<PAGE> 1
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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 March 31, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
___________.
COMMISSION FILE NUMBER 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 Identification Number)
incorporation or organization)
425 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:
NOT APPLICABLE
----------
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
APRIL 30, 1999
<S> <C>
Number of shares of Series A Common Stock outstanding:................................. 107,658,089
Number of shares of Series B Common Stock outstanding:................................. 15,400,000
Number of shares of Series K Common Stock outstanding:................................. 2,609,707
</TABLE>
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AT HOME CORPORATION
TABLE OF CONTENTS
<TABLE>
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Page
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PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 ................................................. 3
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 1999 and 1998 .................................. 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 ......................................... 5
Notes to Condensed Consolidated Financial Statements ..................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ............... 26
PART II OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds................................. 27
ITEM 5. Other Information......................................................... 27
ITEM 6. Exhibits and Reports on Form 8-K ......................................... 28
Signatures ............................................................... 29
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 163,780 $ 300,702
Short-term investments 242,110 118,587
--------- ---------
Total cash, cash equivalents and short-term investments 405,890 419,289
Accounts receivable (net of allowance for doubtful accounts
of $430 in 1999 and $252 in 1998) 7,013 6,358
Accounts receivable - related parties 6,826 4,300
Other current assets 17,591 3,381
--------- ---------
Total current assets 437,320 433,328
Property, equipment and improvements, net 56,283 49,240
Distribution agreements, net 249,946 186,247
Intangible assets, net 87,256 93,989
Other assets 62,692 17,827
--------- ---------
Total assets $ 893,497 $ 780,631
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 10,114 $ 7,100
Accounts payable - related parties 21,614 3,684
Accrued compensation and related expenses 1,613 1,262
Accrued transport costs 447 2,444
Deferred revenues 6,225 5,164
Other accrued liabilities 15,519 11,305
Current portion of capital lease obligations 12,188 12,045
--------- ---------
Total current liabilities 67,720 43,004
Convertible debentures 231,064 229,344
Capital lease obligations, less current portion 16,360 14,356
Other liabilities 61 61
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value:
Authorized shares - 230,277,660
Issued and outstanding shares--
121,808,621 in 1999 and 123,272,867 in 1998 813,963 719,680
Notes receivable from stockholders (4) (4)
Deferred compensation (2,625) (2,880)
Accumulated other comprehensive income 12,247 4,235
Accumulated deficit (245,289) (227,165)
--------- ---------
Total stockholders' equity 578,292 493,866
--------- ---------
Total liabilities and stockholders' equity $ 893,497 $ 780,631
========= =========
</TABLE>
See accompanying notes.
3
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AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Revenues (1) .......................... $ 25,098 $ 5,773
Costs and expenses (2):
Operating costs ..................... 18,600 8,615
Product development and engineering . 6,467 3,573
Sales and marketing ................. 7,676 3,500
General and administrative .......... 4,103 2,874
Cost and amortization of distribution
agreements and intangible assets . 21,753 19,534
--------- ---------
Total costs and expenses .......... 58,599 38,096
--------- ---------
Loss from operations .................. (33,501) (32,323)
Interest and other income, net ........ 15,377 1,107
--------- ---------
Net loss .............................. $ (18,124) $ (31,216)
========= =========
Basic and diluted net loss per share .. $ (0.15) $ (0.28)
========= =========
Shares used in per share calculations . 120,483 111,562
========= =========
(1) Revenues from related parties ..... $ 5,439 $ 1,371
========= =========
(2) Depreciation and amortization
included in costs and expenses $ 28,948 $ 13,552
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES
Net loss .......................................................... $ (18,124) $ (31,216)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization ............................... 7,200 2,590
Amortization of distribution agreements and intangible assets 21,493 10,707
Cost of distribution agreements ............................. 260 8,827
Amortization of deferred compensation ....................... 255 255
Accretion on discount of convertible debentures ............. 1,720 --
Recognized gain on investment ............................... (12,566) --
Changes in assets and liabilities:
Accounts receivable ....................................... (3,181) (1,988)
Other assets .............................................. (39,621) (2,172)
Accounts payable .......................................... 20,944 2,218
Accrued liabilities ....................................... 2,568 (538)
Deferred revenue .......................................... 1,061 1,046
--------- ---------
Cash used in operating activities ................................. (17,991) (10,271)
CASH USED IN INVESTING ACTIVITIES
Purchase of short-term cash investments ........................... (165,139) (20,425)
Sales and maturities of short-term cash investments ............... 41,616 13,565
Purchase of property, equipment and improvements,
net of leases ................................................. (7,596) (4,448)
--------- ---------
Cash used in investing activities ................................. (131,119) (11,308)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................ 15,564 1,149
Payments on capital lease obligations ............................. (3,376) (2,825)
Repayment of notes receivable from stockholders ................... -- 33
--------- ---------
Cash provided by (used in) financing activities ................... 12,188 (1,643)
--------- ---------
Net increase in cash and cash equivalents ......................... (136,922) (23,222)
Cash and cash equivalents, beginning of period .................... 300,702 44,213
--------- ---------
Cash and cash equivalents, end of period .......................... $ 163,780 $ 20,991
========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid ..................................................... $ 434 $ 752
========= =========
Acquisition of equipment under capital leases ..................... $ 5,522 $ 2,358
========= =========
Notes receivable from stockholders issued in connection with
exercise of stock options and restricted stock purchases ...... $ -- $ --
========= =========
Issuance of common stock warrants in connection with
distribution agreements ....................................... $ 78,459 $ 83,320
========= =========
</TABLE>
See accompanying notes.
5
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AT HOME CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of At Home Corporation and its wholly owned subsidiaries
(collectively, the "Company"). These condensed consolidated financial statements
do not include all of the information and accompanying notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of financial position
and results of operations have been included in the condensed financial
statements. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1999. The interim financial statements should be read in
connection with the consolidated financial statements included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
NOTE 2. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. The effect of outstanding stock options,
warrants and Common Stock subject to repurchase is excluded from the computation
as their inclusion would be anti-dilutive.
The computation of basic and diluted net loss per share is as follows -- in
thousands, except per share data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
----------- ---------
<S> <C> <C>
Net loss ........................ $ (18,124) $ (31,216)
=========== =========
Weighted average shares of Common
Stock outstanding ........... 120,483 111,562
=========== =========
Basic and diluted net
loss per share .............. $ (0.15) $ (0.28)
=========== =========
</TABLE>
NOTE 3. DEPRECIATION AND AMORTIZATION INCLUDED IN COSTS AND EXPENSES
The components of the Company's depreciation and amortization included in costs
and expenses are as follows -- in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Depreciation and amortization ......... $ 7,200 $ 2,590
Amortization of distribution agreements 21,493 10,707
Amortization of deferred compensation . 255 255
------- -------
$28,948 $13,552
======= =======
</TABLE>
NOTE 4. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive loss are as follows -- in
thousands:
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss ..................... $(18,124) $(31,216)
Unrealized gain on investments 12,247 1,300
-------- --------
Comprehensive loss ........... $ (5,877) $(29,916)
======== ========
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
In connection with distribution agreements with Cablevision Systems
Corporation in October 1997, the Company issued warrants to purchase up to
10,946,936 shares of the Company's Series A Common Stock at an exercise price of
$0.50 per share. As of March 31, 1999, warrants to purchase 10,231,298 shares of
the Company's Series A Common Stock were exercisable. In the fourth quarter of
1997 and the first quarter of 1998 the Company recorded the fair value of these
warrants as distribution agreements in the amounts of $172,600,000 and
$74,500,000, respectively. These amounts are being amortized over the term of
the exclusivity obligation which concludes in June 2002. As of March 31, 1999,
accumulated amortization of the cost of the distribution agreements totaled
$74,464,000.
