<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from __________ to ___________.
COMMISSION FILE NUMBER 000-22697
AT HOME CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0408542
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
450 BROADWAY STREET
REDWOOD CITY, CA 94063
(Address of principal executive offices, including zip code)
(650) 569-5000
(Registrant's telephone number, including area code)
FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:
425 BROADWAY STREET
REDWOOD CITY, CA 94063
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
<TABLE>
<CAPTION>
AS OF
JULY 31, 1999
<S> <C>
Number of shares of Series A Common Stock outstanding: 333,494,328
Number of shares of Series B Common Stock outstanding: 30,800,000
Number of shares of Series K Common Stock outstanding: 3,609,707
</TABLE>
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<PAGE> 2
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations - Three and
Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities and Use of Proceeds 32
ITEM 3. Defaults Upon Senior Securities 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
ITEM 5. Other Information 33
ITEM 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, expect share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 117,247 $ 300,702
Short-term investments 316,586 118,587
Total cash, cash equivalents and short-term investments 433,833 419,289
Accounts receivable, net 39,389 6,358
Related party receivables 12,735 4,300
Other receivable 32,929 --
Other prepaid and current assets 19,965 3,381
----------- -----------
Total current assets 538,851 433,328
Property and equipment, net 124,317 49,240
Investments in affiliated companies 20,042 --
Other investments 177,602 8,527
Distribution agreements, net 235,803 186,247
Goodwill and other intangibles assets, net 6,920,249 93,989
Other assets 38,683 9,300
----------- -----------
Total assets $ 8,055,547 $ 780,631
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,320 $ 7,100
Related party liabilities 13,182 3,684
Accrued compensation and related expenses 14,625 2,505
Customer deposits 21,743 5,164
Accrued merger costs 26,797 --
Other accrued liabilities 23,697 12,506
Capital lease and other financing obligations, current portion 29,459 12,045
----------- -----------
Total current liabilities 158,823 43,004
Convertible debentures 232,765 229,344
Capital lease and other financing obligations, less current portion 47,827 14,356
Other liabilities 6,080 61
Commitments and contingencies
Stockholders' equity:
Common stock, $0.005 par value
Authorized shares - 719,719,414
Issued and outstanding shares - 367,538,425 in 1999
and 246,545,734 shares in 1998 8,001,005 719,676
Deferred compensation (2,343) (2,880)
Accumulated other comprehensive income 74,623 4,235
Accumulated deficit (463,233) (227,165)
----------- -----------
Total stockholders' equity 7,610,052 493,866
----------- -----------
Total liabilities and stockholders' equity $ 8,055,547 $ 780,631
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues (1) $ 70,542 $ 9,220 $ 95,640 $ 14,993
Cost and expenses (2):
Operating costs 29,084 10,098 47,684 18,713
Product development and engineering 11,281 3,891 17,748 7,464
Sales and marketing 25,274 4,356 32,950 7,856
General and administrative 6,423 2,925 10,526 5,799
Costs and amortization of distribution agreements 18,703 13,628 33,723 33,162
Amortization of goodwill and other intangible assets 153,371 -- 160,104 --
Purchased in-process research and development 34,400 -- 34,400 --
Costs of business combination 11,680 -- 11,680 --
--------- --------- --------- ---------
Total costs and expenses 290,216 34,898 348,815 72,994
--------- --------- --------- ---------
Loss from operations (219,674) (25,678) (253,175) (58,001)
Interest and other income, net 2,472 906 17,849 2,013
Equity in losses of affiliated companies (742) -- (742) --
--------- --------- --------- ---------
Net loss $(217,944) $ (24,772) $(236,068) $ (55,988)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.76) $ (0.11) $ (0.89) $ (0.25)
========= ========= ========= =========
Shares used in net loss per share calculations 287,155 225,268 264,060 224,196
========= ========= ========= =========
(1) Revenues from related parties $ 6,966 $ 1,801 $ 12,405 $ 3,172
========= ========= ========= =========
(2) Depreciation and amortization
included in costs and expenses $ 8,815 $ 3,493 $ 16,270 $ 6,338
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net loss $(236,068) $ (55,988)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 537 510
Depreciation and amortization 15,733 5,828
Costs and amortization of distribution agreements 33,723 33,162
Amortization of goodwill and other intangible assets 160,104 --
Compensation expense from accelerated stock option vesting 7,900 --
Accretion on discount of convertible debentures 3,421 --
Recognized non-cash gain on investment (12,558) --
Purchased in-process research and development 34,400 --
Equity in losses of affiliated companies 742 --
Changes in assets and liabilities:
Accounts receivable (20,387) (3,446)
Other assets (27,069) (3,058)
Accounts payable 12,978 1,892
Other liabilities 13,536 1,279
Customer deposits 8,319 2,239
--------- ---------
Net cash used in operating activities (4,689) (17,582)
CASH USED IN INVESTING ACTIVITIES:
Purchases of investments (298,562) (34,720)
Sales and maturities of investments 93,248 33,440
Purchases of property, equipment and improvements (25,483) (7,672)
Acquisition of Excite, net of cash received 34,341 --
--------- ---------
Net cash used in investing activities (196,456) (8,952)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 25,918 1,412
Payments on capital lease and other financing obligations (8,228) (5,640)
Repayment of notes receivable from stockholders -- 294
--------- ---------
Net cash provided by (used in) financing activities 17,690 (3,934)
--------- ---------
Net decrease in cash and cash equivalents (183,455) (30,468)
Cash and cash equivalents at beginning of period 300,702 44,213
--------- ---------
Cash and cash equivalents at end of period $ 117,247 $ 13,745
========= =========
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock warrants in connection with distribution agreements $ 81,589 $ 83,320
========= =========
Property and equipment acquired under capital leases and other financing obligations $ 14,701 $ 6,418
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 5,795 $ 1,197
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
The Business
At Home Corporation ("Excite@Home" or the "Company") was incorporated in
the state of Delaware on March 28, 1995. The Company is a global media company
based in Redwood City, California. Through the Company's Internet portal, Excite
(www.excite.com), and broadband services, @Home and @Work, we offer consumers
content and interactive services and we offer advertisers ad serving and
targeted marketing solutions across both broadband and narrowband Internet
service platforms.
Basis of Presentation
The unaudited condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the interim periods presented. All significant intercompany
transactions and balances have been eliminated in consolidation. The results of
operations for the three and six months ended June 30, 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 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. 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 27, 1999. Information regarding Excite, Inc., which was acquired on May
28, 1999, can be found in Excite, Inc.'s 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
Monthly customer subscription revenue for the @Home and @Work services is
recognized in the period in which subscription services are provided. The
Company also earns revenue from cable system operators for providing certain
support services, such as customer support, local area content development and
pre-commercial deployment fees. Revenue from cable system operators is
recognized as the services are performed. The Company has also entered into
agreements with U.S. cable stockholders for the development, deployment and
marketing of additional services. Revenues for these development agreements are
recognized on the percentage of completion basis.
Revenues also include on-line advertising revenues which 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 e-commerce sponsorship agreements. Under these agreements, the
Company earns fees for initial programming, initiation of service and for
generating impressions, which in some instances are guaranteed. These revenues,
as well as contract and other revenues, which include 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 do not meet the guarantees, the Company defers recognition
of the corresponding revenues.
Segment Reporting
The Company operates in two significant business segments, which are
advertising and ad targeting, and subscription and other. For internal reporting
purposes the Company separately reports revenues for these two segments as
presented in Note 8. Costs and expenses, loss from operations and net loss and
assets and liabilities are not reported by business segment.
6
<PAGE> 7
Stock Split
In May 1999, the Company's stockholders approved a two for one split of
the Company's common stock, which occurred on June 16, 1999 to stockholders of
record on June 2, 1999. All of the common stock share and per share data have
been adjusted to retroactively reflect this stock split.
Per Share Data
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. The Company has also
excluded all convertible debt, warrants and employee stock options from the
computation of diluted loss per share because all such securities are
anti-dilutive for all periods presented. The following table sets forth the
computation of basic and diluted loss per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands, except per share data) June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss $ (217,944) $ (24,772) $ (236,068) $ (55,988)
========== ========= ========== =========
Weighted average shares outstanding 293,248 237,577 270,970 236,501
Weighted average shares issued and outstanding
subject to repurchase agreements (6,093) (12,309) (6,910) (12,305)
---------- --------- ---------- ---------
Shares used in net loss per share calculations 287,155 225,268 264,060 224,196
========== ========= ========== =========
Basic and diluted net loss per share $ (0.76) $ (0.11) $ (0.89) $ (0.25)
========== ========= ========== =========
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current year's presentation.
2. Business Combination - Excite, Inc.
On May 28, 1999, the Company completed its acquisition of Excite, Inc.
("Excite") a publicly-held global Internet media company that offers consumers
and advertisers comprehensive Internet navigation services with personalization
capabilities and specializes in the delivery of targeted marketing solutions
through its subsidiary MatchLogic, Inc. ("Matchlogic"). The acquisition was
accomplished through a merger of Excite with and into a wholly-owned subsidiary
of the Company. The total purchase consideration of approximately $7,231 million
was based on: the fair value of the Company's Series A common stock issued;
stock option, stock purchase plan and warrant obligations assumed; and
merger-related costs. At the closing, the Company issued approximately 116
million shares of its Series A common stock valued at approximately $6,051
million as of the announcement date, based on an exchange ratio of 2.083804
shares of the Company's Series A common stock for each outstanding share of
Excite common stock, adjusted to reflect the two for one split of the Company's
common stock on June 16, 1999. The Company assumed outstanding options to
purchase Excite common stock and converted these into options to acquire
approximately 46 million shares of the Company's Series A common stock, valued
at approximately $1,105 million, based on the same exchange ratio, subject to
the terms and conditions, including exercisability and vesting schedules, of the
original options. The Company also assumed outstanding warrants and debt
instruments convertible into Excite common stock, valued at approximately $10
million and converted these into warrants and debt instruments that may be
converted into the Company's Series A common stock according to the same
exchange ratio. In addition, the Company incurred merger-related costs of
approximately $65 million, which were included in the purchase consideration.
This transaction was accounted for as a purchase. Accordingly, the total
purchase consideration of $7,231 million was allocated to the estimated fair
value of the assets acquired and liabilities assumed based on their estimated
fair values as of the date of the acquisition. Intangibles assets are being
amortized on a straight-line basis over approximately four years. Goodwill and
other intangible asset amortization related to the merger of Excite that was
charged to operations for the three and six months ended June 30, 1999 was
approximately $147 million.
