52,660 $277,811 $ (907)
====== ========= ====== ========= =========
</TABLE>
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE
INCOME/(LOSS) DEFICIT TOTAL
------------- ------- -----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 152 $ (7,085) $ (4,034)
---------
Net loss -- (44,179) (44,179)
Unrealized loss on available-for-sale investments (326) -- (326)
---------
Comprehensive loss -- -- (44,505)
---------
Issuance of common stock for cash -- -- 1,412
Notes payable conversions -- -- 400
Issuance of warrants in connection with
distribution agreement -- -- 1,625
Issuance of shares, note payable conversion and
exercise of outstanding warrants in connection
with the Company's IPO, net of issuance costs
of $3,682 -- -- 36,418
Conversion of redeemable preferred stock in
in connection with the Company's IPO -- -- 16,129
Issuance of common stock under employee plans -- -- 375
Amortization of deferred compensation, net
of cancellations -- -- 250
Other equity transactions of acquired companies -- -- 1,897
Issuance of common and preferred stock in
connection with asset purchase agreements -- -- 15,919
--------- --------- ---------
BALANCE AT DECEMBER 31, 1996 (RESTATED) (174) (51,264) 25,886
---------
Net loss -- (46,814) (46,814)
Unrealized gain on available-for-sale investments 189 -- 189
---------
Comprehensive loss -- -- (46,625)
---------
Issuance of common stock for cash, net of
issuance costs of $800 -- -- 38,350
Conversion of common stock warrant to
preferred stock warrant -- -- --
Exercise of outstanding warrants -- -- --
Issuance of common stock under employee plans -- -- 2,319
Compensation expense from accelerated deferred
compensation and stock option vesting -- -- 1,658
Deferred compensation related to stock options,
net of amortization and cancellations -- -- 355
Acquisition of Netbot, Inc.:
Conversion of preferred stock to common stock -- -- --
Issuance of preferred stock by acquired companies
for cash, net of issuance costs of $115 -- -- 6,385
Other equity transactions of acquired company -- -- 8,122
Conversion of preferred stock to common stock -- -- --
--------- --------- ---------
BALANCE AT DECEMBER 31, 1997 (RESTATED) 15 (98,078) 36,450
---------
Net loss -- (37,559) (37,559)
Unrealized gain on available-for-sale investments 1,304 -- 1,304
---------
Comprehensive loss -- -- (36,255)
Acquisition of MatchLogic, Inc.:
Conversion of preferred stock to common stock -- -- --
Acquisition of Classifieds2000, Inc.:
Conversion of preferred stock to common stock -- -- --
Acquisition of Throw, Inc.:
Issuance of common stock -- -- 16,242
Issuance of common stock for cash, net of
issuance costs of $650 -- -- 84,331
Issuance of warrants -- -- 19,876
Exercise of outstanding warrants -- -- 6,130
Issuance of common stock under employee plans -- -- 13,269
Compensation expense from accelerated deferred
compensation and stock option vesting -- -- 298
Amortization of deferred compensation, net
of cancellations -- -- 533
Issuance of common stock for equity securities -- -- 2,525
--------- --------- ---------
BALANCE AT DECEMBER 31, 1998 $ 1,319 $(135,637) $143,399
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE> 13
EXCITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED - SEE NOTE 1)
<S> <C> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net loss $(37,559) $(46,814) $(44,179)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 533 355 243
Compensation expense from accelerated deferred compensation
charges and stock option vesting 298 1,658 --
Depreciation 12,911 6,438 2,189
Issuance of warrants -- 55 1,625
Amortization of intangibles 3,780 10,670 954
In-process technology 6,200 2,346 3,500
Amortization of Netscape service, distribution costs and trademarks 23,451 -- --
Loss on disposal of property and equipment 90 -- 96
Provision for loan impairment -- -- 629
Equity share of losses in affiliated company 2,134 477 --
Changes in assets and liabilities:
Accounts receivable (15,195) (18,044) (2,970)
Prepaid Netscape distribution costs and trademarks (70,000) -- --
Prepaid expenses and other current assets (2,929) (3,819) (895)
Other assets 461 (4,221) (896)
Accounts payable 7,077 (1,067) 5,721
Accrued compensation 3,869 3,904 454
Related party liabilities 3,692 1,401 --
Other accrued liabilities 7,101 2,336 6,512
--------- --------- ---------
Net cash used by operating activities (54,086) (44,325) (27,017)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (16,774) (7,347) (1,109)
Proceeds from disposal of property and equipment 186 -- --
Purchases of investments (26,266) (48,182) (49,811)
Sales and maturities of investments 31,353 49,235 31,936
Investment in affiliated company (4,377) -- --
Notes and advances to Novo MediaGroup, Inc. -- -- (629)
--------- --------- ---------
Net cash used in investing activities (15,878) (6,294) (19,613)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Payments on capital lease and other financing obligations (3,904) (4,105) (1,787)
Net (payments) proceeds on bank line of credit and other notes payable (564) 5,878 1,064
Proceeds from issuance of convertible note -- 5,000 --
Proceeds from sale of redeemable convertible preferred stock -- 13,975 14,172
Proceeds from issuance of common stock 103,725 41,146 37,219
--------- --------- ---------
Net cash provided by financing activities 99,257 61,894 50,668
--------- --------- ---------
Net increase in cash and cash equivalents 29,293 11,275 4,038
Cash and cash equivalents at beginning of period 16,073 4,798 760
--------- --------- ---------
Cash and cash equivalents at end of period $ 45,366 $ 16,073 $ 4,798
========= ========= =========
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible preferred stock to common stock $ 12,135 $ 20,358 $ 16,129
Property and equipment acquired under capital leases and other non-
lease financing $ 16,763 $ 7,400 $ 7,652
Preferred stock issued by acquired company for ownership interest $ -- $ 1,720 $ --
Conversion of notes payable to common stock $ -- $ -- $ 1,400
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 2,725 $ 1,050 $ 379
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE> 14
EXCITE, INC.
NOTES TO 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), WebCrawler (www.webcrawler.com) and Classifieds2000
(www.classifieds2000.com) brands, which provide a gateway to the World Wide Web
(the "Web") that organizes, aggregates and delivers information to meet the
needs of individual consumers. Designed to help consumers navigate the Web, the
Excite Network contains a suite of specialized information services, organized
under numerous topical channels which combine proprietary search technology,
editorial Web reviews, aggregated content from third parties, bulletin boards,
chat and other community features and personalization capabilities. Localized
versions of Excite are available in Australia, China, France, Germany, Italy,
Japan, Sweden, the Netherlands and the United Kingdom. The Company conducts its
business within two industry segments, including the selling of banner and
sponsorship advertising on the Excite Network to customers in various
industries, and, through the merger with MatchLogic, Inc. ("MatchLogic"), ad
serving and targeting services. See Note 2 and "Risk Factors that May Affect
Future Results - Acquisition Strategy; Integration of Past and Future
Acquisitions."
The Company has incurred operating losses to date and incurred a net loss of
approximately $37.6 million for the year ended December 31, 1998. Management
believes that available resources will provide sufficient funding to enable the
Company to meet its obligations through at least December 31, 1999. If
anticipated operating results are not achieved, management has the intent and
believes it has the ability to delay or reduce expenditures so as not to require
additional financial resources if such resources were not available.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated. The consolidated financial statements have been restated for
all pooling of interests. See Note 2.
Restatement of Financial Statements
In April 1998 and November 1997, the Company acquired Classifieds2000 and
Netbot in a transaction accounted for as a pooling of interests (See Note 2).
The financial statements prior to the date of acquisition were not restated as
Excite had determined that the results of operations and financial position of
Netbot and Classifieds2000 were not material to the Company's consolidated
financial statements in any period. After discussions with the Staff of the
Securities and Exchange Commission, the Company revised the original accounting
for these transactions and restated its consolidated financial statements for
1998, 1997 and 1996 to reflect the combined results of operations and financial
position of the Company and both Netbot and Classifieds2000. These financial
statements reflect the impact of this restatement.
The effect of this restatement on previously reported consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
--------------------------- ---------------------------- ---------------------------
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (36,974) $ (37,559) $ (41,392) $ (46,814) $ (43,117) $ (44,179)
Basic and diluted net loss per share $ (0.78) $ (0.79) $ (1.47) $ (1.57) $ (2.38) $ (2.37)
</TABLE>
Foreign Currency
Exchange gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved are included in other
expense. Such gains and losses have been insignificant in all years to date. To
date the Company has entered into no foreign currency forward exchange contracts
or other such derivative instruments.
16
<PAGE> 15
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.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, does not require collateral on accounts receivable.
When required, the Company maintains allowances for credit losses and such
losses have been within management's expectations and have not been material in
any year. The Company's services are provided to customers in several
industries, primarily in North America.
No customers accounted for 10% or more of total revenues for the year ended
December 31, 1998 and 1997. One customer accounted for approximately 12% of
total revenues for the year ended December 31, 1996.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization, which includes the amortization of assets recorded under
capital leases.
Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets (generally one
to five years.) Equipment purchased under capital leases is amortized on a
straight-line basis over the lesser of the estimated useful life of the asset or
the lease term. Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
-------- -------
<S> <C> <C>
Computer equipment and internal use software $ 43,746 $18,639
Furniture and fixtures 6,581 3,006
Leasehold improvements 7,125 2,607
-------- -------
57,452 24,252
Less: accumulated depreciation and amortization (21,515) (8,671)
-------- -------
$ 35,937 $15,581
======== =======
</TABLE>
Intangible Assets
Intangible assets consist primarily of goodwill, developed technology,
distribution rights, trademarks, bookmarks and trade names, and are being
amortized generally over periods ranging from four months to three years.
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in various acquisitions.
These purchased intangibles and goodwill relate to the acquisitions of certain
assets from other companies. See Note 2.