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 5,000,000 shares of its
Series A Common Stock at an exercise price of $10.50 per share. These warrants
become exercisable if and when Rogers or Shaw meet certain subscriber
milestones. As of March 31, 1999, these warrants were exercisable as to 923,380
shares. For the quarter ended March 31, 1999, in connection with the
distribution agreements the Company recorded non-cash charges to operations of
$260,000.
In May and June 1998, the Company issued performance based warrants, in
connection with distribution agreements, to certain other cable operators to
purchase up to an aggregate of 5,272,100 shares of its Series A Common Stock at
an exercise price of $10.50 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. In the quarter ended March 31, 1999, these warrants
became exercisable as to 301,232 shares and the Company recorded distribution
agreements of $46.7 million, which will be amortized over the remaining life of
the distribution agreements, approximately five years.
In January and March 1999, the Company issued performance based warrants,
in connection with distribution agreements, to certain other cable operators to
purchase up to an aggregate of 3,030,000 shares of its Series A Common Stock at
an exercise price of $10.50 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. In the quarter ended March 31, 1999, these warrants
became exercisable as to 439,215 shares and the Company recorded distribution
agreements of $31.8 million which will be amortized over the remaining life of
the distribution agreements, approximately six years.
NOTE 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, including material
payments of $18 million in May and August 1999 and $27 million in September
2000.
7
<PAGE> 8
NOTE 7. ACQUISITION AGREEMENT WITH EXCITE, INC (UNAUDITED)
On January 19, 1999 the Company entered into an acquisition agreement with
Excite, Inc. ("Excite"), a global Internet media company that offers consumers
and advertisers comprehensive Internet navigation services with extensive
personalization capabilities. Under the terms of the acquisition agreement, the
Company will issue approximately 54.9 million shares of its Series A common
stock for all of the outstanding common stock of Excite based on an exchange
ratio of approximately 1.041 shares of the Company's Series A common stock for
each share of Excite's common stock. The Company may issue up to approximately
15.3 million additional shares of Series A common stock in connection with the
assumption of obligations under Excite's stock option and employer stock
purchase plans and outstanding warrants. The transaction will be accounted for
as a purchase. The Company's preliminary unaudited estimate of the total
purchase consideration is approximately $7.2 billion, based on the fair value at
the time of announcement of the acquisition, of Series A common stock to be
issued and stock option, stock purchase plan and warrant obligations assumed,
plus estimated transaction costs. The acquisition has been approved by the
boards of directors of At Home and Excite, but the it is subject to several
conditions, including approval by both companies' stockholders on May 28, 1999.
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 (in thousands, except per
share information).
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Pro forma revenues ............................. $ 78,748 $ 30,029
========= =========
Pro forma net loss ............................. $ (25,699) $ (38,760)
========= =========
Pro forma basic and diluted net loss per share . $ (0.15) $ (0.23)
========= =========
Number of shares used in basic and diluted
pro forma per share calculation ................ 175,383 166,462
========= =========
</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.
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. The share numbers in this quarterly report do not
reflect the two-for-one stock split declared by our board on April 16, 1999,
which is subject to stockholder approval.
GENERAL
We are the leading provider of broadband Internet services over the cable
television infrastructure to consumers. By virtue of our relationships with 21
cable companies in North America and Europe, we have access to approximately
65.0 million homes, which includes exclusive access to over 50% of the
households in the United States and Canada capable of receiving cable
television. We also provide broadband Internet services to businesses over both
the cable television infrastructure and digital telecommunications lines.
Our primary offering, the @Home service, allows residential subscribers to
connect their personal computers via cable modems to a high-speed Internet
backbone network developed and managed by us. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial, or HFC, cable at transmission speeds up to 100 times faster than
typical dial-up connections, "always on" connection and rich multimedia
programming through our broadband Internet portal. The technology foundation of
the @Home Experience is our scalable, distributed, intelligent network
architecture (our broadband network), a "parallel Internet" that optimizes
traffic routing, improves 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.
8
<PAGE> 9
Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. To date, the @Home Experience has
generated greater page views per subscriber than are reported by the leading
narrowband Internet portal companies. Our @Media group works with content
providers to facilitate the creation of rich multimedia broadband content
delivered through the @Home portal and to facilitate online transactions and
services for @Home subscribers. Multimedia content offerings include on-demand
video clips from partners such as Bloomberg and CNN Interactive, on-demand music
and CD previews provided by our Tune-In service and low-latency multiplayer
gaming from SegaSoft. Electronic commerce partners include Amazon.com, the
leading online bookseller, BuyDirect.com, an online software distributor, and
Travelocity, a leading online travel site. Our @Media group also sells
advertising on a cost per thousand impressions, or CPM, basis as well as on a
sponsorship basis. We had 67 advertisers in the first quarter of 1999, including
Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and Toyota.
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, 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 compelling 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. We currently provide
@Work services to nearly 2,200 businesses.
We have entered into distribution arrangements for our @Home service with 18
cable companies in North America whose cable systems pass approximately 58.5
million homes -- Tele-Communications, Inc., Cablevision Systems Corp., Comcast
Corporation, Cox Communications, Inc., Rogers Cablesystems Limited, Shaw
Cablesystems Ltd., Bresnan Communications Company, Century Communications Corp.,
Cogeco Cable, Inc., Garden State Cable, Insight Communications, InterMedia
Partners IV L.P., Jones Intercable, Inc., Lenfest Communications Inc., L.P.
Prime Communications - Potomac and Chicago, L.L.C.s, Marcus Cable Operating
Company, Midcontinent Cable Co. and Videon CableSystems, Inc. Some of these
distribution arrangements are subject to the completion of definitive
agreements. As of March 31, 1999, approximately 15.0 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 March 31, 1999,
we had launched the @Home service through our cable partners in portions of 68
cities and communities in the United States and Canada and had more than 460,000
subscribers.
As part of our strategy to expand into international markets, we have
entered into agreements for the distribution of our @Home service by Edon and
Palet Kabelcom in the Netherlands. We have entered into an agreement with Intel
to create a limited partnership whereby Intel invested $20 million in @Home
Benelux, which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. We have also initiated
distribution programs with leading consumer electronics retailers and computer
manufacturers, including CompUSA, Compaq and Dell, to facilitate the sale of the
@Home service and cable modems compliant with the new DOCSIS cable modem
standard. In addition, we are working with CableLabs and National Digital
Television Center, a subsidiary of TCI, to develop advanced digital set-top
boxes to provide broadband Internet access via television sets and to accelerate
transformation of the Internet into a mass medium.
