<PAGE>
================================================================================
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, 2000.
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 No. 000-22697
AT HOME CORPORATION
(Exact name of the Registrant as specified in its charter)
Delaware 77-0408542
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 Broadway Street
Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
(650) 556-5000
(The 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 [ ]
As of April 30, 2000
--------------------
Number of shares of Series A Common Stock outstanding: ..... 365,238,851
Number of shares of Series B Common Stock outstanding: ..... 30,800,000
Number of shares of Series K Common Stock outstanding: ..... 1,083,334
================================================================================
<PAGE>
AT HOME CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999..................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999......................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 39
Item 2. Changes in Securities and Use of Proceeds............................................... 39
Item 3. Defaults Upon Senior Securities......................................................... 39
Item 4. Submission of Matters to a Vote of Security Holders..................................... 39
Item 5. Other Information....................................................................... 39
Item 6. Exhibits and Reports on Form 8-K........................................................ 39
Signatures........................................................................................ 40
</TABLE>
2
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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,
2000 1999
----------- -----------
ASSETS (Unaudited) (*)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 201,513 $ 224,548
Short-term investments.............................................................. 300,769 300,675
----------- -----------
Total cash, cash equivalents and short-term investments.......................... 502,282 525,223
Accounts receivable, net............................................................ 50,260 52,200
Accounts receivable -- related parties.............................................. 26,925 18,332
Other current assets................................................................ 40,169 35,151
----------- -----------
Total current assets............................................................. 619,636 630,906
Property, equipment and improvements, net............................................ 244,596 176,077
Investments in affiliated companies.................................................. 24,815 19,015
Other investments.................................................................... 281,901 273,005
Distribution agreements, net......................................................... 287,878 313,557
Goodwill and other intangible assets, net............................................ 7,182,871 7,615,062
Other assets......................................................................... 82,988 76,657
----------- -----------
Total assets..................................................................... $ 8,724,685 $ 9,104,279
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 55,843 $ 44,491
Accounts payable -- related parties................................................. 14,177 23,206
Accrued compensation and related expenses........................................... 15,691 15,632
Deferred revenue.................................................................... 59,519 56,844
Other accrued liabilities........................................................... 71,761 62,540
Current portion of capital lease and other obligations.............................. 37,039 38,666
----------- -----------
Total current liabilities........................................................ 254,030 241,379
Convertible notes and debentures..................................................... 738,083 736,294
Capital lease and other obligations, less current portion............................ 86,337 52,552
Other liabilities.................................................................... 8,045 7,037
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock, $0.01 par value:
Authorized shares -- 9,650,000
Issued and outstanding shares -- 10,572 in 2000 and 10,134 in 1999................. 408,658 397,019
Common stock, $0.01 par value:
Authorized shares -- 719,719,414
Issued and outstanding shares -- 395,191,598 in 2000 and
384,754,355 in 1999............................................................... 9,556,140 9,312,700
Deferred compensation............................................................... (50,169) (50,493)
Accumulated other comprehensive income.............................................. 84,885 92,594
Accumulated deficit................................................................. (2,361,324) (1,684,803)
----------- -----------
Total stockholders' equity....................................................... 7,638,190 8,067,017
----------- -----------
Total liabilities and stockholders' equity....................................... $ 8,724,685 $ 9,104,279
=========== ===========
</TABLE>
(*) The condensed consolidated balance sheet as of December 31, 1999 has been
derived from audited financial statements as of that date but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
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AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues/(1)/................................................................... $ 138,063 $ 25,098
Costs and expenses/(2)/:
Operating costs............................................................... 57,239 18,600
Product development and engineering........................................... 20,975 6,467
Sales and marketing........................................................... 56,926 7,676
General and administrative.................................................... 10,724 4,103
Cost and amortization of distribution agreements.............................. 93,965 15,020
Amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs............................ 573,133 6,733
--------- --------
Total costs and expenses........................................................ 812,962 58,599
--------- --------
Loss from operations............................................................ (674,899) (33,501)
Interest and other income, net.................................................. 3,193 2,811
Investment gain from business combination....................................... -- 12,566
Equity share of losses of affiliated companies.................................. (4,815) --
--------- --------
Net loss........................................................................ $(676,521) $(18,124)
========= ========
Net loss per share -- basic and diluted......................................... $ (1.75) $ (0.08)
========= ========
Shares used in per share computation -- basic and diluted....................... 387,644 240,966
========= ========
/(1)/Revenues from related parties.............................................. $ 12,094 $ 5,439
========= ========
/(2)/Depreciation and amortization included in costs and expenses,
excluding amortization of distribution agreements and
acquisition-related amounts................................................. $ 19,589 $ 7,455
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ----------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss........................................................................ $(676,521) $ (18,124)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization................................................. 19,589 7,200
Amortization of distribution agreements....................................... 23,217 14,760
Cost of distribution agreements............................................... 70,748 260
Amortization of deferred and other stock-based compensation................... 4,904 255
Amortization of goodwill and other intangible assets.......................... 567,348 6,733
Accretion of discount on convertible debentures............................... 2,394 1,720
Recognition of non-cash gain on investment.................................... -- (12,566)
Equity share of losses of affiliated companies................................ 4,815 --
Changes in assets and liabilities:
Accounts receivable......................................................... (6,548) (3,181)
Other assets................................................................ (13,615) (39,621)
Accounts payable............................................................ 2,137 20,944
Accrued liabilities......................................................... 7,189 2,568
Deferred revenues........................................................... 249 1,061
Other long-term liabilities................................................. 998 --
--------- ---------
Cash provided by (used in) operating activities................................. 6,904 (17,991)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of short-term investments............................................. (65,009) (165,139)
Sales and maturities of short-term investments.................................. 64,915 41,616
Purchases of other investments.................................................. (16,600) --
Sales of other investments...................................................... 9,332 --
Net purchases of property, equipment and improvements........................... (41,867) (7,596)
Payments under backbone agreement............................................... (6,030) --
Investment in joint ventures.................................................... (10,615) --
Business combinations, net of cash received..................................... 941 --
--------- ---------
Cash used in investing activities............................................... (64,933) (131,119)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of repurchases...................... 46,967 15,564
Payments on capital lease obligations........................................... (11,973) (3,376)
--------- ---------
Cash provided by financing activities........................................... 34,994 12,188
--------- ---------
Net decrease in cash and cash equivalents....................................... (23,035) (136,922)
Cash and cash equivalents, beginning of period.................................. 224,548 300,702
--------- ---------
Cash and cash equivalents, end of period........................................ $ 201,513 $ 163,780
========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid................................................................. $ 1,732 $ 434
========= =========
Acquisition of equipment under capital leases................................. $ 44,131 $ 5,522
========= =========
Warrants to purchase Series A common stock earned by cable partners
under distribution agreements and capitalized as intangibles................ $ (2,462) $ 78,459
========= =========
Conversion of preferred stock to common stock................................. $ 40,851 $ --
========= =========
Mergers and acquisitions:
Issuance of common and preferred stock and assumed options and warrants
exercisable for common stock.............................................. $ 139,826 $ --
========= =========
Liabilities assumed......................................................... $ 2,287 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
AT HOME CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts
of At Home Corporation and its subsidiaries, all of which are wholly owned. All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in entities owned 20% or more but less than majority
owned and not otherwise controlled by us are accounted for under the equity
method and presented in the consolidated balance sheets as investments in
affiliated companies. The unaudited condensed consolidated financial statements
reflect all adjustments consisting of normal recurring accruals, which are, in
the opinion of management, necessary for a fair presentation of the interim
periods presented. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results to be expected for any
subsequent period. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. The unaudited condensed
consolidated financial statements and notes included herein should be read in
conjunction with our audited consolidated financial statements and notes
included in our Annual Report on Form 10-K/A for the year ended December 31,
1999 as filed with the Securities and Exchange Commission on April 28, 2000.
Reclassifications
Certain reclassifications have been made to previously reported amounts in
the condensed consolidated financial statements in order to conform to the
current presentation.
Calculation of Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Since we have a net loss
for all periods presented, net loss per share on a diluted basis is equivalent
to basic net loss per share because the effect of converting outstanding stock
options, warrants, common stock subject to repurchase, convertible debt,
preferred stock and other common stock equivalents 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,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net loss............................................................... $(676,521) $(18,124)
========= ========
Weighted average shares of common stock outstanding.................... 390,213 248,694
Less weighted average shares of common stock subject to repurchase..... (2,569) (7,728)
--------- --------
Shares used in per share calculations.................................. 387,644 240,966
========= ========
Net loss per share--basic and diluted.................................. $ (1.75) $ (0.08)
========= ========
</TABLE>
Segment Reporting
Our key operating segments are aggregated into the reported business segments
based upon how our management organizes, manages and internally reports our
operations. As of March 31, 2000, our reported business segments consisted of
Media and Advertising Services, Subscriber Network and Other Services, and
International. Previously, International was reported as a component primarily
of Subscriber Network and Other Services. Our segment disclosures include
revenues for our reported business segments, but costs and expenses, loss from
operations, net loss and assets and liabilities are not reported separately for
each segment because this information is not produced or used internally by
management in reviewing operations and in allocating resources.
6
<PAGE>
The following represents revenues for our reported business segments (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
<S> <C> <C>
2000 1999
-------- --------
Media and Advertising Services......................... $ 76,223 $ 3,463
Subscriber Network and Other Services.................. 55,444 20,086
International.......................................... 6,396 1,549
-------- --------
Total consolidated revenues....................... $138,063 $ 25,098
======== ========
</TABLE>
Media and Advertising Services revenues were derived predominantly from
customers located in the United States for the quarters ended March 31, 2000 and
1999. Subscriber Network and Other Services revenues derived from customers
located outside the United Stated consisted primarily of revenues from cable
partners and their cable customers located in Canada, and accounted for
approximately 13% and 22% of Subscriber Network and Other Services revenues for
the quarters ended March 31, 2000 and 1999, respectively. International revenues
earned from our unconsolidated joint ventures were $4 million and $1.5 million
for the first quarters of 2000 and 1999, respectively. International revenues
earned by our consolidated operations outside of North America were $2.4 million
for the first quarter of 2000 and none for the first quarter of 1999. No single
customer accounted for more than 10% of total consolidated revenues for the
quarters ended March 31, 2000 and 1999.
Revenues from related parties
Revenues from related parties were $12.1 million, or 9% of total revenues,
for the quarter ended March 31, 2000, as compared to $5.4 million, or 22% of
total revenues, for the quarter ended March 31, 1999. One component of revenues
from related parties consists of revenues from our principal cable partners and
included $7 million and $3.9 million in the first quarters of 2000 and 1999,
respectively, which were generated from advertising arrangements, support
services such as customer support, local area content development, development
of set-top devices and pre-commercial deployment consulting. The remaining $5.1
million and $1.5 million of revenues from related parties in the first quarters
of 2000 and 1999, respectively, were earned primarily from consulting and other
services rendered to our joint ventures reimbursed on a cost-plus basis.
Revenues related to our strategic investments
We have made investments in certain companies for strategic purposes,
primarily in connection with expanding our Internet content and services and
providing improved broadband connectivity to our @Work and @Home subscribers.
Revenues from these strategic investments generally consist of the delivery of
advertising impressions, e-commerce sponsorship agreements and revenue share
arrangements on our web sites and were $12.3 million and $1 million for the
quarters ended March 31, 2000 and 1999, respectively.
Barter Revenue
Revenues from the exchange of our media and advertising services for the
products and services of third parties, including advertising in other media,
were $8.4 million for the quarter ended March 31, 2000 and were insignificant
for the quarter ended March 31, 1999. Revenues from these exchanges are recorded
at the lower of the fair value of the services provided or the services received
resulting in the recognition of equivalent amounts of revenue and expense.
2. New Distribution Agreements with Principal Cable Partners
On March 28, 2000, we entered into a letter agreement and term sheets with
AT&T, Comcast and Cox, our principal cable partners. Among other things, this
agreement provides for the extension of our relationship with AT&T until June 4,
2008, and the extension of our relationship with Comcast and Cox until June 4,
2006. Under the letter agreement, the existing master distribution agreement and
local cable operator agreements between us and our principal cable partners
remain in effect until June 4, 2002. However, Comcast or Cox may terminate the
mutual exclusivity obligations of the existing master distribution agreement, or
the entire agreement and the local cable operator agreements, at any time on or
after June 4, 2001 by providing at least 6 months' prior written notice.
Upon the execution of the letter agreement, we granted to AT&T, Comcast and
Cox warrants to purchase two shares of our Series A common stock for each home
passed by their respective cable systems. Upon the effectiveness of the
transactions underlying the agreement, the warrants issued to AT&T will become
exercisable for one share of
7
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Series A common stock and one share of Series B common stock for each home
passed. The exercise price for these warrants is $29.54 per underlying share.
Warrants issued to AT&T with respect to an estimated 50 million shares in
aggregate will become 100% vested and exercisable on June 4, 2002, subject to
limited exceptions, and subject to volume limitations on disposition of the
underlying shares at a rate of 16.67% per year. Warrants issued to Comcast and
Cox with respect to an estimated 35 million shares of our Series A common stock
will vest as to 1/6 of the total shares on June 4, 2001 and as to an additional
1/12 each six months thereafter so long as the existing master distribution
agreement, the letter agreement or superceding definitive agreements, as
applicable, have been continuously in effect up to such date. We will also grant
additional warrants for increases in homes passed, and each warrant granted by
us will be subject to forfeiture based on decreases in homes passed or for
failure to bring new systems in compliance with the distribution provisions of
this agreement. We will record the fair values of these warrants as they are
earned by the cable partners and amortize such amounts to operations over the
terms of the new distribution agreements.
Warrants to purchase approximately 8.9 million shares of our Series A common
stock which Comcast acquired in connection with its acquisition of cable systems
from Prime-Potomac, L.P., Prime-Chicago L.P., Jones Intercable Inc. and Garden
State Cablevision L.P. will be amended to eliminate performance vesting
conditions and will become exercisable in six-month increments over the original
vesting terms of these warrants. The distribution agreements assumed by Comcast
in connection with these warrants may be terminated by Comcast at the same time
that it terminates the existing or new master distribution agreement.
In addition, upon the effectiveness of these transactions, we will issue to
AT&T one share of our Series B common stock, each share of which entitles its
holder to 10 votes, in exchange for each share of our Series A common stock
surrendered by AT&T to us. We expect to issue approximately 50 million shares of
our Series B common stock in this exchange, which, when considered together with
the above warrants, would result in AT&T holding approximately 25% of the total
outstanding shares of our common stock and approximately 74% of our voting
power, each on a fully-diluted basis.
Under the agreement, AT&T has granted Comcast and Cox the right to sell their
shares of our Series A common stock to AT&T for a minimum price of $48 a share
at any time between January 1, 2001, and June 4, 2002, up to a maximum of $1.5
billion for Comcast and $1.4 billion for Cox.
Upon the effectiveness of the transactions, Comcast and Cox will waive most
of their rights under the current stockholders' agreement between those parties,
us, AT&T and other Excite@Home stockholders, including the right to designate a
director to our board. The designees of Comcast and Cox that are currently on
our board will resign their board positions on the effective date of these
transactions. The primary effect of these changes will be that AT&T will acquire
voting control over all board actions, and Comcast and Cox will no longer have
the right to veto a board action by voting together against a board action. AT&T
will consolidate our financial position and results of operations in its
financial statements following the effectiveness of the transactions, which is
expected to occur in the second half of 2000.
Completion of the transactions underlying the agreement is subject to
stockholder approval of an amendment to our fifth amended and restated
certificate of incorporation, receipt of any required approval by the Nasdaq
Stock Market and receipt of any other consents, approvals and waivers as are
necessary to complete these transactions in a manner that results in the
economic effects contemplated by these transactions.