7
<PAGE> 8
Purchase Price Allocation
The purchase consideration was allocated to the assets acquired and
liabilities assumed based on fair values as follows (in millions):
<TABLE>
<S> <C>
Cash and short-term investments $ 57
Accounts receivables and other current assets 90
Other receivable 33
Property and equipment 48
Investment in affiliated companies 21
Other investments 60
Other assets 10
Goodwill 6,727
Other intangibles assets 257
Purchased in-process research and development 34
Liabilities assumed (106)
--------
Total purchase consideration $ 7,231
========
</TABLE>
Purchased In-Process Research and Development
Approximately $34.4 million was allocated to in-process research and
development and charged to operations at the time of acquisition. The in-process
research and development value was determined by identifying the research
projects for which technological feasibility had not been achieved and assessing
the date of completion of the research and development effort. The state of
completion was determined by estimating the costs and time incurred to date
relative to those costs and time to be incurred to develop the in-process
technology into commercially viable products. The estimated discounted net cash
flows included only net cash flows resulting from the percentage of research and
development efforts complete at the end of the date of acquisition. The discount
rate included a factor that took into account the uncertainty surrounding the
successful development of the in-process technology projects.
To determine the value of purchased technology, the expected future cash
flows of the existing developed technologies were discounted taking into account
the characteristics and applications of the product, the size of existing
markets, growth rates of existing and future markets as well as an evaluation of
past and anticipated product-life cycles. In addition, other intangible assets
were valued which includes agreements, trademarks, workforce and data.
Pro Forma Results of Operations
The following unaudited pro forma condensed financial information presents
the combined results of operations of the Company and Excite, including the
amortization of goodwill and other intangible assets, as if the acquisition had
occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------------
(in thousands, except per share information) 1999 1998 1999 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Pro forma revenues $ 100,109 $ 42,225 $ 178,557 $ 72,254
========== ========== ============ ============
Pro form net loss $ (542,682) $ (527,382) $ (1,008,596) $ (1,006,055)
========== ========== ============ ============
Pro forma basic and diluted net loss per share $ (1.50) $ (1.55) $ (2.81) $ (2.96)
========== ========= ============ ===========
Shares used in pro forma per share calculations 360,983 340,707 358,694 339,635
========== ========== ============ ============
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the merger occurred at the beginning of
each year presented, and are not intended to be indicative of future results of
operations.
8
<PAGE> 9
3. Other receivable
In April 1998, Excite and Netscape Communications Corporation ("Netscape")
entered into a two-year agreement (the "Netcenter Agreement") with respect to
Netscape's Netcenter online service, under which Excite was, among other things,
to provide, host and sell advertising for certain co-branded services under
Netscape's Netcenter service.
During the second quarter of 1999, Excite terminated its agreement with
respect to Netcenter as a result of the acquisition of Netscape by America
Online, Inc. ("AOL"). Pursuant to the terms of the Netcenter Agreement, AOL is
required to refund Excite a portion of the initial prepayment and specific costs
associated with its obligations under the Netcenter Agreement. As a result,
during the second quarter of 1999 the refund amount of $32.9 million was
recorded as a receivable due from AOL. This amount was outstanding as of June
30, 1999.
4. Investments in Affiliated Companies
In May 1999, in connection with the acquisition of Excite, approximately
$21 million was allocated to investments of Excite's affiliated companies based
on the fair value of these investments at the date of acquisition. These
investments in affiliated companies represent investments in joint ventures and
privately held companies, including a joint venture with Rogers Media, Inc., a
related party, which are accounted for under the equity method. The Company's
equity interest in these affiliated companies ranges from 22% and 50%. The
equity in losses of affiliated companies for the period ended June 30, 1999 was
$742,000, which represents the Company's share of the entities' losses for June
1999.
In June 1999, the Company and Optus Vision Pty Ltd. ("Optus") entered into
a joint venture agreement to form At Home Network Australia Pty Ltd. ("At Home
Australia"). At Home Australia, which is owned 50% by the Company and 50% by
Optus, will conduct a business consisting of the production, packaging,
marketing, distribution and support of the Company's broadband Internet service
for delivery to residential, small office and home office customers in
Australia. The Company and Optus have committed to provide initial start-up
capital for the venture, and the Company will also provide the core technology,
related services and brand name. The Company and Optus will each initially
contribute a total of approximately $2.6 million (or 4 million Australian
Dollars) to At Home Australia and each may be additionally required to
contribute approximately $21.2 million (or 32 million Australian Dollars). The
Company may elect to bring additional partners into the joint venture to fund
the commitments to At Home Australia. The Company will account for its interest
in the joint venture under the equity method.
5. Other Investments
During the six months ended June 30, 1999, the Company invested
approximately $28.0 million in equity instruments of privately and publicly held
information technology companies for business and strategic purposes. In
addition, in May 1999 the Company completed its acquisition of Excite and
approximately $60 million of the purchase price was allocated to other
investments based on the fair value of these investments at the date of
acquisition.
At June 30, 1999, the total recorded amount of these investments was $177.6
million. See Note 9 "Comprehensive Loss" for the total unrealized gains recorded
on Company's other investments for the three and six months ended June 30, 1999
and 1998. In February 1999, the Company recorded a $12.6 million one-time gain
on an investment in a privately held company due to the investee being acquired
for common stock by a publicly traded company.
6. Commitments
In December 1998, the Company entered into an agreement with AT&T to create
a nationwide network utilizing AT&T's backbone. Under this agreement, the
Company will pay AT&T $45 million in each of 1999 and 2000. At June 30, 1999,
the Company had payments remaining of $22 million in 1999 and $45 million in
2000.
7. Stockholders' Equity
In October 1997, the Company entered into a distribution agreement with
Cablevision Systems Corporation ("Cablevision"), and certain related entities.
Although Cablevision is subject to certain exclusivity obligations that prohibit
it from obtaining high-speed residential consumer Internet services from any
source other than the Company, Cablevision is under no obligation to upgrade its
cable systems to two-way cable infrastructure and is under no affirmative
obligation to roll out, market, promote or carry any of the Company's services.
The exclusivity obligations in favor of the Company expire in June 2002, and may
be terminated sooner under
9
<PAGE> 10
certain circumstances. These exclusivity obligations also are subject to
exceptions that would permit Cablevision to engage in certain activities which
may compete, directly or indirectly, with the activities of the Company.
The agreement provided for the issuance to Cablevision and certain related
entities of a warrant to purchase up to 15,751,568 shares of the Company's
Series A common stock at an exercise price of $0.25 per share (the "Warrant").
The Warrant was immediately exercisable, subject to the receipt of all necessary
governmental consents or approvals. The Agreement provided for the issuance of
an additional warrant to Cablevision and CSC Parent to purchase up to 6,142,304
shares of the Company's Series A common stock at an exercise price of $0.25 per
share under certain conditions (the "Contingent Warrant"). The Contingent
Warrant is exercisable and becomes exercisable as and to the extent certain
cable television systems are transferred from AT&T and its controlled affiliates
to Cablevision and certain related entities. During the year ended December 31,
1997, the Company recorded the fair value of the Warrant, $172.6 million, as the
cost of distribution agreements intangible asset, which is being amortized
ratably over 56 months, the remaining term of the exclusivity obligations.
During the year ended December 31, 1998, the Contingent Warrant became
exercisable for 4,711,028 shares of Series A common stock. The Company
capitalized the fair value of the Contingent Warrant, $74.5 million, as
distribution agreements, which is being amortized ratably over 51 months, the
remaining term of the exclusivity obligations. As of June 30, 1999 and December
31, 1998, accumulated amortization of the cost of the distribution agreement
totaled approximately $88.1 million and $60.8 million, respectively.
In connection with distribution agreements with Rogers Cablesystems Limited
("Rogers") and Shaw Cablesystems Limited ("Shaw") in March 1998, the Company
issued performance based warrants to purchase a total of 10,000,000 shares of
its Series A common stock at an exercise price of $5.25 per share. These
warrants become exercisable if and when Rogers or Shaw meet certain subscriber
milestones. As of June 30, 1999, these warrants were exercisable as to 923,380
shares. In connection with these distribution agreements the Company recorded
non-cash charges to operations of $46.7 million for the three and six months
ended June 30, 1999.
In connection with distribution agreements with certain other cable
operations, the Company issued performance based warrants, in May and June 1998
and January and March 1999 to purchase a total of 10,544,200 and 6,060,000
shares, respectively, of its Series A common stock at an exercise price of $5.25
to $23.13 per share. In the event and to the extent the performance milestones
are met, the Company will incur non-cash charges to operations in future periods
based on the fair market value of the warrants when they become exercisable.
During the three and six months ended June 30, 1999, these warrants became
exercisable as to 52,248 and 1,533,142 shares and the Company recorded the fair
value of these warrants as distribution agreements of $81.6 million, which is
being amortized over the remaining life of the distribution agreements,
approximately five years.
8. Revenues
The Company's revenues for the three and six months ended June 30, 1999 and
1998 is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
(in thousands) 1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Advertising and ad targeting $ 42,442 $ 966 $ 45,770 $ 1,525
Subscription and other 28,100 8,254 49,870 13,468
-------- ------- -------- --------
Total revenues $ 70,542 $ 9,220 $ 95,640 $ 14,993
======== ======= ======== ========
</TABLE>
The Company has invested in several companies from which we expect to
receive revenues equal to or in excess of our cash investment. Revenues from
these companies were $7.0 million and $8.0 million for the three and six months
ended June 30, 1999, respectively.
Revenues from the exchange of advertising services for advertising in other
media were less than 10% of total revenues for the three and six months ended
June 30, 1999 and 1998. Revenues from these exchanges are recorded at the fair
market value of the services provided.
10
<PAGE> 11
9. Comprehensive Loss
The components of the Company's comprehensive loss for each period
presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
(in thousands) 1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss $ (217,944) $ (24,772) $ (236,068) $ (55,988)
Unrealized gain on investments 62,375 1,300 70,388 2,975
---------- --------- ---------- ---------
Comprehensive loss $ (155,569) $ (23,472) $ (165,680) $ (53,013)
========== ========= ========== =========
</TABLE>
10. Subsequent Events
Proposed Acquisition of iMALL, Inc.
In July 1999, the Company entered into an agreement and plan of merger with
iMALL, Inc. ("iMALL"), a publicly traded company that provides integrated
e-commerce solutions for businesses. If the acquisition is accomplished in
accordance with the agreement, each outstanding share of iMALL's common stock
will be converted into the right to receive 0.46 shares of the Company's Series
A common stock. The Company will issue approximately 8.3 million shares of
Series A common stock and will also assume iMALL's outstanding options and
warrants, for a total value of approximately $425 million valued as of July 12,
1999. The warrant issuable to First Data Merchant Services Corporation ("First
Data") for shares of iMALL common stock pursuant to an investment agreement
dated October 30, 1998 will be canceled at the effective time of the merger and
the Company will issue to First Data a warrant to purchase 2,300,000 shares of
the Company's Series A common stock at an exercise price of $36.96 per share.
The transaction is subject to the satisfaction or waiver by the parties of
several conditions, including the receipt of regulatory approvals and approvals
by the stockholders of iMALL. The transaction will be accounted for as a
purchase.