<TABLE>
<CAPTION>
LIFE IN DECEMBER 31,
(IN THOUSANDS) MONTHS 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Goodwill 36 $ 11,163 $ 362
Trademarks, trade names and other 24-36 2,346 2,346
Developed technology 13 8,400 8,400
Operating agreement 4 1,200 1,200
Distribution agreement 24 500 500
-------- --------
23,609 12,808
Less: accumulated amortization (14,817) (11,037)
-------- --------
$ 8,792 $ 1,771
======== ========
</TABLE>
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. To date no such impairment has been
indicated. Should there be an impairment in the future, the Company will
recognize the amount of the impairment based on discounted expected future cash
flows from the impaired assets. The cash
17
<PAGE> 16
flow estimates that will be used will contain management's best estimates, using
appropriate and customary assumptions and projections at the time.
Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments,
including accounts receivable and accrued liabilities, approximate fair value
because of their short maturities. Because the interest rates on the Company's
notes payable and convertible debt are adjusted periodically to reflect market
rates, the fair value of these instruments approximates their carrying amounts.
The carrying amount of the Company's capital lease and other equipment financing
obligations approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at December 31, 1998. See Note 3.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. The Company has
recently entered into a number of longer-term advertising and commerce
sponsorship agreements. These agreements generally involve more integration with
Excite services and provide for more varied sources of revenue to Excite over
the term of the agreements, which average between 2 to 3 years. Under these
agreements, Excite earns fees for initial programming, initiation of service and
access to the Excite Network, and for generating impressions, which in some
instances are guaranteed. These revenues, as well as contract and other
revenues, are generally recognized ratably over the term of the agreements,
provided that the Company does not have any significant remaining obligations
and collection of the resulting receivable is probable. To the extent that
impression deliveries are falling short of the guarantees, the Company defers
recognition of the corresponding revenues. The terms of a number of these
agreements provide that revenues from advertising and electronic commerce
transactions are to be shared between the advertiser and Excite as realized.
Advertising
Costs related to advertising are expensed as incurred. Advertising expense
was approximately $13.9 million, $7.4 million and $10.4 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
Per Share Data
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options, warrants,
convertible securities and unvested securities issued subject to repurchase.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been restated to conform to the SFAS No. 128 requirements. 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.
See Notes 7 and 8 for further information on these securities. The following
table sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss $(37,559) $(46,814) $(44,179)
======== ======== ========
Weighted average shares outstanding 48,180 30,862 19,868
Weighted average common shares issued subject
to repurchase agreements (705) (1,133) (1,220)
-------- -------- --------
Shares used to compute basic and diluted net loss
per share 47,475 29,729 18,648
======== ======== ========
Basic and diluted net loss per share $ (0.79) $ (1.57) $ (2.37)
======== ======== ========
</TABLE>
Stock Split
In June 1998, the Board of Directors of the Company declared a two-for-one
stock split which was in the form of a 100% stock dividend. The dividend was
paid on July 20, 1998 to stockholders of record on July 6, 1998. All of the
Common Stock share and per share data have been adjusted to reflect this stock
split.
Reclassifications
18
<PAGE> 17
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 as of
December 31, 1997 and has presented comprehensive income for all periods
presented in the Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency).
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The Company adopted SFAS No.
131 as of December 31, 1997. Previously reported information has been restated
to reflect the addition of an operating segment resulting from the merger with
MatchLogic in 1998. See Note 2.
In March 1998, the AICPA issued 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 adoption of SOP 98-1 is not expected to have a
material impact on the Company's consolidated financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 for the year ended December 31, 1999. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on its consolidated financial statements because the
Company does not currently hold any derivative instruments.
2. BUSINESS COMBINATIONS AND PURCHASED PRODUCT RIGHTS
During the three years ended December 31, 1998, Excite completed the
following acquisitions:
<TABLE>
<CAPTION>
SHARES OF EXCITE
SHARES OF SERIES E SHARES OF
EXCITE CONVERTIBLE OPTIONS AND
COMMON PREFERRED STOCK WARRANTS
COMPANY OR TECHNOLOGY ACQUIRED DATE ACQUIRED STOCK ISSUED ISSUED ASSUMED
- ------------------------------ ------------- ------------ --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
McKinley August 1996 1,700 -- 28
AOL's WebCrawler November 1996 -- 1,950 --
Netbot November 1997 1,708 -- 422
MatchLogic February 1998 6,122 -- 1,049
Classifieds2000 April 1998 1,730 -- 50
Throw April 1998 330 -- 318
</TABLE>
In August 1996, the Company acquired McKinley, the creator of the Magellan
Internet Guide, in a transaction accounted for as a pooling of interests. The
Company incurred approximately $2.2 million in merger related expenses,
including $1.0 million for legal and other professional fees, $901,000 for
personnel severance and outplacement expenses and $345,000 for termination of
distribution contracts and discontinuation of duplicate operations and
facilities. All consolidated financial information for 1996 was restated to
reflect the combined operations of the Company and McKinley.
19
<PAGE> 18
In November 1996, the Company entered into a series of agreements with AOL, a
provider of Internet online services, whereby a co-branded version of Excite
became the exclusive Internet search and directory service for AOL. Under these
agreements, Excite acquired AOL's WebCrawler search and directory technology
assets. The series of agreements were accounted for as the acquisition of rights
to developed and in-process technologies and distribution rights. The intangible
assets were recorded based on their appraised fair values as of December 1,
1996. Of the total purchase price, $3.5 million was allocated to purchased
in-process technology and the remaining purchase price of approximately $12.6
million was capitalized as trademarks, distribution rights, bookmarks, trade
names, goodwill and other. The amount of the purchase price allocated to
purchased in-process technology was charged to the Company's operations as of
December 1, 1996.
In November 1997, the Company acquired Netbot, a private company and
developer of advanced search technology utilized for electronic commerce, in a
transaction accounted for as a pooling of interests. The Company incurred
approximately $1.5 million in merger related expenses, including $1.3 million
for accelerated deferred compensation charges and $217,000 in professional fees
and other expenses. All consolidated financial information has been restated to
reflect the combined operations of the Company and Netbot.
In February 1998, the Company acquired MatchLogic, a private company
providing advertisers and agencies with Internet advertising management services
that began operations in May 1997, in a transaction accounted for as a pooling
of interests. In connection with the acquisition of MatchLogic, the Company
incurred approximately $700,000 in merger related expenses primarily for legal
and other professional fees. All consolidated financial information has been
restated to reflect the combined operations of the Company and MatchLogic.
Separate results of the combined entities through the periods preceding the
merger (February 2, 1998) are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEARS ENDED DECEMBER 31,
FEBRUARY 2, ---------------------------
(IN THOUSANDS) 1998 1997 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Excite $ 6,016 $51,863 $14,823
MatchLogic 376 3,963 --
-------- -------- --------
$ 6,392 $55,826 $14,823
======== ======== ========
Net Loss:
Excite $(1,851) $(35,581) $(44,179)
MatchLogic (1,388) (11,233) --
-------- -------- --------
$(3,239) $(46,814) $(44,179)
======== ======== ========
</TABLE>
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
In April 1998, the Company acquired Classifieds2000, a provider of Web-based
classified ads that began operations in July 1996, in a transaction accounted
for as a pooling of interests. In connection with the acquisition of
Classifieds2000, the Company incurred approximately $743,000 in merger-related
expenses primarily for legal and other professional fees. All consolidated
financial information has been restated to reflect the combined operations of
the Company and Classifieds2000.
Separate results of the combined entities through the periods preceding the
merger (April 1, 1998) are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEARS ENDED DECEMBER 31,
APRIL 1, --------------------------
(IN THOUSANDS) 1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Excite $23,001 $54,280 $14,757
Classifieds2000 1,255 1,546 66
-------- -------- --------
$24,256 $55,826 $14,823
======== ======== ========
Net Loss:
Excite $(6,959) $(45,169) $(43,900)
Classifieds2000 (584) (1,645) (279)
-------- -------- --------
$(7,543) $(46,814) $(44,179)
======== ======== ========
</TABLE>
20
<PAGE> 19
There were no significant inter-company transactions between the two
companies and no significant conforming accounting adjustments.
In April 1998, the Company acquired Throw, a development stage company
focused on community products that began operations in April 1996, in a
transaction accounted for as a purchase. The total purchase price was allocated
to the acquired assets and liabilities based on their estimated fair values as
of the date of the acquisition. This included an original purchase price
allocation of approximately $800,000 to other intangibles assets, which were
being amortized on a straight-line basis through 1999 and approximately, $16.2
million was allocated to in-process technology and charged to operations at the
time of acquisition. Accordingly, the Company expensed this amount in its
originally reported June 30, 1998 operating results.
In response to recent Securities and Exchange Commission ("SEC")
interpretative guidance surrounding acquisition-related in-process research and
development, the Company has revised the original accounting for the purchase
price allocation related to the 1998 acquisition of Throw and the related
amortization of intangibles. This adjustment decreased the amount previously
allocated to in-process technology by $10.0 million, which has been capitalized
as goodwill and will be amortized on a straight-line basis over three years. As
a result, in the second quarter of 1998, the Company allocated $6.2 million to
in-process technology, and during the year ended December 31, 1998, the Company
amortized a total of $2.7 million of goodwill to operations. Pro-forma results
of operations have not been presented because the effect of this acquisition was
not material to the Company's consolidated financial position, results of
operations, and cash flows.
To determine the value of the in-process research and development, the
Company considered, among other factors, the state of development of each
project, the time and cost needed to complete each project, expected income, and
associated risks which included the inherent difficulties and uncertainties in
completing the project and thereby achieving technological feasibility and risks
related to the viability of and potential changes to future target markets. This
analysis results in amounts assigned to in-process research and development
projects that had not yet reached technological feasibility and does not have
alternative future uses.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers investments in highly liquid instruments purchased with
an original maturity of 90 days or less to be cash equivalents. All of the
Company's cash equivalents and short-term investments, consisting principally of
commercial paper, equity securities and government securities, are classified as
available-for-sale as of December 31, 1998. These securities are recorded at
fair market value. Unrealized gains and losses on these investments are included
in stockholders' equity. The cost of securities sold is based on specific
identification. There were no material gross realized gains or losses from sales
of securities in the periods presented. The fair value of investments is based
on quoted market prices at December 31, 1998 and 1997. The fair value of
investments presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. All available-for-sale
investments generally mature in one year or less.