3. Significant Business Combinations
On February 10, 2000, we completed the acquisition of Kendara, Inc., a
Delaware corporation, for approximately 1.5 million shares of our Series A
common stock, 202 shares of our Series B non-voting preferred stock and 1,279
shares of our Series C non-voting preferred stock, with a fair value of $104.8
million. The Series B preferred stock is being held in escrow for one year and
will automatically convert into approximately 0.2 million shares of our Series A
common stock upon the expiration of the one year escrow period. The Series C
preferred stock is convertible into approximately 1.3 million shares of Series A
common stock, subject to a vesting schedule and one year escrow period. We also
assumed Kendara's outstanding stock options, which were converted into options
to purchase approximately 0.1 million shares of our Series A common stock, with
a fair value of $4.2 million. The total purchase consideration of $109.6 million
also includes approximately $0.6 million of direct acquisition costs. The total
purchase consideration was allocated to cash of $3.9 million, accounts
receivable and other assets of $0.1 million,
8
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net property and equipment of $0.9 million, goodwill of $99.5 million, other
identified intangible assets of $5.6 million and liabilities assumed of $(0.4)
million. Kendara is a provider of browser-based marketing services. We accounted
for this acquisition as a purchase.
During the first quarter of 2000, we issued additional purchase consideration
to the former owners of Hartford House, Ltd., the previous operator of
Bluemountain.com. We acquired Bluemountain.com in December 1999. The additional
purchase consideration resulted from Bluemountain.com meeting certain
performance criteria for the month of December 1999, as stipulated in the merger
agreement. The additional purchase consideration included approximately 3.5
million shares of our Series A common stock and assumed employee stock options
to purchase approximately 0.5 million shares of Series A common stock. As of
December 31, 1999, approximately $150 million of the additional purchase
consideration was determinable and was therefore recorded in the consolidated
financial statements. Based on determination of the remaining portion of
additional purchase consideration during the first quarter of 2000, the total
purchase consideration was increased by $32.3 million to $1,002.3 million as of
March 31, 2000 from $970 million as of December 31, 1999. The allocation of the
additional purchase consideration resulted in an increase in goodwill of $26.5
million and an increase in deferred compensation of $4.8 million. The resolution
of an acquisition-related contingency resulted in the allocation of the
remaining $1 million to net assets.
4. Investments in Affiliated Companies
At Home Australia
In March 2000, At Home Australia acquired Excite Asia Pacific Pty Ltd and the
combined entity was renamed Excite@Home Australia Pty Limited. We have a 50%
interest in the combined joint venture operations. Our joint venture partner and
we may each be required to contribute up to approximately $20 million to the
joint venture and we have contributed approximately $6.6 million to date.
Excite Japan
In March 2000, we increased our ownership percentage in the Excite Japan
joint venture from 50% to 67%. We continued to account for Excite Japan under
the equity method of accounting in our consolidated financial statements for the
period through March 31, 2000.
5. Commitments and Contingencies
Under our backbone agreement with AT&T, we made payments of approximately $6
million during the quarter ended March 31, 2000 and we are required to make
additional payments of approximately $39 million in 2000. Our payments under the
backbone agreement are capitalized as they are made and are amortized by charges
to operations over the term of the agreement or the estimated useful life of the
equipment purchased. We will also be required to make additional payments of up
to $5 million annually during the term of the agreement for co-location space,
equipment and support and maintenance fees.
6. Stockholders' Equity
Warrants to Initial Investors
In April 1997, we issued warrants for 4 million shares of Series A common
stock with an exercise price of $5 per share to Rogers and Shaw, our primary
cable partners in Canada that were Series C preferred stock investors prior to
our initial public offering. The warrants become exercisable beginning June 2004
or earlier subject to certain performance standards being met by these cable
partners. We deemed the warrants to have insignificant fair value at the time of
issuance. During the quarter ended March 31, 2000, the holders of these warrants
acquired approximately 0.3 million shares of our Series A common stock through
exercises of these warrants. As of March 31, 2000, warrants for approximately
1.6 million shares were outstanding, of which approximately 0.4 million shares
were exercisable.
9
<PAGE>
Cable System Operator Performance Warrants
In February 1998, we issued additional warrants for 10 million shares to
Rogers and Shaw with an exercise price of $5.25. These warrants are earned based
on achievement of subscriber performance milestones by the cable partners. We
recorded non-cash charges to operations for the fair value of earned warrants of
$70.7 million and $0.3 million during the quarters ended March 31, 2000 and
1999, respectively. Exercises of warrants resulted in the net issuance of
approximately 0.8 million shares during the quarter ended March 31, 2000.
Warrants for approximately 6 million shares were outstanding as of March 31,
2000, of which approximately 5.7 million shares were earned and may be
exercised.
Warrants Subject to Distribution Agreements
As of March 31, 2000, performance-based warrants issued to certain cable
partners as incentives under exclusive distribution agreements were outstanding
as to approximately 37.3 million shares of our Series A common stock, of which
approximately 24.5 million shares were earned and may be exercised. The warrants
have exercise prices ranging from $0.25 to $23.13. During the quarter ended
March 31, 2000, warrants were earned with respect to approximately 0.2 million
shares, and approximately 0.3 million shares previously earned were cancelled
due to transfers of cable systems covered by certain warrants. As a result, we
recorded a net reduction during the first quarter of 2000 of $2.5 million to
distribution agreements in our condensed consolidated balances sheets
representing the change in the number of warrants earned at fair value. We are
amortizing the distribution agreements ratably over their remaining exclusive
terms, which expire at various dates through 2004. Amortization of distribution
agreements was $23.2 million and $14.7 million during the quarters ended
March 31, 2000 and 1999, respectively, and accumulated amortization as of March
31, 2000 was $159.5 million. There were no exercises of these warrants during
the quarter ended March 31, 2000.
7. Comprehensive Loss
The components of our comprehensive loss for each period presented are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net loss............................................... $(676,521) $(18,124)
Unrealized gain (loss) on available-for-sale (7,840) 8,012
investments...........................................
Foreign currency translation gain...................... 131 --
--------- --------
Comprehensive loss..................................... $(684,230) $ 10,112
========= ========
</TABLE>
8. Subsequent Events
On April 5, 2000, we completed the acquisition of Worldprints.com
International, Inc., a Colorado corporation, for approximately 0.8 million
shares of our Series A common stock and 0.8 million shares of our Series B non-
voting preferred stock, with an aggregate fair value of approximately $48
million. The Series B preferred stock will convert to Series A common stock
subject to a vesting schedule and one year escrow period. We also assumed
Worldprints' options and warrants, which were converted to options and warrants
to purchase approximately 0.5 million shares of our Series A common stock, with
a fair value of approximately $10 million. In addition, we also paid, prior to
the completion of the transaction, $4 million plus interest of Worldprints'
outstanding debt and assumed $6.5 million plus interest in loans that we
previously made to Worldprints. Worldprints is the operator of a web site that
offers photos and screensavers over the Internet. We accounted for this
acquisition as a purchase.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the condensed consolidated
financial statements and related notes contained herein and the information
contained in our annual report for the year ended December 31, 1999. This
discussion contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. We may identify these
statements by the use of words such as "believe", "expect", "anticipate",
"intend", "plan" and similar expressions. These forward-looking statements
involve several risks and uncertainties. Our actual results could differ
materially from those set forth in these forward-looking statements as a result
of a number of factors, including those described under the caption "Risk
Factors" herein and elsewhere in our annual report for the year ended December
31, 1999. These forward-looking statements speak only as of the date of this
quarterly report, and we caution you not to rely on these statements without
also considering the risks and uncertainties associated with these statements
and our business as addressed elsewhere in this quarterly report and in our
annual report for the year ended December 31, 1999.
Overview
Excite@Home is the leading provider of broadband Internet connectivity, with
approximately 1.5 million subscribers to our @Home service worldwide as of March
31, 2000. Our @Home service provides high-speed Internet access to consumers
utilizing the cable television infrastructure and we will soon also offer the
@Home service over digital subscriber lines (DSL). These technologies offer an
"always on" connection and speeds many times faster than 56 kilobits-per-second
dial-up modems. The @Home service features a scalable, distributed, intelligent
private network, which is designed to avoid bottlenecks frequently encountered
on the public Internet. Elements of this network include a national, optical
fiber Internet protocol backbone, regional data centers and local caching
servers. To support our expanding subscriber base, we plan to make
infrastructure investments in our network during 2000 to provide stability and
scalability for rapid growth. We intend to leverage our broadband connectivity
services to deliver a comprehensive broadband experience to our customers,
including entertainment and media, information, communications and other
services. Our recent introduction of the @Home 2000 service is a significant
step toward our goal of delivering this experience to broadband customers
worldwide. @Home 2000 is available so far to @Home subscribers in the United
States and features a custom browser utilizing the latest multimedia and
security features and a broadband portal incorporating the personalization
capabilities of Excite with multimedia content made possibly by a high-speed
connection
We have long-term agreements with many of the largest cable partners in North
America to carry the @Home service. We also have agreements with cable partners
in Australia, Belgium, Germany, Japan and the Netherlands to provide the @Home
service in those countries. Our agreements provide that we are the exclusive
provider of broadband Internet connectivity through at least June 2002 with
respect to AT&T, Cox, Comcast and Cablevision, our principal cable partners in
the United States, and through various dates from 2002 to 2006 with respect to
other cable partners. We have recently agreed with Cox, Comcast and AT&T to
terms that will extend our relationship with these cable partners on a favorable
but non-exclusive basis through 2006 and in the case of AT&T, through 2008. The
new agreements also provide that we will issue additional warrants to these
cable partners for an estimated 85 million shares of our common stock and that
AT&T will obtain voting control over all board actions. Please see Risk Factors
for further discussion of the recently-announced agreements. Our recently
announced DSL agreement with Rhythms NetConnections expands the potential
market, or footprint, of our @Home service to approximately 87 million homes
worldwide as of March 31, 2000. Approximately 26 million homes in our 72 million
home cable footprint were served by upgraded two-way cable capable of carrying
our @Home service as of March 31, 2000.
We expanded our media and advertising services in 1999 by acquiring Excite, a
leading consumer Internet portal, MatchLogic, a subsidiary of Excite
specializing in targeted advertising services, Bluemountain.com, the most-used
online greeting card service according to Media Metrix, and other media
properties that deliver entertainment, shopping and information services to our
users. Our other acquisitions, including Webshots in 1999 and Kendara and
Worldprints in 2000 will enable us to deliver enhanced Internet-based shopping,
community and photo services to our users. The Excite Network encompasses the
above web properties and offers comprehensive search, news and information,
shopping, community and communications services that can be customized and
personalized to users' preferences. We intend to develop comprehensive broadband
Internet services for consumers, such as the recently launched @Home 2000
service, utilizing the acquired narrowband media and advertising platforms. In
addition, users of the Excite Network represent potential customers for our
broadband connectivity services and we plan to increase
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marketing and branding efforts to both attract users to the Excite Network and
convert narrowband users to our broadband services. We also offer services to
customers over other Internet-access platforms such as handheld wireless devices
with our recent introduction of Excite Mobile and our free dial-up Internet
service FreeLane, which enable our customers to access our service offerings
from any location at any time and represent additional opportunities to market
our broadband services.
Our @Work service provides end-to-end managed connectivity services for
businesses over cable, DSL and other digital communications lines connected to
our private network and also provides web hosting and development of e-commerce
solutions. We had approximately 6,200 @Work access customers as of March 31,
2000. @Work also offers Internet content providers such as Equinix, Inc. direct
access to our broadband subscribers by connecting their data centers directly to
our network, putting data closer to our broadband users and bypassing the public
Internet. In addition, we are developing information and e-commerce services for
small and medium-size businesses and have recently formed a joint venture with
Dow Jones to develop Work.com, a comprehensive Internet portal for businesses.
We acquired iMALL in 1999 to provide comprehensive e-commerce solutions for
businesses and recently integrated the product offerings of iMall's e-commerce
enabled businesses into the Excite Network under ExciteStores.
We are pursuing opportunities to capitalize on the growth of broadband
services and the Internet outside of North America by building integrated
content and broadband access services worldwide. Our @Home service is being
deployed in partnership with cable operators in Australia, Belgium, Germany,
Japan and the Netherlands, primarily under joint venture agreements. These
partnerships encompass approximately 13.5 million homes as of March 31, 2000
under exclusive, seven-year access agreements. The @Home service has been
commercially launched in Australia, Belgium and the Netherlands with launches
planned in Germany and Japan later in 2000. In addition, we offer Excite-branded
portal sites with locally-sourced content in Australia, Canada, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and in Chinese,
many under joint venture agreements with partners operating in these countries.
We recently merged our @Home and Excite joint ventures in Australia with the
intention of offering Excite-branded content to Australian broadband customers.
We also recently increased our ownership in the Excite Japan joint venture to
67% and we intend to increase our equity stake in other joint ventures.
We believe that our future operating results will be impacted primarily by
growth in our broadband subscriber base, our ability to generate broadband
content revenues from media and advertising services, the successful
duplication of our domestic efforts on an international scale and the related
costs and expenses required to achieve these results.
We believe that our broadband subscriber base has significant growth
opportunity given the 87 million home worldwide footprint, only a portion of
which is capable of receiving the @Home service as of March 31, 2000. We expect
that a significant portion of markets where our service is not yet available
will be upgraded by the end of 2001 through cooperation with our cable partners.
In addition, the penetration rate in markets where the @Home service has been
available for several years is much higher than the penetration rate in recently
launched markets. In response to the opportunity in the short term for
significant increases in broadband subscribers and the longer-term challenge
from competing technologies such as DSL and fixed wireless systems, we plan to
make significant investments in our infrastructure during 2000 and also plan to
increase our marketing efforts, including online marketing using the Excite
Network and FreeLane. We believe that it will be less expensive to acquire
broadband customers now than several years in the future. Please see Risk
Factors for discussion of the risks and uncertainties regarding our broadband
services, subscriber business and cable partners, all of which could negatively
impact the growth and viability of our broadband subscriber base.
We believe that broadband media revenues will become more substantial as our
subscriber base grows and as we introduce new services that leverage high-speed
connectivity. Additionally, we plan to increase our marketing of the Excite
Network during 2000 in order to grow the user base of our media and content
services. Expanding our reach across many access platforms enables us to provide
our personalized Internet media, content and application services to a larger
number of Internet users and these users represent potential broadband
customers. Please see Risk Factors for discussion of the risks and uncertainties
regarding our business and broadband and narrowband services, all of which could
negatively impact our ability to generate revenues from broadband and narrowband
media services and the growth in users and market acceptance of these services.
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We plan to increase our ownership percentage in several international joint
ventures to better take advantage of broadband growth opportunities outside
North America, and as a result, we expect to consolidate the operations of most
of these entities in our financial statements. Instead of recording our share
of losses under the equity method, the revenues and costs and expenses of the
consolidated entities will be reflected in our consolidated revenues and costs
and expenses. We believe this will result in an increase in our operating loss
since our international joint ventures are currently not profitable, but we
expect that these consolidated entities will increase the growth rate of our
revenues in future periods. Please see Risk Factors for discussion of the
risks and uncertainties regarding our broadband and narrowband services,
subscriber business and cable partners, all of which could negatively impact
the growth and results of our international operations.
Results of Operations
Revenues
We accounted for the Excite acquisition as a purchase and Excite's revenues,
which are derived primarily from Media and Advertising Services, have been
included in our results of operations commencing on May 28, 1999, the date of
the acquisition. Therefore, comparisons of revenues for the quarters ended March
31, 2000 and 1999 are not relevant for the purposes of indicating revenue growth
in 2000 and future years.
As of March 31, 2000, our reported business segments consisted of Media and
Advertising Services, Subscriber Network and Other Services, and International.