RECENT EVENTS
Acquisition of Excite, Inc. On January 19, 1999, we agreed to acquire
Excite, Inc. and to issue shares of our Series A common stock, including shares
issuable upon the exercise of Excite options and warrants, valued at
approximately $7.2 billion at the time of the announcement of the acquisition.
Excite is a global Internet media company that attracts approximately 17 million
visitors monthly to its www.excite.com and www.webcrawler.com portal Web sites.
Excite is based in Redwood City, California. Under the merger agreement, we will
issue approximately 1.0419 shares of our Series A common stock in exchange for
each outstanding share of Excite common stock. As a result, assuming no exercise
of Excite or our outstanding options and warrants, former shareholders of Excite
will own approximately 30% of the outstanding shares of our Series A common
stock. The acquisition will be accounted for as a purchase and is expected to
close in the second quarter of 1999. Although our board and Excite's board have
approved the transaction, the acquisition is subject to several conditions,
including approval by both companies' stockholders on May 28, 1999.
9
<PAGE> 10
Backbone capacity contract with AT&T. On January 5, 1999, we announced that
we had entered an agreement with AT&T to create a nationwide Internet Protocol
network utilizing AT&T's backbone to cost-effectively support broadband services
throughout North America over the next 20 years. This new backbone facility,
which is scheduled to be deployed in mid-1999, represents a 100-fold increase in
our backbone capacity and initially will enable us to support up to five million
broadband users. AT&T will first provide us with 2 OC-48 channels, each with the
capacity to transport 2.5 gigabits per second of data, over a 15,000 mile
optical network. The agreement provides for significant expansion of capacity
that allows us to take advantage of the rapid evolution of data transport
technology.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 CHANGE 1998
---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............. $25,098 335% $5,773
======= ======
</TABLE>
Our revenues increased by 335% to $25.1 million for March 31, 1999 from $5.8
million for March 31, 1998. The growth in revenues was the result of an increase
in the number of subscribers to our services. Our revenues consist of:
- monthly subscription fees for the @Home residential service
- installation and monthly access fees for @Work services and
- fees for advertising, content placement and content development from
@Media services.
In the first quarter of 1999, approximately 55% of our revenues came from
@Home services, approximately 30% of our revenues came from @Work services, and
approximately 15% of our revenues came from @Media services. Our @Home
subscribers increased 411% to approximately 460,000 at the end of the first
quarter of 1999 from approximately 90,000 at the end of the first quarter of
1998. The number of subscribers to our @Work services increased by 270% to
approximately 2,200 at the end of the first quarter of 1999 from 595 at the end
of the first quarter of 1998. Revenues generated from our @Media services were
evenly split between advertising revenue and content revenue. Our number of
advertisers at March 31, 1999, 67, was 235% higher than our number of
advertisers at March 31, 1998. Content revenues increased as demand for
broadband portal placement intensified. For the quarter ended March 31, 1999,
subscriber revenues for the @Home service generated from United States
subscribers and Canadian subscribers represented 78% and 22% of total revenues.
We expect subscriber growth rates for the @Home service in the United States
to exceed those in Canada in 1999. Therefore, we expect revenues generated from
United States @Home subscribers will represent a greater portion of total
revenues for the @Home service in 1999. However, subscriber growth is subject to
a number of risks. See "Risk Factors -- Growth of the @Home service may be
inhibited by factors beyond our control."
Revenues from related parties, as a percentage of total revenues,
represented approximately 22% for the quarter ended March 31, 1999 and 24% for
the quarter ended March 31, 1998. Related-party revenues included development
fees for @Work services and set-top devices and fees for billing and support
functions.
TOTAL COSTS AND EXPENSES
10
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 CHANGE 1998
---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating costs ................................ $18,600 116% $ 8,615
Product development and engineering ............ 6,467 81% 3,573
Sales and marketing ............................ 7,676 119% 3,500
General and administrative ..................... 4,103 43% 2,874
Cost and amortization of distribution agreements
and intangible assets ....................... 21,753 11% 19,534
------- -------
Total costs and expenses ............. $58,599 54% $38,096
======= =======
</TABLE>
Total costs and expenses before charges for cost and amortization of
distribution agreements and intangible assets increased 99% to $36.8 million for
the quarter ended March 31, 1999 from $18.6 million for the same period in 1998.
Total costs and expenses after cost and amortization of the distribution
agreements increased 54% for the quarter ended March 31, 1999 to $58.6 million
from $38.1 million for the same period in 1998. We believe continued expansion
of our operations is critical to the achievement of our goals, and we anticipate
that costs and expenses will continue to increase throughout the remainder of
1999, although at a slower rate than the expected increases in our revenues.
However, our operating results are subject to several risks, including those
discussed in "Risk Factors," and may fluctuate significantly.
Operating costs. Operating costs are primarily related to providing services
to customers, maintaining the @Home broadband network, generating content
programming for the @Home portal and deploying the @Home service in Europe.
Operating costs increased 116% to $18.6 million for the quarter ended March 31,
1999 from $8.6 million for the same period in 1998. This increase of $10.0
million in operating costs was primarily attributable to the following factors
in the following proportions:
- approximately 20% to costs of customer service operations to support a
larger subscriber base;
- approximately 20% to maintenance and depreciation of capital equipment
required for our network;
- approximately 15% to the initiation of our international operations; and
- approximately 10% to telecommunications costs related to our @Work
business.
Operating costs are expected to increase substantially during the remainder of
1999 as we continue to make substantial investments in network infrastructure
and customer service operations.
Product development and engineering. Product development and engineering
expenses consist primarily of salaries and related expenses for personnel, fees
to outside contractors and consultants and the allocated cost of facilities.
Product development and engineering increased 81% to $6.5 million for the
quarter ended March 31, 1999 from $3.6 million for the same period in 1998. This
increase of $2.9 million in product development and engineering expenses was
primarily attributable to the following factors in the following proportions:
- approximately 55% to efforts to incorporate Internet technologies into
advanced digital set-top boxes; and
- approximately 35% to expenditures focused on the continued development
of the @Home backbone to incorporate new telecommunications and server
technologies.
We anticipate that product development and engineering costs will continue
to increase during the remainder of 1999 due in part to increased technology
development efforts related to our broadband network, including initial design
and deployment costs associated with our AT&T backbone capacity agreement, and
advanced digital set-top boxes.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
increased 119% to $7.7 million for the quarter ended March 31, 1999 from $3.5
million for the same period in 1998. This increase of $4.2 million in sales and
marketing expenses was primarily attributable to the following factors in the
following proportions:
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- approximately 30% for the inclusion and continued expansion of our
Enliven services;
- approximately 30% from the continued expansion of our @Media portal
service; and
- approximately 25% to advertising and content partnering arrangements and
regional deployments of the @Home service.