The estimated fair value of cash, cash equivalents and short-term investments
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash $33,977 $5,995
Money market funds 126 62
Commercial paper -- 1,958
U.S. Government securities 11,263 8,058
------- -------
$45,366 $16,073
======= =======
Short-term investments:
Commercial paper $3,104 $7,791
Equity securities 4,411 --
U.S. Government securities 8,166 9,402
------- -------
$15,681 $17,193
======= =======
Restricted investments:
Cash $ 223 $ --
Certificates of deposit 335 --
Equity securities -- 302
------- -------
$ 558 $ 302
======= =======
</TABLE>
21
<PAGE> 20
The restricted cash at December 31, 1998 is being held for tenant
improvements at the Company's corporate facilities in Redwood City, California.
The restricted certificates of deposit at December 31, 1998 includes a $250,000
security deposit for one of the Company's facilities. The restricted investment
in common stock at December 31, 1997 was being held as collateral by a financial
institution against the Company's line of credit borrowings. See Note 4.
The net unrealized gains for the year ended December 31, 1998 was $1.3
million, which was attributable to equity securities that the Company held
during 1998. The net unrealized gains for the year ended December 31, 1997, were
not material. At December 31, 1998, the fair values of cash and cash
equivalents, available-for-sale investments and restricted investments
approximated cost. The realized gains and losses on sales of each type of
security for the years ended December 31, 1998 and 1997, were not material. For
the purpose of determining gross realized gains and losses, the cost of the
securities sold is based upon specific identification.
4. BORROWINGS UNDER BANK LINE OF CREDIT AND OTHER NOTES PAYABLE
Borrowings under bank line of credit and other notes payable, all of which
are current liabilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1998 1997
------ ------
<S> <C> <C>
Borrowings under bank line of credit $6,000 $6,000
Borrowings under credit facility loan -- 489
Other notes payable 100 100
------ ------
$6,100 $6,589
====== ======
</TABLE>
In March 1997, the Company entered into and borrowed on a $6.0 million line
of credit. This line of credit bears interest at the bank's prime rate
(approximately 7.75% at December 31, 1998) and is secured by substantially all
of the Company's assets. This line of credit agreement also contains certain
financial covenants, including minimum requirements for tangible net worth,
quick ratio and accounts receivable balances, as well as prohibiting the
declaration and payment of cash dividends on capital stock. The Company was in
compliance with these covenants at December 31, 1998. This line of credit
expired in 1998 and the Company has subsequently received extensions through
February 15, 1999, which is the current maturity of the note. The Company is
currently negotiating a new line of credit.
In connection with the Company's acquisition of Classifieds2000, the Company
assumed $489,000 outstanding on a $500,000 credit facility loan at an interest
rate of 9.5%. The outstanding balance under this credit facility loan was paid
in full and canceled in 1998.
5. COMMITMENTS
Capital Leases
The Company leases certain computer equipment and office furniture under
capital leases. The leases generally provide for the Company to pay taxes,
maintenance and insurance. Most of the leases contain purchase options as well
as renewal provisions at the end of the initial lease terms, which generally
range from 30 to 36 months. At December 31, 1998 the Company had an additional
$5.5 million available under a lease line of credit expiring on March 31, 1999.
Equipment under capital leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
Computer equipment and internal use software $25,855 $ 9,914
Furniture and fixtures 3,232 785
-------- --------
29,087 10,699
Less: accumulated depreciation and amortization (13,929) (5,490)
-------- --------
$15,158 $ 5,209
======== ========
</TABLE>
22
<PAGE> 21
Non-lease Financing Arrangements
During 1998 and 1997, the Company entered into several non-lease equipment
financing arrangements. These liabilities are secured by specified computer
equipment, internal use software and office furniture of the Company and are
payable over 36 months. At December 31, 1998, property and equipment under
non-lease financing arrangements totaled $2.7 million, net of $2.3 of
accumulated depreciation. At December 31, 1997, property and equipment under
non-lease financing arrangements totaled $2.5 million, net of $401,000 of
accumulated depreciation.
Building Leases
During the three years ended December 31, 1998, the Company entered into
several leases relating to its corporate facilities located in Redwood City,
California. In 1998, the Company's subsidiary, MatchLogic, entered into a lease
for its new facility located in Westminster, Colorado. The Company leases these
facilities under non-cancelable operating leases that have terms of
approximately ten years. The Company leases additional space, primarily for
sales offices, in various states as well as in the United Kingdom. Rent expense
under operating leases was approximately $4.6 million, $2.7 million and $772,000
for the years ended December 31, 1998, 1997 and 1996, respectively. The Company
has subleased a portion of its facilities to third parties under non-cancelable
sublease agreements, which expire in June 1999 and March 2003. Sublease rental
income was $852,000 for the year ended December 31, 1998. There was no sublease
rental income for the years ended December 31, 1997 and 1996.
Annual minimum commitments under these leases and other financing
arrangements are as follows:
<TABLE>
<CAPTION>
CAPITAL OTHER OPERATING SUBLEASE
(IN THOUSANDS) LEASES FINANCING LEASES RENT
-------- --------- -------- --------
Years Ended December 31,
<S> <C> <C> <C> <C>
1999 $ 8,873 $ 1,756 $ 5,434 $ (911)
2000 7,857 1,176 4,970 (445)
2001 4,981 495 5,065 (457)
2002 113 -- 4,858 (469)
2003 -- -- 4,454 (120)
Thereafter -- -- 20,264 --
-------- -------- -------- --------
Total minimum payments required $21,824 $ 3,427 $45,045 $(2,402)
======== ======== ======== ========
Less amounts representing interest (3,023) (328)
-------- --------
Present value of future lease payments 18,801 3,099
Less current portion (7,133) (1,531)
-------- --------
$11,668 $ 1,568
======== ========
</TABLE>
Other Equipment Financing
Other equipment financing consists of the liability for computer equipment,
which the Company may enter into capital leases in 1999. Due to the timing of
these computer equipment purchases at the end of 1998, $7.5 million has been
recorded as other equipment financing at December 31, 1998. Equipment under
other equipment financing arrangements totaled $7.1 million, net of $400,000 of
accumulated depreciation at December 31, 1998.
6. CONVERTIBLE NOTE
In 1997, the Company entered into a convertible promissory note with Itochu
Corporation and certain affiliated entities (collectively "Itochu") for the
principal amount of $5.0 million. See Note 12. The note bears interest at the
London Interbank Offered Rate plus 1% (approximately 6.1% at December 31, 1998),
is payable in United States dollars, and matures on October 17, 2002, although
earlier payment is permitted. The entire unpaid principle amount at the maturity
date (or earlier in the event the Company elects to prepay the note) is
convertible, in whole but not in part, at the option of the holder, into fully
paid shares of Excite Common Stock at a conversion price equal to the average
closing price of the shares for the 30 trading day period ending on the date of
conversion.
7. STOCKHOLDERS EQUITY
The Company was incorporated on June 9, 1994 in California and reincorporated
in Delaware on August 27, 1998. The Company's Preferred Stock and Common Stock
have a par value of $0.001 per share. The classification of the capital accounts
reflects the effect of the reincorporation for all periods presented.
23
<PAGE> 22
Convertible Preferred Stock
Of the 4,000,000 authorized shares of Convertible Preferred Stock ($0.001 par
value), 3,280,000 shares were designated as Series E. In November 1996, the
Company issued to AOL in connection with the acquisition of AOL's WebCrawler
Assets, 1,950,000 shares of Series E and a warrant to purchase 650,000 shares of
Series E (see Note 2). As a result of the Company's two-for-one stock split in
July 1998, which was in the form of a stock dividend, the Series E are
convertible into Common Stock at a ratio of two-for-one. In September 1997, AOL
exercised 325,000 of its 650,000 warrant to purchase shares of Series E, with
the holder electing to receive a lesser number of shares in exchange for a
reduction in the total exercise price, resulting in the issuance of 229,000
shares of Series E. The 2,179,000 outstanding shares of Series E were converted
into 4,358,000 shares of Common Stock in December 1997. The remaining shares of
Preferred Stock authorized and unissued at December 31, 1997 were retired in
August 1998.
Excite assumed 409,000, 2,291,000 and 411,000 shares of Convertible Preferred
Stock related to equity transactions of Netbot, MatchLogic and Classifieds2000,
respectively, prior to mergers with Excite. These shares converted into shares
of Excite Common Stock upon the closing of the respective mergers (see Note 2).
In August 1998, the Company authorized 4,000,000 shares of Convertible
Preferred Stock ($0.001 par value) of which 350,000 shares are designated as
Series E for the unexercised portion of AOL's warrant to purchase Series E
shares and 230,000 shares are designated as Series F for the Stock Holders Right
Plan dated September 24, 1998. At December 31, 1998, the remaining 3,420,000
authorized shares of Convertible Preferred Stock are undesignated.
Common Stock
In April 1996, the Company completed its initial public offering and issued
4,600,000 shares of its Common Stock at a price of $8.50 per share. The Company
received approximately $35.4 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of the
initial public offering, each outstanding share of Redeemable Convertible
Preferred Stock was automatically converted into two shares of Common Stock,
outstanding warrants were exercised (on a net exercise basis) at an exercise
price of $8.50 per share, resulting in the issuance of 2,382,000 shares of
Common Stock, and $1.0 million principal amount of notes payable was converted
into 320,000 shares of Common Stock.
