Document/Exhibit Description Pages Size
1: 8-K Current Report 5 19K
2: EX-2.01 Agreement and Plan of Reorganization Dated 1/19/99 70 358K
3: EX-2.02 Stock Option Agreement Dated as of 1/19/99 14 55K
4: EX-23.01 Consent of Ernst & Young LLP 1 6K
5: EX-99.01 Press Release of the Company Dated 1/19/99 5 21K
6: EX-99.02 Financial Statements for Excite, Inc. 24 178K
7: EX-99.03 Unaudited Pro Forma Condensed Combined Financials 4 23K
[ERNST & YOUNG LLP LOGO]
EXHIBIT 99.02
EXCITE INC.
Index to Financial Statements
Report of Ernst & Young, LLP.......................................... 2
Consolidated Balance Sheets........................................... 3
Consolidated Statements of operations................................. 4
Consolidated Statements of Stockholders' Equity (Deficit)............. 5
Consolidated Statements of Cash Flows................................. 6
Notes to Consolidated Financial Statements............................ 7
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 statement taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 19, 1999
EXCITE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
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DECEMBER 31,
-----------------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 45,366 $ 15,366
Short-term investments 15,681 16,398
Restricted investments 558 302
Accounts receivable, net of allowance for doubtful accounts
of $1,422 in 1998 and $1,120 in 1997 36,592 20,907
Prepaid Netscape distribution costs and trademarks, current portion 45,473 --
Other prepaid and current assets 4,848 2,149
--------- ---------
Total current assets 148,518 55,122
Property and equipment, net 35,937 15,143
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 4,657
--------- ---------
Total assets $ 220,673 $ 76,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and other notes payable $ 6,100 $ 6,100
Accounts payable 13,079 5,717
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 5,024
--------- ---------
Total current liabilities 59,038 32,152
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 2,291 shares at
December 31, 1998 and 1997, respectively 813 9,518
Common stock, $0.001 par value
Authorized - 100,000 shares
Issued and outstanding - 52,660 and 38,892 shares at
December 31, 1998 and 1997, respectively 52 39
Additional paid-in-capital ("APIC") 277,759 122,874
Deferred compensation (907) (1,440)
Unrealized gain on available-for-sale securities 1,319 15
Accumulated deficit (135,637) (96,154)
--------- ---------
Total stockholders' equity 143,399 34,852
========= =========
Total liabilities and stockholders' equity $ 220,673 $ 76,693
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
[Enlarge/Download Table]
EXCITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
Revenues(1) $ 154,105 $ 54,114 $ 14,757
Cost of revenues:
Hosting costs 16,161 8,586 3,296
Royalties and other cost of revenues 12,912 4,235 667
Amortization of purchased technology -- 8,214 186
--------- --------- ---------
Total cost of revenues 29,073 21,035 4,149
--------- --------- ---------
Gross profit 125,032 33,079 10,608
Operating expenses:
Research and development 29,205 16,694 8,030
Sales and marketing 62,372 32,009 21,103
Distribution license fees and data acquisition costs 21,723 9,365 11,878
General and administrative 16,573 9,477 7,081
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 158,649 73,880 54,726
--------- --------- ---------
Operating loss (33,617) (40,801) (44,118)
Interest income 1,620 1,303 1,410
Interest expense and other (2,843) (1,417) (409)
Equity share of losses of affiliated company (2,134) (477) --
--------- --------- ---------
Net loss $ (36,974) $ (41,392) $ (43,117)
========= ========= =========
Basic and diluted net loss per share $ (0.78) $ (1.47) $ (2.38)
========= ========= =========
Shares used in computing net loss per share 47,475 28,154 18,152
========= ========= =========
(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.