We expect that sales and marketing costs will continue to increase throughout
the remainder of 1999 primarily due to personnel and other costs related to:
- @Home and @Work subscriber acquisition, including expanded retail
initiatives;
- our efforts to increase advertising and content partnering arrangements;
and
- expanded product offerings, including delivery of the @Home service
through set-top devices.
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 by 11% to $4.1 million for the quarter
ended March 31, 1999 from $2.9 million for the same period in 1998. This
increase was the result of hiring additional finance, human resource and
facilities personnel. To support our expected growth, we anticipate that costs
in this area will continue to grow significantly during the remainder of 1999.
Cost and amortization of distribution agreements and intangible assets. 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 their future performance in connection with
distributing our services. Cost and amortization of distribution agreements and
intangible assets increased from $19.5 million in the first quarter of 1998 to
$21.8 million in for the quarter ended March 31, 1999. This increase was
primarily the result of the amortization of intangible assets acquired in the
Narrative and Full Force acquisitions and amortization of the cost of the
Cablevision distribution agreement, offset by a decrease in charges associated
with the achievement of performance milestones by some of our cable partners. We
will incur approximately $17.3 million per quarter for amortization of the cost
of these distribution agreements through the first half of 2002. This amount
would increase if TCI transfers certain cable systems to Cablevision. In
addition, total cost and amortization of distribution agreements could fluctuate
significantly each quarter if our cable partners achieve certain performance
milestones.
Interest and other income, net. Interest income, net represents interest and
realized gains earned on our cash and short-term cash investments and
available-for-sale investments less interest expense on debt obligations,
including our convertible subordinated debentures. Interest income, net was
$15.4 million for quarter ended March 31, 1999 and $1.1 million for the same
period in 1998. Interest income for the quarter ended March 31, 1999 was $5.1
million compared to $1.6 million for the same period in 1998. This increase was
principally due to the increased cash balances available to invest following our
public offering of Series A common stock in August 1998 and our private offering
of convertible subordinated debentures in December 1998. We recognized a $12.6
million one-time gain on one of our private company investments in the period
ended March 31, 1999 as a result of the investee being acquired for common stock
by a publicly traded company. Interest expense for the first quarter of 1999 was
$2.3 million compared to $0.5 million for same period in 1998. This increase was
due primarily to the interest obligations of our convertible subordinated
debentures.
Income taxes. Because we had net losses for the quarter ended March 31, 1999
and for the same period in 1998, we did not record a provision for income taxes
for these periods.
Net loss. Our net income before the costs and amortization for distribution
agreements and intangible assets was $3.7 million for the quarter ended March
31, 1999 and our net loss before the costs and amortization for distribution
agreements was $11.7 million for the same period in 1998. Our net loss for the
quarter ended March 31, 1999 of $18.1 million includes costs and amortization of
$21.8 million related to distribution agreements. The decrease in net loss
before the costs and amortization for distribution agreements and intangible
assets was primarily a result of additional revenues, partially offset by the
additional expenses attributable to the expansion of our @Home and @Work
services, and further offset by the one-time gain recognized from one of our
private company investments. We anticipate that our net loss, excluding non-cash
charges relating to amortization of the distribution agreement, performance
warrants earned by cable operators and amortization of amounts related to
mergers and acquisitions, will continue to
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decline during 1999 as revenues grow at a faster rate than expenses. However,
our operating results are subject to several risks, including those discussed in
"Risk Factors", and may fluctuate significantly.
If our merger with Excite closes, we expect to record charges for the
amortization of goodwill and other intangible assets in our statement of
operations estimated at approximately $1.7 billion annually for four years
from the date of the acquisition. This estimate is based on a preliminary
valuation and is subject to change pending a final analysis of the total
purchase cost and the fair value of the assets acquired and liabilities assumed.
The impact of these changes could be material.
LIQUIDITY AND CAPITAL RESOURCES
CASH INFLOWS AND OUTFLOWS
Operating activities. Net cash used in operating activities in the quarter
ended March 31, 1999 was $18.0 million. This is primarily the result of a net
loss of $18.1 million. Increased spending in other assets of $39.6 million was
primarily offset by a $20.9 million increase in accounts payable and non-cash
charges of $21.5 million for amortization of distribution agreements and
intangible assets. An $8.1 million increase in accounts receivable occurring in
connection with our growth in revenues also impacted our cash used in operating
activities.
Investing activities. Net cash used in investing activities in the quarter
ended March 31, 1999 was $131.1 million. This use of funds was the result of
purchases of net short-term investments of $165.1 million and $41.6 million
sales and maturities of short-term cash investments. Gross capital expenditures
for equipment, software, furniture, leasehold improvements and fixtures in the
first quarter of 1999 was $13.1 million and for the same period in 1998 was $6.8
million, of which $5.5 million in the quarter ended March 31, 1999 and $2.4
million for the same period in 1998 was financed through capital leases.
Financing activities. Since our inception, we have financed our operations
primarily through a combination of private and public sales of equity and
convertible debt securities and capital equipment leases. Net cash provided by
financing activities in the quarter ended March 31, 1999 was $12.2 million.
This is primarily the result of $15.6 million from the sale of common stock
offset by $3.4 million in payments on capital lease obligations.
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 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
March 31, 1999, there were no borrowings under this term loan, although there
were outstanding letters of credit in the amount of $3.5 million related to real
property transactions. Under the term loan agreement, we are required to meet
certain financial covenants. The term loan expires on October 19, 2002.
CASH, CASH EQUIVALENTS AND COMMITMENTS
Cash and cash equivalents. At March 31, 1999, our principal source of
liquidity was approximately $406 million of cash, cash equivalents and
short-term cash investments, compared with $419 million at December 31, 1998.
Commitments. 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 material payments
of $18 million in May and August 1999 and $27 million in September 2000. We
expect to make additional disbursements of approximately $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.
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
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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.
IMPACT OF THE YEAR 2000 ISSUE
Year 2000 computer issues create certain risks for us, although we believe
that such risks are less significant than those faced by many companies due to
the fact that we commenced operations in 1995. If our internal and network
information systems do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact on our operations. To
address these Year 2000 issues with our internal and network systems, we
initiated a program to evaluate our internal and network systems. We initiated a
comprehensive program to address Year 2000 readiness in our systems and with our
customers' and suppliers' systems. The program has been designed to gather
information regarding the Year 2000 compliance of products and services that we
require for deployment of our residential and commercial Internet services.
Under the program, assessment and remediation proceeded in tandem with the
intention that our critical systems are in Year 2000 compliance by June 30,
1999. We have completed our assessment and remediation phases. These activities
encompassed all major categories of systems that we use, including network
management, customer service and business operations. The costs incurred to date
related to the program have not been material. We currently expect that the
total cost of our Year 2000 readiness program will not exceed $750,000. The
total cost estimate does not include potential costs related to any customer or
other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of our Year 2000 readiness needs and is subject to change as the
program proceeds.
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.