On March 3, 1997 the Company filed a registration statement on Form S-1 with
the Securities and Exchange Commission with respect to the sale of shares of the
Company's Common Stock. The Company sold all of the 5,800,000 shares of the
Company's Common Stock offered to Intuit Inc. ("Intuit") on June 26, 1997 at a
price of $6.75 per share (see Note 14). Proceeds to the Company from this
offering were approximately $38.4 million net of offering costs. Intuit was also
granted a right of first refusal to participate in certain future issuances of
the Company's securities in order to prevent dilution of Intuit's percentage
ownership, as well as registration rights with respect to the shares originally
purchased, and any shares that might be purchased pursuant to the right of first
refusal. The agreements also place certain conditions on Intuit's ability to
dispose of its shares of, or acquire additional shares of, the Company's Common
Stock.
In May 1998, the Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission for the sale of shares of the Company's
Common Stock in a public offering. The Company sold 3,105,000 shares of Common
Stock in June 1998 at a price of $31.50 per share. Of the 3,105,000 shares sold,
2,870,000 shares (including 405,000 shares, which were purchased on the exercise
of the underwriters over-allotment option) were offered directly by the Company
and 235,000 shares were offered by selling stockholders. The Company did not
receive any proceeds from the sale of shares by selling stockholders. Proceeds
to the Company from this offering were approximately $84.3 million net of
offering costs.
At December 31, 1998, 705,000 shares of Common Stock issued by the Company
were subject to stock repurchase agreements whereby the Company has the option
to repurchase the unvested shares upon termination of employment for any reason,
with or without cause, at the original price paid for the shares.
In December 1998, the Company issued 50,000 shares of Common Stock to
LibertyOne Ltd. ("LibertyOne"), a partner in the Company's Australian joint
venture (see Note 10), in exchange for 1,000,000 shares of LibertyOne. These
equity securities were recorded at the fair market value of the Company's stock
at the date of the transaction. As a result, the fair market value of $2.5
million was recorded to short-term investments and the unrealized gain as of
December 31, 1998 of $1.4 million was included in stockholder's equity. The
Company has classified this equity security as an available-for-sale investment.
24
<PAGE> 23
Warrants
During 1995, the Company issued warrants to purchase 30,000 shares of Series
A and 16,000 shares of Series B Redeemable Convertible Preferred Stock at an
exercise price of $0.67 and $1.25 per share, respectively, in connection with an
equipment lease agreement. These warrants converted into warrants to purchase
Common Stock upon the Company's initial public offering in April 1996. In
January 1997, the holder of these warrants elected to exercise the warrants and
receive a lesser number of shares in exchange for a reduction in the exercise
price resulting in the issuance of 87,000 shares of Common Stock.
During 1995, the Company issued warrants to purchase 2,400,000 shares of
Common Stock at an exercise price of $0.0625 per share in connection with the
sale of Series B Redeemable Convertible Preferred Stock. These warrants were
exercised in April 1996 in connection with the Company's initial public
offering. Also during 1995, the Company issued warrants to purchase 72,000 and
57,000 shares of Common Stock at an exercise price of $0.34 and $0.63 per share,
respectively, in connection with an employment offer. These warrants were
exercised in 1996.
In connection with the acquisition of McKinley, in August 1996, the Company
assumed warrants under which the holder can purchase 4,712 shares and 14,190
shares of Common Stock at an exercise price of $16.33 and $50.64 per share,
respectively. The warrant for 4,712 shares of Common Stock was exercised in
1998. At December 31, 1998, 14,190 warrants were outstanding at an exercise
price of $50.64 per share and expire on January 31, 1999.
In March 1996, the Company entered into an agreement with AOL whereby, in
return for certain distribution rights, the Company issued a warrant to purchase
1,300,000 shares of Common Stock at an exercise price of $4.00 per share. The
warrant expires in March 2001. The value of the warrant was established through
appraisal. A charge to operations of $1.6 million for the fair value of the
warrant was recorded at the time of issuance. Upon the closing of the
acquisition of WebCrawler, this warrant to purchase 1,300,000 shares of Common
Stock was converted into a warrant to purchase 650,000 shares of Series E
("Series E warrant") at the same exercise price per share. The value attributed
to the amendment of the warrant terms from Common Stock warrant to the Series E
warrant was minimal, as the expiration date of the warrant was also amended such
that 325,000 shares exercisable under this warrant would expire, if unexercised,
on September 30, 1997, instead of in March 2001. In September 1997, 325,000
shares were exercised under this Series E warrant, with the holder electing to
receive a lesser number of shares in exchange for a reduction in the total
exercise price, resulting in the issuance of 229,000 shares of Series E, which
were converted into 458,000 shares of Common Stock in December 1997. The
remaining Series E warrant for 325,000 shares outstanding at December 31, 1998,
if exercised, is convertible into 650,000 shares of Common Stock.
In connection with the acquisition of Netbot, in November 1997, the Company
assumed warrants under which the holder can purchase 4,100 shares of the
Company's Common Stock at an exercise price of approximately $5.75 per share.
In connection with the acquisition of MatchLogic, in February 1998, the
Company assumed warrants under which the holder can purchase 167,000 shares of
the Company's Common Stock at an exercise price of approximately $2.36 per
share. These warrants were exercised in 1998.
In April 1998, the Company acquired Classifieds2000 and Throw. In connection
with these acquisitions, the Company assumed warrants under which the holder can
purchase 4,000 and 68,000 shares of the Company's Common Stock at an exercise
price of approximately $16.67 and $0.345 per share, respectively. These warrants
were exercised in 1998.
In April 1998, the Company issued a warrant to Netscape Communication
Corporation ("Netscape") to purchase 846,158 shares of the Company's Common
Stock at an exercise price of approximately $29.55 per share, exercisable for a
two-year period commencing on April 30, 1998, and a second warrant to purchase
shares of the Company's Common Stock at an aggregate exercise price of $10.0
million, which is exercisable for a two-year period commencing April 30, 1999.
The exercise price per share of Common Stock covered by the second warrant will
be determined by dividing $10 million by the average closing price of the
Company's Common Stock for the 30 most recent trading days ending on the third
trading day preceding April 30, 1999.
25
<PAGE> 24
8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
During 1995, the Company adopted the 1995 Equity Incentive Plan (the "1995
Plan") which authorized for issuance under the 1995 Plan 3,300,000 shares of
Common Stock, under which incentive stock options and non-qualified stock
options to purchase Common Stock may be granted to eligible participants. Under
the 1995 Plan, options to purchase Common Stock may be granted at prices no less
than 85% of the fair market value on the date of grant (110% of fair value in
certain instances.) Options generally vest over a 48-month period. In March
1996, the Company increased the number of shares authorized under the 1995 Plan
from 3,300,000 to 4,400,000 shares. The 1995 Plan was terminated in April 1995.
Options granted under the 1995 Plan before its termination in April 1996 remain
outstanding in accordance with their terms, but no further options have been
granted under the 1995 Plan after the date of its termination.
In March 1996, the Company adopted the 1996 Equity Incentive Plan ("1996
Plan") which authorized for issuance under the 1996 Plan 3,000,000 shares of
Common Stock for granting of either incentive or non-qualified stock options.
The Company increased the number of shares authorized under the 1996 Plan from
3,000,000 shares to 4,600,000 shares in November 1996 and from 4,600,000 shares
to 9,928,000 in June 1997. Additionally, the company increased the number of
shares authorized under the 1996 Plan from 9,928,000 shares to 16,528,000 in
June 1998.
The 1996 Plan serves as the successor equity incentive program to the
Company's 1995 Plan. The 1996 Plan provides for the grant of either incentive
stock options (as defined in Section 422 of the Internal Revenue Code of 1986,
as amended) or non-qualified stock options or the issuance of restricted stock,
at a price no less than 85% of the fair value on the date of grant as well as
stock bonuses by the Company to eligible participants. Options generally vest
over a 48 month period. No person is eligible to receive more than 500,000
shares in any calendar year pursuant to grants under the 1996 Plan, other than
new employees of the Company who will be eligible to receive up to a maximum of
800,000 shares in the calendar year in which they commence employment with the
Company. Shares that (i) are subject to issuance upon exercise of an option but
cease to be subject to such stock option for any reason other than exercise of
such stock option, (ii) are subject to an award granted under the 1996 Plan but
are forfeited or are repurchased by the Company at the original issue price or
(iii) are subject to an award that otherwise terminates without shares being
issued will again be available for grant and issuance in connection with future
awards under the 1996 Plan. The 1996 Plan will terminate in February 2006,
unless terminated earlier in accordance with the provisions of the 1996 Plan. As
of December 31, 1998, 4,676,000 shares of Common Stock were reserved for future
grants.
Assumed Options
In connection with the acquisition of McKinley in August 1996, the Company
assumed 9,000 outstanding options to purchase Common Stock originally issued
under McKinley's stock option plan. In 1997, the Company acquired Netbot, and in
connection with this acquisition, the Company assumed 418,000 outstanding
options to purchase Common Stock originally issued under Netbot's stock option
plan. In connection with the acquisitions of MatchLogic, Classifieds2000 and
Throw during 1998, the Company assumed options to purchase Common Stock under
these companies' stock option plans of 882,000, 46,000 and 250,000,
respectively. Additionally, the Company assumed 854,000 options authorized for
future grants under the MatchLogic stock option plan, which increased the total
number of shares authorized in 1997. See Note 2.
Directors Plan
In February 1996, the Company adopted the 1996 Directors Stock Option Plan
(the "Directors Plan") under which it authorized 300,000 shares of Common Stock
for granting of non-qualified stock options to directors of the Company who are
not employees of the Company ("Outside Directors") at exercise prices not less
than the fair market value on the date of grant. Upon initial election or
appointment, an Outside Director shall be automatically be granted an Option for
30,000 shares of Common Stock. An Outside Director is automatically granted an
additional 15,000 shares of Common Stock on each of the Outside Directors
anniversary dates. The options granted under the Directors Plan generally vest
at a rate of 2.08% each month and have a term of ten years. During 1998 the
Company granted 30,000 shares of Common Stock under the Directors Plan. As of
December 31, 1998, 265,000 shares of Common Stock were reserved for future
grants.