11
<PAGE> 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report contains forward-looking statements relating to
future events or financial results, such as statements indicating that "we
believe," "we expect" or "we anticipate" that events may occur or trends may
continue, and similar statements relating to future events or financial results.
These forward-looking statements are subject to risks and uncertainties as
indicated under the caption "Risk Factors." Actual results could vary materially
as a result of a number of factors including those discussed in "Risk Factors"
and elsewhere in this report.
Overview
At Home Corporation, or "Excite@Home," is a global media company based in
Redwood City, California. Through our Internet portal, Excite (www.excite.com),
and broadband services, @Home and @Work, we offer consumers content and
interactive services and we offer advertisers ad serving and targeted marketing
solutions across both broadband and narrowband Internet service platforms.
Media Services
Through our Media services, we provide consumers content and interactive
services via broadband and narrowband Internet service platforms. These
platforms include the broadband Internet portal of the @Home service launch
screen and our Internet portal site, www.excite.com, through which we offer
consumers and advertisers comprehensive Internet navigation services with
personalization capabilities via our Internet portal site, www.excite.com. We
work with content providers to facilitate the creation of rich multimedia
broadband and narrowband content delivered through our Internet portals and to
facilitate online transactions and services for @Home subscribers. We also
provide advertisers with ad serving and targeted marketing solutions through our
MatchLogic and Enliven business units. As of June 30, 1999, the number of
advertisers on our services, both broadband and narrowband, exceeded 1,700.
@Home Service
We are a provider of broadband Internet services over the cable television
infrastructure to consumers. By virtue of our relationships with 22 cable
companies in North America, Europe, Japan and Australia, we have access to
approximately 67 million homes, which includes exclusive access to over 55% of
the households in the North America capable of receiving cable television. The
@Home service allows residential subscribers to connect their personal computers
via cable modems and hybrid fiber co-axial, or "HFC", cable wires to a
high-speed Internet backbone network developed and managed by us. This service
enables subscribers to access all Internet content and services at transmission
speeds up to 100 times faster than typical dial-up connections, provides an
"always on" connection and offers rich multimedia programming through our
broadband Internet portal. The technology foundation of the @Home service is our
scalable, distributed, intelligent network architecture (our broadband network),
a "parallel Internet" that is designed to optimize traffic routing, improve
security and consistency of service, and facilitates end-to-end network
management, enhancing our ability to address performance bottlenecks before they
affect the user experience.
@Work Services
For businesses, our @Work services provide a platform for Internet,
intranet and extranet connectivity solutions and networked business applications
over both cable infrastructure and digital telecommunications lines. In order to
accelerate deployment of the @Work connectivity and hosting solutions into major
U.S. metropolitan areas, we have established strategic relationships with
Teleport Communications Group, or "TCG," the country's largest competitive local
exchange carrier and a subsidiary of AT&T, NorthPoint, a provider of digital
subscriber line services to businesses, and Exodus, a provider of Internet
hosting and network management services. By combining our broadband distributed
network architecture with cable, telephone and technology relationships, the
@Work services provide a platform for nationwide delivery of network-based
business applications. We have developed this platform at a low incremental cost
by leveraging our existing broadband network investment. As of June 30, 1999, we
provided @Work services to nearly 3,300 businesses.
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<PAGE> 13
Distribution
We have entered into distribution arrangements with cable companies in
North America for our @Home service. Some of these distribution arrangements are
subject to the completion of definitive agreements. As of June 30, 1999,
approximately 17.0 million of the homes served by these cable partners were
passed by upgraded two-way HFC cable, and we believe that our cable partners
will complete the upgrade of systems passing a majority of their homes within
four years or less. In order to shorten time to market for cable operators, we
provide a turnkey solution, which includes not only a technology platform and a
national brand, but also ongoing marketing, customer service, billing and
product development support. As of June 30, 1999, we had launched the @Home
service through our cable partners in portions of 89 cities and communities in
the United States, Canada and the Netherlands and had more than 620,000
subscribers.
Recent Events
Acquisition of Excite, Inc.
On May 28, 1999, we completed our acquisition of Excite, Inc., or "
Excite," Excite is a global Internet media company that operates an Internet
portal web site, www.excite.com, and specializes in the delivery of highly
targeted marketing solutions through its MatchLogic subsidiary. The acquisition
was accomplished by way of a merger of Excite with and into a wholly-owned
subsidiary of At Home Corporation. The aggregate purchase price was
approximately $7,231 million, which was based on the closing market price of our
Series A common stock on the day the merger was announced, the value of the
assumed Excite stock options and the merger related costs. At the closing, we
issued approximately 116 million shares of our Series A common stock valued at
approximately $6,051 million, based on an exchange ratio of 2.083804 shares of
our Series A common stock for each outstanding share of Excite common stock
adjusted to reflect the two for one split of our common stock on June 16, 1999.
We assumed outstanding options to purchase Excite common stock and converted
these into options to acquire approximately 46 million shares of our Series A
common stock valued at approximately $1,105 million, based on the same exchange
ratio, subject to the terms and conditions, including exercisability and vesting
schedules, of the original options. We also assumed outstanding warrants to
purchase Excite common stock and outstanding debt instruments convertible into
Excite common stock valued at approximately $10 million and converted these into
warrants and debt instruments convertible into our Series A common stock based
on the same exchange ratio. In addition, we incurred merger-related costs of
approximately $65 million.
Proposed Acquisition of iMALL, Inc.
On July 12, 1999, we entered into an agreement and plan of merger with
iMALL, Inc., or "iMALL," a publicly traded company that provides integrated
e-commerce solutions for businesses. If the acquisition is accomplished in
accordance with the agreement, each outstanding share of iMALL's common stock
will be converted into the right to receive 0.46 shares of our Series A common
stock. We will issue approximately 8.3 million shares of Series A common stock
and will also assume iMALL's outstanding options and warrants, for a total value
of approximately $425 million valued as of July 12, 1999. The warrant issuable
to First Data Merchant Services Corporation ("First Data") for shares of iMALL
common stock pursuant to an investment agreement dated October 30, 1998 will be
canceled at the effective time of the merger and we will issue to First Data a
warrant to purchase 2,300,000 shares of our Series A common stock at an exercise
price of $36.96 per share. The transaction is subject to the satisfaction or
waiver by the parties of several conditions, including the receipt of regulatory
approvals and approvals by the stockholders of iMALL. The transaction will be
accounted for as a purchase. We expect to complete this transaction in the
fourth quarter of 1999.
13
<PAGE> 14
Results of Operations
Revenues
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
(in thousands) 1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Advertising and ad targeting $ 42,442 $ 966 $ 45,770 $ 1,525
Subscription and other 28,100 8,254 49,870 13,468
-------- ------- -------- --------
Total revenues $ 70,542 $ 9,220 $ 95,640 $ 14,993
======== ======= ======== ========
</TABLE>
Revenues consist of advertising and ad targeting revenues and subscription
and other revenues. Advertising and ad targeting revenues are primarily made up
of revenues from our Media services which includes advertising, sponsorship
commerce agreements and ad serving and targeting revenues. Subscription and
other revenues are primarily made up of monthly customer subscription revenue
from the @Home and @Work services and revenue from cable system operators for
providing support services, such as customer support, local area content
development and pre-commercial deployment fees.
Advertising and ad targeting revenues
Advertising and ad targeting revenues increased to $42.4 million, or 60% of
total revenues, in the second quarter of 1999, from $1.0 million, or 10% of
total revenues, for the comparable period of the prior year. Current year to
date advertising and ad targeting revenues increased to $45.8 million, or 48% of
total revenues, from $1.5 million, or 10% of total revenues, for the comparable
period of the prior year. The increase in 1999 was attributable to an increase
in advertising and ad targeting revenues from Media services primarily due to
the acquisition of Excite on May 28, 1999. The advertising and ad targeting
revenues from Excite since the date of acquisition have been included in our
total revenues. Our advertising and ad targeting revenues increased
substantially from prior periods because the advertising and ad targeting
revenues from Excite after the acquisition are substantially higher than our
revenues from these sources before the acquisition. Therefore, we do not believe
that it is appropriate to compare our advertising and targeting revenues from
periods subsequent to May 1999 with periods ending prior to that time.
Subscription and other revenues
Subscription and other revenues increased to $28.1 million, or 40% of total
revenues, in the second quarter of 1999, from $8.3 million, or 90% of total
revenues, for the comparable period of the prior year. Current year to date
subscription revenues increased to $49.9 million, or 52% of total revenues, from
$13.5 million, or 90% of total revenues, for the comparable period of the prior
year. The increase in 1999 was primarily attributable to an increase in revenues
from the broadband Internet services of @Home and @Work. Excite does not
generate any subscription and other revenues.
Subscription and other revenues from the @Home service during the second
quarter and first half of 1999 increased from the comparable periods of the
prior year as our @Home subscriber base increased 322% to 620,000 at June 30,
1999 from 147,000 at June 30, 1998, including recently acquired Internet
subscribers that are being converted into the @Home service. The @Home service
represented approximately 62% and 44% of subscription and other revenues for the
second quarter of 1999 and 1998, respectively. Revenues from the @Home service
represented approximately 60% and 42% of subscription and other revenues for the
first half of 1999 and 1998, respectively. Revenues from United States
subscribers and Canadian subscribers represented 78% and 22% of our @Home
service revenues for each of the second quarter and first half of 1999 and the
second quarter and first half of 1998. We also had a small number of subscribers
through our joint venture in the Netherlands. However, revenues from these
subscribers were not significant for the first half of 1999.
14
<PAGE> 15
Subscription and other revenues from our @Work service during the second
quarter and first half of 1999 increased from the comparable periods of the
prior year as our @Work subscriber base increased 230% to 3,300 at June 30, 1999
to 1,000 at June 30, 1998. Revenues from our @Work services represented
approximately 28% and 51% of subscription and other revenues for the second
quarter of 1999 and 1998, respectively. Revenues from our @Work services
represented approximately 30% and 51% of subscription and other revenues for
current year to date 1999 and 1998, respectively.
Revenues from related parties
Revenues from related parties were $7.0 million, or 10% of total revenues,
for the second quarter of 1999, compared to $1.8 million, or 20% of total
revenues, for comparable period of the prior year. Current year to date revenues
from related parties were $12.4 million, or 13% of total revenues, compared to
$3.2 million, or 21% of total revenues, for the comparable period of the prior
year. Related party revenues for the periods in 1999 and 1998 included
development fees for @Work services and set-top devices and fees for billing and
support functions.
We have invested in several companies from which we expect to receive
revenues equal to or in excess of our cash investment. Revenues from these
companies were $7.0 million and $8.0 million for the three and six months ended
June 30, 1999, respectively. Substantially all of these revenues are
attributable to the Excite acquisition.