Previously, International was reported as a component primarily of Subscriber
Network and Other Services. International includes revenues derived from our
operations outside of North America consisting primarily of revenues earned by
our consolidated subsidiaries and revenues earned from our unconsolidated
joint ventures in Australia, Japan and several European countries. The
following represents revenues for our reported business segments (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 Change 1999
-------- ------ -------
<S> <C> <C> <C>
Media and Advertising Services............................... $ 76,223 2,101% $ 3,463
Subscriber Network and Other Services........................ 55,444 176% 20,086
International................................................ 6,396 313% 1,549
-------- ----- -------
Total consolidated revenues............................. $138,063 450% $25,098
======== ===== =======
</TABLE>
Media and Advertising Services
Revenues derived from Media and Advertising Services were $76.2 million, or
55% of total revenues, for the quarter ended March 31, 2000 as compared to $3.5
million, or 14% of total revenues, for the quarter ended March 31, 1999. This
increase in the first quarter of 2000 over the first quarter of 1999 was
predominantly due to our acquisition of Excite. Under the purchase method of
accounting, our results of operations include the operations of Excite
commencing on May 28, 1999, the date of the acquisition. We generated revenues
from Media and Advertising Services in the first quarter of 1999, prior to the
acquisition of Excite, primarily from advertising and related services that we
provided with respect to our cable partners' co-branded broadband portals.
We generate Media and Advertising Services revenues primarily as a result of
impressions, page views or other methods of advertising delivery on certain
portions of the Excite Network. We recently introduced our @Home 2000 service,
which features a broadband version of the Excite portal as the default broadband
home page for @Home subscribers. We believe that our Media and Advertising
Services revenues from broadband will increase at a greater rate going forward
than from narrowband as our pricing and average revenue per thousand impressions
are significantly higher on broadband. Also, we intend to increase our product
development efforts toward broadband and utilize our narrowband services for
online marketing of our broadband services. Although our daily average page
views on the Excite Network have increased over prior quarters, growing for
example from 123 million during the fourth quarter of 1999 to 144 million
during the first quarter of 2000, a substantial portion of the increase in
page views was in areas of the Excite Network that do not currently generate
significant revenues, such as our recently acquired Bluemountain.com and
Webshots web sites and the chat and mail features on the Excite portal. While
our average revenue per thousand impressions in narrowband has decreased
recently, our pricing has remained stable.
The level of future revenues from Media and Advertising Services will
primarily be based on our ability to attract and serve narrowband and broadband
traffic on the Excite Network, integrate advertising in high-traffic areas,
attract
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<PAGE>
advertisers and obtain favorable pricing terms. Please see Risk Factors for
further discussion of factors that may affect our ability to generate revenues
from Media and Advertising Services in the future.
Subscriber Network and Other Services
Revenues from Subscriber Network and Other Services increased to $55.4
million, or 40% of total revenues, for the quarter ended March 31, 2000, from
$20 million, or 80% of total revenues, for the quarter ended March 31, 1999. The
increase in the first quarter of 2000 over the first quarter of 1999 was
primarily attributable to an increase in the number of subscribers to the @Home
and @Work broadband Internet connectivity services.
@Home service. The @Home service represented approximately 75% of
Subscriber Network and Other Services revenues for the quarter ended March 31,
2000 as compared to approximately 65% for the quarter ended March 31, 1999.
Subscriber Network and Other Services revenues generated by the @Home service
increased by approximately 220% in the first quarter of 2000 over the first
quarter of 1999 primarily due to the growth in the number of subscribers.
@Home subscribers increased from 331,000 as of December 31, 1998 to 460,000 as
of March 31, 1999 and from 1.1 million as of December 31, 1999 to 1.5 million
as of March 31, 2000. Revenues from the @Home service vary by cable partner
and market, but typically represent 35% of the average $40 per month fee
collected from each subscriber by our cable partners. Subscribers can choose
to purchase their own modems in which case we receive a smaller fee from our
cable partners. In addition, our cable partners may offer incentives to new
subscribers including reduced price or free service for up to several months,
and therefore, revenues from the @Home service may not fully reflect the number
of subscribers for several months after the end of any period .
The number of markets and households that our cable partners upgrade to
receive our services and the subscriber penetration rates in those markets will
determine the source and amount of our Subscriber Network and Other Services
revenues in future periods. As of March 31, 2000, the markets of our cable
partners in North America included approximately 59 million households, of which
approximately 45% were capable of receiving our services. Our recent DSL
agreement with Rhythms NetConnections adds approximately 15 million households
to our North American footprint outside of markets served by our cable partners.
Please see Risk Factors for further discussion of factors that may affect our
ability to generate Subscriber Network and Other Services revenues from the
@Home service in the future.
@Work service. The @Work service represented approximately 25% of Subscriber
Network and Other Services revenues for the quarter ended March 31, 2000 as
compared to approximately 35% for the year quarter ended March 31, 1999. @Work
Subscriber Network and Other revenues increased by approximately 90% in the
first quarter of 2000 over the first quarter of 1999 primarily as a result of
the growth in the number of @Work customers, which increased from 1,700 as of
December 31, 1998 to 2,300 as of March 31, 1999 and from 5,100 as of December
31, 1999 to 6,200 as of March 31, 2000.
International
Revenues from International increased to $6.4 million, or 5% of total
revenues, for the quarter ended March 31, 2000, from $1.5 million, or 6% of
total revenues, for the quarter ended March 31, 1999. International revenues
earned from our unconsolidated joint ventures were $4 million and $1.5 million
for the first quarter of 2000 and 1999, respectively. International revenues
earned by our consolidated operations outside of North America were $2.4
million for the first quarter of 2000 and none for the first quarter of 1999.
The increase in International revenues was due primarily to more consulting
services provided to our international joint ventures in the first quarter of
2000 as compared to the first quarter of 1999 and the impact of Excite's
international Internet portals. Excite's revenues have been included in our
results of operations commencing on May 28, 1999, the date of the acquisition.
In general, the future level of International revenues will be determined
by similar factors as those relating to our Media and Advertising Services and
Subscriber Network and Other Services in North America, and therefore, please
see Risk Factors related to these business segments for risks and
uncertainties that are also applicable to our international operations. We
intend to increase our ownership stake in several international joint ventures
and, if successful, would expect to include the revenues, as well as costs and
expenses, of these operations in our consolidated financial statements. As of
March 31, 2000, the markets of our international joint ventures included
approximately 13.5 million cable
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<PAGE>
households in five countries, of which approximately 10% were upgraded to
receive the @Home service, and local versions of the Excite portal were
available in eleven languages.
Revenues from related parties
Revenues from related parties were $12.1 million, or 9% of total revenues,
for the quarter ended March 31, 2000, as compared to $5.4 million, or 22% of
total revenues, for the quarter ended March 31, 1999. One component of revenues
from related parties consists of revenues from our principal cable partners and
included $7 million and $3.9 million in the first quarters of 2000 and 1999,
respectively, which were generated from advertising arrangements, support
services such as customer support, local area content development, development
of set-top devices and pre-commercial deployment consulting. The remaining
$5.1 million and $1.5 million of revenues from related parties in the first
quarters of 2000 and 1999, respectively, were earned primarily from consulting
and other services rendered to our joint ventures reimbursed on a cost-plus
basis.
Revenues related to our strategic investments
We have made investments in certain companies for strategic purposes,
primarily in connection with expanding our Internet content and services and
providing improved broadband connectivity to our @Work and @Home subscribers.
Revenues from these strategic investments generally consist of purchased
sponsorship or advertising space and revenue share arrangements on our web sites
and were $12.3 million and $1 million for the quarters ended March 31, 2000 and
1999, respectively.
Barter revenues
Revenues from the exchange of our media and advertising services for the
products and services of third parties, including advertising in other media,
were $8.4 million for the quarter ended March 31, 2000 and were insignificant
for the quarter ended March 31, 1999.
Total Costs and Expenses
We accounted for the Excite acquisition as a purchase and Excite's costs and
expenses have been included in our results of operations commencing on May 28,
1999, the date of the acquisition. Therefore, comparisons of our costs and
expenses for the first quarters of 2000 and 1999 are not relevant for purposes
of indicating the trend of our costs and expenses in 2000 and future years.
Our costs and expenses were as follows for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 Change 1999
-------- ------ -------
<S> <C> <C> <C>
Costs and expenses:
Operating costs....................................................... $ 57,239 208% $18,600
Product development and engineering................................... 20,975 224% 6,467
Sales and marketing................................................... 56,926 642% 7,676
General and administrative............................................ 10,724 161% 4,103
-------- ------ -------
Total costs and expenses excluding costs and amortization
related to acquisitions and distribution agreements................... 145,864 296% 36,846
Costs and amortization of distribution agreements..................... 93,965 526% 15,020
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-related costs............ 573,133 n/a 6,733
-------- ------ -------
Total costs and expenses............................................... $812,962 1,287% $58,599
======== ====== =======
</TABLE>
Operating costs
Operating costs are primarily related to maintaining the @Home network and
our Internet web sites and include telecommunication, web hosting and technical
support costs such as personnel, access fees and equipment depreciation, as well
as royalties, license agreements and revenue sharing arrangements for content
and other services. Operating costs in our media and advertising business are
typically lower than the operating costs related to the @Home broadband network.
Operating costs increased by 208% to $57.2 million, or 41% of total revenues,
for
15
<PAGE>
the quarter ended March 31, 2000, from $18.6 million, or 74% of total revenues,
for the quarter ended March 31, 1999. Approximately 40% of the increase in
operating costs in the first quarter of 2000 over the first quarter of 1999 was
related to our acquisition of Excite in May 1999. The remainder of the increase
was primarily attributable to telecommunication and technical support costs
which have scaled with subscriber growth.
During the first quarter of 2000, operating costs increased on an absolute
dollar basis over prior quarters due primarily to growth in our subscriber base
which required additional investments in network infrastructure and customer
service operations. Additionally, recent acquisitions, such as iMALL and
Bluemountain.com, have resulted in an increase in our operating costs over prior
quarters. Future acquisitions, expansion into international markets and
deployment of advanced technologies will result in further increases in
operating costs due to additional personnel, equipment depreciation, royalties,
revenue sharing arrangements and other factors. In addition, operating costs
in 2000 will increase as compared to the same period in 1999 due to our
results of operations reflecting the operations of Excite for a full year in
2000.
Gross Margins. We define gross margin as total revenues net of operating
costs, excluding cost and amortization of distribution agreements, which is a
presentation not in conformity with generally accepted accounting principles.
Gross margin increased to $80.8 million, or 59% of total revenues, for the
quarter ended March 31, 2000, from $6.5 million, or 26% of total revenues, for
the quarter ended March 31, 1999. The increase in gross margin and gross
margin percentage in the first quarter of 2000 over the first quarter of 1999
was primarily due to an increase in media and advertising revenues related to
our acquisition of Excite in May 1999. Media and advertising revenues
historically have lower direct costs than subscriber network services.
In the future, the types of advertising revenues generated and the revenue
sharing provisions of distribution and content agreements may affect gross
margin. Additionally, the expansion of our broadband subscriber services may
require higher operating costs, or conversely, may result in lower incremental
operating costs, and as a result affect gross margin. We believe that the
continued expansion of our operations is critical to the achievement of our
goals and we anticipate that operating costs will increase in the future
although generally at a slower rate than the expected increase in our revenues.
However, operating results may fluctuate significantly, and revenues may grow at
a slower rate than operating costs.
Product development and engineering
Product development and engineering expenses consist primarily of salaries
and related expenses for hardware and software engineering and development
personnel, consulting fees, equipment depreciation, supplies, the allocated cost
of facilities and related miscellaneous expenses. Product development and
engineering expenses increased by 224% to $21 million, or 15% of total revenues,
for the quarter ended March 31, 2000, from $6.5 million, or 26% of total
revenues, for the quarter ended March 31, 1999. Approximately 60% of the
increase in product development and engineering costs in the first quarter of
2000 over the first quarter of 1999 was related to our acquisition of Excite in
May 1999. The remainder of the increase was primarily related to costs
associated with enhancing the stability and scalability of the @Home broadband
network.
We anticipate that product development and engineering expenses will continue
to increase on an absolute dollar basis in the future due in part to:
. increased technology development efforts related to the stability and
scalability of our broadband network, including continuing design and
deployment costs and costs related to providing the Excite personalized
service over the @Home network;
. development and introduction of new content and services on our Internet
sites, in order to create and maintain brand loyalty among customers and
users of our narrowband and broadband Internet services;
. additional technology development efforts and integration of acquired
technologies from Excite, iMALL, Bluemountain.com and other companies
acquired in the future;
. development of narrowband and broadband Internet services in international
locations; and
. our results of operations reflecting the inclusion of Excite for an entire
year.
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<PAGE>
In addition, we anticipate that product development and engineering
expenses will increase as a percentage of revenues during 2000 as we further
develop our broadband media and content services and make additional
infrastructure investments designed to provide network stability and scalability
to support our larger broadband subscriber base.
Sales and marketing
Sales and marketing expenses consist primarily of promotional and advertising
expenses, personnel costs, commissions and agency and consulting fees. For our
media and advertising services, we have a direct sales force that sells banner
advertisements and sponsorships on the Excite Network to advertisers and
advertising agencies. For our subscriber network services, we currently rely
primarily on our cable partners to market the @Home broadband Internet service.
In addition, we have engaged in nationwide marketing of the service through
promotional activities and retail initiatives. We also incur promotional and
advertising expenses as we promote our brands and introduce new services, such
as our free dial-up service called FreeLane, in order to create and maintain
brand loyalty among customers.
Sales and marketing expenses increased by 642% to $56.9 million, or 41% of
total revenues, for the quarter ended March 31, 2000, from $7.7 million, or 31%
of total revenues, for the quarter ended March 31, 1999. Approximately 70% of
the increase in sales and marketing expenses in the first quarter of 2000 over
the first quarter of 1999 was related to our acquisition of Excite in May 1999.
The remainder of the increase was split approximately equally between @Home
subscriber acquisition expenses, e-commerce expenses related to our acquisition
of iMALL in October 1999, expenses associated with FreeLane and an increase in
international sales and marketing expenses.
We expect sales and marketing expenses will continue to increase on an
absolute dollar basis in the future, and as a percentage of revenues in 2000,
primarily due to:
. an increase in our sales efforts with respect to our broadband media
services, such as the @Home 2000 broadband portal;
. expanded marketing campaigns and greater use of media advertising and
promotions in an effort to create and maintain brand loyalty among
broadband subscribers;
. more sponsorship and content arrangements to enhance our narrowband and
broadband Internet services;
. acceleration of marketing activities related to @Home and @Work subscriber
acquisitions, including expanded retail and self-installation initiatives;
. increased international sales and marketing activities to promote the
Excite and @Home services; and
. our results of operations reflecting the inclusion of Excite for an entire
year.
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 161% to $10.7 million, or 8% of total revenues, for the quarter
ended March 31, 2000, from $4.1 million, or 16% of total revenues, for the
quarter ended March 31, 1999. The increase in general and administrative
expenses in the first quarter of 2000 over the first quarter of 1999 was related
to our acquisition of Excite in May 1999 and the increase of personnel and
expenditures related to expansion of our facilities and information technology
to support our business strategy and the growth of our operations and
infrastructure.
We anticipate that general and administrative expenses will continue to
increase on an absolute dollar basis in the future as we expand our
administrative and executive staff, add infrastructure, expand facilities and
assimilate acquired technologies and businesses.
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<PAGE>
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements were $94 million and $15
million for the quarters ended March 31, 2000 and 1999, respectively, and
consisted primarily of charges and amortization related to warrants to purchase
our common stock issued to certain cable partners in connection with
distribution agreements and performance incentives for distributing the @Home
service. Warrants issued to cable partners as incentives under exclusive
distribution agreements are recorded as intangible assets at fair value when the
performance criteria are met, and the intangible assets are amortized over the
remaining terms of the distribution agreements, which expire at various dates
through 2005. During the first quarter of 2000, certain warrants subject to
vesting under distribution agreements were canceled and we recorded a net
reduction of $2.5 million to distribution agreements in our condensed
consolidated balances sheets. Amortization of distribution agreements was $23.2
million and $14.7 million during the quarters ended March 31, 2000 and 1999,
respectively. The increase in amortization of distribution agreements in the
first quarter of 2000 compared to the first quarter of 1999 was due to an
increase in the number of warrants earned by cable partners that met certain
performance milestones.