Stockholders Rights Plan
On September 24, 1998, the Board of Directors of the Company approved a
Stockholders Rights Plan, which declared a dividend of one Preferred Share
purchase right (a "Right") for each outstanding share of Common Stock, par value
$0.001 per share (the "Common Shares"), of the Company. The dividend is payable
to
26
<PAGE> 25
stockholders of record on October 30, 1998 (the "Record Date"). In addition, one
Right shall be issued with each Common Share that becomes outstanding (i)
between the Record Date and the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date (as such terms are defined in the
Rights Agreement) or (ii) following the Distribution Date and prior to the
Redemption Date or Final Expiration Date, pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company, which options or
securities were outstanding prior to the Distribution Date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a share
of Series F Junior Participating Preferred Stock, par value $0.001 per share
(the "Preferred Shares"), of the Company, at a price of $175.00, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and BankBoston, as Rights
Agent.
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING WEIGHTED
AVAILABLE ----------------------------------- AVERAGE
FOR NUMBER OF EXERCISE
(SHARES IN THOUSANDS) GRANT SHARES PRICE PER SHARE PRICE
---------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 550 2,748 $0.018-$17.306 $0.16
Additional shares authorized 6,418 -- -- --
Options granted and assumed (5,844) 5,844 0.260-33.879 3.13
Options exercised -- (600) 0.018-2.875 0.17
Options canceled 526 (526) 0.018-33.879 5.25
Options expired (1,056) -- -- --
------- ------- ---------------- ------
Balance at December 31, 1996 594 7,466 0.018-33.879 2.33
Additional shares authorized 5,810 -- -- --
Options granted and assumed (4,647) 4,647 0.018-14.188 4.86
Options exercised -- (1,128) 0.018-8.063 1.31
Options canceled 1,272 (1,272) 0.018-33.879 2.58
Options expired (420) -- -- --
------- ------- ---------------- ------
Balance at December 31, 1997 2,609 9,713 0.018-33.879 3.60
Additional shares authorized 6,850 -- -- --
Options granted and assumed (6,014) 6,014 0.315-52.375 28.64
Options exercised -- (3,630) 0.018-44.313 3.34
Options canceled 1,741 (1,741) 0.063-35.875 6.24
Options expired (245) -- -- --
------- ------- ---------------- ------
Balance at December 31, 1998 4,941 10,356 $0.018-$52.375 $17.19
======= ======= ================ ======
</TABLE>
Employee Stock Purchase Plan
In February 1996 the Company's Board of Directors adopted, and in March 1996
the Company's stockholders approved, the 1996 Employee Stock Purchase Plan (the
"ESPP") to provide employees of the Company with an opportunity to purchase
Common Stock through payroll deductions. Under the ESPP, 900,000 shares of
Common Stock have been reserved for issuance, subject to anti-dilution
adjustments. The ESPP became effective in December 1996. The Board of Directors
has the authority to determine the duration of offering periods, up to a maximum
of 24 months. Eligible employees may participate in the ESPP by authorizing
payroll deductions of an amount determined by the Board of Directors. The amount
of authorized payroll deductions may not be less than 2% nor more than 10% of an
employee's compensation, not to exceed $21,250 per year. Amounts withheld are
applied at the end of every six-month accumulation period to purchase shares of
Common Stock, but not more than the number of shares as the Board of Directors
shall determine.
Participants may withdraw their contributions at any time prior to fifteen
days before the stock is purchased, and such contributions will be returned to
the participants without interest. The purchase price is equal to 85% of the
lower of (i) the fair market price of the Company's Common Stock on the offering
date of the applicable period or (ii) the fair market price of the Company's
Common Stock on the purchase date. As of December 31, 1998 and 1997, 165,000 and
55,000 shares respectively, had been purchased under the ESPP. Included in the
accrued compensation at December 31, 1998 and 1997, the Company has accrued $1.2
million and $329,000, respectively for employee contributions under the ESPP. At
December 31, 1998, 680,000 shares of Common Stock were reserved for future
purchases under the ESPP.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock plans because,
27
<PAGE> 26
as discussed below, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock plans granted subsequent to
December 31, 1994 under the fair value method of SFAS No. 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model, assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Average risk-free interest rate 5.1% 6.1% 5.9%
Average expected life (in years) 3.0 3.0 4.5
Volatility (1) 106% 75% 75%
</TABLE>
(1) Options granted prior to the Company's initial public offering and by
non-public companies prior to their merger with Excite were valued using the
minimum value method.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period and the
six-month purchase period (for stock purchases under the ESPP). The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported $ (37,559) $ (46,814) $ (44,179)
Pro forma $ (80,302) $ (58,188) $ (45,890)
Basic and diluted net loss per share:
As reported $ (0.79) $ (1.57) $ (2.37)
Pro forma $ (1.69) $ (1.96) $ (2.46)
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and 1996
was approximately $22.15, $3.45 and $1.77 per share, respectively, and was
approximately $7.42 and $3.87, respectively, for shares granted under the ESPP
in 1998 and 1997.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL LIFE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- --------------- -------------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.018- $0.220 1,014 7.5 $ 0.16 362 $ 0.13
$0.290- $2.875 500 7.8 $ 1.41 145 $ 1.44
$2.938- $4.375 1,699 8.0 $ 3.39 329 $ 3.38
$4.500-$10.063 1,427 8.4 $ 6.81 292 $ 6.24
$10.969-$14.938 568 8.9 $ 12.70 88 $ 12.17
$15.969-$28.250 2,620 9.3 $ 23.88 106 $ 23.79
$28.907-$43.625 2,207 9.6 $ 34.52 89 $ 34.45
$44.313-$52.375 321 9.8 $ 49.10 5 $ 45.36
------ ----- --------- ------ ---------
$0.018-$52.375 10,356 8.8 $ 17.19 1,416 $ 7.11
====== ===== ========= ====== =========
</TABLE>
28
<PAGE> 27
Employee Benefit Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15% or $10,000 per year, whichever is less) of their pretax earnings up
to the Internal Revenue Service's annual contribution limit. All full time
employees on the United States payroll of the Company are eligible to
participate in the Plan. The Company is not required to contribute to the
Savings Plan and has made no contributions to the Savings Plan since its
inception.
9. INCOME TAXES
Due to operating losses and the inability to recognize an income tax benefit
therefrom, there is no provision for income taxes for 1998, 1997 or 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards $ 53,000 $ 29,160 $ 15,200
Research credits 1,900 910 400
Acquired intangible assets 5,700 5,670 1,865
Depreciation 4,300 1,730 390
Capitalized research & development expenses 1,100 -- --
Other 2,300 710 1,345
--------- --------- ---------
Total deferred tax assets $ 68,300 $ 38,180 $ 19,200
Valuation allowance for deferred tax assets (68,300) (38,180) (19,200)
--------- --------- ---------
Net deferred tax assets $ -- $ -- $ --
========= ========= =========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $30.1 million and $19.0 million during the years ended December 31,
1998 and 1997, respectively. Approximately $26.0 million of the valuation
allowance at December 31, 1998 is attributable to stock option deductions, the
benefit of which will be credited to paid in capital when realized.
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $143.4 million and $71.0 million, respectively.
The federal net operating loss carryforwards will expire at various dates
beginning in 2009 through 2013, and the state net operating loss carryforwards
will expire at various dates beginning in 1999 through 2003. As of December 31,
1998 the Company also had federal and California research and development credit
carryforwards of approximately $1.0 and $1.4 million, respectively. The federal
credits will expire in 2009 through 2013 if not utilized.
Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before full
utilization.
10. JOINT VENTURES
Excite Japan
In October 1997, the Company and Itochu Corporation and certain affiliated
entities (collectively "Itochu") entered into a joint venture agreement with
respect to the Company's wholly-owned subsidiary, Excite Japan, Co. Ltd.
("Excite Japan") in order to provide Web based information services to the
Japanese market. The Company intends to retain a 50% equity interest in Excite
Japan. Advertising sales responsibilities will be assumed by CTC Create
Corporation, a wholly-owned subsidiary of Itochu Corporation. The joint venture
agreement with respect to Excite Japan obligates Excite and Itochu to make
capital contributions in the aggregate amount of $10.0 million by March 31,
1999. Itochu loaned Excite $5.0 million (see Note 6) in 1997 in order to fund
Excite's capital contributions. As of December 31, 1998 and 1997 Excite had
invested $4.9 million and $168,000, respectively, in the joint venture, and had
recognized 50% of the losses through December 31, 1998 and 1997 totaling $2.1
million and $477,000. Condensed financial information of Excite Japan has not
been presented as
29
<PAGE> 28
its operating results and financial position are not material to the
consolidated financial statements of the Company.
Excite Italia
In August 1998, the Company and Telecom Italia S.p.A. ("Telecom Italia")
entered into a joint venture agreement to form Excite Italia BV ("Excite
Italia"). The new company, Excite Italia, which is owned 50% by Excite and 50%
by Telecom Italia, will program certain portions of www.tin.lit, the Internet
site of TIN, a division of Telecom Italia and one of Italy's Internet access
providers, as well as provide an Italian language search directory service under
the Excite brand. Telecom Italia has committed to provide the initial start-up
capital for the venture, while Excite will provide the core technology, related
services and brand name. The cash contributed by Telecom Italia to Excite Italia
is in the form of a loan and is capped at approximately 10.5 billion Lira.
Excite will account for its interest in the joint venture under the equity
method.
Excite Asia Pacific
In August 1998, the Company and LibertyOne Limited ("LibertyOne") entered
into a joint venture agreement to form Excite Asia Pacific Pty Ltd ("Excite Asia
Pacific"). The new company, Excite Asia Pacific, is owned 50% by Excite and 50%
by LibertyOne and will build an Excite branded, advertising and commerce
supported Web portal for the Australian and the Asia-Pacific Internet markets.