We have also initiated formal communications with many of our significant
suppliers to determine the extent to which we are vulnerable to these suppliers'
failure to remedy their own Year 2000 issues. We received assurances of Year
2000 compliance from our suppliers. We are taking steps with respect to new
supplier agreements to seek assurance that the suppliers' products and internal
systems are Year 2000 compliant. Despite these assurances, we may still
experience supplier-related Year 2000 problems.
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 developed contingency plans for continuing
operations in the event these problems arise.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following risk factors and the other information in this Form 10-Q
carefully. The risks described below are not the only ones we face. Additional
risks that we are aware of or that we currently believe are immaterial may
become important factors that affect our business. If any of the following risks
or others occur, our business, operating results and financial condition could
be seriously harmed. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED AND EXPECT TO INCUR SUBSTANTIAL LOSSES
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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 March 31, 1999, we had an accumulated deficit of $245.3
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 two quarters.
OUR BUSINESS IS UNPROVEN, AND WE MAY NOT ACHIEVE PROFITABILITY
The profit potential of our business model is unproven. Our @Home service
was available only in portions of 68 geographic markets as of March 31, 1999 and
may not achieve broad consumer or commercial acceptance. Although approximately
2,200 primarily small- and medium-sized business organizations have agreed to
utilize @Work services as of March 31, 1999, our @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 Internet services will prove to be viable, whether demand for our
Internet 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 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.
GROWTH OF THE @HOME SERVICE MAY BE INHIBITED BY FACTORS BEYOND OUR CONTROL
As of March 31, 1999, we had in excess of 460,000 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 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:
- the rate at which our current and future cable partners upgrade their
cable infrastructures for two-way data services
- our ability and the ability of our cable partners to coordinate timely
and effective marketing campaigns with the availability of cable
infrastructure upgrades
- the success of our cable partners in marketing and installing the @Home
service in their local cable areas
- the prices that our cable partners set for the @Home service and for its
installation
- the speed at which our cable partners can complete the installations
required to initiate service for new subscribers
- 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
- the quality of customer and technical support provided by us and our
cable partners and
- 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 1.0 million by
December 31, 1999 from in excess of 460,000 subscribers at March 31, 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
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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 seek to eliminate this abuse by limiting users' upstream
bandwidth, our failure to achieve or maintain high-speed data transmission would
significantly reduce 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 AS QUICKLY
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. Cable modems that are
DOCSIS-compliant are not expected to be available in significant quantities
until at least the second quarter of 1999. 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:
- 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, but we
may compete for subscribers in the future if and when our cable partners
cease to be subject to their exclusivity obligations.
- 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.
- 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.
- 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.
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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 could 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, could cause interruptions in the services we provide. Any damage or
failure that causes interruptions in our operations could harm our business.
OUR LIMITED EXPERIENCE WITH INTERNATIONAL EXPANSION MAY PREVENT US FROM GROWING
OUR BUSINESS OUTSIDE THE UNITED STATES
A key component of our strategy is expansion into international markets. To
date, we have developed distribution relationships only with United States,
Canadian and Dutch cable system operators. We have extremely limited experience
in developing localized versions of our products and services and in developing
relationships with international cable system operators. We may not be
successful in expanding our product and service offerings into foreign markets.
In addition to the uncertainty regarding our ability to
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generate revenues from foreign operations and expand our international presence,
we face specific risks related to providing Internet services in foreign
jurisdictions, including:
- regulatory requirements, including the regulation of Internet access
- legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions and
- potential inability to use European customer information due to new
European governmental regulations.
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 could develop 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, including:
- 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.
- 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.
- The FCC or local agencies could require our cable partners to grant our
competitors access to their cable systems. America Online, MindSpring
Enterprises, Inc., Consumers Union and other parties have requested the
FCC 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 FCC otherwise requires 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. Also, 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, and other
municipalities such as Los Angeles are considering imposing similar
requirements.
WE COULD FACE LIABILITY FOR DEFAMATORY OR INDECENT CONTENT
Claims could be made against Internet and online service providers under
both United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of the
materials disseminated through their networks. Several private lawsuits seeking
to impose this liability are currently pending. In addition, legislation has
been proposed that imposes liability for or prohibits the transmission over the
Internet of indecent content. The imposition upon Internet and online service
providers of potential liability for information carried on or disseminated
through their systems could require us to implement measures to reduce our
exposure to this liability. This may require that we expend substantial
resources or discontinue service or product offerings. The increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could impact the growth of Internet use. Furthermore, some foreign
governments, such as Germany, have enacted laws and regulations governing
content distributed over the Internet that are more strict than those currently
in place in the United States. One or more of these factors could significantly
harm our business.
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RISKS RELATED TO OUR RELATIONSHIPS WITH OUR CABLE PARTNERS
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 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 March 31, 1999, approximately 25% of our North American
cable partners' cable infrastructure is 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.
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:
- Our principal cable partners may terminate all their exclusivity
obligations upon a change in law that materially impairs some of their
rights.
- 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 12 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.
- 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, we expect that Cox will have this
right, but Cox has agreed to waive this right for 1999 so long as our
stockholders approve proposed governance changes prior to July 22, 1999.
- Comcast may terminate its own exclusivity obligations after June 4, 1999
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 after June 4, 1999.
Our board approved the proposed governance changes on April 16, 1999. We
are submitting the proposed changes to a vote by our stockholders at our 1999
annual stockholders meeting on May 28, 1999. Our stockholders agreement requires
AT&T, Comcast and Cox to vote their shares in favor of the changes. These
governance changes will 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 of its
right to terminate exclusivity as of June 4, 1999, AT&T has agreed to increase
its subscriber acquisition goal 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.
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WE ARE CONTROLLED BY TCI AND AT&T
TCI, which recently merged with AT&T, controls approximately 71% of our
voting power and currently has the power to elect a majority of our board
members and to control all matters requiring the approval of our stockholders.
TCI's Series B common stock carries ten votes per share and 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. Currently, four of our ten directors are
directors, officers or employees of TCI or its affiliates, including AT&T. Under
our current corporate governance structure, as long as TCI owns at least
7,700,000 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 a majority
of the Series B directors, three of the five of which are designees of TCI. This
allows TCI to block actions of our board, even through the TCI directors may not
then constitute a majority of the board. In addition, TCI can expand the board
at any time and fill the vacancies with TCI designees to control a majority of
the board. After our 1999 annual stockholders meeting on May 28, 1999, if the
proposed governance changes are adopted, TCI will no longer have the ability to
expand the board and fill vacancies, and approval of at least 75%, or four of
the five, of our Series B directors will be required for most board actions. As
a result of the proposed governing changes we will not be able to take any
corporate actions without the approval of TCI's Series B directors and one, or
in some cases both, of the directors designated by Comcast and Cox.
Notwithstanding these provisions, all of our directors owe fiduciary duties to
our stockholders. AT&T now owns TCI and therefore controls us. Even if and when
we complete the Excite merger, TCI or AT&T will continue to own more than 50% of
our voting power.