Warrants that vest based on performance incentives, but were not issued in
connection with an exclusive distribution agreement, are charged to operations
as such warrants are earned, amounting to $70.7 million in the first quarter of
2000 and $0.3 million in the first quarter of 1999. The increase in the cost of
these performance incentives in 2000 compared to 1999 was primarily attributable
to our cable partners achieving performance milestones which significantly
increased the number of warrants earned.
We will incur a minimum of approximately $24 million per quarter for
amortization of our distribution agreements through the first half of 2002 and
lesser amounts thereafter until our distribution agreements fully expire in
2005. We will also record additional charges in the second quarter of 2000
related to achievement of milestones related to performance incentives. In
addition, the new distribution agreements with our principal cable partners
provide for the issuance of warrants to purchase an estimated 85 million shares
of common stock. We will record the fair values of these warrants as they are
earned by the cable partners and amortize such amounts to operations over the
terms of the new distribution agreements.
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs
Amortization of goodwill and intangible assets. During the quarter ended March
31, 2000, amortization of goodwill and acquired intangible assets was $567.3
million as compared to $6.7 million during the quarter ended March 31, 1999.
Goodwill and acquired intangible assets resulted primarily from our acquisition
of Excite in May 1999, iMALL in October 1999 and Bluemountain.com in December
1999. We expect to incur goodwill and intangible asset amortization charges of
up to $600 million per quarter until the goodwill and intangible asset balances
from each of our acquisitions become fully amortized starting in 2003. In
addition, we expect to incur additional goodwill and intangible asset
amortization charges related to future acquisitions.
Amortization of deferred compensation. Amortization of deferred compensation
related to acquisitions was $4.9 million for the quarter ended March 31, 2000
and none for the quarter ended March 31, 1999. Acquisition-related deferred
compensation resulted from our assumption of stock-based awards held by
employees of Bluemountain.com and Webshots prior to the acquisition and
represents the difference between the exercise price of unvested awards and the
fair market value of our Series A common stock. Deferred compensation is
amortized over the vesting term of the award and is expected to be approximately
$5 million per quarter through 2001 when the stock-based awards begin to fully
vest. Amortization of deferred compensation related to issuance of restricted
stock to employees under stock purchase agreements was approximately $0.3
million during both the first quarters of 2000 and 1999 and is included in the
category of costs and expenses in which the related employee salaries are
recorded.
Other acquisition-related costs. Costs directly associated with our
acquisitions that were not capitalized as part of the purchase consideration,
primarily resulting from our acquisition of Excite, iMALL and Bluemountain.com,
were $0.9 million for the quarter ended March 31, 2000 and none for the quarter
ended March 31, 1999. Such costs were primarily related to system integration
costs and professional fees. We expect to continue to incur additional
integration and other costs in the future related to our acquisitions.
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Equity Share of Losses of Affiliated Companies
Our equity share of losses of affiliated companies, which include joint
ventures and investments in privately held companies accounted for under the
equity method, was $4.8 million for the quarter ended March 31, 2000 and none
for the quarter ended March 31, 1999. Our equity interest in these affiliated
companies range from 20% to 50%, with the exception of our 67% interest in
Excite Japan as a result of an additional investment by us in March 2000.
We consider such affiliated companies to be related parties. Our investments
under the equity method were $24.8 million as of March 31, 2000 and $19 million
as of December 31, 1999. The increase represents cash investments by us during
the first quarter of 2000 net of our equity share of losses. We expect to record
further losses related to our equity share in these affiliated companies in the
future.
Realized Gain on Investment
We recognized a gain of $12.6 million in February 1999 as a result of an
investee, a privately held company that we had accounted for under the cost
method, being acquired in a common stock acquisition by a publicly traded
company.
Interest and Other Income, Net
Our net interest and other income consisted of the following amounts for the
years indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
2000 Change 1999
-------- ------ -------
<S> <C> <C> <C>
Interest and other income ......................................... $ 14,224 149% $ 5,706
Interest and other expense ........................................ (11,031) 281% (2,895)
-------- ---- -------
Total interest and other income, net ............................. $ 3,193 14% $ 2,811
======== ==== =======
</TABLE>
Interest and other income, net increased to $3.2 million for the quarter
ended March 31, 2000 compared to $2.8 million for the quarter ended March 31,
1999. The increase in interest and other income in the first quarter of 2000
over the first quarter of 1999 was due primarily to an increase in interest
income earned on higher cash and investment balances as a result of the funds
received from our secondary public offering in August 1998 and the private
offering of convertible subordinated debt in December 1998 and 1999, as well as
realized gains from our sale of equity securities in publicly held companies.
The increase in interest and other expense in the first quarter of 2000 compared
to the first quarter of 1999 was due primarily to higher capital lease
obligations in 2000 and the interest expense on the $500 million principal
amount of convertible subordinated debt issued in December 1999.
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes during the first quarters of 2000 or 1999. A
valuation allowance has been recorded for net deferred tax assets reducing
such amounts to zero because we lack an earnings history. Accordingly, we have
not recorded any income tax benefit for net losses incurred for any period
from inception through March 31, 2000.
Net Loss
Our net loss for the quarters ended March 31, 2000 and 1999 was $676.5
million and $18.1 million, respectively. The net loss in the first quarter of
2000 was due predominantly to the cost and amortization of distribution
agreements of $94 million and the amortization of goodwill, intangible assets
and deferred compensation and other acquisition-related costs of $573.1 million,
the substantial portion of which did not require cash outlay. Net income (loss)
before such costs and expenses was $(9.4) million for the first quarter of 2000
and $3.6 million for the first quarter of 1999.
We will continue to generate net losses in the foreseeable future due to the
significant non-cash charges associated with the costs and amortization related
to acquisitions and distribution agreements. The amount of future net loss or
income before such costs and amortization will depend on our future revenues and
the costs and expenses required to generate those revenues.
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Liquidity and Capital Resources
Liquidity
Since inception, we have financed our operations primarily through a
combination of private and public sales of equity and convertible debt
securities and capital lease obligations. As of March 31, 2000, our principal
source of liquidity was approximately $502.3 million of cash, cash equivalents
and short-term investments, compared with $525.2 million as of December 31,
1999. Our short-term investments consist predominantly of debt instruments that
mature in less than one year, are highly liquid and have a high-quality
investment rating. We intend to make our short-term investments available, if
and when needed, for operating purposes.
Our cash and cash equivalents decreased by $23 million from $224.5 million
as of December 31, 1999 to $201.5 million as of March 31, 2000. This decrease
resulted from cash provided by operating activities of $6.8 million, cash used
in investing activities of $65 million and cash provided by financing
activities of $35 million during the first quarter of 2000. Cash provided by
operating activities of $6.8 million included a net loss of $676.5 million
offset by non-cash charges of $693 million related to depreciation and
amortization of distribution agreements, acquisition-related amounts, deferred
compensation and other amounts, and a net decrease of $9.7 million in
operating assets and liabilities. Cash used in investing activities of $65
million included net purchases of equipment of $41.9 million, net purchases of
other investments of $7.4 million, payments under our backbone agreement of $6
million and investment in joint ventures of $10.6 million, offset by net cash
received in business combinations of $0.9 million. Cash provided by financing
activities of $35 million included net proceeds from common stock issuance of
$47 million offset by payments under capital leases of $12 million.
We intend to make investments in infrastructure of approximately $250
million in 2000, including investments in our private network designed to
provide stability and scalability. We also intend to make investments in our
international joint ventures to increase our ownership and control of these
entities. We believe that we have sufficient liquidity to support such
investments, to meet the commitments described below and to fund our operating
needs for at least the next 12 months; however, it is possible that we could
experience unexpected costs and expenses with respect to these or other items.
Thereafter, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to seek alternative financing, such as
selling additional equity or debt securities or obtaining additional credit
facilities. However, depending on market conditions, we may consider
alternative financing even if our financial resources are adequate to meet
presently anticipated business requirements. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. Financing may not be available on terms acceptable to us or at
all.
Commitments
In December 1998, we entered into a backbone agreement with AT&T to create a
nationwide network utilizing AT&T's 15,000-mile optical fiber Internet protocol
data communications line. Under the terms of this agreement, we paid
approximately $57 million in 1999 and we are required to make remaining payments
totaling $45 million in 2000. We have paid approximately $6 million to date in
2000 and will make additional payments of $39 million during the year. We expect
to make additional disbursements of approximately $5 million per year during the
20-year term of this agreement for co-location space, equipment and support and
maintenance fees.
As of March 31, 2000, we had commitments under our capital leases and other
financings to repay approximately $123 million plus interest over the next 36
months with a substantial portion of this amount due in 2000.
Our corporate headquarters, including recently constructed facilities,
consist of approximately 670,000 square feet in Redwood City, California, which
we occupy under 12 to 15 year leases. Rent under leases for recently constructed
headquarters facilities is based on construction costs, and we are responsible
for some tenant improvements. We occupied these new facilities early in 2000. In
addition, we plan to occupy additional nearby facilities in 2001. Rental
payments for our headquarters facilities including recently constructed
facilities are approximately $1.1 million per month. Total rental payments on
facilities in other locations are approximately $400,000 per month.
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Risk Factors
The risks described below are not the only ones facing our company.
Additional risks not presently known to us, or that we currently deem
immaterial, may also impair our business operations. Our business, financial
condition or results of operations could be seriously harmed by any of these
risks. The trading price of our Series A common stock could decline due to any
of these risks.
Risks Related to Excite@Home's Business
We may fail to integrate our business and technologies with the business and
technologies of Bluemountain.com and the other companies we have recently
acquired or may acquire.
We have completed several acquisitions recently, including our acquisitions
of iMALL, Inc. in October 1999, Bluemountain.com in December 1999 and others. We
intend to pursue additional acquisitions in the future. If we fail to integrate
these businesses, our quarterly and annual results may be adversely affected.
Integrating acquired organizations and products and services could be expensive,
time-consuming and a strain on our resources. Risks we could face with respect
to acquisitions include:
. the difficulty of integrating acquired technology or content and rights
into our services;
. the difficulty of assimilating the personnel of the acquired companies;
. the difficulty of coordinating and integrating geographically-dispersed
operations;
. our ability to retain customers of an acquired company;
. the potential disruption of our ongoing business and distraction of
management;
. the maintenance of brand recognition of acquired businesses;
. the failure to successfully develop acquired in-process technology;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
. the impairment of relationships with employees and customers as a result
of the integration of new management personnel.
In addition, we may be unable to identify future acquisition targets and we
may be unable to complete future acquisitions on reasonable terms.
Our @Home 2000 service may experience unforeseen problems as deployment
continues, and we may not be successful in integrating other aspects of Excite's
Internet services with the @Home service.
Although we have launched @Home 2000, which integrates the technology
platform of the @Home network broadband services with Excite's Internet
services, we have not fully integrated these services. In addition, @Home 2000
has not experienced significant traffic to date due to its recent release and we
cannot ensure that problems will not occur in widespread deployment. Further
integration of the Excite and MatchLogic services with the @Home network
broadband platform poses a number of technical challenges, including
difficulties associated with providing reliable updating and personalization of
content over @Home's broadband services and the difficulties associated with
applying the advertising services and targeting technologies of Excite's
MatchLogic subsidiary over the @Home broadband services. This is particularly
challenging because it is more difficult to provide regularly updated and
personalized information from distributed regional data centers, which we rely
upon to deliver our broadband services, than it is to deliver services from a
central data center, as Excite and MatchLogic currently do, in delivering their
narrowband services. We may not be able to achieve the same level of reliability
in providing updated and
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personalized Excite broadband content over the @Home service as we have achieved
with the Excite narrowband service.
Recently-acquired businesses may not be successful.
We have recently acquired companies in an early stage of development and with
unproven business models. Acquired features, functions, products or services may
not achieve market acceptance.
iMALL. Prior to August 1998, substantially all of iMALL's revenues were
attributable to its seminar business. This business was discontinued in August
1998. iMALL has yet to achieve significant revenue from its current business of
providing turnkey electronic commerce services to online merchants or its other
shopping-oriented web sites. A market for iMALL's services may not develop, and
iMALL's services may not become widely accepted.
Bluemountain.com. The acquisition of Bluemountain.com also involves a number
of risks. For example, prior to the acquisition, the Bluemountain.com electronic
greeting card service only sold limited advertising on its web sites.
Bluemountain.com users may not accept a service that displays advertising.
Bluemountain.com users may not continue to use the Bluemountain.com service for
other reasons. For instance, competitive electronic greeting card sites have
increased in popularity. Also, the popularity of electronic greeting card
services could decline generally. Additionally, advertisers may not choose to
advertise on the Bluemountain.com service if users do not accept advertising or
purchase goods or services advertised on Bluemountain.com in sufficient
quantities.
During 2000, we have acquired Kendara, Inc. and Worldprints.com
International, Inc. and we expect to acquire several other companies during
2000. These companies have specific technology and other capabilities that we
may not be able to successfully integrate with our services or transition to our
online platforms. As a result, we may incur unexpected integration and product
development expenses that could harm our results of operations. We may also be
required to record charges to operations related to the impairment of acquired
technology or other intangible assets.
We have incurred and expect to continue to incur substantial losses.
At Home Corporation was incorporated in March 1995, commenced operations in
August 1995, and has incurred net losses in each fiscal period since its
inception. As of March 31, 2000, we had an accumulated deficit of $2,361
million, which includes depreciation and amortization, cost and amortization of
acquisition-related intangibles and deferred compensation and cost and
amortization of distribution agreements of approximately $2,317 million since
inception. In addition, we currently intend to increase capital expenditures and
operating expenses in order to expand our network, market and provide our
broadband services to potential subscribers and expand our international
operations. As a result of the acquisitions of Excite, iMALL, Bluemountain.com
and other companies, we anticipate that we will incur substantial non-cash
charges including those relating to the amortization of goodwill and other
intangible assets in future periods. Therefore, we anticipate that we will
incur significant net losses for the foreseeable future.
Our quarterly operating results may fluctuate because of a number of factors.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control.
These factors include:
. the level of usage of the Internet in general and portal web sites in
particular;
. subscriber growth rates and prices charged by our cable partners;
. demand for Internet advertising;
. the addition or loss of advertisers;
. the level of user traffic on our web sites used for our narrowband
services;
. the mix of types of advertising we sell, such as the mix of targeted
advertising as compared to general rotation advertising;
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. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. the introduction of new products or services by us or our competitors;
. pricing changes for Internet-based advertising;
. the timing of marketing expenditures to promote our brands;
. costs incurred with respect to acquisitions;
. seasonality during the first quarter of each year associated with the
advertising business and Bluemountain.com; and
. general economic conditions.
Our expense levels are based in part on expectations of future revenue and,
to a large extent, are fixed. We may be unable to adjust spending quickly enough
to compensate for any unexpected revenue shortfall.
Our Internet advertising revenue is subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters,
and user traffic for our narrowband services has historically been lower during
the summer and during year-end vacation and holiday periods.
Due to all of the foregoing factors and the other risks described in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance, particularly in light of the
number of acquisitions we have completed. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our Series A common stock
may fall.
If we do not develop new and enhanced features, products and services for our
narrowband and broadband services, we may not be able to attract and retain a
sufficient number of users.
Because of the competitiveness of our market, we believe it is important to
introduce additional or enhanced features, products and services in the future
in order to differentiate our services and retain our current users and attract
new users. Acquiring or developing new features, products and services may
require a substantial investment of personnel and financial and other resources.