LibertyOne will contribute a total of 10.0 million Australian Dollars for a 50%
equity ownership in Excite Asia Pacific. Excite will provide the core
technology, related services and brand name for the remaining 50% equity
ownership in Excite Asia Pacific. Excite will account for its interest in the
joint venture under the equity method.
Excite UK
In January 1999, the Company and British Telecom Holdings Ltd ("BT") entered
into a joint venture agreement whereby BT purchased 50% of the shares of Excite
UK Ltd, that had been a wholly-owned subsidiary of the Company. The new joint
venture company, which will continue to be known as Excite UK Ltd., will be
owned 50% by the Company and 50% by BT, and will continue to provide an Excite
branded, advertising and commerce supported Web portal for the market in the
United Kingdom. BT will contribute a total of 6,250,000 Pounds Sterling. Excite
will contribute the core technology, related services and brand name. Excite
will account for its interest in the joint venture under the equity method.
11. SEGMENT INFORMATION
The Company operates in the Internet navigation industry and the Internet ad
serving and targeting business segments. Prior to the merger with MatchLogic,
which began operations in May 1997, the Company operated only in the Internet
navigation industry. The Company's management has determined the operating
segments based upon how the business is managed and operated. MatchLogic, which
provides Internet ad serving and targeting services, operates as an independent
subsidiary of 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>
Year ended December 31, 1998
- ----------------------------
Operating information:
Revenues from external customers $ 126,370 $ 28,990 $ 155,360
Gross profit $ 100,308 $ 25,566 $ 125,874
Distribution license fees and data acquisition costs $ 14,899 $ 6,824 $ 21,723
Segment operating loss $ (29,269) $ (4,919) $ (34,188)
Balance sheet information at December 31, 1998:
Total assets $ 205,662 $ 15,011 $ 220,673
Year ended December 31, 1997
- ----------------------------
Operating information:
Revenues from external customers $ 51,863 $ 3,963 $ 55,826
Gross profit $ 30,688 $ 3,537 $ 34,225
Distribution license fees and data acquisition costs $ 7,615 $ 1,750 $ 9,365
Segment operating loss $ (35,273) $ (10,931) $ (46,204)
Balance sheet information at December 31, 1997:
Total assets $ 75,893 $ 3,263 $ 79,156
</TABLE>
30
<PAGE> 29
<TABLE>
<S> <C> <C> <C>
Balance sheet information at December 31, 1997:
Total assets $ 75,893 $ 3,263 $ 79,156
</TABLE>
Information by Geographic Area:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
United States operations
United States customers $ 151,135 $ 53,798 $ 14,787
International customers 211 831 36
--------- --------- ---------
151,346 54,629 14,823
International operations:
International customers 4,014 1,197 --
--------- --------- ---------
Total revenues $ 155,360 $ 55,826 $ 14,823
========= ========= =========
Operating loss:
United States operations $ (31,867) $ (42,808) $ (45,105)
International operations (2,321) (3,396) (129)
--------- --------- ---------
Total operating loss $ (34,188) $ (46,204) $ (45,234)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long-lived assets:
United States operations $ 72,074 $ 21,729 $ 21,198
International operations 81 313 --
-------- -------- --------
$ 72,155 $ 22,042 $ 21,198
======== ======== ========
Total assets:
United States operations $217,789 $ 78,051 $ 48,780
International operations 2,884 1,105 30
-------- -------- --------
$220,673 $ 79,156 $ 48,810
======== ======== ========
</TABLE>
12. RELATED PARTY TRANSACTIONS
Intuit
In June 1997, the Company sold 5,800,000 shares of the Company's Common Stock
to Intuit at a price of $6.75 per share. Proceeds from this offering were
approximately $38.4 million net of offering costs. Also in June 1997, the
Company entered into a Joint Activities Agreement with Intuit. Under this
agreement, Intuit became the exclusive provider and aggregator of financial
content on all of Excite's services, and Excite became the exclusive search and
navigation service featured in the U.S. versions of Intuit's Quicken, Quickbooks
and TurboTax products. Under this agreement, the two companies share certain
revenues and expenses at varying amounts throughout the seven year term of this
agreement. For the years ended December 31, 1998 and 1997 the Company recorded
approximately $8.3 million and $1.5 million due to Intuit under this agreement,
of which approximately $5.1 was unpaid as of December 31, 1998.
The Company borrowed $50.0 million from Intuit, which is a principal
stockholder of the Company, in April 1998 to fund a portion of the Company's
cash payment obligation to Netscape under the Netcenter Agreement. The loan bore
interest at 5.9% per annum and was due no later than October 30, 1998. In June
1998, the Company repaid the loan in full, plus interest of approximately
$410,000, with proceeds from the Company's public offering, which closed in June
1998. See Note 7.
America Online
In November 1996, the Company entered into a five-year distribution agreement
with America Online ("AOL") which expires in November 2001 under which a
co-branded version of the Excite search and directory service, AOL NetFind
Powered by Excite, is designated as the exclusive Web search and directory
service for the AOL service for an initial two-year period ending in November
1998. In 1998, the exclusive period was extended by AOL beyond the initial
two-year term through December 31, 1999. If the exclusive period is not extended
by AOL beyond December 31, 1999, the co-branded service would become the
"default" search and directory service of AOL. Excite will also advertise AOL's
service on Excite and AOL will pay a commission to the Company for new AOL
subscribers referred from these advertisements. The Company is also required to
satisfy certain technical, product feature and editorial criteria. Revenues
associated with this agreement for the year
31
<PAGE> 30
ended December 31, 1998 was $4.8 million. Revenues and expenses associated with
this agreement for the years ended December 31, 1997 and 1996 were not material.
Notes Receivable from an Officer
In 1998, the Company provided an officer of the Company a loan option for
$750,000. In December 1998, the officer exercised this loan option and borrowed
$675,000 from the Company. This note receivable bears interest at 4.4%
compounded quarterly and is secured by the officer's stock options of the
Company. This note receivable is due upon the earlier of the following events:
at the end of the officer's third year of employment with the Company (August
2001); the fair value of the stock option falls below $750,000; or if employment
with the Company is terminated for any reason. At December 31, 1998, the
outstanding $675,000 note receivable is included in other current assets.
Accrued interest as of December 31, 1998 was not material.
Other Related Party Transactions
In December 1998, MatchLogic, a wholly-owned subsidiary of Excite, invested
in a small company that collects and provides user profiles. MatchLogic
contributed targeting technology in exchange for an ownership of 19% in the
company. Revenues associated with providing clickstream data and anonymous
profiles to the Company for the year ended December 31, 1998, was $3.5 million.
This amount was paid in full to the Company in December 1998.
13. 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. Under the Netcenter Agreement, the Company will provide programming and
content for the Co-Branded channels to be offered on Netscape's Netcenter online
service and will develop a Web search and directory service for Netscape
(collectively, the "Co-Branded Services"). In addition, the Company's
Classifieds2000 service will be featured as the provider of classified
advertising (excluding career and job posting classified ads) for the Netcenter
service. The Company will also be featured as a "premier provider" on the "Net
Search" page of Netscape's Web site and will also be similarly featured on the
Netcenter Widget Tool. The Company will be responsible for advertising sales
for, and will pay to Netscape a percentage of advertising revenues generated
from, the Co-Branded Netcenter channels, the search service and the directory
service, and will also be required to make payments based upon the amount of
traffic generated from the Net Search page and the Netcenter Widget Tool. The
Company has paid a total of $70.0 million as a prepayment of its obligations
under the Netcenter Agreement. In addition, the Company has issued a warrant to
Netscape to purchase 846,158 shares of the Company's Common Stock at an exercise
price of approximately $29.55 per share and a second warrant to purchase shares
of the Company's Common Stock at an aggregate exercise price of $10.0 million.
The original fair value assigned to the warrants was $16.1 million.
In the second quarter of 1998 the Company capitalized $29.3 million as
Prepaid Distribution Fees and charged $56.8 million to operations as a
non-recoverable portion of the prepayment to Netscape. The Company had
previously concluded that there was no reasonable basis to assume a probable
recovery of the value of the prepayment and warrants issued to Netscape.
Specifically, the Company had developed a valuation model to calculate the
anticipated incremental net revenues that would be earned from the Netcenter
Agreement over its term of two-years. This model determined that an amount of
$56.8 million was not expected to be recovered from anticipated future revenue
streams. Accordingly, the Company expensed this amount in its originally
reported June 30 1998 operating results.
After discussions with the Staff of the Securities and Exchange Commission,
the Company revised the original accounting for this transaction and increased
the fair value of the warrants issued to Netscape by $3.8 million. The total
consideration of $89.9 million has been capitalized as Prepaid Netscape
Distribution Costs and Trademarks. The amount capitalized represents the amount
of the sum of the prepayments ($70.0 million) and the revised valuation of the
warrants issued ($19.9 million) from the Netcenter Agreement. The $89.9 million,
representing the combined value of marketing and distribution rights, trademarks
and other exclusive rights, which extend over the term of the Netcenter
Agreement, will be recognized ratably over the term of the agreement as
distribution services are received, commencing with the launch of the service in
June 1998. Prepaid Netscape Distribution Costs and Trademarks consists of the
following:
32
<PAGE> 31
<TABLE>
<CAPTION>
CAPITALIZED AMORTIZATION BALANCE
AMOUNTS AS OF JUNE 1, 1998 TO AS OF
APRIL 30 DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1998 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Prepaid distribution license fees and data acquisition costs $ 29,285 $ (5,776) $ 23,509
Prepaid Netscape service 50,591 (14,757) 35,834
Prepaid trademark license 10,000 (2,916) 7,084
-------- -------- --------
$ 89,876 $(23,449) $ 66,427
======== ======== ========
</TABLE>
During the year ended December 31, 1998, the Company amortized $23.5 million
to operations. The $23.5 million charge to operations is as follows: $5.8
million is included in Distribution License Fees and Data Acquisition Costs and
$17.7 million is reported separately as Amortization of Prepaid Netscape
Service.