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 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. First, 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 our @Home service. Second, AT&T owns TCG, which operates an
Internet service for business customers that competes with our @Work service.
Our @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 our @Work business is not subject to
the cable partners'
21
<PAGE> 21
exclusivity obligations, AT&T or TCG are not limited in their ability to compete
with our @Work business. In addition, AT&T and Time Warner recently announced
the formation of a significant strategic relationship that will include a joint
venture to offer AT&T-branded cable telephony service to 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
our @Home service. AT&T may take actions that benefit TCG, WorldNet or other
services of AT&T or other parties to our detriment.
OUR DEPENDENCE ON OUR CABLE PARTNERS FOR DISTRIBUTION CREATES CONFLICTS OF
INTEREST
Through their cable systems, our cable partners provide the principal
distribution network for our services, and they share the revenue from the @Home
services that are derived from our subscribers. Given our contractual and
business relationships with our cable partners, the interests of our cable
partners may not always coincide with our interests, and conflicts of interest
concerning the split of revenues and other matters exist.
Because TCI, Cablevision, Comcast and Cox all operate cable systems that are
the primary distributors of the @Home service, situations may arise where their
interests may diverge or appear to diverge from the interests of our other
stockholders. TCI and the other principal cable partners, acting through their
board designees, have the ability to cause us to take some actions or prohibit
us from taking some actions that may be favored by other stockholders or by the
other directors who are not affiliated with our principal cable partners. Our
board, which is controlled by TCI, has the power, subject to directors'
fiduciary duties, to approve transactions in which our principal cable partners
have an interest, including amending or terminating their distribution agreement
with us or changing the revenue splits in their favor.
Under the agreements under which our U.S. cable partners distribute our
services, we receive 35% of monthly fees and fees for premium services. However,
most of these agreements, including the agreement with our principal cable
partners, contain contractual most favored nation provisions, which provide that
our principal cable partners are entitled to distribution arrangements and
related services on terms at least as favorable as those obtained by any other
cable system operator. Therefore, our principal cable partners have the power,
subject to their fiduciary duties, to cause us to approve more favorable
distribution arrangements, including more favorable revenue splits, for one or
more unaffiliated cable operators in order to receive more favorable
distribution arrangements themselves and reduce our share of subscriber fees.
WE DEPEND ON OUR CABLE PARTNERS TO MARKET, DELIVER AND SUPPORT THE @HOME SERVICE
Because subscribers to the @Home service will subscribe through a cable
partner, the cable partner will substantially control the customer relationship
with the subscriber. Each cable partner has complete discretion regarding the
pricing of the @Home service to subscribers in its territories, except for some
premium services for which we may contract directly with the subscriber, and a
cable partner could use the @Home service as a loss leader in order to increase
demand for other products or services with more attractive terms.
The cable partners do not have any affirmative obligations, other than the
payment of revenue splits to us, with respect to marketing, installing and
maintaining infrastructure for, providing customer service for and billing for
the @Home service. In limited circumstances, such as a cable partner's failure
to upgrade a cable system or roll out the @Home service after it has committed
to do so, we may be entitled to cost reimbursements and to be released from some
of our exclusivity obligations, neither of which may be an effective remedy for
the failure. Our business requires a substantial rollout of the @Home service,
and if a widespread rollout does not occur, our business will not be viable.
Moreover, our cable partners have in the past experienced, and may in the future
experience, delays in installing the @Home service in areas in which it has been
introduced.
Our cable partners are expected to provide general customer service to our
subscribers and, under their distribution agreements, have the option to provide
technical support, rather than utilizing our service and support capabilities.
If a cable partner elects to provide technical support, we must reimburse it for
our avoided costs, and we would have little or no control over the quality of
customer service actually provided to subscribers of the @Home service. If the
customer service and support provided by our cable partners are unsatisfactory
to subscribers, consumer demand for the @Home service will likely diminish.
OUR CABLE PARTNERS CONTROL THE TERMS OF DISTRIBUTION OF THE @HOME SERVICE
22
<PAGE> 22
We and our cable partners have entered into agreements providing for the
distribution of the @Home service by our cable partners and their affiliates.
The economic and other terms of these agreements may be less favorable to us
than those that could have been negotiated had we been independent of our
principal cable partners. In addition, the agreements with our principal cable
partners contain provisions that permit a cable partner to change aspects of the
distribution of the @Home service without our approval. For example, a principal
cable partner has the option to provide customer service functions that we
currently provide and upon which our 35% revenue split was based. If a principal
cable partner elects to provide these services, it is also entitled to
reimbursement of costs.
Similarly, the principal cable partners have rights to remove cable systems
from the approved rollout schedule or to substitute cable systems in place of
removed systems. These rights are contractual in nature and may be exercised by
the principal cable partners in their sole discretion. The exercise by the
principal cable partners of these contractual rights may significantly harm our
business. Our cable partners also control the rollout schedule of the @Home
service, and our principal cable partners hold priority rights with respect to
this rollout schedule. This priority could harm us because we may be required to
roll out our services to our principal cable partners before rolling out the
services to other cable system operators, even though the other cable system
operators may be ready to roll out the @Home service sooner or on terms more
favorable for us.
OUR CABLE PARTNERS MAY COMPETE WITH US FOR ADVERTISING AND PROGRAMMING REVENUE
While we retain 100% of the revenue from our programming of the designated
national area of the @Home service, our principal U.S. cable partners retain
100% of revenue generated from their programming of a designated local area of
the start page of the @Home service. These revenues could include advertising
fees, service fees, content provider charges, transaction fees and promotional
revenue. Accordingly, in exercising their right to program the local area, our
cable partners could place a significant amount of advertising or program
content on the @Home service for which we receive no revenues. For example,
given the national or regional coverage of their operations, any of our
principal cable partners and their affiliates could strike agreements with
advertisers that could effectively result in broad-based advertising campaigns
reaching significant regions of the United States in competition with our
advertising campaigns, generating revenue only for the cable partner and its
affiliates and not for us. In Canada, we share national advertising revenue with
our Canadian cable partners.
OUR PRINCIPAL CABLE PARTNERS MAY DISPOSE OF THEIR CABLE SYSTEMS, WHICH WOULD
REDUCE OUR POTENTIAL SUBSCRIBER BASE
Our agreements with our principal cable partners do not require that they
maintain a specified number of cable systems, subscribers or homes passed in
order to maintain their control over equity ownership of us. These principal
cable partners may dispose of a significant amount of their cable systems
without requiring that these cable systems remain subject to any exclusivity
provisions. However, to the extent that any of our principal cable partners
dispose of systems accounting for more than 20% of the number of homes passed in
its service areas as of June 4, 1996, subject to exceptions, without causing
transferred homes to remain exclusive to us, then that principal cable partner
may be required to sell a proportionate amount of its equity interest in us to
our other principal cable partners at fair market value. For example, TCI has
completed the transfer or sale of some cable systems and has announced the
proposed sale or transfer of additional cable systems and is considering various
plans and proposals that may result in the disposition of other of its cable
systems. Although TCI has informed us that it is attempting to cause some of
these transferred systems to remain subject to TCI's exclusivity obligations,
these efforts may not be successful. These dispositions could significantly harm
us if the transferred homes do not remain exclusive.