Revenues from the exchange of advertising services for advertising in other
media were less than 10% of total revenues for the three and six months ended
June 30, 1999 and 1998. Revenues from these exchanges are recorded at the fair
market value of the services provided.
Costs and Expenses
We accounted for the Excite acquisition as a purchase. The revenues and
expenses from Excite have been included in our results of operations commencing
on May 28, 1999. Therefore, we believe that period to period comparisons of our
historical results of operations in term of both absolute dollars and as a
percentage of revenues are not meaningful and should not be relied upon as an
indication of our future performance.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
(in thousands) 1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Cost and expenses:
Operating costs $ 29,084 $ 10,098 $ 47,684 $ 18,713
Product development and engineering 11,281 3,891 17,748 7,464
Sales and marketing 25,274 4,356 32,950 7,856
General and administrative 6,423 2,925 10,526 5,799
Costs and amortization of distribution agreements 18,703 13,628 33,723 33,162
Amortization of goodwill and other intangible assets 153,371 - 160,104 -
Purchased in-process research and development 34,400 - 34,400 -
Costs of business combination 11,680 - 11,680 -
--------- -------- --------- --------
Total costs and expenses $ 290,216 $ 34,898 $ 348,815 $ 72,994
========= ======== ========= ========
</TABLE>
Operating costs
Operating costs are primarily related to providing services to customers,
maintaining the @Home broadband network, royalties, license agreements and
revenue sharing arrangements for content and other services. In addition,
operating costs include hosting costs related to the maintenance and technical
support of our Internet portals, including Excite, and are comprised principally
of personnel costs, telecommunications costs and equipment depreciation. These
hosting costs are typically lower than the operating costs related to the @Home
broadband network.
Operating costs increased to $29.1 million, or 41% of revenues, for the
second quarter ended of 1999, from $10.1 million, or 110% of revenues, for the
comparable period of the prior year. Current year to date operating costs
increased to $47.7 million, or 50% of revenues, from $18.7 million, or 125% of
revenues, for the comparable period of the prior year. The increase in 1999 was
partially attributable to the acquisition of Excite on May 28, 1999. The
operating costs incurred by Excite since the date of acquisition have been
included in our results of operations. The increase in operating costs in 1999,
including Excite, were attributable to activities in the following proportions
for the second quarter and first half of 1999, respectively:
o approximately 28% and 29% to maintenance and depreciation of capital
equipment required for our broadband network;
15
<PAGE> 16
o approximately 18% and 16% to royalties, license agreements and revenue
sharing arrangements for content and other services for our Internet
portals, including Excite;
o approximately 14% and 13% to costs of customer service operations to
support a larger subscriber base;
o approximately 14% and 9% to hosting costs for our Internet portals, ad
serving and target marketing services which increased with the
acquisition of Excite; and
o approximately 13% and 16% to telecommunications costs related to our
@Work business.
We expect operating costs to increase substantially in the next quarter
over the second quarter of 1999 because the next quarter will be the first
quarter reflecting Excite operations. We also expect operating costs to increase
substantially during the remainder of 1999 as we continue to make substantial
investments in network infrastructure and customer service operations. In
addition, due to the acquisition of Excite in May 1999 and the potential
acquisition of iMALL, we anticipate that operating costs will increase due to
additional personnel, equipment depreciation, royalties and revenue sharing
arrangements.
Product development and engineering
Product development and engineering expenses consist primarily of salaries
and related expenses for engineering and editorial personnel, consulting fees,
equipment depreciation, supplies and the allocated cost of facilities.
Product development and engineering expenses increased to $11.3 million, or
16% of revenues, for the second quarter of 1999, from $3.9 million, or 42% of
revenues, for the comparable period of the prior year. Current year to date
product and development and engineering expenses increased to $17.7 million, or
19% of revenues, from $7.5 million, or 50% of revenues, for the comparable
period of the prior year. The increase in 1999 was partially attributable to the
Excite acquisition on May 28, 1999, as Excite had a number of product
development personnel and engineers. The product development and engineering
expenses incurred by Excite since the date of acquisition have been included in
our results of operations. The increase in product development and engineering
expenses in 1999, including Excite, were attributable to activities in the
following proportions for the second quarter and first half of 1999,
respectively:
o approximately 36% and 26% to the development and introduction of new
services on our Internet portals including Excite;
o approximately 17% and 20% to the continued development of the @Home
backbone to incorporate new telecommunications and server
technologies;
o approximately 14% and 21% to efforts to incorporate Internet
technologies into advanced digital set-top boxes; and
o approximately 14% and 15% to the development of ad serving and target
marketing technologies for advertisers on the Internet.
We expect product development and engineering expenses to increase
substantially in the next quarter over the second quarter of 1999 because the
next quarter will be the first quarter reflecting Excite operations. We
anticipate that product development and engineering expenses will
continue to increase during the remainder of 1999 due in part to:
o increased technology development efforts related to our broadband
network, including initial design and deployment costs;
o development and introduction of new content and services on our
Internet portals, including Excite, in order to create and maintain
brand loyalty among customers and users on our narrowband and
broadband Internet services; and
o additional technology development efforts in the integration of
acquired technologies from Excite and other companies acquired in the
future.
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs,
commissions, promotional and advertising expenses and agency and consulting
fees.
16
<PAGE> 17
Sales and marketing expenses increased to $25.3 million, or 36% of revenues,
for the second quarter of 1999, from $4.4 million, or 47% of revenues, for the
comparable period of the prior year. Current year to date sales and marketing
expenses increased to $33.0 million, or 34% of revenues, from $7.9 million or
52% of revenues, for the comparable period of the prior year. The increase in
1999 was primarily attributable to the Excite acquisition on May 28, 1999, as
Excite maintains a direct sales force and engages in a number of marketing
activities to promote its brands. The sales and marketing expenses incurred by
Excite since the acquisition have been included in our results of operations.
The increase in sales and marketing expenses in 1999, including Excite, were
attributable to activities in the following proportions for the second quarter
and first half of 1999, respectively:
o approximately 35% and 29% to promotional and advertising expense to
promote brand awareness of the Excite Internet service;
o approximately 29% and 34% to advertising sales for the @Home, @Work
and Media services, which increased with the acquisition of Excite;
o approximately 19% and 16% to sponsorship and content arrangements for
our continued expansion of our Internet portals' market reach and
number of users; and
o approximately 7% and 12% to obtaining @Home and @Work service
subscribers.
We expect sales and marketing expenses to increase substantially in the
next quarter over the second quarter of 1999 because the next quarter will be
the first full quarter reflecting Excite operations. We also expect that sales
and marketing expenses will continue to increase throughout the remainder of
1999 primarily due to personnel and other costs related to:
o @Home and @Work subscriber acquisition, including expanded retail
initiatives;
o our efforts to increase advertising, sponsorship and content
arrangements for our Internet portals;
o expanded product offerings, including planned delivery of the @Home
service through set-top devices and a broadband version of Excite's
Internet portal; and
o promotional and advertising expenses as we promote our brands and
introduce new services in order to create and maintain brand loyalty
among customers, expand market reach and increase the number of users
on our Internet portals as well as the amount of time they spend on
the web sites and the number of web pages they view.
General and administrative
General and administrative expenses consist primarily of administrative and
executive personnel costs, fees for professional services and the costs of
computer systems to support our operations.
General and administrative expenses increased to $6.4 million, or 9% of
revenues, for the second quarter of 1999, from $2.9 million or 32% of revenues,
for the comparable period of 1998. Current year to date general and
administrative expenses increased to $10.5 million, or 11% of revenues, from
$5.8 million or 39% of revenues, for the comparable period of the prior year.
The increase in 1999 was partially attributable to the Excite acquisition on May
28, 1999 as Excite had a number of administrative personnel who continue to work
for us. The general and administrative expenses incurred by Excite since the
date of acquisition have been included in our results of operations. The
increase in 1999, including Excite, was attributable to the addition of
personnel, expenditures related to facilities and information technology to
support the expansion and infrastructure of our operations and business
strategy.
We expect general and administrative expenses to increase substantially in
the next quarter over the second quarter of 1999 because the next quarter will
be the first full quarter reflecting Excite operations. We also anticipate that
general and administrative expenses will continue to increase as we expand our
administrative and executive staff, add infrastructure and assimilate
acquisitions of acquired technologies and businesses.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements consist primarily of
charges and amortization related to warrants to purchase our common stock issued
in connection with distribution agreements with some of our cable partners, a
portion of which vest based on
17
<PAGE> 18
their future performance in connection with distributing our broadband Internet
services. Cost and amortization of distribution agreements increased in the
second quarter of 1999 to $18.7 million, from $13.6 million for the comparable
period of the prior year. Current year to date amortization and distribution
agreements increased slightly to $33.7 million, from $33.2 million for the
comparable period of the prior year. The increased cost and amortization of
distribution agreements for 1999 was primarily attributable to the amortization
of cable partner distribution agreements and charges associated with the
achievement of performance milestones by some of our cable partners.
We will incur a minimum of approximately $17.3 million per quarter for
amortization of the cost of these distribution agreements through the first half
of 2002. This amount may increase if AT&T transfers cable systems to
Cablevision. In addition, total cost and amortization of distribution agreements
may fluctuate significantly each quarter depending upon our cable partners
achieving performance milestones.
Amortization of goodwill and other intangible assets
During the second quarter and first half of 1999, the amortization of
goodwill and other intangible assets was $153.4 million and $160.1 million,
respectively. During the second quarter of 1999, we incurred charges of $146.6
million relating to the amortization of goodwill and other purchased intangible
assets resulting for the Excite acquisition on May 28, 1999. The remaining
charges for the second quarter and first half of 1999 of $6.8 million and $13.5
million, respectively, were attributable to the amortization of goodwill and
other purchased intangible assets resulting from the acquisition of Full Force
in November 1998 and Narrative in December 1998.
We expect to incur quarterly charges to amortization of goodwill and other
intangible assets of approximately $440.0 million related to the acquisition of
Excite through the second quarter of 2003 and approximately $6.8 million per
quarter related to the acquisitions of Full Force and Narrative through the
second quarter of 2002.
Purchased in-process research and development
During the second quarter and first half of 1999, we incurred charges for
purchased in-process research and development of $34.4 million. We accounted for
the Excite acquisition as a purchase. Of the total purchase price of $7,231
million for Excite, $34.4 million was allocated to in-process technology and
charged to operations in the second quarter of 1999. The in-process research and
development value was determined by identifying the research projects for which
technological feasibility had not been achieved and assessing the date of
completion of the research and development effort. The state of completion was
determined by estimating the costs and time incurred to date relative to those
costs and time to be incurred to develop the in-process technology into
commercially viable products. The estimated discounted net cash flows included
only net cash flows resulting from the percentage of research and development
efforts complete at the end of the date of acquisition. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the in-process technology projects.