In July 1998, Netscape exercised a portion of the warrant issued under the
Netcenter Agreement and paid approximately $5.9 million to purchase 200,000
shares of the Company's Common Stock.
14. OTHER SIGNIFICANT AGREEMENTS
In April 1996, Excite and McKinley each entered into agreements with Netscape
under which they were each designated as one of five "premier providers" of
search and navigation services accessible from the "Net Search" button on the
Netscape home page. These agreements provided that the "premier provider" status
was established for one year from April 1, 1996, in exchange for which the
Company made payments in cash and delivery of advertising impressions totaling
$10.0 million over the course of the year. These contracts were subsequently
extended to April 30, 1997.
In March 1997, the Company entered into an agreement to continue the premier
provider arrangement for the Excite brand, and a marquee provider agreement for
the WebCrawler brand covering the period from May 1, 1997 through April 30,
1998. Under the terms of these agreements, the Company was committed to make
minimum payments of $8.25 million in exchange for a guaranteed number of
impressions. Of the $8.25 million minimum, a portion was being applied towards
advertising by Netscape on the Excite Network over the one year term of the
agreements based upon delivery of such advertisements, with the remainder being
paid in cash at intervals over the term of the agreements.
In June 1997, the Company entered into a Co-Marketing Services Agreement and
a Trademark License Agreement with Netscape. Under these agreements, the Company
is responsible for the programming, production, operations and advertising sales
of "International Netscape Guide by Excite", a new service being made available
in Australia, France, Germany, Japan and the United Kingdom. In connection with
these agreements, the Company made a payment of $4.0 million to Netscape in July
1997, which is being amortized over the terms of these agreements to
distribution license fees expense. At December 31, 1998, the unamortized portion
of this payment of $2.5 million was included in other assets.
15. LITIGATION
On November 18, 1996, Kristine Paaso and Laura Lindsey filed a complaint in
the California Superior Court, Santa Clara County, against the Company and
certain of its founders alleging breach of an alleged oral agreement, breach of
fiduciary duty and fraud. The plaintiffs allege that they participated in the
creation of the Company's business plan and were entitled to participate as
officers and stockholders of the Company. The complaint seeks an unspecified
amount of damages, including punitive damages. In February 1998, the Court
granted the Company a motion for summary judgment to this complaint and entered
judgment in favor of the Company and the individual defendants on all claims.
The plaintiffs have subsequently filed a notice of appeal from the judgment. The
Company intends to continue to defend this action vigorously. It may not be
possible to ascertain the definitive outcome of this litigation at this time, an
unfavorable outcome may have an adverse effect on the Company's business,
results of operations and financial condition.
The Company is also subject to other legal proceedings and claims that arise
in the ordinary course of business. Management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions,
either individually or in the aggregate, will not materially affect the
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact may be material. Furthermore, any litigation,
regardless of the outcome, may have an adverse impact on the Company's results
of operations as a result of defense costs, diversion of management resources,
and other factors.
33
<PAGE> 32
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) MAR. 31 JUN. 30 SEP. 30 DEC. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998:
Revenues $ 24,256 $ 33,005 $ 44,004 $ 54,095
Cost of revenues:
Hosting costs 2,788 3,667 4,447 5,259
Royalties and other cost of revenues 3,219 2,792 3,277 4,037
-------- -------- -------- --------
Total cost of revenues 6,007 6,459 7,724 9,296
Gross profit 18,249 26,546 36,280 44,799
Operating expenses:
Research and development 6,252 7,291 8,151 7,863
Sales and marketing 10,776 14,918 16,294 21,086
Distribution license fees and data acquisition costs 3,986 5,179 5,664 6,894
General and administrative 3,115 3,928 4,264 5,625
In-process technology -- 6,200 -- --
Merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles 977 1,920 1,177 829
Amortization of prepaid Netscape service -- 2,525 7,574 7,574
-------- -------- -------- --------
Total operating expenses 25,106 41,961 43,124 49,871
Operating loss (6,857) (15,415) (6,844) (5,072)
Interest income 402 385 420 418
Interest expense and other (610) (1,034) (561) (657)
Equity share of losses of affiliated company (479) (551) (614) (490)
-------- -------- -------- --------
Net loss $ (7,544) $(16,615) $ (7,599) $ (5,801)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.18) $ (0.36) $ (0.15) $ (0.11)
======== ======== ======== ========
Shares used in computing net loss per share 41,336 46,600 50,339 51,511
======== ======== ======== ========
1997:
Revenues $ 8,021 $ 10,476 $ 16,394 $ 20,935
Cost of revenues:
Hosting costs 1,852 1,701 2,539 2,555
Royalties and other cost of revenues 663 679 1,271 2,127
Amortization of purchased technology 2,399 1,938 1,939 1,938
-------- -------- -------- --------
Total cost of revenues 4,914 4,318 5,749 6,620
Gross profit 3,107 6,158 10,645 14,315
Operating expenses:
Research and development 3,373 4,064 4,767 5,996
Sales and marketing 6,745 7,903 8,607 11,056
Distribution license fees and data acquisition costs 30 1,707 3,216 4,412
General and administrative 2,087 2,412 3,365 4,354
In-process technology -- 2,346 -- --
Merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles 953 463 530 2,043
-------- -------- -------- --------
Total operating expenses 13,188 18,895 20,485 27,861
Operating loss (10,081) (12,737) (9,840) (13,546)
Interest income 251 277 409 380
Interest expense and other (123) (248) (348) (731)
Equity share of losses of affiliated company -- -- -- (477)
-------- -------- -------- --------
Net loss $ (9,953) $(12,708) $ (9,779) $(14,374)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.39) $ (0.48) $ (0.30) $ (0.42)
======== ======== ======== ========
Shares used in computing net loss per share 25,394 26,482 32,900 34,139
======== ======== ======== ========
</TABLE>
34
<PAGE> 33
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996:
Revenues $ 1,374 $ 2,816 $ 4,082 $ 6,551
Cost of revenues:
Hosting costs 246 413 1,015 1,622
Royalties and other cost of revenues 143 14 160 370
Amortization of purchased technology -- -- -- 186
-------- -------- -------- --------
Total cost of revenues 389 427 1,175 2,178
Gross profit 985 2,389 2,907 4,373
Operating expenses:
Research and development 1,376 2,109 2,132 2,646
Sales and marketing 2,489 3,203 6,394 9,272
Distribution license fees and data acquisition costs 1,625 10,000 253 --
General and administrative 1,141 2,812 2,007 1,795
In-process technology -- -- -- 3,500
Merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles -- 73 2,292 769
-------- -------- -------- --------
Total operating expenses 6,631 18,197 13,078 17,982
Operating loss (5,646) (15,808) (10,171) (13,609)
Interest income 30 492 539 403
Interest expense and other (28) (121) (111) (149)
-------- -------- -------- --------
Net loss $ (5,644) $(15,437) $ (9,743) $(13,355)
======== ======== ======== ========
Basic and diluted net loss per share $ (1.35) $ (0.67) $ (0.41) $ (0.56)
======== ======== ======== ========
Shares used in computing net loss per share 4,170 22,903 23,647 23,872
======== ======== ======== ========
</TABLE>
17. SUBSEQUENT EVENTS (UNAUDITED)
At Home Merger
On January 19, 1999, Excite, At Home Corporation ("At Home"), an Internet
service provider aimed at broadband cable subscribers, and Countdown Acquisition
Corporation, entered into a definitive Agreement and Plan of Reorganization,
(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 Capital Stock will be exchanged for shares of At Home's
Series A Common Stock, and options and warrants to purchase Excite's Capital
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 in the
future. 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 Capital Stock subject to Company 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 (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 specified in the Stock Option Agreement.
The Merger, which is expected to close in the second quarter of 1999, is
subject to various conditions, including clearance under the Hart-Scott-Rodino
Antitrust Improvements Act and approval of the Excite's and At Home's
stockholders.
Excite may be required to pay a substantial termination fee if the Merger
Agreement is terminated for certain specific reasons. Excite has filed the
Merger Agreement with the Securities and Exchange Commission on January 20, 1999
under its Report on Form 8-K.
35
<PAGE> 34
Netscape Warrant Exercise
In January and February 1999, Netscape exercised a portion of the warrant
issued under the Netcenter Agreement and paid approximately $19.1 million to
purchase 646,158 shares of the Company's Common Stock.
Related Party Transaction
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.
36
<PAGE> 1
EXHIBIT 99.04
UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed combined consolidated financial
information for At Home gives effect to the Excite merger as if it had occurred
on the dates indicated below, based on a preliminary allocation of the total
purchase cost. The historical financial information has been derived from the
respective historical financial statements of At Home and Excite, and should be
read in conjunction with these financial statements and the related notes
incorporated by reference in this Report on Form 8-K/A.
The unaudited pro forma condensed combined consolidated balance sheet
assumes the merger took place as of March 31, 1999 and allocates the total
purchase costs of the fair values of assets and liabilities of Excite.
The unaudited pro forma condensed combined consolidated statement of
operations combines At Home's and Excite's historical statements of operations
for the three months ended March 31, 1999 and for the year ended December 31,
1998 and gives effect to the merger, including the amortization of goodwill and
other intangible assets, as if it occurred at the beginning of each period
presented.
The total estimated purchase cost of the Excite merger has been allocated
on a preliminary basis to assets and liabilities of Excite based on management's
estimate's of their fair value with the excess costs over the net assets
acquired allocated to goodwill. This allocation is subject to changes pending a
final analysis of the total purchase cost and the fair value of the assets
acquired and liabilities assumed. The impact of these changes could be material.
The unaudited pro forma condensed combined consolidated financial
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of future operating results or financial position of
the combined companies.