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<PAGE> 23
WARRANTS ISSUED TO OUR CABLE PARTNERS MAY RESULT IN ADDITIONAL DILUTION TO OUR
STOCKHOLDERS
We have entered into agreements with Cablevision Systems Corporation,
Rogers, Shaw and other cable partners under which warrants to purchase
23,106,722 shares of our Series A common stock were outstanding as of March 31,
1999. Under these agreements, warrants to purchase 10,431,590 shares of our
Series A common stock at an average exercise price of $0.76 per share were
exercisable as of March 31, 1999. To the extent that these cable partners become
eligible to and choose to exercise their warrants, our stockholders would
experience substantial dilution. We also may issue additional stock, or warrants
to purchase stock, at prices less than fair market value in connection with
efforts to expand distribution of the @Home service.
RISKS RELATING TO THE PROPOSED MERGER WITH EXCITE, INC.
OUR PRO FORMA ACCOUNTING FOR THE EXCITE MERGER MAY CHANGE
We have allocated the total estimated purchase price for the Excite merger
on a preliminary basis to assets and liabilities based on our best estimates of
the fair values of these assets and liabilities, with the excess costs over the
net assets acquired allocated to goodwill and other intangible assets. This
allocation is subject to 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 results of operations.
WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US
FROM SUCCESSFULLY INTEGRATING EXCITE WITH US
The merger involves risks related to the integration and management of
acquired technology, operations and personnel. Our integration of Excite will be
a complex, time consuming and expensive process and may disrupt our business if
not completed in a timely and efficient manner. Following the merger, we must
operate as a combined organization utilizing common information and
communication systems, operating procedures, financial controls and human
resources practices. We and Excite may encounter substantial difficulties, costs
and delays involved in integrating the operations of our companies, including:
- potential incompatibility of business cultures
- perceived adverse changes in business focus
- potential conflicts in sponsor, advertising or content relationships and
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
THE MERGER COULD HARM KEY THIRD PARTY RELATIONSHIPS
The present and potential relationships of us and Excite with sponsors,
content providers, advertisers, users and subscribers may be harmed by the
proposed merger. Uncertainties regarding sponsorship, joint venture overlap and
new service development following the merger may cause these parties to delay
decisions regarding these relationships. Any changes in these relationships
could harm our business.
WE AND EXCITE MAY LOSE CONTRACTUAL RIGHTS DUE TO THE MERGER
We and Excite have contracts with many suppliers, customers and other
business partners. Some of these contracts require us and Excite to obtain the
consent, waiver or approval of these other parties in connection with the
proposed merger. If consent, waiver or approval cannot be obtained, we or Excite
may lose the right to use intellectual property or other rights that are
necessary for smooth operation of the @Home or Excite services. We and Excite
have agreed to seek to secure the necessary consents, waivers and approvals.
However, we and Excite may not be able to obtain all of the necessary consents,
waivers and approvals. Failure to do so could harm our business. In addition,
both we and Excite have granted exclusive rights to third parties with regard to
content, sponsorship or other strategic relationships. Some of these rights
conflict with rights granted by the other party. We may not successfully resolve
these conflicts and failure to do so could harm our business.
ADDITIONAL RISKS RELATING TO EXCITE'S BUSINESS
24
<PAGE> 24
EXCITE HAS NOT BEEN AND MAY NEVER BE PROFITABLE
Excite has incurred significant operating expenses since it was formed. As
of December 31, 1998, Excite had an accumulated deficit of $135.6 million.
Although Excite has had significant revenue growth in recent periods, it may not
be able to sustain this growth in future periods. Excite may never achieve
profitability.
EXCITE MAY NO LONGER RECEIVE REVENUES AND USERS FROM NETCENTER
In April 1998, Excite entered into a two-year agreement with Netscape to
provide, host and sell advertising for co-branded content channels, a co-branded
Web search service and a co-branded Web directory service to be offered on
Netscape's Netcenter online service. In April 1999, Excite announced that it had
notified Netscape that it intends to terminate the agreement due to the
acquisition of Netscape by American Online, a competitor of Excite. As a result,
unless the parties renegotiate this agreement or enter into a new agreement,
this agreement will terminate during the second quarter of 1999. If this
agreement is terminated, Excite's revenues could be harmed if it does not
successfully generate new revenues to replace the revenues it was receiving
under this agreement.
EXCITE COULD LOSE USERS, ADVERTISERS AND REVENUES TO ITS COMPETITORS
Excite competes with a number of companies both for users and advertisers,
and therefore for revenues. Excite expects this competition will intensify,
particularly because there are few barriers to entry in Excite's market.
Excite's competitors include:
- Web portal companies such as Infoseek's Go Network, Lycos, Netscape's
Netcenter and Yahoo!
- online service providers such as America Online and Microsoft's MSN
service
- large media companies such as CBS, NBC, Time-Warner and USA Networks,
Inc., who have announced initiatives to develop Web services or partner
with Web companies and
- providers of Web-based advertising solutions, including AdForce,
advertising management software, including NetGravity, Inc., advertising
supported content and traditional advertising media.
EXCITE DEPENDS ON SPONSORSHIP AGREEMENTS FOR REVENUES
Excite derived approximately 25% of its 1998 advertising revenues from third
parties to provide sponsored services and placements on Excite's Web sites.
These sponsorships typically last for a longer period of time than traditional
banner advertisement purchases. If these sponsorship arrangements do not meet
the advertisers' expectations as to new customers or increased sales or brand
awareness, the sponsors may not renew their arrangements with Excite. It may
also be difficult for Excite to obtain additional sponsors if potential new
sponsors compete with existing sponsors. If Excite does not renew its existing
sponsorships or obtain new sponsors, its business would be harmed.
EXCITE DEPENDS ON SEVERAL THIRD PARTY RELATIONSHIPS FOR USERS, ADVERTISERS AND
REVENUES
Excite depends on a number of third party relationships to provide users
and content for its services, including agreements for links to Excite's
services to be placed on high-traffic Web sites and agreements for third parties
to provide content, games and e-mail for Excite's Web sites. If these
relationships terminate and Excite is not able to replace them, it could lose
users or advertisers, and this could harm Excite's revenues.
PRIVACY CONCERNS REGARDING THE USAGE OF DEMOGRAPHIC INFORMATION COULD PREVENT US
AND EXCITE FROM BENEFITING FROM SELLING TARGETED ADVERTISING
Excite's and some of our services, as well as those of Excite's subsidiary
MatchLogic, use cookies to help deliver targeted advertising and help compile
demographic information about users. Cookies are bits of information on a user's
drive and are passed between a Web server and the user's Web browser. These
cookies can be placed on a user's hard drive without the user's consent or
knowledge. Due to privacy concerns, some commentators and governmental bodies
have suggested that the use of cookies be limited. In addition, many versions of
Web browsers permit users to block or delete cookies. Any reduction or
limitation in the use of cookies could prevent Excite or MatchLogic from
utilizing their ad targeting capabilities, which could result in lower
advertising rates.