Costs of business combination
During the second quarter and first half of 1999, we incurred business
combination costs of $11.7 million, which were not included in the purchase
consideration of Excite. The charges consist primarily of severance and
personnel costs of some At Home employees, corporate communication costs and
other professional fees.
Interest and other income, net
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(in thousands) 1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest and other income $ 5,682 $ 1,388 $ 23,355 $ 2,970
Interest and other expense (3,210) (482) (5,506) (957)
-------- ------- -------- -------
Interest and other income, net $ 2,472 $ 906 $ 17,849 $ 2,013
======== ======= ======== =======
</TABLE>
Interest and other income, net increased to $2.5 million for the second
quarter of 1999, from $900,000 for the comparable period of the prior year.
Current year to date interest and other income, net increased to $17.8 million,
from $2.0 million for the comparable period of the prior year. The increase in
1999 was due primarily to an increase in interest income earned on higher cash
and investment balances as a result of the funds received from our secondary
offering in July 1998 and private offering of convertible subordinated
18
<PAGE> 19
debentures in December 1998. In addition, this increase is also attributable to
the recognition of a $12.6 million one-time gain in February on an investment in
a privately held company due to the investee being acquired for common stock by
a publicly traded company. The increase in interest and other income was
partially offset by interest expense on debt and capital lease obligations,
including convertible subordinated debentures.
Investment Portfolio
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of 90 days or less and are stated at amounts that
approximate fair value based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and the
U.S. Government. We include in cash and cash equivalents all short-term, highly
liquid investments that mature within 90 days of their acquisition date. We do
not expect any material loss with respect to our investment portfolio. In
addition, we do not use derivative financial instruments in our investment
portfolio.
We invest in equity instruments of information technology companies for
business and strategic purposes, which are included as other investments and are
accounted for under the cost method. For these investments in privately held
companies, our policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the carrying values.
We identify and record impairment losses on the other investments when events
and circumstances indicate that such assets might be impaired. To date, no such
impairment has been recorded. Some of these investments in publicly held
companies are considered marketable equity securities which are subject to
significant fluctuations in fair market value due to the volatility of the stock
market, and are recorded as other investments and are held as
available-for-sale.
The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows for the remainder
of 1999 and the related average interest rates.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
<TABLE>
<CAPTION>
Fair Value at
(in thousands, except interest rates) 1999 June 30, 1999
---------- -------------
<S> <C> <C>
Cash equivalents $ 86,966 $ 86,966
Average interest rate 4.70%
Short-term Investments $ 314,014 $ 316,586
Average interest rate 5.20%
Total portfolio, excluding other investments $ 400,980 $ 403,552
Average interest rate 5.10%
Other investments $ 177,602
</TABLE>
Equity in losses of affiliated companies
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
(in thousands) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Equity in losses of affiliated companies $ (742) $ -- $ (742) $ --
====== ====== ====== ======
</TABLE>
We accounted for our acquisition of Excite in May 1999 as a purchase. Of
the total purchase price of $7,231 million for Excite, approximately $21 million
was allocated to investments of Excite's affiliated companies based on the fair
value of these investments at the date of acquisition. These investments in
affiliated companies represent investments in joint ventures and privately held
companies, including a joint venture with Rogers Media, Inc., a related party,
which we account for under the equity method. Our equity interest in these
affiliated companies ranges from 22% and 50%. The equity in losses of affiliated
companies for the three and six months ended June 30, 1999 was $742,000 which
represents our share of the entities' losses for June 1999. At June 30, 1999,
our investment in affiliated companies was $20.0 million. We expect to record
increased losses from these affiliated companies during the remainder of 1999.
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<PAGE> 20
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
(in thousands) 1999 1998 Change
---------- --------- ------
<S> <C> <C> <C>
Cash and cash equivalents $ 117,247 $ 13,745 753%
Net cash used in operating activities $ (4,689) $ (17,582) (73)%
Net cash used in investing activities $ (196,456) $ (8,952) 209%
Net cash provided by (used for) financing activities $ 17,690 $ (3,934) 550%
</TABLE>
Operating activities
Net cash used in operating activities during the first half of 1999 was
$4.7 million compared to $17.6 million for the comparable period of 1998. Net
cash used in operating activities during 1999 reflects a net loss of $236.1
million compared to $56 million for the comparable period of the prior year.
Non-cash charges, which were charged to operations and included in net loss, but
do not require the use of cash, amounted to $244 million compared to $39.5
million in the comparable period of the prior year. This increase in non-cash
charges during 1999 included: amortization of goodwill and other intangible
assets of $146.6 million related to the Excite acquisition in May 1999 and $13.5
million related to the acquisitions of Full Force in November 1998 and Narrative
in December 1998; purchased in-process research and development of $34.4 million
related to the Excite acquisition; and various depreciation and amortization
charges of $16.3 million. Net cash used in operating activities after non-cash
charges in the six months ended June 30, 1999 compared to the comparable period
of the prior year reflects decreases in accounts receivable and other assets,
partially offset by decreases in accounts payable, other accrued liabilities and
customer deposits.
Investing activities
Net cash used in investing activities for the first half of 1999 was $196.5
million compared to $9.0 million for the comparable period of the prior year.
The increased use of cash in investing activities during 1999 was attributable
to the net purchases of short and long-term investments and the purchases of
property, equipment and improvements, partially offset by the cash portion of
the purchase consideration for the Excite acquisition in May 1999. Capital
expenditures have been, and future expenditures are anticipated to be, primarily
for facilities and equipment to support expansion of our operations. We expect
that our capital expenditures will increase as our business and employee base
grows.
Financing activities
Net cash from financing activities for the first half of 1999 was $17.7
million compared to net cash used in financing activities of $3.9 million for
the comparable period of the prior year. Financing activities for the first half
of 1999 included $25.9 million from the issuance of common stock primarily under
our equity incentive plans, partially offset by $8.2 million in payments on
capital lease and other financing obligations. Financing activities for the
first half of 1998, included $5.6 million in payments on capital lease
obligations, partially offset by $1.4 million from the issuance of common stock
primarily under our equity incentive plans and $294,000 from the repayment of
notes receivable from stockholders.
Cash and cash equivalents
At June 30, 1999, our principal source of liquidity was approximately
$433.8 million of cash, cash equivalents and short-term cash investments,
compared with $419.3 million at December 31, 1998.
Commitments
In September 1997, we entered into a term loan agreement with Silicon
Valley Bank. The term loan, as amended in October 1998, allows us to borrow up
to $15.0 million to finance the acquisition of property, equipment and
improvements and to collateralize letters
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of credit. At our option, borrowings under this term loan bear interest either
at the bank's prime rate or at LIBOR plus 2.5%. As of June 30, 1999, there were
no borrowings under this term loan, although there were outstanding letters of
credit in the amount of $3.7 million related to real property transactions.
Under the term loan agreement, we are required to meet financial covenants. The
term loan expires on October 19, 2002.
In December 1998, we entered into an agreement with AT&T to create a
nationwide network utilizing AT&T's backbone. Under this agreement, we will pay
AT&T $45 million in each of 1999 and 2000, including payments remaining of $22
million in 1999 and $45 million in 2000. We expect to make additional
disbursements of at least $5 million per year over the next few years for
backbone capacity, equipment and maintenance fees.
Our corporate headquarters consist of facilities of approximately 135,000
square feet in Redwood City, California, which we occupy under a 12-year lease,
with new facilities under construction of approximately 360,000 square feet on
adjacent property. We have leases on these new facilities of up to 15 years in
length. Rent under these leases is based on construction costs, and we will pay
for some tenant improvements. We will begin occupying the first phase of these
newly constructed facilities during the third quarter of 1999. We estimate that,
once we fully occupy this first phase, our rental payments for this first phase
will be approximately $412,0000 per month. Occupancy of the second phase is
scheduled to occur early in the year 2000 and will result in estimated
additional rental payments of approximately $412,000 per month. In connection
with the Excite acquisition, we assumed several leases relating to Excite's
facilities located in Redwood City, California and its MatchLogic subsidiary,
located in Westminster, Colorado. These facilities are under 10-year leases that
expire between 2007 and 2009. Our rental payments for these facilities are
approximately $415,000 per month
We believe that we have the financial resources needed to meet our
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next 12 months. Thereafter, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to seek alternative financing, such as selling
additional equity or debt securities or obtaining additional credit facilities.
However, depending on market conditions, we may consider alternative financing
even if our financial resources are adequate to meet presently anticipated
business requirements. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. Financing may
not be available on terms acceptable to us or at all.
Year 2000 Implications
Many currently installed computer systems and hardware and software
products are coded to accept only two digit entries in the date code field and
cannot distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates and,
as a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. Our
business is dependent on the operation of numerous systems that may potentially
be adversely impacted by Year 2000 related problems. Those systems include,
among others:
o hardware and software systems used by us to deliver our @Home, @Work
and Media services to our consumers and advertisers, including our
proprietary software systems as well as hardware and software supplied
by third parties;
o communications networks, such as the Internet, which we depend on to
provide services;
o the internal systems of our consumers, users and suppliers;
o the hardware and software systems used internally by us in the
management of our business; and
o non-information technology systems and devices used by us in our
business, such as telephone and building systems.
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State of Readiness
We have implemented a six-phase plan to mitigate possible Year 2000 affects
on our business and systems. We have designated a Year 2000 project team to
develop and implement that plan. This plan has executive sponsorship and is
regularly reviewed by senior management. This six-phase plan includes the
following:
o Phase one, awareness: involves increasing company awareness by
educating and involving all appropriate levels of management regarding
the need to address Year 2000 issues.
o Phase two, inventory: consists of identifying all of our systems,
technology, services and relationships that may be impacted by Year
2000.
o Phase three, assessment: involves determining our current state of
Year 2000 readiness for those areas identified in the inventory phase
and prioritizing areas that need to be addressed.
o Phase four, remediation: consists of developing a plan and repairing,
replacing or retiring those systems identified as needing correction
in the assessment phase.
o Phase five, validation: involves developing test plans, conducting
tests and analyzing the results of these tests to assure all key
systems are Year 2000 compliant.
o Phase six, implementation and contingency planning: consists of moving
compliant systems back into the production environment and to assure
systems' Year 2000 status remains unaffected by subsequent changes.
The contingency plan includes developing our response to failure of
mission critical systems, and other major risks related to Year 2000
compliance.
The @Home and @Work services have completed phase five, validation and
currently are in phase six. Phase six, implementation and contingency planning,
is scheduled to be substantially complete early in the fourth quarter of 1999.
The Media services have substantially completed phase four, remediation and
phase five, validation and are scheduled to complete these phases in the third
quarter of 1999. Phase six, implementation and contingency planning, is
scheduled to be substantially complete early in the fourth quarter of 1999.