If we introduce a feature, product or service that is not favorably received by
our current users, they may not continue using our services as frequently and
they may choose a competing service.
We must also continually enhance our products and services to incorporate
rapidly changing Internet technologies. We could incur substantial development
costs if we need to modify our products, services or infrastructure to adapt to
changes in Internet technologies. Our business could be harmed if we incur
significant costs to adapt to these changes. If we cannot adapt to these
changes, users may discontinue using our services. Additionally, a new feature,
product or service may not gain acceptance with users and we may not achieve a
return on our investment.
We may also experience difficulties that could delay or prevent us from
introducing new features, products or services. Furthermore, these features,
products or services may contain errors that are discovered after the feature,
product or services are introduced. We may need to modify their design
significantly to correct these errors. In addition, we must consult with and
involve our principal cable partners in the development and design of new
features, products or services for our broadband services. Therefore, the
process of introducing new broadband features, products and services is time
consuming and if our principal cable partners object to a new feature, product
or service, we could be prohibited from offering it in particular areas. Our
business could be adversely affected if we experience difficulties in
introducing new products and services or if users do not accept these new
products or services.
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We depend on the sale of advertisements on our services, and if online
advertising does not become accepted, or if users employ new technology to block
or filter online advertising, our business would be harmed.
We expect to derive a substantial amount of our revenues from the sale of
advertising on our services for the foreseeable future. No standards have been
widely accepted to measure the effectiveness of online advertising. If standards
do not develop, existing advertisers may not continue their current levels of
online advertising. Furthermore, advertisers that have traditionally relied upon
other advertising media may be reluctant to advertise online. Advertisers that
already have invested substantial resources in other advertising methods may be
reluctant to adopt a new strategy. Our business would be harmed if the market
for online advertising fails to develop or develops more slowly than expected.
Different pricing models are used to sell online advertising. It is difficult
to predict which, if any, will emerge as the industry standard. This makes it
difficult to project future advertising rates and revenues. For example,
advertising rates based on the number of "click throughs," or user requests for
additional information made by clicking on the advertisement, instead of rates
based solely on the number of impressions, or number of times an advertisement
is displayed, could adversely affect our revenues because impression-based
advertising comprises a substantial majority of our current advertising
revenues. Our advertising revenues could be harmed if we are unable to adapt to
new forms of online advertising.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to a web user's computer are available. Other software programs
are able to hide a web user's identity and prevent "cookies" from being written
to, or read from, the user's hard drive. Cookies are bits of information keyed
to a specific memory location and passed to a web site server through the user's
browser software. This software prevents the proper operation of our services,
including personalization of the My Excite Start Page and targeted banner
advertising. Widespread adoption of software products such as these could reduce
the attractiveness of our personalization features and harm the commercial
viability of online advertising.
We must develop and maintain the awareness of our brands to attract consumers
and advertisers.
Maintaining and strengthening our brands is critical to achieving widespread
acceptance of our services by consumers and advertisers, particularly in light
of the competitive nature of our markets. Promoting and positioning our brands
will depend largely on the success of our marketing efforts and our ability to
provide high quality services. We may find it necessary to increase our
marketing budget or otherwise increase our financial commitment to creating and
maintaining brand loyalty among users. If we fail to promote and maintain our
brands or incur excessive expenses in an attempt to promote and maintain our
brands, our business could be harmed.
Privacy concerns could lead to legislation or new technology that could make it
more difficult for us to deliver targeted advertising.
Due to privacy concerns, some Internet commentators, consumer advocates and
governmental officials have suggested that the use of cookies be limited or
eliminated. In addition, certain currently available web browsers allow a user
to delete cookies or prevent cookies from being stored on the user's hard drive,
and technology that shields e-mail addresses, cookies and other electronic means
of identification could become commercially accepted. Any reduction or
limitation in the use of cookies through legislation, new technology or
otherwise, could limit the effectiveness of our ad targeting, which could harm
our business.
We could face liability related to the privacy of personal information about our
users.
Our narrowband services use cookies to deliver targeted advertising, help
compile demographic information about users and limit the frequency with which
an advertisement is shown to the user. Cookies are placed on the user's hard
drive, often without the user's knowledge or consent. We could face liability
relating to the collection and use of this information, as well as other misuses
such as unauthorized marketing. The Federal Trade Commission and some states
have been investigating Internet companies regarding their use of personal
information, and some groups have initiated legal action against Internet
companies regarding their privacy practices. In addition, the United States
federal and various state governments have proposed new laws restricting the
collection and use of information regarding Internet users. We could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if government agencies choose to investigate our privacy
practices.
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The sponsorship advertising we sell subjects us to financial and other risks.
We derive a substantial portion of our revenues from sponsorship
arrangements. These are advertising relationships under which third parties
receive sponsored services and placements on our services in addition to
traditional banner advertisements across our services. These arrangements expose
us to potential financial risks, including the risk that we fail to deliver
required minimum levels of user impressions, that third party sponsors do not
perform their obligations under these agreements, or that they do not renew the
agreements at the end of their term. These arrangements also require us to
integrate sponsors' content with our services, which can require the dedication
of resources and programming and design efforts to accomplish. We may not be
able to attract additional sponsors or renew existing sponsorship arrangements
when they expire.
In addition, we have granted exclusivity provisions to some of our sponsors,
and may in the future grant additional exclusivity provisions. These exclusivity
provisions may have the effect of preventing us from accepting advertising or
sponsorship arrangements from certain advertisers during the term of the
agreements. Our inability to enter into further sponsorship or advertising
arrangements as a result of any exclusivity arrangements could harm our
business.
Our equity investments in other companies may not yield any returns.
We have made equity investments in many Internet companies, including joint
ventures in other countries. In most instances, these investments are in the
form of illiquid securities of private companies. These companies typically are
in an early stage of development and may be expected to incur substantial
losses. Due to recent market volatility, some of these companies may alter plans
to go public, and others that have gone public have experienced or may
experience significant decreases in the trading prices of their common stock.
Our investments in these companies may not yield any return. Furthermore, if
these companies are not successful, we could incur charges related to write-
downs or write-offs of assets. We also record and continue to record a share of
the net losses in some of these companies, up to our cost basis, if they are
equity investments. We intend to continue to invest in illiquid securities of
private companies and in joint ventures in the future. Losses or charges
resulting from these investments could harm our operating results.
We must maintain the security of our networks.
We have in the past experienced security breaches in our networks. We have
taken steps to prevent these breaches, to prevent users from sharing files via
the @Home service and to protect against bulk unsolicited e-mail. However,
actual problems with, as well as public concerns about, the security, privacy
and reliability of our networks may inhibit the acceptance of our services.
The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications over the
Internet. Any well-publicized compromise of security could deter more people
from using the Internet or our services to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Because many of our advertisers seek to encourage people to use the Internet to
purchase goods or services, our business could be harmed if this were to occur.
We may also incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by these breaches.
Our limited experience with international operations may prevent us from growing
our business outside the United States.
A key component of our strategy is to expand into international markets and
offer broadband and narrowband services in those markets. We have 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. Some of our investments in international joint ventures include an
option to purchase the interests of other joint venture stockholders which, if
not exercised by a specified date, gives the other joint venture stockholders
the right to purchase our interest in the joint venture for a nominal price. In
addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, we face specific risks
related to providing broadband and narrowband services in foreign jurisdictions,
including:
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. regulatory requirements, including the regulation of Internet access;
. legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions;
. potential inability to use European customer information due to new
European governmental regulations; and
. lack of a developed cable infrastructure in many international markets.
We may be liable for our links to third-party web sites.
We could be exposed to liability with respect to the third-party web sites
that may be accessible through our services. These claims may allege, among
other things, that by linking to web sites operated by third parties, we may be
liable for copyright or trademark infringement or other unauthorized actions by
third parties through these web sites. Other claims may be based on errors or
false or misleading information provided by our services. Our business could be
harmed due to the cost of investigating and defending these claims, even to the
extent these types of claims do not result in liability.
We may face potential liability from our electronic commerce-related advertising
arrangements.
Some of our advertising relationships provide that we may receive payments
based on the amount of goods or services purchased by consumers clicking from
our services to a seller's web site. These arrangements may expose us to legal
risks and uncertainties, including potential liabilities to consumers of the
advertised products and services. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or may not be adequate
to indemnify us for all liability that may be imposed.
Some of the liabilities that may result from these arrangements include:
. potential liabilities for illegal activities that may be conducted by the
sellers;
. product liability or other tort claims relating to goods or services sold
through third-party e-commerce sites;
. claims for consumer fraud and false or deceptive advertising or sales
practices;
. breach of contract claims relating to purchases; and
. claims that items sold through these sites infringe third-party
intellectual property rights.
Even to the extent that these claims do not result in material liability,
investigating and defending these claims could harm our business.
Protection of our intellectual property rights is costly and difficult.
We regard our intellectual property, including our patents, copyrights,
trademarks, trade secrets, and similar intellectual property as critical to our
success. We rely upon patents, trademark and copyright law, trade secret
protection and confidentiality and license agreements to protect our proprietary
rights. Effective protection of intellectual property may not be available in
every country in which our products and services are available. We cannot
guarantee that the steps we have taken to protect our proprietary rights will be
adequate.
We may be subject to intellectual property infringement claims which are costly
to defend and could limit our ability to use certain technologies in the future.
Many parties are actively developing Internet-related technologies. We
believe that these parties will continue to take steps to protect these
technologies, including seeking patent protection. As a result, we believe that
disputes regarding the ownership of these technologies are likely to arise in
the future. From time to time, parties assert patent infringement claims against
us in the form of letters, lawsuits and other forms of communications. In
addition to
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patent claims, third parties may assert claims against us alleging infringement
of copyrights, trademark rights, trade secret rights or other proprietary rights
or alleging unfair competition.
We may incur substantial expenses in defending against third-party
infringement claims regardless of the merit of the claims. In the event that
there is a determination that we have infringed third-party proprietary rights,
we could incur substantial monetary liability and be prevented from using the
rights in the future.
Our business depends on the continued growth in Internet use.
We operate in a new and rapidly evolving market. Our business may be
adversely affected if usage of the Internet or other online services does not
continue to grow. This growth could be hindered by a number of factors including
the adequacy of the Internet's infrastructure to meet increased usage demands,
privacy and security concerns and the availability of cost-effective services.
Any of these issues could cause the Internet's performance or level of usage to
decline.
Our substantial leverage and debt service obligations may adversely affect our
cash flow.
We have substantial amounts of outstanding indebtedness, primarily from our
convertible subordinated debentures due 2018 and our 4 3/4% convertible
subordinated notes due 2006. We may be unable to generate cash sufficient to pay
the principal of, interest on and other amounts due in respect of our
indebtedness when due. As of March 31, 2000, the total principal amount of our
debt outstanding was $942 million. Our substantial leverage could have
significant negative consequences, including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
Future acquisitions could result in dilutive issuances of stock and the need for
additional financing.
We have typically paid for our acquisitions by issuing shares of our capital
stock. In the future, we may effect other large or small acquisitions by using
stock, and this will dilute our stockholders. We may also use cash to buy
companies or technologies in the future, as we did for a portion of the purchase
price for Bluemountain.com, and we may need to incur additional debt to pay for
these acquisitions. Acquisition financing may not be available on favorable
terms or at all. In addition, we will likely be required to amortize significant
amounts of goodwill and other intangible assets in connection with future
acquisitions, which will have a material effect on our results of operations.
We must manage our growth.
Our growth and recent acquisitions have placed a significant strain on our
managerial, operational, and financial resources. For example, we have grown
from 570 employees at December 31, 1998 to more than 2,400 employees at March
31, 2000. In addition, we plan to continue to hire additional personnel. To
manage our growth, we must continue to implement and improve our operational and
financial systems and to expand, train and manage our employee base. Any failure
to manage growth effectively could harm our business.
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Government regulation and legal uncertainties relating to the Internet could
hinder the popularity of the Internet.
New Internet privacy and other laws. There are currently few laws or
regulations that specifically regulate communications or commerce on the
Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, content and the characteristics
and quality of products and services. For example:
. The United States federal government and various state governments have
proposed limitations on the collection and use of information regarding
Internet users. In October 1998, the European Union adopted a directive
that may result in limitations on our ability to collect and use
information regarding Internet users in Europe.
. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. This could increase
the cost of transmitting data over the Internet.
. A portion of the Telecommunications Act, which has since been ruled
unconstitutional, sought to prohibit transmitting certain types of
information and content over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the Internet
could harm our business.
Tax laws. The tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made at the federal, state
and local level and by certain foreign governments that could impose taxes on
the sale of goods and services and certain other Internet activities. Our
business may be harmed by the passage of laws in the future imposing taxes or
other burdensome regulations on online commerce.
Other jurisdictions. Because our service is available in multiple states and
foreign countries, these jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each of these states and foreign
countries. If we fail to qualify as a foreign corporation in a jurisdiction
where we are required to do so, we could be subject to taxes and penalties.
We could face liability for defamatory or indecent content provided on our
services.
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 against Internet and online services
providers. Our insurance may not adequately protect us from these types of
claims.
In addition, legislation has been proposed that prohibits, or imposes
liability for, 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 focus on liability issues as a result of these lawsuits
and legislative proposals could impact the growth of Internet use. Furthermore,
governments of some foreign countries, 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.
Our future success depends on our ability to attract, retain and motivate highly
skilled employees.
Our future success depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in the Internet industry is
intense, particularly in the Silicon Valley where we are headquartered. Due to
the recent decline in the trading price of our common stock, we may face
challenges in attracting and retaining employees. Additionally, the exercise
price of a significant portion of our equity awards such as stock options may
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be higher than the current trading price of our stock, and such stock options
may not retain the incentive effect intended at the time of issuance. We may
issue additional equity awards from time to time to retain employees and this
may dilute existing shareholders. We may be unable to attract, assimilate or
retain other highly qualified employees in the future. We have from time to time
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. Recently, several members of executive management have resigned
from our company, and although we have replaced most of these employees, the new
employees have generally not had previous experience working together with each
other or other members of executive management. The risk of attracting and
retaining qualified employees is compounded by the fact that we are controlled
by our principal cable partners or by AT&T alone if the transactions
contemplated by the recently-announced agreements with our cable partners become
effective, and therefore we may not have the same flexibility as a typical
Silicon Valley company to pursue initiatives proposed by management.
Furthermore, certain key employees possess marketing, technical and other
expertise which is important to the operations of our business, and if these
employees leave, we may not be able to replace them with employees possessing
comparable skills.
Risks Relating to Excite@Home's Broadband Services
Our broadband business is unproven, and it may not achieve profitability.
The profit potential of our broadband business model is unproven and our
broadband services may not achieve widespread consumer or commercial acceptance.
We have had difficulty predicting whether the pricing models or revenue sharing
arrangements with our cable partners for our broadband services will prove to be
viable, whether demand for our broadband services will continue at the prices
our cable partners charge for our broadband services, or whether current or
future pricing levels will be sustainable. If these pricing levels are not
achieved or sustained or if our broadband services do not achieve or sustain
broad market acceptance, our business will be significantly harmed.
Growth of our broadband service may be inhibited by factors beyond our control.
Our ability to increase the number of subscribers to our broadband 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 the roll-out of these products with the @Home service; and
. the quality of customer and technical support our cable partners provide.
We need to add subscribers at a rapid rate for our broadband business to
succeed, but we may not achieve our subscriber growth goals.
Our actual revenues or the rate at which we 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
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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.
Our broadband subscriber growth is limited by installation and price
constraints.
Installation of the @Home service generally requires a customer service
representative employed by a cable partner to install a cable modem at a
customer's location and therefore can be time consuming. If we are unable to
speed the installation of our service, our subscriber growth could be
constrained. 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 service. Recently, companies have begun to offer free
Internet access with the purchase of personal computers and some Internet
service providers have reduced or eliminated Internet access charges in exchange
for placing advertisements on a customer's computer screen. If these promotions
become more widely used, or if Internet access fees decline, consumers may be
less willing to pay a premium for broadband services, or our broadband services
in particular.