POTENTIAL LITIGATION WITH RESPECT TO INTELLECTUAL PROPERTY RIGHTS COULD HARM
EXCITE'S BUSINESS
Many parties, including competitors of Excite, are actively developing
search, indexing and related Internet technologies. Some of these parties have
taken steps to protect these technologies, and Excite believes that others will
follow. Therefore, Excite believes that disputes regarding the ownership of
these technologies are likely to arise in the future. Excite may not be able to
defend any litigation successfully. Even if successful, defending litigation can
be costly and divert management resources.
25
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates and equity prices.
Interest rate sensitivity
Short-term investments. We had short-term investments of $242.1 million at
March 31, 1999. These short-term investments consist of highly liquid
investments with original maturities at the date of purchase of between three
and twelve months. These investments are subject to interest rate risk and will
fall in value if market interest rates increase. A hypothetical increase in
market interest rates by 10 percent from levels at March 31, 1999 would cause
the fair value of these short-term investments to decline by an immaterial
amount. Because we are not required to sell these investments before maturity,
we have the ability to avoid realizing losses on these investments due to a
sudden change in market interest rates. However, we could choose to sell these
investments before maturity at a loss. Declines in interest rates over time
will, however, reduce our interest income.
Equity price risk
As of March 31, 1999, we owned 77,500 shares of common stock of Exodus
Communications. We purchased these shares at the time of Exodus' initial public
offering in March 1998 at a price of $15.00 per share. At March 31, 1999, the
closing price of Exodus' common stock was $134.50 per share. We value this
investment using the closing fair market value stated in the Wall Street Journal
for the last day of each month. As a result, we reflect this investment in our
balance sheet at March 31, 1999 at its market value of $10.4 million, with the
unrealized gains and losses excluded from earnings and reported in the
"Accumulated Other Comprehensive Income" component of stockholders' equity. The
above information does not reflect a two-for-one split of Exodus common
stock on April 12, 1999. We do not hedge against equity price changes.
We also own 746,654 shares of common stock of Beyond.com Corporation. We
purchased these shares in a private placement through BuyDirect.com Corporation
in February, 1999. BuyDirect.com Corporation was acquired by Beyond.com
Corporation on March 29, 1999 in a stock-for-stock transaction. Our post
acquisition basis in each share of Beyond.com is $5.36. At March 31, 1999, the
closing price of Beyond.com's common stock was $26.19 per share. We value this
investment using the closing fair market value stated in the Wall Street Journal
for the last day of each month. As a result, we reflect this investment in our
balance sheet at March 31, 1999 at its market value of $19.6 million, with the
unrealized gains and losses excluded from earnings and reported in the
"Accumulated Other Comprehensive Income" component of stockholders' equity. We
do not hedge against equity price changes.
26
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent sales of unregistered securities. In January and March 1999, we
issued performance based warrants to some of our cable partners to purchase up
to an aggregate of 3,030,000 shares of our Series A common stock at an exercise
price of $10.50 per share in connection with new distribution agreements entered
into in January and March 1999. These warrants were exercisable as to 439,215 as
of March 31, 1999 and will continue to vest and become exercisable based
generally on: (1) the number of eligible homes that a cable partner upgrades to
two-way HFC cable and that are capable of accessing the @Home service; and (2)
the number of @Home subscribers residing in any commercially deployed homes of
that cable partner. These warrants were issued in private transactions that were
exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act.
Use of proceeds from sales of registered securities. We commenced our
initial public offering on July 11, 1997 pursuant to a Registration Statement on
Form S-1 (File No. 333-27323). In the offering, we sold an aggregate of
10,350,000 shares of our Series A common stock (including 1,350,000 shares sold
pursuant to the exercise of the underwriters' over-allotment option) at an
initial price of $10.50 per share. The offering was closed on July 16, 1997.
Aggregate proceeds from the offering were $108,675,000, which included
$14,175,000 in aggregate proceeds due to the exercise of the underwriters'
option to purchase shares to cover over-allotments. We paid underwriters'
discounts and commissions of $7,607,250 and other expenses of approximately
$1,300,000 in connection with the offering. Our total expenses in the offering
were $8,907,250, and our net proceeds were $99,767,750. Of the net proceeds,
$19,941,000 has been used for purchases of property, equipment and improvements,
$12,668,000 has been used for payments on capital lease obligations, $37,752,000
has been used to fund operating losses and the remainder has been allocated to
general working capital requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed in the accompanying exhibit index are
filed as part of this report.
(b) Reports on Form 8-K.
On January 14, 1999, we filed a current report on Form 8-K under
Item 2 announcing that we had acquired Narrative Communications
Corp., a provider of rich media advertising and direct marketing
solutions for the World Wide Web.
On January 21, 1999, we filed a current report on Form 8-K under
Item 5 announcing that we had raised approximately $222.0 million
through a private offering of $437,000,000 principal amount at
maturity of convertible subordinated debentures to qualified
institutional buyers.
On January 21, 1999, we filed a current report on Form 8-K under
Item 5 announcing that, following discussions with the staff of the
Securities and Exchange Commission, we determined to record as
intangible assets and amortize ratably over their remaining lives
amounts which were previously expensed in connection with our
issuance of warrants to Cablevision under our Cablevision
distribution agreement.
On February 19, 1999, we filed a current report on Form 8-K under
Item 5 announcing that we had signed a definitive agreement to
acquire Excite, Inc., a global Internet media company. This report
also included Excite financial statements and pro forma combined
financial statements.
On February 19, 1999, we amended our current report on Form 8-K
filed on January 14, 1999 to include Narrative financial statements
and pro forma combined financial statements.
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 if governance changes that generally
require board actions to be approved by a majority of our board of
directors, including either Cox or Comcast, were approved by our
stockholders and in exchange for AT&T agreeing to increase its
subscriber penetration goal for the next twelve months.
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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)
/s/ KENNETH A. GOLDMAN
---------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
/s/ ROBERT A. LERNER
---------------------------------
Corporate Controller and Treasurer
(Principal Accounting Officer)
(Duly Authorized Officer)
MAY 14, 1999
29
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 163,780
<SECURITIES> 242,110
<RECEIVABLES> 14,269
<ALLOWANCES> 430
<INVENTORY> 0
<CURRENT-ASSETS> 437,320
<PP&E> 86,650
<DEPRECIATION> 30,367
<TOTAL-ASSETS> 893,497
<CURRENT-LIABILITIES> 67,720
<BONDS> 231,064
0
0
<COMMON> 813,963
<OTHER-SE> (235,671)
<TOTAL-LIABILITY-AND-EQUITY> 893,497
<SALES> 0
<TOTAL-REVENUES> 25,098
<CGS> 0
<TOTAL-COSTS> 36,846
<OTHER-EXPENSES> 21,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,296
<INCOME-PRETAX> (18,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,124)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