<PAGE> 2
AT HOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
As of March 31,1999
------------------------------------------------------------------------
Pro Forma
Business
Combination
At Home Excite Combined Adjustments Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 163,780 $ 45,407 $ 209,187 $ - $ 209,187
Short-term cash investments 242,110 28,971 271,081 - 271,081
----------- ----------- ----------- ----------- -----------
Total cash, cash equivalents and short-term
cash investments 405,890 74,378 480,268 - 480,268
Accounts receivable 7,013 31,395 38,408 (435)(5) 37,973
Accounts receivable - related parties 6,826 5,071 11,897 - 11,897
Prepaid Netscape distribution costs and trademarks - 47,039 47,039 (47,039)(2) -
Other current assets 17,591 10,534 28,125 (503)(5) 27,622
----------- ----------- ----------- ----------- -----------
Total current assets 437,320 168,417 605,737 (47,977) 557,760
Property, equipment and improvements, net 56,283 41,351 97,634 - 97,634
Distribution agreements, net 249,946 - 249,946 - 249,946
Investment in affiliated companies - 1,667 1,667 19,362 21,029
Goodwill 87,256 - 87,256 6,768,260 (2) 6,855,516
Prepaid Netscape distribution costs and trademarks - 8,721 8,721 (8,721)(2) -
Intangible assets, net - 7,703 7,703 249,947 (2) 257,200
Other assets 62,692 19,177 81,869 48,118 (2) 129,987
----------- ----------- ----------- ----------- -----------
Total assets $ 893,497 $ 247,036 $ 1,140,533 $ 7,028,539 $ 8,169,072
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable $ - $ 100 $ 100 $ - $ 100
Accounts payable 10,114 7,672 17,786 (803)(5) 16,983
Accounts payable - related parties 21,614 - 21,614 - 21,614
Accrued compensation and related expense 1,613 8,214 9,827 - 9,827
Accrued transport costs 447 - 447 - 447
Deferred revenues 6,225 5,394 11,619 - 11,619
Other accrued liabilities 15,519 7,661 23,180 65,400 (1) 88,580
Related party liabilities - 4,056 4,056 - 4,056
Capital lease obligation, current portion 12,188 10,148 22,336 - 22,336
Non-lease financing, current portion - 4,373 4,373 - 4,373
----------- ----------- ----------- ----------- -----------
Total current liabilities 67,720 47,618 115,338 64,597 179,935
Convertible debentures 231,064 5,000 236,064 - 236,064
Capital lease obligations, less current portion 16,360 18,668 35,028 - 35,028
Deferred revenue - 2,000 2,000 - 2,000
Non-lease financing - 6,581 6,581 - 6,581
Other long-term liabilities 61 - 61 - 61
Stockholders' equity:
Common stock 813,959 309,146 1,123,105 6,856,500 (1)(3) 7,979,605
Deferred compensation (2,625) (789) (3,414) 789 (3) (2,625)
Unrealized gain on available-for-sale investments 12,247 1,889 14,136 (1,889)(3) 12,247
Accumulated deficit (245,289) (143,077) (388,366) 108,542 (3)(4)(5) (279,824)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 578,292 167,169 745,461 6,963,942 7,709,403
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 893,497 $ 247,036 $ 1,140,533 $ 7,028,539 $ 8,169,072
=========== =========== =========== =========== ===========
</TABLE>
see accompanying notes
<PAGE> 3
AT HOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
-------------------------------------------------------------------------
Pro Forma
Business
Combination
At Home Excite Combined Adjustments Pro Forma
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 25,098 $ 54,085 $ 79,183 $ (435)(A) $ 78,748
Costs and expenses (2):
Operating costs 18,600 10,757 29,357 -- 29,357
Product development and engineering 6,467 7,533 14,000 -- 14,000
Sales and marketing 7,676 20,358 28,034 (300)(A) 27,734
General and administrative 4,103 5,037 9,140 -- 9,140
Purchased in-process research and development -- -- -- -- (B) --
Cost of distribution agreements and amortization
of intangible assets 21,753 16,874 38,627 423,040 (C) 461,667
---------- ---------- ---------- ---------- ----------
Total costs and expenses 58,599 60,559 119,158 422,740 541,898
Loss from operations (33,501) (6,474) (39,975) (423,175) (463,150)
Interest income, net 15,377 (390) 14,987 14,987
Equity share of losses of affiliated company (576) (576) (576)
Net loss $ (18,124) $ (7,440) $ (25,564) $ (423,175) $ (448,739)
========== ========== ========== ========== ==========
Basic and diluted net loss per share $ (0.08) $ (0.07) $ (0.07) (1.26)
========== ========== ========== ==========
Shares used in per share calculations 240,966 110,039 351,005 (D) 356,405
========== ========== ========== ==========
(1) Revenues from related parties 5,439 6,600 12,039
(2) Depreciation and amortization included
in costs and expenses 7,455 5,312 12,767
</TABLE>
See accompanying notes
<PAGE> 4
AT HOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------
PRO FORMA
BUSINESS
COMBINATION
AT HOME EXCITE COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 48,045 $ 155,360 $ 203,405 $ - $ 203,405
Costs and expenses (2):
Operating costs 46,965 29,486 76,451 ---- 76,451
Product development and engineering 17,009 29,557 46,566 ---- 46,566
Sales and marketing 18,091 63,074 81,165 ---- 81,165
General and administrative 12,429 16,932 29,361 ---- 29,361
Purchased in-process research and development 2,758 6,200 8,958 ----(B) 8,958
Cost of distribution agreements and amortization
of intangible assets 101,385 44,299 145,684 1,715,357(C) 1,861,041
----------- ----------- ----------- ----------- -----------
Total costs and expenses 198,637 189,548 388,185 1,715,357 2,103,542
Loss from operations (150,592) (34,188) (184,780) (1,715,357) (1,900,137)
Interest income, net 6,413 (1,237) 5,176 ---- 5,176
Equity share of losses of affiliated company ---- (2,134) (2,134) ---- (2,134)
----------- ----------- ----------- ----------- -----------
Net loss $ (144,179) $ (37,559) $ (181,738) $(1,715,357) $(1,897,095)
=========== =========== =========== =========== ===========
Basic and diluted net loss per share $ (0.60) $ (0.34) $ (0.52) (5.61)
=========== =========== =========== ===========
Shares used in per share calculations 240,966 110,039 351,005 (D) 338,248
=========== =========== =========== ===========
(1) Revenues from related parties 10,458 8,300 18,758
(2) Depreciation and amortization included
in costs and expenses 66,620 13,444 80,064
</TABLE>
See accompanying notes
<PAGE> 5
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The total purchase cost of the merger has been allocated on a preliminary
basis to assets and liabilities based on management's determination of their
fair values The excess of the purchase cost over the fair value of the net
assets acquired has been allocated to goodwill. This allocation is subject to
change pending the completion of the final analysis of the fair value of the
assets acquired and liabilities assumed. The impact of these changes could be
material.
All share information and per share amounts in the accompanying unaudited pro
forma condensed combined financial information has been adjusted to reflect the
two-for-one stock split completed on July 16, 1999.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999 have been calculated as if the merger occurred on March 31,
1999 and are as follows:
1. To reflect the acquisition of all of the outstanding capital
stock of Excite for a total estimated purchase cost of
approximately $7,231 million. The purchase consideration consists
of the following (in millions):
o Issuance of 115.4 million shares of At Home's Series A common
stock with a fair value of $6,051 million. The fair value per
share of At Home's Series A common stock issued is based on
the average closing price of At Home's Series A common stock
on January 19, 1999 (the day the merger was announced) and the
three days prior and subsequent to such date.
o Assumption of options, warrants and convertible debt to
purchase 13.1 million shares of At Home's Series A common
stock with a fair value of $1,115 million. The fair value of
the options, warrants and convertible debt assumed is based on
the Black-Scholes model using the following assumptions:
- Fair market value of the underlying shares is based on the
average closing price of At Home's Series A common stock
on January 19,1999 (the day the merger was announced) and
the three days prior and subsequent of such date
- Expected life of one-half to three years
- Expected volatility of 1.0
- Risk-free interest rate of 5.5%
- Expected dividend rate of 0%
o Other related merger costs consisting of the following (in
millions):
<PAGE> 6
<TABLE>
<S> <C>
- Investment banking fees $25
- Attorney, accountants and printing fees 2
- Filing and registration costs 3
- Merger-related restructuring costs 35
---
Total $65
===
</TABLE>
2. Recognition of the excess purchase costs of $7,025 million over
the fair value of net assets acquired, have been recorded as
goodwill and other intangible assets as follows (in millions):
<TABLE>
<S> <C>
Intangible assets:
Purchased Technology $ 95
Distribution and other Agreements 71
Tradename 48
Acquired workforce 18
Class 1 Data 25
Goodwill 6,768
-------
$ 7,025
=======
</TABLE>
3. To reflect the elimination of the historical stockholders' equity
accounts of Excite.
4. Recognition of purchased in-process research and development
charge of $34.4 million.
5. To reflect the elimination of transactions between At Home and
Excite as of March 31, 1999.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the three months ended March 31, 1999 and the year ended December
31, 1998, assumes the merger occurred as of January 1, 1999 and January 1, 1998
and are as follows:
A. To reflect the elimination of transactions between At Home and
Excite during the three months ended March 31, 1999. For the year
ended December 31, 1999, no material transactions occurred
between At Home and Excite.
B. The purchased in-process research and development charge of $34.4
million has not been included in the unaudited selected pro forma
statement of operations as it is considered a non-recurring
charge. The charge was recorded in the three months ended June
30, 1999.
C. To reflect the amortization of goodwill and other intangible
assets resulting from the merger. The goodwill and other
intangible assets are being amortized over periods of
approximately four years.
<PAGE> 7
D. Basic and diluted net loss per share have been adjusted to
reflect the issuance of 115.4 million shares of At Home's Series
A common stock, as if the shares had been outstanding for the
entire year. The effect of stock options, warrants and
convertible debt assumed in the merger have not been included as
their inclusion would be anit-dilutive.