If we cannot maintain the scalability and speed of our @Home broadband network,
customers will not accept our broadband services.
Due to the limited deployment of our broadband services, the ability of our
broadband network to connect and manage a substantial number of subscribers at
high transmission speeds is unknown. Therefore, we face risks related to our
network's ability to be scaled up to accommodate increased subscriber levels
while maintaining performance. Our network may be unable to achieve or maintain
a high speed of data transmission, especially as the number of our subscribers
increases. Because of our reliance on regional data centers and the cable
infrastructure located in particular geographic areas to support our broadband
services, our and our cable partners' infrastructure must also be able to
accommodate increased subscribers in a particular area. If the existing
infrastructure for a geographic area does not accommodate additional
subscribers, network performance for an area could decline causing us to lose
subscribers in that area, especially if a cable partner was unwilling to upgrade
its infrastructure in that area.
In recent periods, the performance of the @Home network has experienced some
deterioration in some markets partially as a result of subscriber abuse of the
@Home service. While we are seeking to eliminate this abuse by enforcing our
acceptable-use policy and by limiting users' upstream bandwidth, our failure to
do so may result in slower network performance and reduced customer demand for
our services.
If new "DOCSIS" compliant and self-installable cable modems are not deployed
timely and successfully, our subscriber growth could be constrained.
Currently, each of our subscribers must typically 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
deployments of the @Home service until the commercial availability of DOCSIS-
compliant cable modems is widespread, among other reasons. Also, cable modem
manufacturers have experienced, and may continue to experience, production and
delivery problems with cable modem components that may restrict the number of
modems available. Cable modem manufacturers may also delay the production or
delivery of cable modems for various economic or other reasons. 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 because
they are not able to obtain a sufficient quantity of DOCSIS-compliant modems and
if such modems do not become widely available through other channels.
We believe that our ability to meet our subscriber goals depends on the
degree to which two-way cable modems become widely available in channels such as
personal computer manufacturers and retail outlets. Currently, this widespread
availability has not yet occurred. In addition, these modems must be easy for
consumers to install themselves, rather than requiring a customer service
representative to perform the installation. If two-way cable modems do not
become quickly available in outlets other than through cable television
companies, or if they cannot be installed easily by consumers, it would be
difficult for us to attract large numbers of additional subscribers and our
business would be harmed.
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Our broadband business may be impacted by cable access proposals and other
government regulation.
Currently, our broadband services are not directly subject to regulations of
the Federal Communication Commission or any other federal, state or local
communications regulatory agency. However, there may be changes in the
regulatory environment relating to the Internet, cable television or
telecommunications markets. These changes could require regulatory compliance by
us, impact our exclusivity arrangements or limit our ability to provide
broadband services to our subscribers, and therefore could adversely affect our
revenues and results of operations. Such possible government regulations include
the following:
. The FCC or local agencies could require our cable partners to grant
competitors access to their cable systems. GTE, MindSpring Enterprises,
Inc., Consumers Union and other parties have requested Congress, the
Federal Communications Commission and state and local authorities to
require cable operators to provide Internet and online service providers
with unbundled access to their cable systems. Some parties have also
attempted to petition for unbundled access under existing cable
franchising rules, such as those for local programming access. If we or
our cable partners are classified as common carriers, or if government
authorities require third-party access to cable networks or unaffiliated
Internet service providers, our competitors may be able to provide service
over our cable partners' systems. The rates that our cable partners charge
for this third-party access, or for the @Home services, could also be
subject to rate regulation or tariffing requirements.
. Local governmental proceedings. Some local jurisdictions, including
Portland and Multnomah County, Oregon and Broward County, Florida, have
imposed third-party access requirements on AT&T and other cable companies
operating in those communities. The imposition of these requirements has
been challenged in Federal Courts. In June 1999, a U.S. District Court
upheld the third-party access requirement imposed on AT&T by Portland and
Multnomah County. This decision was appealed to the U.S. Court of Appeals
for the Ninth Circuit and arguments were presented to the court in
November 1999. Although appeals decisions have no time limit, most rulings
occur within three to twelve months after the date arguments are
presented. Numerous other local jurisdictions have considered or are
considering imposing similar third-party access requirements and other
municipalities may consider imposing similar requirements in the future.
. Other litigation. In October 1999, GTE filed a lawsuit in a U.S. District
Court and in November 1999, a class action was filed, each alleging
violations by us of the federal antitrust laws. Although it is too early
to predict the outcome of this litigation, we could be forced to pay
damages, allow other service providers to utilize our network, otherwise
alter the way we do business or incur significant costs in defending these
litigations. Any of these outcomes could harm our business. In addition,
others could initiate litigation on similar legal theories in the future.
. 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 broadband services successfully. For example,
changes in the regulation of cable television rates may affect the speed
at which our cable partners upgrade their cable systems to carry our
broadband 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 an additional cable service 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 other requirements in connection
with their distribution of the @Home service. There are thousands of
franchise authorities, and thus it would be difficult or impossible for us
or our cable partners to operate without a uniform set of franchise
requirements.
We could lose subscribers, distribution relationships and revenues related to
broadband services to our competitors.
The markets for consumer and business broadband services are extremely
competitive, and we expect that competition will intensify in the future. Our
most direct competitors for broadband services include the following:
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. Providers of cable-based Internet services. Media One Group, which AT&T
has agreed to acquire, and Time Warner Inc. have deployed high-speed
Internet access services over their local cable networks through their own
cable-based Internet service, Road Runner. We currently compete with Road
Runner to establish distribution arrangements with cable system operators
and we may compete for subscribers in the future if and when our cable
partners cease to be subject to their exclusivity obligations. In
addition, we compete with other providers of cable-based Internet
services, such as ISP Channel, Inc. and High Speed Access Corporation.
. Telecommunications providers. We compete with national long-distance and
local exchange carriers that offer high-speed, Internet access services
such as asymmetric digital subscriber line, known as DSL. Recently, these
services have been offered in a number of areas and at lower prices than
in the past. 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, online service
providers such as America Online, and other Internet portals and online
services that have announced broadband strategies, such as Yahoo!.
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 can. We may not be able to compete
successfully against current or future competitors. Competitive pressures could
significantly impact the growth of our broadband subscriber base and our ability
to renew and enter into new distribution agreements and as a result may hurt our
revenues.
The proposed merger between America Online and Time Warner Inc. creates
uncertainties about which cable markets will be served by Road Runner on an
exclusive or non-exclusive basis, and the merger may improve Road Runner's
ability to negotiate distribution agreements with cable system operators.
Additionally, our principal shareholder, AT&T, will have a substantial ownership
interest in Time Warner and Road Runner if its proposed merger with MediaOne is
completed. This relationship between America Online, AT&T, Time Warner and Road
Runner creates further uncertainties about which cable markets we will be able
to serve and under what terms. The proposed merger would also give America
Online, the dominant dial-up Internet service provider, the ability to utilize
Road Runner's technology as a basis for leveraging its marketing prowess and
extensive subscriber base to compete for customers in our cable markets once our
exclusivity agreements have expired. As a result, we may face intense long-term
competition for customers in previously exclusive cable markets.
Our dependence on our network to provide our broadband services exposes us to a
significant risk of system failure.
Our broadband service 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 broadband 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 our broadband services. Any damage or failure that causes interruptions in
our network operations could harm our business.
Risks Related to Our Relationships With Our Cable Partners
The success of our business depends on our relationships with our cable
partners. We recently announced extended and modified distribution agreements
with AT&T, Comcast and Cox, which are subject to stockholder and regulatory
approvals, and we also have distribution agreements with other cable partners.
Additionally, we have agreed not to provide a variety of Internet services in
the areas covered by our cable partners. Our agreements with our cable partners
are complex and some of the risks associated with these relationships are set
forth below. Please
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also refer to our proxy statement for our 2000 annual stockholders meeting for a
further description of the recently announced agreements.
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 our broadband 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, 2000, approximately
43% of our North American cable partners' cable infrastructure was capable of
delivering the @Home service. Our cable partners have announced and are
implementing 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. Furthermore, because of consolidation in the
cable television industry, as well as the sale or transfer of cable assets among
cable television operators, many cable companies have delayed upgrading
particular systems that they plan to sell or transfer. If these upgrades are not
completed in a timely manner, our broadband services may not be available on a
widespread basis and we may not be able to increase our subscriber base at the
rate we anticipate. 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 broadband services. As has happened in the past, even if a cable
partner upgrades its cable infrastructure, the upgraded infrastructure may not
function properly, and therefore may cause a delay in the availability of our
broadband services for particular areas. The failure of our cable partners to
complete these upgrades in a timely and satisfactory manner, or at all, would
prevent us from delivering broadband services and would significantly harm our
business.
Our cable partners are not generally obligated to carry our broadband services,
and the exclusivity obligations that prevent them from carrying competing
services may be terminated.
Most of our cable partners are currently 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, our cable partners are generally under no affirmative obligation to
carry any of our broadband services. The current exclusivity obligations of our
principal cable partners, AT&T, Comcast, Cox and Cablevision, expire on June 4,
2002, and may be terminated sooner under some circumstances, as follows:
. under the new agreements, Comcast or Cox may terminate their exclusivity
obligations to us, or their entire relationship with us, at any time on or
after June 4, 2001 by providing six months' prior written notice, with the
termination to become effective on the first June 4 or December 4
following this notice period, provided that they forfeit newly-issued
warrants to purchase shares of our Series A common stock;
. under the new agreements, Comcast may terminate its current exclusivity
obligations at any time if required to do so by Microsoft pursuant to an
agreement between those companies, in which case we may repurchase a
portion of Comcast's equity interest in Excite@Home;
. any principal cable partner may terminate all of its exclusivity
obligations upon a change in law that materially impairs its 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; and
. Comcast or Cox may terminate the exclusivity provisions of our principal
cable partners as of June 4 of each year if AT&T and its affiliates do not
meet specified subscriber penetration levels for the @Home service.
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Under the new agreements, Comcast and Cox were granted the right to sell
their shares of our Series A common stock to AT&T for a minimum price of $48 a
share at any time between January 1, 2001 and June 4, 2002. This right could
make it easier for Comcast or Cox to terminate their relationship with us should
they choose to do so.
Additionally, under the new agreements, once the current exclusivity
obligations expire on June 4, 2002, these cable partners have agreed to use us
as their provider of platform and connectivity services used in delivering their
high-speed Internet access services over their cable systems in the United
States through June 4, 2008 with respect to AT&T, and through June 4, 2006 with
respect to Comcast and Cox. However, these agreements do not prohibit these
cable partners from offering consumers a choice to use other service providers
after June 4, 2002, or sooner with respect to Comcast or Cox if they terminate
their exclusivity obligations. Comcast or Cox may terminate this new agreement
at any time by providing six months' prior written notice, with the termination
to become effective on the first June 4 or December 4 following this notice
period.
If the exclusivity obligations of our cable partners or our new agreements
with these cable partners are terminated, our business could be harmed
significantly and our stock price would likely suffer an immediate drop.
Our cable partners may offer services that compete with the @Home service, but
we are prohibited from offering competing services.
Many of our cable partners' exclusivity obligations are limited to high-speed
residential Internet services and do not extend to various services that they
may offer without us. These services include, but are not limited to, telephony
services, commercial and business services similar to our @Work service,
Internet services that do not use the cable television infrastructure or do not
require use of an Internet backbone and limited Internet services including
streaming video and other downstream-only services. By providing these services,
most cable partners can compete, directly or indirectly, with our broadband
delivery activities.
Until the expiration of our principal cable partners' exclusivity
obligations, we may not offer the services described above using their plant, or
to residences in the geographic areas served by their cable systems, without
their consent. These restrictions apply even if we have integrated such a
service with the @Home service in another geographic area. For example, in order
to provide streaming video longer than 10 minutes in duration, we must seek a
principal cable partner's consent or negotiate a separate agreement, including a
new revenue split, if applicable, prior to offering the service. We must
similarly obtain our cable partners' consent or execute a separate agreement to
provide broadband services over alternate platforms including fixed wireless,
cellular or DSL infrastructures to any residential customers in the cable
partners' geographic area. If our principal cable partners do not allow us to
offer broadband services over alternate platforms, our market for such services
will be severely limited and our business could be harmed.
We depend on our cable partners to promote our services and obtain new
subscribers.
The rate at which we are able to obtain new subscribers depends not only on
the degree to which our cable partners upgrade their cable systems but also on
the level and effectiveness of the efforts of our cable partners to promote our
services. Our cable partners have achieved different levels of subscriber
penetration. In Canada, for example, where our cable partners have high levels
of upgraded cable systems and faced early competition from other providers of
high speed data services, we have relatively high levels of subscriber
penetration (exceeding those in the United States). Among our principal U.S.
cable partners, AT&T, Cox and Comcast are actively promoting our services and
are beginning to increase their penetration rates. Cablevision, however, has
deployed our service to only a small number of subscribers and continues to
offer its own online service called Optimum Online to the majority of
subscribers in cable systems deployed to date. We cannot predict the rate at
which our cable partners will add new subscribers to our services. If our cable
partners do not actively and effectively promote our services, we will not be
able to reach the level of subscribers necessary to achieve a profitable
business model.
We are currently controlled by our principal cable partners, and may become
subject to control by AT&T, and our interests may not always align with AT&T or
our other principal cable partners.
AT&T controls approximately 55% of our voting power. Currently, four of our
eleven directors are directors, officers or employees of AT&T or its affiliates.
AT&T currently owns all 30.8 million outstanding shares of our Series B common
stock, each of which carries ten votes per share. This Series B common stock
ownership gives
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AT&T the right to elect five Series B directors, one of which is designated by
Comcast and one of which is designated by Cox. Currently, our board may take
action only if approved by the board and by at least 75%, or four of the five,
of our Series B directors. As a result, corporate actions generally require the
approval of AT&T's three Series B directors and one, or in some cases both, of
the directors designated by Comcast and Cox. Therefore, Comcast and Cox, acting
together, may veto any board action.
Under our new agreements with these cable partners, AT&T will acquire
additional voting control over us. If the transactions contemplated by these
agreements become effective, AT&T will have the right to elect at least a
majority of the board of directors. Comcast and Cox will waive their right to
elect directors to our board and their designees will resign their board
positions. All board actions will be decided by a majority vote of the board.
Currently, we depend on a continuing cooperative relationship with our
principal cable partners in order to approve board action and in order to take
action that requires stockholder consent. If the transactions contemplated by
our new agreements with our cable partners become effective, we will be subject
to both board and stockholder voting control by AT&T. It is possible that the
objectives of these companies, or AT&T if the transactions contemplated by our
new agreements become effective, will diverge from what management considers to
be our optimum strategy.
Warrants issued to our cable partners may result in additional dilution to our
stockholders.
We have entered into agreements with Cablevision, Rogers, Shaw and other
cable partners under which we issued warrants to purchase shares of our Series A
common stock. Under these agreements, warrants to purchase approximately 29.7
million shares of our Series A common stock at an average price of $2.09 per
share were exercisable as of March 31, 2000.
Under our new agreements with our principal cable partners, we granted or
will grant warrants to Comcast and Cox to purchase two shares of Series A common
stock and warrants to AT&T to purchase one share of Series A common stock and
one share of Series B common stock, for each home passed by the cable systems
located in the United States operated by each respective cable partner. Warrants
for an estimated 85 million shares in aggregate will be issued, and each warrant
will have an exercise price of $29.54 per share. We may grant additional
warrants in the future depending on increases in homes passed by cable systems
owned by these cable partners. Additionally, approximately 50 million shares of
Series A common stock held by AT&T will be converted into shares of Series B
common stock, each share of which entitles AT&T to 10 votes and which will
therefore result in additional voting power for AT&T. We will record the fair
values of the warrants as they are earned by the cable partners and amortize
such amounts to operations over the terms of the new distribution agreements.