EXCITE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS)
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COMMON STOCK
PREFERRED STOCK AND APIC DEFERRED
---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT COMPENSATION
-------- --------- ------ --------- ---------
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 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
Issuance of common and preferred stock in
connection with asset purchase agreements 1,950 15,816 30 103 --
-------- --------- ------ --------- ---------
Balance at December 31, 1996 1,950 15,816 24,216 59,999 (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.:
Issuance of common stock -- -- 1,708 3,731 --
Accumulated deficit -- -- -- -- --
Issuance of preferred stock by acquired company
for cash, net of issuance costs of $115 1,772 6,385 -- -- --
Other equity transactions of acquired company 519 2,320 1,540 446 --
Conversion of preferred stock to common stock (2,179) (16,628) 4,358 16,628 --
-------- --------- ------ --------- ---------
Balance at December 31, 1997 2,291 9,518 38,892 122,913 (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.:
Issuance of common stock -- -- 1,730 3,522 --
Accumulated deficit -- -- -- -- --
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)
======== ========= ====== ========= =========
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OTHER
COMPREHENSIVE
INCOME/(LOSS) DEFICIT TOTAL
--------- --------- ---------
Balance at December 31, 1995 $ 152 $ (7,085) $ (4,034)
---------
Net loss -- (43,117) (43,117)
Unrealized loss on available-for-sale investments (280) -- (280)
--------
Comprehensive loss -- -- (43,397)
--------
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 connection with the Company's IPO -- -- 16,129
Issuance of common stock under employee plans -- -- 375
Amortization of deferred compensation, net
of cancellations -- -- 250
Issuance of common and preferred stock in
connection with asset purchase agreements -- -- 15,919
--------- --------- ---------
Balance at December 31, 1996 (128) (50,202) 25,097
---------
Net loss -- (41,392) (41,392)
Unrealized gain on available-for-sale investments 143 -- 143
---------
Comprehensive loss -- -- (41,249)
---------
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.:
Issuance of common stock -- -- 3,731
Accumulated deficit -- (4,560) (4,560)
Issuance of preferred stock by acquired company
for cash, net of issuance costs of $115 -- -- 6,385
Other equity transactions of acquired company -- -- 2,766
Conversion of preferred stock to common stock -- -- --
--------- --------- ---------
Balance at December 31, 1997 15 (96,154) 34,852
---------
Net loss -- (36,974) (36,974)
Unrealized gain on available-for-sale investments 1,304 -- 1,304
---------
Comprehensive loss -- -- (35,670)
Acquisition of MatchLogic, Inc.:
Conversion of preferred stock to
common stock -- -- --
Acquisition of Classifieds2000, Inc.:
Issuance of common stock -- -- 3,522
Accumulated deficit -- (2,509) (2,509)
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
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
EXCITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, IN THOUSANDS)
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YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net loss $ (36,974) $ (41,392) $ (43,117)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 534 355 243
Compensation expense from accelerated deferred compensation
charges and stock option vesting 298 1,658 --
Depreciation 12,868 6,360 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 (15,185) (17,567) (2,957)
Prepaid Netscape distribution costs and trademarks (70,000) -- --
Prepaid expenses and other current assets (2,901) (1,001) (863)
Other assets 428 (4,203) (873)
Accounts payable 7,069 (1,378) 5,515
Accrued compensation 3,746 4,492 425
Related party liabilities 3,691 1,575 --
Other accrued liabilities 7,041 2,092 6,512
--------- --------- ---------
Net cash used by operating activities (53,730) (35,461) (26,122)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (16,709) (6,925) (892)
Proceeds from disposal of property and equipment 186 -- --
Purchases of investments (25,210) (47,433) (49,765)
Sales and maturities of investments 30,618 49,235 31,936
Investment in affiliated company (4,377) -- --
Notes and advances to Novo MediaGroup, Inc. -- -- (629)
Payments for acquisitions, net of cash received -- (598) --
--------- --------- ---------
Net cash used in investing activities (15,492) (5,721) (19,350)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Payments on capital lease and other financing obligations (3,929) (3,737) (1,875)
Net (payments) proceeds on bank line of credit and other notes payable (574) 4,900 1,064
Proceeds from issuance of convertible note -- 5,000 --
Proceeds from sale of redeemable convertible preferred stock -- 6,385 12,282
Proceeds from issuance of common stock 103,725 40,029 37,212
--------- --------- ---------
Net cash provided by financing activities 99,222 52,577 48,683
--------- --------- ---------
Net increase in cash and cash equivalents 30,000 11,395 3,211
Cash and cash equivalents at beginning of period 15,366 3,971 760
--------- --------- ---------
Cash and cash equivalents at end of period $ 45,366 $ 15,366 $ 3,971
========= ========= =========
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible preferred stock to common stock $ 8,705 $ 16,628 $ 16,129
Property and equipment acquired under capital leases and other non-
lease financing $ 16,763 $ 7,400 $ 7,564
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
The accompanying notes are an integral part of these consolidated financial statements.
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 $37.0 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 material pooling of interests. See Note 2.
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.
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:
[Download Table]
DECEMBER 31,
---------------------------
(IN THOUSANDS) 1998 1997
-------- --------
Computer equipment and internal use software $ 43,746 $ 18,168
Furniture and fixtures 6,581 2,950
Leasehold improvements 7,125 2,607
-------- --------
57,452 23,725
Less: accumulated depreciation and amortization (21,515) (8,582)
-------- --------
$ 35,937 $ 15,143
======== ========
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.