As part of the normal course of our operations, we are currently in the
process of transitioning to or implementing new computer software for our
billing and network management systems. We are assessing and testing these
systems for Year 2000 dependencies and will implement changes to such systems if
necessary. The successful implementation of these systems is crucial to the
efficient operation of our business. We may not be successful implementing new
systems in an efficient and timely manner and the new systems may not be
adequate to support our operations. Problems with installation or initial
operation of the new systems could cause substantial difficulties in operations
planning, business management and financial reporting, which could have a
material adverse effect on our business. The cost of bringing our new systems
into Year 2000 compliance, if necessary, is not expected to have a material
effect on our financial condition or results of operations.
In addition to the systems used in our business, we utilize third-party
equipment and software in the delivery of our services and in the management of
our business that may not be Year 2000 compliant. We have initiated formal
communications with many of our significant vendors to determine the extent to
which we are vulnerable to these vendors' failure to remedy their own Year 2000
issues. Based on our progress on formal communications with our significant
vendors, we currently believe that our internal systems are, or can readily be
made, Year 2000 compliant in all material respects. We are taking steps with
respect to new vendor agreements to seek assurance that the vendors' products
and internal systems are Year 2000 compliant. Even if we receive these
assurances, we may still experience vendor-related Year 2000 problems. Failure
of third-party equipment or software or of non-information technology systems
and devices used by us to become Year 2000 compliant may require us to incur
unanticipated expenses to remedy problems. This could have a material effect on
our financial condition.
We also rely, both domestically and internationally, upon various vendors,
governmental agencies, utility companies, telecommunication service companies,
including Internet service and online service providers, delivery service
companies and other service providers who are outside our control. Further, we
have not fully determined the progress of our joint venture partners and content
partners in identifying and addressing systems that may potentially be impacted
by Year 2000 related problems. Failure of these parties to become Year 2000
compliant, may have a material effect on our business.
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Contingency Plan
Although we currently expect that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems or a failure to fully identify all Year 2000 dependencies in
our existing systems and in the systems of our suppliers could have material
adverse consequences. Therefore, we have developed contingency plans for
continuing operations in the event that these problems arise.
Risks Related to Year 2000 Issues
Any failure of ours to address Year 2000 issues may have a material adverse
affect on our business. These affects may include, but are not be limited to:
o a reduction in our ability to provide services for our customers such
as having specific content or services available;
o a reduction in our ability to deliver, track and measure Internet
advertisements and recognize or process sales;
o our service could experience outages, delays and other difficulties
due to system failures, which may make our services unavailable for
consumers; and
o decreased utilization of our services which may adversely affect our
advertising relationships.
We are also subject to external forces that generally affect similarly
situated business over which we have no control, such as possible interruptions
of utility or Internet-related data network services as a result of Year 2000
failures, any of which may have similar material affects.
Furthermore, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 readiness. These expenditures may result in reduced funds
available for Internet advertising or sponsorship of Internet services, which
may have a material adverse affect on our financial condition.
The results of our Year 2000 testing and implementation phase activities
and responses received from significant third-party vendors and service
providers will be taken into account in determining the nature and extent of any
contingency plans.
Costs
While Year 2000 costs incurred to date have not been material, we expect to
incur additional costs and expenditures to remedy any Year 2000 related
problems. Based on our assessment, we estimate that for 1999 we will incur
approximately $2.5 million in support of our Year 2000 compliance initiative.
There is risk that additional costs could be incurred, but based on management's
current knowledge it is unable to fully ascertain those costs.
The above discussion regarding costs, risks and estimated completion dates
for the Year 2000 is based on our best estimates given information that is
currently available, and is subject to change.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
------------------------------
WE HAVE INCURRED AND EXPECT TO INCUR SUBSTANTIAL LOSSES
We were incorporated in March 1995, commenced operations in August 1995,
and have incurred net losses from operations in each fiscal period since our
inception. As of June 30, 1999, we had an accumulated deficit of $463.2 million.
In addition, we currently intend to increase capital expenditures and operating
expenses in order to expand our network and to market and provide our services
to a growing number of potential subscribers. As a result, we expect to incur
additional net losses before cost and amortization of distribution agreements
and amortization of goodwill and other intangible assets for at least the next
quarter. As a result of our acquisition of Excite and our pending acquisition of
iMALL, we anticipate that we will incur substantial non-cash charges relating to
the amortization of goodwill and other intangible assets.
OUR BUSINESS IS UNPROVEN AND WE MAY NOT ACHIEVE PROFITABILITY
The profit potential of our business model is unproven. The @Home service
was available only in portions of 89 geographic markets as of June 30, 1999 and
may not achieve broad consumer or commercial acceptance. Although approximately
3,300 primarily small- and medium-sized business organizations have agreed to
utilize @Work services as of June 30, 1999, @Work services may not achieve broad
commercial acceptance and the current rate of deployment for @Work services may
not be sustained. We have difficulty predicting whether the pricing models for
our @Home and @Work services will prove to be viable, whether demand for our
such services will materialize at the prices our cable partners charge for the
@Home service or the prices we or our cable partners charge for @Work services,
or whether current or future pricing levels will be sustainable. If these
pricing levels are not achieved or sustained or if our @Home and @Work services
do not achieve or sustain broad market acceptance, our business, operating
results and financial condition will be significantly harmed. We may never
achieve favorable operating results or profitability.
The Media services relies substantially upon the sale of advertising, ad
serving and targeting marketing solutions on the Internet, which is a developing
market. Risks related to the Media services business include, without
limitation:
o the inability to maintain and increase levels of traffic on our
Internet portal services;
o the failure of the market to adopt the Internet as an advertising and
commercial medium;
o reductions in market prices for Internet advertising as a result of
competition or otherwise;
o the inability to achieve higher cost per thousand impression, or
"CPM," rates for targeted advertising or to increase the percentage of
our advertising inventory sold;
o the inability to meet minimum guaranteed impressions under sponsorship
agreements;
o the inability to develop or acquire content for our Media services;
o the inability to generate commerce-related revenues;
o the inability of the Media services to continue to generate increased
revenues;
o the failure to anticipate and adapt to a developing market; and
o government regulation.
GROWTH OF THE @HOME SERVICE MAY BE INHIBITED BY FACTORS BEYOND OUR CONTROL
As of June 30, 1999, we had in excess of 620,000 cable modem subscribers,
including recently acquired Internet subscribers that are being converted to the
@Home service. Our ability to increase the number of subscribers to the @Home
service to achieve our
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business plans and generate future revenues will depend on many factors which
are beyond our control. For instance, some of our cable partners have not
achieved the subscriber levels that we had originally anticipated. Other factors
include:
o the rate at which our current and future cable partners upgrade their
cable infrastructures for two-way data services;
o our ability and the ability of our cable partners to coordinate timely
and effective marketing campaigns with the availability of cable
infrastructure upgrades;
o the success of our cable partners in marketing and installing the
@Home service in their local cable areas;
o the prices that our cable partners set for the @Home service and for
its installation;
o the speed at which our cable partners can complete the installations
required to initiate service for new subscribers;
o the commercial availability of self-installable, two-way modems that
comply with the recently adopted interface standards known as DOCSIS,
and the success of our roll-out of these products with the @Home
service;
o the quality of customer and technical support provided by us and our
cable partners; and
o the quality of content on the @Home service.
WE NEED TO ADD SUBSCRIBERS AT A RAPID RATE FOR OUR BUSINESS TO SUCCEED, BUT WE
MAY NOT ACHIEVE OUR SUBSCRIBER GROWTH GOALS
Our actual revenues or the rate at which we will add new subscribers may
differ from our forecasts. We may not be able to increase our subscriber base
enough to meet our internal forecasts or the forecasts of industry analysts or
to a level that meets the expectations of investors. The rate at which
subscribers have increased in the past does not necessarily indicate the rate at
which subscribers may be expected to grow in the future. In particular, while we
have forecast that our number of subscribers could grow to over 1.1 million by
December 31, 1999 from more than 620,000 subscribers at June 30, 1999 we may not
achieve this level of subscriber growth.
OUR SUBSCRIBER GROWTH DEPENDS ON THE ACTIONS OF OUR CABLE PARTNERS, AND IS
LIMITED BY PRICE AND INSTALLATION CONSTRAINTS
We believe subscriber growth has been constrained, and will continue to be
constrained, by the cost and time required to install the @Home service for each
residential consumer. In addition, our growth has been constrained by the rate
at which our cable partners have upgraded their systems, and most of our cable
partners are not obligated to upgrade their cable infrastructures or market the
@Home service. Moreover, the @Home service is currently priced at a premium to
many other online services, and large numbers of subscribers may not be willing
to pay a premium for the @Home service.
IF WE CANNOT MAINTAIN THE SCALABILITY, SPEED AND SECURITY OF OUR NETWORK,
CUSTOMERS WILL NOT ACCEPT OUR SERVICES
Due to the limited deployment of our services, the ability of our network
to connect and manage a substantial number of online subscribers at high
transmission speeds is unknown. Therefore, we face risks related to our
network's ability to be scaled up to its expected subscriber levels while
maintaining superior performance. Our network may be unable to achieve or
maintain a high speed of data transmission, especially as our subscribers
increase. In recent periods, the performance of our network has experienced some
deterioration in some markets as a result of subscriber abuse of the @Home
service. While we are seeking to eliminate this abuse by enforcing our
acceptable user policy and by limiting users' upstream bandwidth, our failure to
do so may result in slower network performance and reduced consumer demand for
our services. In addition, while we have taken steps to prevent users from
sharing files via the @Home service and to protect against bulk unsolicited
e-mail, public concerns about security, privacy and reliability of the cable
network, or actual problems with the security, privacy or reliability of our
network, may inhibit the acceptance of our Internet services.
IF NEW TWO-WAY CABLE MODEMS ARE NOT DEPLOYED TIMELY AND SUCCESSFULLY, WE MAY NOT
BE ABLE TO GROW OUR SUBSCRIBER BASE QUICKLY
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Each of our subscribers currently must obtain a cable modem from a cable
partner to access the @Home service. The North American cable industry has
recently adopted interface standards known as DOCSIS for hardware and software
to support the delivery of data services over the cable infrastructure utilizing
compatible cable modems. Some of our cable partners have chosen to delay some
deployments of the @Home service until the widespread commercial availability of
DOCSIS-compliant cable modems. Our subscriber growth could be constrained and
our business could be significantly harmed if our cable partners choose to slow
the deployment of the @Home service further. If our cable partners are not able
to obtain a sufficient quantity of DOCSIS-compliant modems, our growth will be
limited.