To the extent that our principal cable partners, Cablevision, Rogers, Shaw or
other cable partners become eligible to and exercise their warrants, our
stockholders would experience substantial dilution. We also may issue additional
stock, or warrants to purchase stock, at prices equal to or less than fair
market value in connection with efforts to expand distribution of the @Home
service.
Risks Related to Our Narrowband Services
Our narrowband services could lose users, advertisers and revenues to
competitors.
Our narrowband services compete with a number of companies both for users and
advertisers and, therefore, for revenues. We expect this competition will
intensify, particularly because there are few barriers to entry in this market.
These competitors include:
. Internet portal companies such as Disney's Go Network, Lycos, Netscape's
Netcenter, NBCi 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
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. providers of a wide variety of online information, entertainment and
community services such as services that are targeted to vertical markets
or electronic commerce services.
Many providers of Internet services have been entering into distribution
arrangements, co-branding arrangements, content arrangements and other strategic
partnering arrangements with ISPs, online service providers, providers of web
browsers, operators of high-traffic web sites and other businesses in an attempt
to increase traffic and page views, thereby making their web sites more
attractive to advertisers, while also making it more difficult for consumers to
link to services. To the extent that our direct competitors or other web site
operators are able to enter into successful strategic relationships, these
competitors and web sites could experience increases in traffic and page views,
or the traffic and page views on our narrowband services could remain constant
or decline, either of which could harm our business by making these web sites
appear more attractive to advertisers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, distribution
partners, advertisers and content providers. Further, it is possible that our
competitors could develop search and retrieval services or other online services
that are equal or superior to ours or that achieve greater market acceptance
than our offerings.
The Internet in general, and our narrowband services specifically, also must
compete with traditional advertising media, such as print, radio and television,
for a share of advertisers' total advertising budgets. To the extent that the
Internet is not perceived as an effective advertising medium, advertisers may be
reluctant to devote a significant portion of their advertising budgets to
Internet advertising.
The proposed merger between Time Warner Inc. and America Online announced in
January 2000 would create a very large, diverse media conglomerate. The combined
companies may be able to use their diverse media holdings and Internet service
delivery capabilities to develop or expand Internet services and content that
could attract a significant number of new users and increased traffic.
Additionally, America Online will likely use Time Warner's subscription-based
services as an advertising mechanism to attract users to the Internet access
services provided by America Online and Road Runner. Increased competition for
users of Internet services and content may result in lower subscriber growth
rates for our online and Internet services and lower advertising rates and
decreased demand for advertising space on our web sites.
If usage of Internet portal sites by Internet users declines, our business could
be harmed.
The success of our Internet portal web sites is also dependent on Internet
users continuing to use "portal" web sites for their information needs. Some
Internet measurement services have reported that the number of unique users of
Internet portal sites has been decreasing in recent periods. If Internet users
begin to become less dependent on portal sites, and instead go directly to
particular web sites, our traffic levels could decrease as measured by unique
users, reach and pages views. As a result, the number of advertising impressions
and the attractiveness of our sites to advertisers could be impacted, which
would harm our media and advertising revenues.
Our systems may not be able to accommodate increases in the number of users of
our narrowband services.
Our web sites for the Excite Network are currently hosted and operated on a
computer network infrastructure separate from our broadband services. The Excite
Network must accommodate a high volume of traffic and deliver frequently-updated
information. The web sites for the Excite Network have in the past, and may in
the future, experience slower response times or other problems for a variety of
reasons. We also depend on third party information providers to provide updated
information and content for these services on a timely basis. The Excite Network
could experience disruptions or interruption in service due to the failure or
delay in the transmission or receipt of this information. In addition, the users
of these Excite Network services depend on Internet service providers, online
service providers and other web site operators for access to the Excite Network.
Each of these parties has experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. These types of occurrences could cause users to
perceive the Excite Network as not functioning properly and therefore cause them
to use other services.
36
<PAGE>
We depend on several third-party relationships for users, advertisers and
revenues.
We depend on a number of third party relationships to provide users and
content for the Excite Network, including agreements for links to our services
to be placed on high-traffic web sites and agreements for third parties to
provide content, games and e-mail for narrowband web sites. We are not
guaranteed of recouping our investments in these agreements through additional
users or advertising revenues, and we may have to pay penalties for terminating
agreements early. Some of these third parties could become our competitors, or
provide their services to our competitors, upon termination of such
relationships. If these relationships are terminated and we are not able to
replace them, we could lose users or advertisers.
37
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
Interest Rate Sensitivity
Short-Term Investments
We had short-term investments of $300.8 million as of March 31, 2000. These
short-term investments consist predominantly of highly liquid debt instruments
that are of high-quality investment grade and mature in one year or less. These
investments are subject to interest rate risk in that their value will fall if
market interest rates increase. A hypothetical increase in market interest rates
by 10 percent from levels at March 31, 2000 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.
Outstanding Convertible Debt
As of March 31, 2000, we had two issuances of long-term convertible debt
outstanding. The balance of our convertible debentures issued in December 1998,
net of unamortized original issue discount, was approximately $238.1 million as
of March 31, 2000 and bears an effective interest rate of approximately 4%. Our
convertible notes issued in December 1999 had an outstanding balance of $500
million on March 31, 2000 and bear a fixed rate of interest of 4.75%. In certain
circumstances, we may be required to redeem these debt instruments for our
Series A common stock or cash. Because the interest rates on these debt
instruments are fixed, a hypothetical 10 percent decrease in interest rates
would not have a material impact on us. Increases in market interest rates
could, however, increase the interest expense associated with future borrowings
by us, if any. Changes in interest rates and the price of our stock also affect
the market value of these securities. We do not hedge against interest rate
increases.
Equity Price Risk
We own shares of certain public companies. We value these investments using
the closing fair market value stated in the Wall Street Journal for the last day
of each month. As a result, we reflect these investments in our consolidated
balance sheet at March 31, 2000 at their fair market value of $281.9 million,
with the unrealized gains and losses reported in stockholders' equity as
"Accumulated Other Comprehensive Income". We do not hedge against equity price
changes.
Foreign Currency Exchange Rate Risk
Substantially all of our revenues are realized in U.S. dollars and most of
our revenues are from customers in the United States. Therefore, we do not
believe we face significant direct foreign currency exchange rate risk. We do
not hedge against foreign currency exchange rate changes.
38
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On February 10, 2000, in connection with our acquisition of Kendara, Inc., we
issued approximately 1.5 million shares of our Series A common stock, 202 shares
of our Series B non-voting preferred stock and 1,279 shares of our Series C non-
voting preferred stock to the stockholders of Kendara in a private transaction
that was exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act or Regulation D thereunder.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed in the accompanying exhibit index are
filed as part of this report.
(b) Current Reports on Form 8-K.
On April 3, 2000, we filed a current report on Form 8-K announcing under Item
5 that (1) on March 28, 2000, we agreed with our principal cable partners--AT&T
Corp., Comcast Corporation and Cox Communications, Inc.--to new extended
distribution agreements and a reorganization of our corporate governance
structure and (2) on March 29, 2000, we issued a press release jointly with AT&T
announcing this agreement.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT HOME CORPORATION
(Registrant)
Date: May 15, 2000 By: /s/ KENNETH A. GOLDMAN
----------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ ROBERT A. LERNER
----------------------------------------
Vice President, Corporate Controller and
Treasurer
(Principal Accounting Officer)
40
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit -------------------------------------- Filed
No. Exhibit Description Form File No. Exhibit Filing Date Herewith
- ------- ------------------- ----- --------- ------- ----------- --------
<C> <S> <C> <C> <C> <C> <C>
2.01 Agreement and Plan of Reorganization, dated February 2, S-3/A 333-31530 4.07 05/01/00
2000, between the Registrant and Kendara, Inc.
2.02 Agreement and Plan of Reorganization, dated April 5, S-3/A 333-31530 4.08 05/01/00
2000, between the Registrant and Worldprints.com
International, Inc.
4.01 Letter Agreement and Term Sheets, dated March 28, 2000, 8-K -- 99.01 04/03/00
between the Registrant and AT&T Corp., Comcast
Corporation and Cox Communications, Inc.
10.1 Employment Agreement, dated December 9, 1999, between X
the Registrant and Mark O'Leary*
10.2 Employment Agreement, dated January 4, 2000, between X
the Registrant and Byron Smith*
10.3 Separation Agreement, dated January 31, 2000, between X
the Registrant and Don Hutchison*
10.4 Worldprints.com International, Inc. 1999 Stock S-8 333-34452 4.03 04/10/00
Incentive Plan*
27.01 Financial Data Schedule for three months ended March X
31, 2000 (EDGAR version only).
</TABLE>
* Management contracts or compensatory plans required to be filed as an
exhibit to this quarterly report.
<PAGE>
Exhibit 10.1
December 9, 1999
Mark O'Leary
106 Wild Oak Court
Danville, CA 94506
Dear Mark,
Excite@Home is pleased to offer you the position of Senior Vice President,
@Work. In this position, you will report to Adam Grosser, President, Subscriber
Network. Your base salary will be an annual salary of $200,000. You will also be
eligible to participate in the Excite@Home Executive Incentive plan. Your
annual target incentive award is 25% of your base salary or $50,000 paid
annually.
You will also be offered a one-time hiring bonus of $35,000 gross payable.
$20,000 will be paid in your first regular paycheck. The remaining $15,000 will
be paid after six months of service. The following restrictions apply to this
bonus. If you terminate prior to a year of service, you will be required to re-
pay the bonus in full.
STOCK
Subject to approval by Excite@Home's Board of Directors (or its designee), you
will receive a stock option to purchase 150,000 shares of Series A Common Stock.
The exercise price of your stock option will equal the Nasdaq closing price for
Excite@Home's Series A Common Stock on the date your stock option is approved by
the Board of Directors (or its designee), which we anticipate will occur within
two weeks following your date of hire. Your date of hire is the date that you
actually begin working at Excite@Home and are on Excite@Home's payroll records.
Your right to purchase your option shares will be subject to a vesting schedule
that provides for 25% of your option shares to vest on your first year
anniversary (twelve months) with the remainder to vest at the rate of 2.0833%
per month over the next thirty-six months. The specific terms and conditions of
your stock option will be set forth in a definitive stock option grant that you
will receive shortly after your stock option is approved.
BENEFITS
We provide health and welfare benefits, including Medical, Dental, Vision, Life
and Disability Insurance, through our benefits plan. Please refer to the
attached Benefits Summary for more details. Should you have any questions about
the benefit programs offered, please contact Margaret Chavez at (650) 569-2403.
AUTHORIZATION TO WORK IN USA
In accordance with the Immigration Reform and Control Act of 1986, you are
required to provide verification of your identity and legal rights to work in
the United States. The appropriate documents must be presented for
Excite@Home's review on your first day of employment.
PROPRIETARY INFORMATION
We wish to impress upon you that we do not want you to bring with you any
confidential or proprietary material of any former employer, or to violate any
other obligation to your former
<PAGE>
employers. Within five days of your start date, you agree to execute the
company's Nondisclosure and Invention Assignment Agreement, providing us trade
secret protection of the company's proprietary information. Please understand
that this offer is contingent upon a background investigation, reference checks
and your written acceptance by Friday, December 17, 1999.
As a comprehensive Internet Search and Navigation Network, Excite@Home is
involved in a wide variety of projects involving content from as many different
sources on the Internet as possible. As a result, Excite@Home cannot guarantee
employees that they will not be exposed to some adult material, either through
specific work assignments or due to the presence of such material in the work
environment. Any representations contrary to those contained in this letter
which may have been made to you are superseded by this offer. If you accept
this offer, the terms described in this letter constitute the terms of your
employment with Excite@Home.
Please note: Excite@Home currently offers employee orientations every Monday at
9:00 a.m. It is required that you schedule your start date to coincide with our
Monday orientations. Benefits, payroll, and policies and procedures will be
covered during this session. Please return the signed original offer letter
along with the New Hire Form and Non-Disclosure Agreement in the enclosed
envelope to Elaine Morgado at 450 Broadway, Redwood City, CA 94063. A duplicate
original is enclosed for your records.
Mark, we look forward to your acceptance, and future contributions as part of
the Excite@Home senior management team.
Sincerely,
/s/ Adam Grosser
Adam Grosser
President, Subscriber Network
Enclosures: Excite@Home Benefits Summary
New Hire Forms
I accept this offer of employment with the understanding that it is not an
employment contract. I understand that either I or Excite@Home may terminate
any time, for any reason, with or without cause and with or without notice. The
provisions stated in the offer of employment supersede all prior discussions and
negotiations, and no other writing published by Excite@Home is intended to
modify the presumptions of at-will employment status.
Accepted and Agreed:
By: /s/ Mark O'Leary Start date:
--------------------- ----------------------------
Print Name: Mark O'Leary Date: , 1999
-------------- -----------------------------
<PAGE>
Exhibit 10.2
January 4, 2000
Mr. Byron Smith
Dear Byron,
Excite@Home is pleased to offer you the position of Senior Vice President,
Marketing. In this position, you will report to Dean Gilbert, Executive Vice
President and General Manager, @Home Division.
SALARY AND BONUS
Your base salary will be an annual salary of $250,000. You will also be
eligible to participate in the Excite@Home Executive Incentive plan (EIP). Your
annual target award will be 40% of your base salary. The performance measures
for EIP currently in effect for 1999 are: 90% attainment of company revenue
goals (40% of award), 90% attainment of profit/loss minimum (40% of award), and
customer satisfaction (20% of award). EIP performance measures are subject to
modification in 2000 and future years. EIP award payments are made only if the
performance measures are achieved.
Notwithstanding the above, you will be guaranteed a minimum bonus of $48,000
each year for the first two years of your employment (total of $96,000
guaranteed over a 2-year period). If EIP awards are greater than this bonus
guarantee, the difference will be added to your guaranteed award.
Additionally, we have added a signing bonus of $50,000 gross. $25,000 gross
will be paid in the first payroll cycle following your first day of employment,
the remaining $25,000 gross will be paid in the first payroll cycle in April
2000. If within one year of your hire date you voluntarily terminate your
employment you will be required to re-pay a pro-rata portion of your bonus based
on your date of termination.
STOCK
Subject to approval by Excite@Home's Board of Directors (or its designee), you
will receive an option to purchase 200,000 shares of Series A Common Stock. The
exercise price of your stock option will equal the Nasdaq closing price for
Excite@Home's Series A Common Stock on the date your stock option is approved by
the Board of Directors (or its designee), which we anticipate will occur within
two to three weeks following your date of hire. Your date of hire is the date
that you actually begin working at Excite@Home and are on Excite@Home's payroll
records. Your right to purchase your option shares will be subject to a vesting
schedule that provides for 25% of your option shares to vest on your first year
anniversary (twelve months) with the remainder to vest at the rate of 2.0833%
per month over the next thirty-six months. Shortly after your stock option is
approved you will receive a confirmation notice in the mail. Our Stock Option
Plan and Stock Option Terms and Conditions will be made available to you on
<PAGE>
our employee Intranet site or may be obtained by contacting our Stock
Administration department. As discussed, we anticipate that you will take on
additional responsibilities within approximately 90 days of starting your
employment with Excite@Home. At the point of you assuming additional
responsibilities, you will be granted an additional 50,000 shares. Subject to
your satisfactory performance, you will be granted a minimum of 1__% of your
initial stock option grant in refresh options within the first 12 months of your
employment.
BENEFITS
We provide health and welfare benefits, including Medical, Dental, Vision, Life
and Disability Insurance, through our benefits plan. Please refer to the
attached Benefits Summary for more details. Should you have any questions about
the benefit programs offered, please contact Margaret Chavez at (650) 569-2403.