[Download Table]
DECEMBER 31,
LIFE IN ---------------------------
(IN THOUSANDS) MONTHS 1998 1997
------- -------- --------
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
======== ========
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 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, $7.1 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:
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
-------- -------- --------
Net loss $(36,974) $(41,392) $(43,117)
======== ======== ========
Weighted average shares outstanding 48,180 29,288 19,372
Weighted average common shares issued subject
to repurchase agreements (705) (1,134) (1,220)
-------- -------- --------
Shares used to compute basic and diluted net loss
per share 47,475 28,154 18,152
======== ======== ========
Basic and diluted net loss per share $ (0.78) $ (1.47) $ (2.38)
======== ======== ========
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
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:
[Enlarge/Download Table]
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)
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
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.
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. The results of operations and financial position of Netbot
were not material to the Company's consolidated financial statements in any
period, and therefore, amounts prior to the date of acquisition were not
combined with the Company's financial statements.
In 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 to the
inception of MatchLogic has been restated to reflect the combined operations of
the two companies.
Separate results of the combined entities through the periods preceding the
merger (February 2, 1998) are as follows:
[Download Table]
PERIOD ENDED YEARS ENDED DECEMBER 31,
FEBRUARY 2, ---------------------------
(IN THOUSANDS) 1998 1997 1996
------------- ------------ -------------
Revenues:
Excite $ 5,598 $ 50,151 $ 14,757
MatchLogic 376 3,963 --
------------- ------------ -------------
$ 5,974 $ 54,114 $ 14,757
============= ============ =============
Net Loss:
Excite $ (1,656) $ (30,159) $ (43,117)
MatchLogic (1,388) (11,233) --
------------- ------------- -------------
$ (3,044) $ (41,392) $ (43,117)
============= ============ =============
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. The results of
operations and financial position of Classifieds2000 were not material to the
Company's consolidated financial statements in any period, and therefore,
amounts prior to the date of acquisition were not combined with the Company's
financial statements.
In April 1998, the Company acquired Throw, a 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.
Equipment under capital leases consist of the following:
[Download Table]
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
--------- ---------
Computer equipment and internal use software $ 25,855 $ 9,914
Furniture and fixtures 3,232 785
--------- ---------
29,087 10,699
(13,929) (5,490)
--------- ---------
$ 15,158 $ 5,209
========= =========
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, $2.6 million and $722,000
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:
[Enlarge/Download Table]
CAPITAL OTHER OPERATING SUBLEASE
(IN THOUSANDS) LEASES FINANCING LEASES RENT
--------- --------- --------- ---------
Years Ended December 31,
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
========= =========
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.
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.
The Company had 2,291,000 shares of Convertible Preferred Stock outstanding
at December 31, 1997 related to equity transactions of MatchLogic prior to its
merger with Excite. These shares were converted into an equivalent number of
shares of Excite Common Stock upon the closing of the merger in February 1998
(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.
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.
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 share 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 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:
[Enlarge/Download Table]
SHARES OPTIONS OUTSTANDING WEIGHTED
AVAILABLE ------------------------------------------ AVERAGE
FOR NUMBER OF EXERCISE
(SHARES IN THOUSANDS) GRANT SHARES PRICE PER SHARE PRICE
--------- --------- ------------------------------ ----------
Balance at December 31, 1995 550 2,748 $ 0.018 -- $ 17.306 $ 0.16
Additional shares authorized 6,000 -- -- --
Options granted and assumed (5,672) 5,672 1.250 -- 33.879 3.40
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 348 7,294 0.018 -- 33.879 2.33
Additional shares authorized 6,182 -- -- --
Options granted and assumed (4,776) 4,776 0.018 -- 14.188 5.44
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 2,606 9,670 0.018 -- 33.879 3.60
Additional shares authorized 6,896 -- -- --
Options granted and assumed (6,057) 6,057 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 $ 17.21
====== ======= ============================== ========
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, 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:
[Download Table]
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
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%
(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:
[Download Table]
YEARS ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