WE COULD LOSE SUBSCRIBERS, DISTRIBUTION RELATIONSHIPS AND REVENUES TO OUR
COMPETITORS
The markets for consumer and business Internet services and online content
are extremely competitive, and we expect that competition will intensify in the
future. Our most direct competitors in these markets include the following:
o Providers of cable-based Internet services. For example, Time Warner
Inc. and Media One Group have deployed high-speed Internet access
services over their local cable networks through their own cable-based
Internet service, Road Runner. We currently compete with Road Runner
to establish distribution arrangements with cable system operators,
and we may compete for subscribers in the future if and when our cable
partners cease to be subject to their exclusivity obligations;
o Telecommunications providers. We compete with national long-distance
and local exchange carriers that offer high-speed, Internet access
services such as integrated services digital network and asymmetric
digital subscriber line. If the advanced services offered by these
companies are deregulated, this would further enhance the ability of
these companies to compete against our services;
o Internet and online service providers. We compete with Internet
service providers that provide basic Internet access services and with
online service providers such as America Online that provide Internet
access and content; and
o Internet content aggregators. We compete with content aggregators and
Internet portals that seek to capture audience flow by providing
ease-of-use and offering content that appeals to a broad audience,
including America Online, Yahoo! Inc. and Lycos, Inc.
Many of our competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than we do.
These competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote more resources to developing
Internet services or online content than we could. We may not be able to compete
successfully against current or future competitors, and competitive pressures
could significantly harm our subscriber base, our ability to renew and enter
into new distribution agreements and our revenues.
OUR DEPENDENCE ON OUR NETWORK EXPOSES US TO A SIGNIFICANT RISK OF SYSTEM FAILURE
Our operations are dependent upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, telecommunications failures and similar events. The occurrence of a
natural disaster or other unanticipated problem at our network operations center
or at a number of our regional data centers may cause interruptions in our
services. Additionally, failure of our cable partners or companies from which we
obtain data transport services to provide the data communications capacity that
we require, for example as a result of natural disaster, or operational
disruption, may cause interruptions in the services we provide. Any damage or
failure that causes interruptions in our operations may harm our business.
The performance of the systems that host our Internet portals is critical
to our ability to attract and retain advertisers and users for our Media
services. Any failure that causes interruptions in the availability of, or that
increases response time of, these systems could reduce user satisfaction and
traffic to our Internet portals and, if sustained or repeated, would reduce the
attractiveness of our Media services to advertisers and consumers. An increase
in the volume of searches conducted through our Internet portals could lead to
slower response time or system failures. In addition, as the amount of Web pages
and traffic increases, there can be no assurance that the our Internet portals
will be able to scale proportionately. The Media services also depend upon
timely feeds and downloads of information from content providers, Internet and
online service providers, and other Web site operators, which have experienced
significant outages in the past. In the past, Internet consumers have
experienced outages, delays and other difficulties due to system failures
unrelated to our systems and services. Additional difficulties may also
materially and adversely affect consumer and advertiser satisfaction. To the
extent that the capacity constraints described above are not effectively
addressed by us, such constraints may have a material adverse affect on our
business.
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OUR BUSINESS MAY BE IMPACTED BY CABLE UNBUNDLING PROPOSALS AND OTHER GOVERNMENT
REGULATION
Currently, our services are not directly subject to regulations of the
Federal Communication Commission or any other federal, state or local
communications regulatory agency. However, changes in the regulatory environment
relating to the Internet, cable or telecommunications markets which could
require regulatory compliance by us or which could impact our exclusivity
arrangements, subscribers and revenues include:
o Federal regulation. Regulatory changes that affect telecommunications
costs, limit usage of subscriber-related information or increase
competition from telecommunications companies could affect our pricing
or ability to market our services successfully. For example,
regulation of cable television rates may affect the speed at which our
cable partners upgrade their cable systems to carry our services;
o Regulation by local franchise authorities. Many of our United States
cable partners' local cable affiliates have elected to classify the
provision of the @Home service as additional cable services under
their local franchise agreements, and to pay franchise fees under
those agreements. Local franchise authorities may attempt to subject
cable systems to higher or different franchise fees, taxes or
requirements in connection with their distribution of the @Home
service. There are thousands of franchise authorities, and it would be
difficult or impossible for us or our cable partners to operate under
a unified set of franchise requirements; and
o Third-party access requirements. America Online, GTE, regional bell
operating companies, MindSpring Enterprises, Inc., Consumers Union and
other parties have requested Congress, the FCC and state and local
authorities to require cable operators to provide Internet and online
service providers with unbundled access to their cable systems. If we
or our cable partners are classified as common carriers of Internet
services, or if the government authorities otherwise require
third-party access to their cable infrastructures, Internet and online
service providers could provide services over our cable partners'
systems that compete with our services. Our cable partners could also
be subject to tariffs for the amounts they could charge for our
services.
In local government proceedings, Portland and Multnomah County, Oregon have
imposed third-party access requirements on TCI as a condition of its merger with
AT&T. Other municipalities such as Denver, Colorado, King County, Washington,
San Francisco and Los Angeles, California are considering imposing similar
requirements. In June 1999, a U.S. District Court upheld the third-party access
requirement imposed on TCI by Portland and Multnomah County. This decision has
been appealed to the U.S. Court of Appeals for the Ninth Circuit.
RISKS RELATED TO OUR RELATIONSHIPS WITH OUR CABLE PARTNERS
----------------------------------------------------------
Our agreements with our cable partners are complex. For a summary of some
of the key aspects of these agreements, you should refer to our Annual Report on
Form 10-K/A.
WE DEPEND ON OUR CABLE PARTNERS TO UPGRADE TO THE TWO-WAY CABLE INFRASTRUCTURE
NECESSARY TO SUPPORT THE @HOME SERVICE; THE AVAILABILITY AND TIMING OF THESE
UPGRADES ARE UNCERTAIN
Transmission of the @Home service and cable-based @Work services depends on
the availability of high-speed two-way hybrid fiber coaxial cable
infrastructure. However, only a 8 portion of existing cable plant in the United
States and in some international markets has been upgraded to two-way hybrid
fiber coaxial cable, and even less is capable of high-speed two-way
transmission. As of June 30, 1999 approximately 55% of our North American cable
partners' cable infrastructure was capable of delivering the @Home service. Our
cable partners have announced and begun to implement major infrastructure
investments in order to deploy two-way hybrid fiber coaxial cable. However,
these investments have placed a significant strain on the financial, managerial,
operating and other resources of our cable partners, most of which are already
highly leveraged. Therefore, these infrastructure investments have been, and we
expect will continue to be, subject to change, delay or cancellation. Although
our commercial success depends on the successful and timely completion of these
infrastructure upgrades, most of our cable partners are under no obligation to
upgrade systems or to introduce, market or promote our services. The failure of
our cable partners to complete these upgrades in a timely and satisfactory
manner, or at all, would prevent us from delivering high-performance Internet
services and would significantly harm our business.
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OUR CABLE PARTNERS ARE NOT GENERALLY OBLIGATED TO CARRY OUR SERVICES, AND THE
EXCLUSIVITY OBLIGATIONS THAT PREVENT THEM FROM CARRYING COMPETING SERVICES MAY
BE TERMINATED
Our cable partners are subject to exclusivity obligations that prohibit
them from obtaining high-speed, greater than 128 kilobits per second,
residential consumer Internet services from any source other than us. However,
most of our cable partners are under no affirmative obligation to carry any of
our services. Also, the exclusivity obligations of our principal cable partners,
TCI, Comcast, Cox and Cablevision, expire on June 4, 2002, and may be terminated
sooner under some circumstances, including:
o Our principal cable partners may terminate all their exclusivity
obligations upon a change in law that materially impairs some of their
rights.
o Comcast or Cox may terminate all exclusivity obligations of our
principal cable partners at any time if there is a change of control
of TCI that results within twelve months in the incumbent TCI
directors no longer constituting a majority of TCI's board. AT&T, TCI,
Comcast and Cox have agreed, however, that AT&T's acquisition of TCI
did not constitute a change of control under the terms of the original
agreement.
o Cox or Comcast may terminate the exclusivity provisions of our
principal cable partners if AT&T and its affiliates do not meet @Home
subscriber penetration levels. On June 4, 1999, Cox had this right,
but Cox waived this right for 1999.
o Comcast may terminate its own exclusivity obligations if it allows us
to repurchase a portion of Comcast's equity interest in us. Comcast
has informed us that it has entered into an agreement with Microsoft
Corporation under which Microsoft can require Comcast to terminate its
exclusivity obligations.
In consideration for Cox's agreement to waive its right to terminate
exclusivity as of June 4, 1999, our board approved changes to our corporate
governance on April 16, 1999. Our stockholders approved these changes on May 28,
1999. These governance changes generally require board action to be approved by
a majority of our board, including the board representatives of AT&T and either
Cox or Comcast. In addition, as further consideration for Cox's waiver, AT&T
agreed to increase its subscriber acquisition goals for the next twelve months
above its current goal for that period.
If the exclusivity obligations of our cable partners are terminated, this
could significantly harm our business and cause an immediate drop in our stock
price.
WE ARE CONTROLLED BY TCI AND AT&T
TCI controls approximately 58% of our voting power. AT&T owns TCI and
therefore controls us. Currently, four of our eleven directors are directors,
officers or employees of TCI, AT&T or its affiliates. TCI currently owns all
outstanding shares of our Series B common stock, 30,800,000 shares, each of
which carries ten votes per share. This Series B common stock ownership gives
TCI the right to elect five Series B directors, one of which is designated by
Comcast and one of which is designated by Cox. So as long as TCI owns at least
15,400,000 shares of our Series B common stock and holds a majority of our
voting power, our board may take action only if approved by the board and by at
least 75%, or four of the five, of our Series B directors. As a result,
corporate actions generally require the approval of TCI's three Series B
directors and one, or in some cases both, of the directors designated by Comcast
and Cox. Therefore, Comcast and Cox, acting together, may veto any board action.
Notwithstanding these provisions, all of our directors owe fiduciary duties to
our stockholders.
WE DEPEND ON TCG FOR LOCAL TELECOMMUNICATIONS SERVICES FOR OUR @WORK SERVICES
We depend on TCG, which is owned by AT&T, to provide local
telecommunications services and co-location within TCG's facilities on favorable
economic terms. This relationship enables us to provide @Work services to an
entire metropolitan area in which TCG has facilities. If we were required to
obtain comparable telecommunications services from local exchange carriers, we
would effectively be limited to providing @Work services to commercial customers
within a ten-mile radius of one of our points of presence. As a result, we would
be required to build multiple points of presence to service an entire
metropolitan area, which would substantially increase our capital costs to enter
new markets and which could make market entry uneconomical. If we were required
to pay standard local exchange carrier rates, the ongoing operating costs for
our @Work services would be substantially higher. The loss of our strategic
relationship with TCG would significantly harm our ability to deploy our @Work
services. In addition, TCG has acquired a
28
<PAGE> 29
provider of Internet-related services to businesses and corporate customers and
will compete directly with the @Work Internet service. To the extent TCG
acquires or enters into strategic relationships with other Internet service
providers, TCG may reduce its support of the @Work services. Although there are
alternative suppliers for TCG's services, it could take a significant period of
time for us to establish similar relationships, and equivalent terms might not
be available.
WE MAY FACE ADDITIONAL COMPETITION FROM AT&T
AT&T operates businesses that could compete with our services,
notwithstanding any exclusivity obligations that may apply to it due to its
ownership of TCI:
o AT&T operates a consumer Internet service known as AT&T WorldNet.
Although AT&T WorldNet is currently a telephone dial-up service that
does not utilize broadband technologies, AT&T may be able to use
non-cable-based data transport mechanisms to offer high-speed
residential Internet services that compete with the @Home service.
o AT&T owns TCG, which operates an Internet service for business
customers that competes with the @Work service. The @Work business
depends to a significant extent on our agreement with TCG for local
access telecommunications services. If TCG ceases to cooperate with
us, our @Work business would be harmed. Because the @Work business is
not subject to the cable partners' exclusivity obligations, AT&T or
TCG are not limited in their ability to compete with the @Work
business.
o AT&T and Time Warner have announced the formation of a significant
strategic relationship that will include a joint venture to offer
AT&T-branded cable telephony service to 10 residential and small
business customers over Time Warner's existing cable television
systems in 33 states. The relationship between AT&T and Time Warner
could ultimately extend to other broadband services, including cable
Internet services, that compete with the @Home service.
AT&T may take actions that benefit TCG, WorldNet or other services of AT&T
or other parties to our detriment.
WE FACE SEVERAL TRANSITORY RISKS ASSOCIATED WITH OUR ACQUISITION OF EXCITE
Although the Excite acquisition is complete, the following risks associated
with this transaction remain:
o Our accounting for the merger may change pending a final analysis of
the fair values of the assets acquired and liabilities assumed. The
impact of these changes could be material to our future operating
results;
o We may encounter substantial difficulties, costs and delays associated
with integrating the operations of our companies. This process may
disrupt our business if not completed in a timely and efficient
manner;
o The present and potential relationships of us and Excite with
sponsors, content providers, advertisers, users and subscribers may be
harmed by the merger;
o We may lose the right to use intellectual property or other
contractual rights of Excite if we cannot obtain third party consent,
waiver or approval of the merger where required under existing
agreements; and
o The merger may result in conflicts associated with exclusive rights
that both Excite and we have granted to third parties with regard to
content, sponsorship or other strategic relationships, and failure to
resolve these conflicts could harm our business.
RISKS ASSOCIATED WITH BANNER ADVERTISING
We derive a significant portion of our revenues from the sale of banner
advertisements on our Internet portal services. A majority of our customers
purchasing banner advertisements purchase these advertisements on a short-term
basis, and many of these customers may terminate their advertising commitments
at any time without penalty. Consequently, there can be no assurance that these
customers will continue or increase their level of advertising on our Internet
portal services or that these customers will not move their advertising to
competing Internet sites or to other traditional media. Therefore, there can be
no assurance that we will be successful in
29
<PAGE> 30
maintaining or increasing the amount of banner advertising on our Internet
portal services, and the failure to do so would have a material adverse affect
on our business.
OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH IN INTERNET USE GENERALLY AND
PORTAL WEB SITES IN PARTICULAR
We operates in a new and rapidly evolving market. Our business may be
adversely affected if usage of the Internet or other online services does not
continue to grow. This growth could be hindered by a number of factors
including: the adequacy of the Internet's infrastructure to meet increased usage
demands; privacy and security concerns; and availability of cost-effective
services. Any of these issues could cause the Internet's performance or level of
usage to decline.
The success of our Internet portals is also dependent on Internet users
continuing to use "portal" web sites for their information needs. If Internet
users begin to become less dependent on portal sites, but rather go directly to
particular web sites, our traffic levels could decrease, which could make our
sites less attractive to advertisers.
RISKS ASSOCIATED WITH DEVELOPING INTERNET ADVERTISING MARKETS
The Internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. Therefore the Internet is an unproven medium for
advertising-supported services. Accordingly, our future operating results will
depend substantially upon the increased use of the Internet for information,
publication, distribution and commerce and the emergence of the Internet as an
effective advertising medium.
OUR MEDIA SERVICES DEPENDS ON SEVERAL THIRD PARTY RELATIONSHIPS FOR USERS,
ADVERTISERS AND REVENUES
We depend on a number of third party relationships to provide users and
content for our services, including agreements for links to our Internet portal
services to be placed on high-traffic Web sites and agreements for third parties
to provide content, games and e-mail for our Internet portal services. If these
relationships terminate and we are not able to replace them, we could lose users
or advertisers, and this could harm our revenues.
PRIVACY CONCERNS REGARDING THE USAGE OF DEMOGRAPHIC INFORMATION COULD PREVENT US
FROM BENEFITING FROM SELLING TARGETED ADVERTISING
Due to privacy concerns regarding the usage of demographic information in
online advertising, some commentators and governmental bodies have suggested
limitations on the technology that we use to deliver targeted advertising and
compile demographic information about users. Any reduction or limitation in the
use of this technology could result in lower advertising rates.
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<PAGE> 31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Information relating to quantitative and qualitative disclosure about
market risk is set forth under the captions "Investment Portfolio" in Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
31
<PAGE> 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
On May 28, 1999, our stockholders adopted our fifth amended and restated
certificate of incorporation. This new version of our certificate of
incorporation:
o Increased the authorized number of shares of our common stock, Series
A common stock and Series B common stock and decreased the number of
shares of our Series K common stock.
o Increased the additional board vote required for corporate actions, in
addition to approval by a majority of all directors, from approval of
at least a majority of the Series B directors (who are designated by
TCI, Cox and Comcast) to approval of a least 75% of the Series B
directors. As a result of this change, Comcast and Cox, voting
together, may veto any board action.
o Eliminated the Series B committee of the board, which previously had
the right to fix the size of the board and fill any resultant
vacancies.
o Eliminated the references in the previous certificate of incorporation
to the rights of the Series K directors to elect a director, since the
Series K stockholders do no hold enough shares of Series K common
stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(All votes below are reflected on a pre-split basis)
Holders of our Series A common stock and Series K common stock are entitled
to one vote for each share, and holders of our Series B common stock are
entitled to ten votes for each share.
On May 28, 1999, we held our annual meeting of stockholders. The matters
voted upon and approved by the stockholders at the meeting, and the number of
votes cast with respect to each such matter, were as follows:
1. Adoption of our fifth amended and restated certificate of incorporation to
increase the authorized shares of the our common stock, Series A common
stock, and Series B common stock, decrease the authorized shares of our
Series K common stock and effect some corporate governance changes.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ----------- ------- ------- ----------
<S> <C> <C> <C>
236,831,449 93,554 44,793 11,988,664
</TABLE>
2. Issuance of shares of our Series A common stock to the Excite stockholders
under the Agreement and Plan of Reorganization, dated January 19, 1999 by
and among Excite Countdown Acquisition Corp and us.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ----------- ------- ------- ----------
<S> <C> <C> <C>
236,900,474 33,524 35,923 11,988,539
</TABLE>
3. Election of our Series A directors, Series B directors and additional
directors.
o Vote of Series A stockholders for election of Series A directors (L. John
Doerr and William R Hearst III)
32
<PAGE> 33
<TABLE>
<CAPTION>
For Against
---------- -------
<S> <C> <C>
Doerr 93,782,999 175,461
Hearst 93,781,187 177,273
</TABLE>
o Vote of Series B stockholders for election of Series B directors (C.
Michael Armstrong, Leo J. Hindery, Jr., John C. Petrillo, Brian L.
Roberts and David M. Woodrow)
<TABLE>
<CAPTION>
For Against
----------- -------
<S> <C> <C>
154,000,000 --
</TABLE>
o Vote of holders of common stock for additional directors (George Bell,
Thomas A. Jermoluk, John C. Malone and James R. Shaw).
<TABLE>
<CAPTION>
For Against
----------- -------
<S> <C> <C>
Bell 248,789,420 169,040
Jermoluk 248,784,945 173,515
Malone 248,784,648 173,812
Shaw 248,787,993 170,467
</TABLE>
4. Amendment of our 1997 Equity Incentive Plan to increase the number of
shares authorized thereunder by 8,675,000 shares.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ----------- --------- ------- ----------
<S> <C> <C> <C>
234,453,598 2,437,510 78,712 11,988,640
</TABLE>
5. Ratification of Ernst & Young LLP as our independent auditors for 1999.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ----------- --------- ------- ----------
<S> <C> <C> <C>
248,859,046 45,781 53,633 --
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
<S> <C>
2.01 Agreement and Plan of Merger, dated as of July 12, 1999, between
us and iMALL, Inc. (incorporated by reference to our Schedule 13D
filed with the Commission on August 2, 1999).
2.02 Certificate of Merger, as filed with the Delaware Secretary of
State on May 28, 1999 (incorporated by reference to our current
report on Form 8-K filed with the Commission on June 14, 1999).
3.01 At Home Corporation's Fifth Amended and Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State on
May 28, 1999 (incorporated by reference to our registration
statement on Form S-8 (File No. 333-79883) filed with the
Commission on June 3, 1999).
27.01 Financial Data Schedule for three months ended June 30, 1999
(EDGAR version only).
</TABLE>
(b) Current reports on Form 8-K.
On April 8, 1999, we filed a current report on Form 8-K under Item 5
announcing that Cox Communications had waived its right to terminate its
exclusivity obligations in exchange for (i) governance changes that generally
require board actions to be approved by a majority of our board of directors,
including either Cox or Comcast, and (ii) in exchange for AT&T agreeing to
increase its subscriber penetration goal for the next twelve months.
On June 14, 1999, we filed a current report on Form 8-K under Item 2
announcing that we had acquired Excite.
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<PAGE> 34
SIGNATURES
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.
AT HOME CORPORATION
(Registrant)
Date: August 15, 1999 By: /s/ KENNETH A. GOLDMAN
-----------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ ROBERT A. LERNER
-----------------------------------
Corporate Controller and Treasurer
(Principal Accounting Officer)
34
<PAGE> 35
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.01 Financial Data Schedule for three months ended June 30, 1999
(EDGAR version only).
</TABLE>
- --------------
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from At Home
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 117,247
<SECURITIES> 316,586
<RECEIVABLES> 47,684
<ALLOWANCES> (8,295)
<INVENTORY> 0
<CURRENT-ASSETS> 538,851
<PP&E> 191,305
<DEPRECIATION> (66,988)
<TOTAL-ASSETS> 8,055,547
<CURRENT-LIABILITIES> 158,823
<BONDS> 232,765
0
0
<COMMON> 8,001,005
<OTHER-SE> (390,853)
<TOTAL-LIABILITY-AND-EQUITY> 8,055,547
<SALES> 0
<TOTAL-REVENUES> 95,640
<CGS> 0
<TOTAL-COSTS> 47,684
<OTHER-EXPENSES> 301,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,070)
<INCOME-PRETAX> (236,068)
<INCOME-TAX> 0
<INCOME-CONTINUING> (236,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (236,068)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