----------- ----------- -----------
Net loss:
As reported $ (36,974) $ (41,392) $ (43,117)
Pro forma $ (79,494) $ (48,681) $ (44,104)
Basic and diluted net loss per share:
As reported $ (0.78) $ (1.47) $ (2.38)
Pro forma $ (1.67) $ (1.73) $ (2.43)
The weighted average fair value of options granted during 1998, 1997 and 1996
was approximately $21.99, $2.81 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:
[Enlarge/Download Table]
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
--------------- ------------- --------------- -------------- ------------- -------------
$ 0.018-$ 0.220 1,014 7.5 $ 0.16 362 $ 0.13
$ 0.290-$ 2.875 500 7.8 $ 1.41 148 $ 1.46
$ 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
$18.750-$28.250 2,614 9.3 $23.90 106 $ 23.79
$28.907-$43.625 2,208 9.6 $34.52 89 $ 34.45
$44.313-$52.375 326 9.8 $49.13 5 $ 45.36
------ --- ------ ----- -------
$ 0.018-$52.375 10,356 8.8 $17.21 1,419 $ 7.10
====== === ====== ===== =======
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:
[Download Table]
YEARS ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
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 $ -- $ -- $ --
========= ========= =========
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 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:
[Enlarge/Download Table]
INTERNET AD SERVING
(IN THOUSANDS) NAVIGATION & TARGETING TOTAL
---------- ----------- -----------
Year ended December 31, 1998
Operating information:
Revenues from external customers $ 125,115 $ 28,990 $ 154,105
Gross profit $ 99,466 $ 25,566 $ 125,032
Distribution license fees and data acquisition costs $ 14,899 $ 6,824 $ 21,723
Segment operating loss $ (28,698) $ (4,919) $ (33,617)
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 $ 50,151 $ 3,963 $ 54,114
Gross profit $ 29,542 $ 3,537 $ 33,079
Distribution license fees and data acquisition costs $ 7,615 $ 1,750 $ 9,365
Segment operating loss $ (29,870) $ (10,931) $ (40,801)
Balance sheet information at December 31, 1997:
Total assets $ 73,430 $ 3,263 $ 76,693
Information by Geographic Area:
[Download Table]
YEARS ENDED DECEMBER 31,
-----------------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- --------- ---------
Revenues:
United States operations
United States customers $ 149,880 $ 52,086 $ 14,721
International customers 211 831 36
--------- --------- ---------
150,091 52,917 14,757
International operations:
International customers 4,014 1,197 --
--------- --------- ---------
Total revenues $ 154,105 $ 54,114 $ 14,757
========= ========= =========
Operating loss:
United States operations $ (31,296) $ (37,405) $ (43,989)
International operations (2,321) (3,396) (129)
--------- --------- ---------
Total operating loss $ (33,617) $ (40,801) $ (44,118)
========= ========= =========
[Download Table]
DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 1998 1997 1996
--------- -------- --------
Long-lived assets:
United States operations $ 72,074 $ 21,258 $ 20,958
International operations 81 313 --
--------- -------- --------
$ 72,155 $ 21,571 $20,958
========= ======== ========
Total assets:
United States operations $ 217,789 $ 75,588 $ 47,668
International operations 2,884 1,105 30
--------- -------- --------
$ 220,673 $ 76,693 $ 47,698
========= ======== ========
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 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 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" of Netscape's 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:
[Enlarge/Download Table]
CAPITALIZED AMORTIZATION
AMOUNTS AS OF JUNE 1, 1998 TO BALANCE AS OF
APRIL 30 DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1998 1998 1998
---------- ---------- ----------
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
========== =========== ==========
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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
[Enlarge/Download Table]
THREE MONTHS ENDED
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) MAR. 31 JUN. 30 SEP. 30 DEC. 31
--------- --------- --------- --------
1998:
Revenues $23,001 $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 2,806 2,792 3,277 4,037
--------- --------- --------- --------
Total cost of revenues 5,594 6,459 7,724 9,296
Gross profit 17,407 26,546 36,280 44,799
Operating expenses:
Research and development 5,900 7,291 8,151 7,863
Sales and marketing 10,074 14,918 16,294 21,086
Distribution license fees and data acquisition costs 3,986 5,179 5,664 6,894
General and administrative 2,756 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 23,693 41,961 43,124 49,871
Operating loss (6,286) (15,415) (6,844) (5,072)
Interest income 397 385 420 418
Interest expense and other (591) (1,034) (561) (657)
Equity share of losses of affiliated company (479) (551) (614) (490)
--------- --------- --------- --------
Net loss $ (6,959) $(16,615) $ (7,599) $(5,801)
========= ======== ========= =======
Basic and diluted net loss per share $ (0.17) $ (0.36) $ (0.15) $ (0.11)
========= ======== ========= =======
Shares used in computing net loss per share 41,450 46,600 50,339 51,511
========= ======== ========= =======
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.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Dates Referenced Herein and Documents Incorporated by Reference
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