RELOCATION
To assist you with your move to the San Francisco Bay Area, Excite@Home will
agree to the following relocation package.
. One house hunting trip for two
. Airline travel for you and your family, or mileage reimbursement if you
decide to drive your car to the Bay Area.
. Movement of household goods and up to two autos
. Storage of household goods and up to two autos for up to 60 days
. Car rental for up to 60 days
. Interim living expenses for up to 60 days
. Customary non-recurring closing costs related to the purchase of a home in
San Francisco Bay Area (your down payment, prepaid interest, and property
taxes will not be considered closing costs)
In addition, Excite@Home will make available to you two loans in the aggregate
amount of $300,000 for the purpose of assisting you in purchasing a home in the
San Francisco Bay Area. Each loan will have a principal amount of $150,000, be
made pursuant to a full recourse promissory note, accrue simple interest
annually at a rate sufficient to avoid imputation of income under the Internal
Revenue Code, and be secured by your San Francisco Bay Area home and the shares
subject to your stock option. You will be responsible for any tax liability you
may incur in connection with these loans and their repayment. These loans will
be available to you at any time within one year from your hire date.
The first loan will have a term of four years. One fourth of the principal
amount, together with all accrued and unpaid interest, will be forgiven by the
Company on each anniversary of the date that the loan is made. If prior to the
fourth anniversary of the loan date you voluntarily terminate your employment
from Excite@Home or your employment is terminated for cause (as defined below),
all remaining principal and interest will become due and payable in full ninety
(90) days following the termination of your employment.
<PAGE>
The second loan will have a term of five years. All accrued and unpaid interest
will be forgiven by the Company on each anniversary of the date that the loan is
made. All principal will be due on the fifth anniversary of the loan in a
single balloon payment. If prior to the fifth anniversary of the loan date you
voluntarily terminate your employment from Excite@Home or your employment is
terminated for cause (as defined below), all remaining principal and interest
will become due and payable in full ninety (90) days following the termination
of your employment.
In the event you sell any of the shares subject to your stock option, all
proceeds from the sale of such shares will first be applied against all unpaid
principal under the second loan. Moreover, in the event you sell any of the
shares subject to your stock option grant after you have provided notice that
you plan to voluntarily terminate your employment or after you have received
notice that your employment will be terminated for cause (as defined below), all
proceeds from the sale of such shares will be applied against all unpaid
principal and unpaid interest under both loans.
For purposes of this letter, termination "for cause" will exist at any time
after the occurrence of one or more of the following events: (a) a good faith
determination by the Board of Directors of Excite@Home that you willfully failed
to follow the written directions of the Board; (b) your engagement in gross
misconduct which is materially detrimental to the Company; (c) your willful
failure or refusal to comply in any material respect with your Invention
Assignment and Confidentiality Agreement (including your theft of Excite@Home's
proprietary information), the Company's insider trading policy, or such other
reasonable policies of Excite@Home where noncompliance would be materially
detrimental to Excite@Home; or (d) your committing an unlawful or criminal act
which would reflect badly on Excite@Home in Excite@Home's reasonable judgment.
AUTHORIZATION TO WORK IN USA
In accordance with the Immigration Reform and Control Act of 1986, you are
required to provide verification of your identity and legal rights to work in
the United States. The appropriate documents must be presented for
Excite@Home's review on your first day of employment. If you do not provide the
appropriate documentation, you will not be permitted to work and your date of
hire will be delayed. The appropriate documentation is listed on the I-9 form
included.
PROPRIETARY INFORMATION
We wish to impress upon you that we do not want you to bring with you any
confidential or proprietary material of any former employer, or to violate any
other obligation to your former employers. Within five days of your start date,
you agree to execute the company's Invention Assignment and Confidentiality
Agreement, providing us trade secret protection of the company's proprietary
information.
MISCELLANEOUS
As a comprehensive Internet access provider and Internet portal, Excite@Home is
involved in a wide variety of projects involving content from as many different
sources on the Internet as possible. As a result, Excite@Home cannot guarantee
employees that they will not be exposed
<PAGE>
to some adult material, either through specific work assignments or due to the
presence of such material in the work environment.
This offer is contingent upon a proof of authorization to work n the United
States, a background investigation, satisfactory reference checks and your
written acceptance by Friday, January 7, 2000.
Please return the signed original offer letter along with the New Hire Form and
Non-Disclosure Agreement in the enclosed envelope to Elaine Morgado at 450
Broadway, Redwood City, CA 94063. A duplicate original is enclosed for your
records.
Any representations contrary to those contained in this letter which may have
been made to you are superseded by this offer letter. If you accept this offer,
the terms described in this letter constitute the terms of your employment with
Excite@Home. Byron, we look forward to having you join Excite@Home as part of
the executive management team!
Sincerely,
/s/ Dean Gilbert
Dean Gilbert
Executive Vice President and General Manager, @Home Division
Enclosures: Excite@Home Benefits Summary
New Hire Forms
Accepted and Agreed:
By: /s/ Byron Smith Start date:
-------------------------- --------------------
Print Name: Byron Smith Date: , 1999
------------------- --------------------
<PAGE>
Exhibit 10.3
SEPARATION AGREEMENT
This Separation Agreement (the "Agreement") is entered into by and between At
Home Corporation ("Excite@Home") and Don Hutchison ("Hutchison") as of January
31, 2000. The parties agree as follows:
1. Resignation. Hutchison has resigned from his position as SVP, General
Manager @Work for the Excite@Home effective as of December 31, 1999 and will
cease all employment with Excite@Home on February 15, 2000 (the "Step Down
Date"). Hutchison acknowledges and agrees that his employment with Excite@Home
will terminate on the Step Down Date, and that after such date he will have no
right to employment with Excite@Home. Notwithstanding the foregoing, the
parties acknowledge that at a later date this Agreement may be amended by the
written consent of both parties to provide for a longer period of employment
and/or other benefits in connection with Hutchison's work in creating a new
venture focused on the work.com business portal. There is no express or implied
obligation, however, for either party to enter into such an amendment.
2. Benefits During Transition Period. From December 31, 1999 through the
Step Down Date (the "Transition Period"), Hutchison will receive the same
employee benefits as he received prior to December 31, 1999 (including his
salary for the period, his current medical benefits, and continued stock
vesting) except that he will not participate in Excite@Home's executive bonus
plan for 2000.
3. Duties and Authority During the Transition Period.
(a) Duties. During the Transition period, Hutchison will continue to
abide by Excite@Home's Invention Assignment and Confidentiality Agreement; will
comply with all of Excite@Home's standard employment policies and procedures
including Excite@Home's guidelines governing trading by company personnel; and
will not engage in any dishonest, fraudulent or illegal activity in his capacity
as an Excite@Home employee.
(b) Authority. Hutchison agrees that he has no authority to act on
behalf of Excite@Home during the Transition Period or at any time thereafter,
and he will not represent to others that he has any such authority.
4. Benefits Following the Step Down Date. Upon the Step Down Date,
Hutchison will receive no further employee benefits except as expressly set
forth below.
(a) Expenses. Hutchison will submit to Excite@Home within fifteen
(15) days of the Step Down Date any unreimbursed Excite@Home authorized business
expenses incurred by him on or before that date and Excite@Home will promptly
reimburse Hutchison for such expenses.
(b) Accrued Vacation Pay. Excite@Home shall pay Hutchison the value
of all unused and not lost vacation days accrued through the Step Down Date,
less all applicable tax
<PAGE>
withholdings and other standard deductions.
(c) Medical and Dental Benefits; COBRA. Excite@Home will offer
Hutchison the opportunity to continue health and dental insurance coverage, at
Hutchison's own expense, to the extent required by COBRA. Hutchison
acknowledges that he has received the information and documentation required in
order to extend his health and dental insurance coverage under COBRA.
5. 1999 Bonus Payment. Excite@Home executives are eligible to receive a
bonus payment under the 1999 Executive Bonus Plan calculated based on
Excite@Home's performance against the 1999 bonus criteria (i.e. 40% company
revenue, 40% P&L, and 20% customer satisfaction). If and at the time the
Compensation Committee authorizes bonus payments under the 1999 Executive Bonus
Plan, Hutchison will receive a bonus payment calculated in the same manner as
used for all other eligible executives.
6. Section 401(k) Plan. Hutchison will no longer be eligible to make
contributions to the Excite@Home Retirement Savings and Investment Plan (the
"401(k) Plan") after the Step Down Date. On the Step Down Date, Hutchison's
contributions to the 401(k) Plan, if any, will be distributed to him or left in
the 401(k) Plan in accordance with his instructions and the provisions of 401(k)
Plan.
7. Stock.
(a) Original Stock Option Grant. On March 15, 1997, Hutchison
purchased 800,000 shares (on a split adjusted basis) of Excite@Home Series A
Common Stock (the "Original Option Shares") at a purchase price of $0.125 per
share (on a split adjusted basis) by exercising a stock option that was granted
to Hutchison on March 3, 1997. The Original Option Shares will continue to vest
until the Step Down Date at their normal rate (i.e. 2.083% per month). In
addition, the parties agree that the vesting of an additional 116,667 Original
Option Shares was accelerated as of December 31,1999 pursuant to that certain
letter agreement between Excite@Home and Hutchison dated February 10, 1997
concerning vesting upon a "change of control" (as defined therein). On the Step
Down Date, Excite@Home will exercise its right to repurchase all of Hutchison's
83,333 unvested Original Option Shares at $0.125 per share.
(b) Other Stock Option Grants. All other stock options granted to
Hutchison will continue to vest until the Step Down Date at their normal rate
(i.e. 2.083% per month). All vested and unexercised stock option shares not
exercised by Hutchison within ninety (90) days following the Step Down Date will
be forfeited.
(c) Stock Purchase Plan. Hutchison will no longer be eligible to
participate in the Employee Stock Purchase Plan (the "ESPP") following the
completion of the current purchase period on February 1, 2000.
8. Nonsolicitation and Proprietary Information.
(a) Nonsolicitation. Hutchison will remain bound by the Excite@Home
Invention Assignment and Confidentiality Agreement, including without limitation
the
<PAGE>
nonsolicitation obligations contained therein. The parties acknowledge and
agree, however, that these nonsolictation obligations do not prevent Hutchison:
(i) from hiring an Excite@Home employee when the employee initiates hiring
discussions with Hutchison or Hutchison's new employer, or (ii) prevent
Hutchison from hiring any former Excite@Home employee so long as Hutchison does
not induce that person to leave Excite@Home or otherwise solicit the employment
of that person while that person is employed at Excite@Home.
(b) Excite@Home Property. Promptly following the Step Down Date,
Hutchison will return to Excite@Home all Excite@Home property now in his
possession (including, if applicable, his Excite@Home badge, portable computer,
portable phone and Excite@Home access cards/keys) unless Hutchison and
Excite@Home's Senior Vice President of Human Resources agree in writing that
Hutchison will retain or purchase specific equipment.
9. Hutchison Release. Hutchison forever fully releases and discharges
Excite@Home, its predecessors, successors, subsidiaries, officers, directors,
agents, attorneys, employees and assigns (collectively referred to hereafter as
"Releasees") from any and all causes of action, claims, suits, demands or other
obligations or liabilities (except those set forth in this Agreement), whether
known or unknown, that Hutchison ever had, now has, or may in the future have,
that may be alleged to arise out of or in connection with his employment with
Excite@Home and his separation therefrom (collectively referred to hereafter as
the "Hutchison Claims"), including, but not limited to any claims: (a) for
wages, stock, bonuses or expense reimbursements, and (b) that any terms of his
employment with Excite@Home or any circumstances of his separation were
wrongful, in breach of any obligation of Excite@Home or in violation of any
contractual rights or any rights arising under any federal, state or local
statute (including, without limitation, the Age Discrimination in Employment Act
and the Older Worker Protection Act). Hutchison further agrees not to sue or
otherwise institute or cause to be instituted or in any way participate in
(except at the request of Excite@Home) legal or administrative proceedings
against the Releasees with respect to the Hutchison Claims.
10. Excite@Home Release. Excite@Home forever fully releases and
discharges Hutchison from any and all causes of action, claims, suits, demands
or other obligations or liabilities (except those set forth in this Agreement),
whether known or unknown, that Excite@Home ever had, now has, or may in the
future have, that may be alleged to arise out of or in connection with his
employment with Excite@Home or his separation therefrom other than those related
to his obligations under the Excite@Home Invention Assignment and
Confidentiality Agreement (collectively referred to hereafter as the
"Excite@Home Claims"). Excite@Home further agrees not to sue or otherwise
institute or cause to be instituted or in any way participate in legal or
administrative proceedings against Hutchison with respect to Excite@Home Claims.
11. Other Claims. This Agreement extends to all claims of every nature
and kind, known or unknown, suspected or unsuspected, past, present, or future,
arising from or attributable to Hutchison's employment with Excite@Home or the
termination of that employment, and any and all rights granted to Hutchison and
Excite@Home under Section 1542 of the California Civil Code or any analogous
state law or federal law or regulation are hereby expressly waived. Section 1542
of the Civil Code of the State of California reads as follows:
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST OF MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
12. Confidentiality. Both parties agree that they will not disclose the
terms of this Agreement to any other party except as required by law. This
covenant of non-disclosure is a material inducement to each party for entering
into this Agreement.
13. Arbitration. Both parties agree that any dispute between them
regarding any aspect of this Agreement or any of the terms or circumstances of
Hutchison's employment with Excite@Home or the termination of that employment
will be resolved pursuant to confidential arbitration proceedings to be held in
San Mateo County, California, in accordance with the rules of the American
Arbitration Association. The parties agree that the decision of the arbitrator
will be final and binding upon the parties.
14. No Admission of Liability. Nothing in this Agreement shall constitute
an admission by either party of any claim, liability, wrongdoing, or violation
of the law, all of which are denied by both parties.
15. Authorization. The parties agree that they have read and understand
the foregoing Agreement, and that they affix their signatures hereto voluntarily
and without coercion. Hutchison further acknowledges that he has been given an
opportunity to consult with an attorney of his own choosing concerning the terms
of this Agreement, and that the waivers he has made and the terms he has agreed
to are knowingly made, conscious, and with full appreciation that he is forever
foreclosed from pursuing any of the rights so waived.
16. Review Period. Hutchison has been advised (and acknowledges such
advice) that he may take up to twenty-one (21) days to consider this Agreement
after the date it was delivered to him, that he should consult with an attorney
prior to executing this Agreement, that he may revoke this Agreement within
seven (7) days of execution and that this Agreement shall not be effective or
enforceable until the end of such seven (7) day revocation period. In order to
revoke this Agreement, Hutchison must deliver to the General Counsel of
Excite@Home a letter stating that he is revoking this Agreement.
17. Miscellaneous. This Agreement will bind the parties and their
respective legal representatives, successors and assigns. This Agreement will
be governed by the laws of California. This Agreement may not be modified
without the written consent of both parties. This Agreement contains the entire
agreement and understanding between the parties with respect to this matter and
supersedes all prior discussions, agreements, and understandings except as
expressly provided herein. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties duly execute this Agreement as of the date first
written above.
<PAGE>
AT HOME CORPORATION
By: /s/ Leilani Gayles /s/ Don Hutchison
----------------------------- -----------------------------
Leilani Gayles DON HUTCHISON
Senior Vice President, Human Resources
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from At Home Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 201,513
<SECURITIES> 300,769
<RECEIVABLES> 77,185
<ALLOWANCES> (3,632)
<INVENTORY> 0
<CURRENT-ASSETS> 619,636
<PP&E> 244,596
<DEPRECIATION> (117,816)
<TOTAL-ASSETS> 8,724,685
<CURRENT-LIABILITIES> 254,030
<BONDS> 738,083
0
408,658
<COMMON> 9,556,140
<OTHER-SE> (2,326,608)
<TOTAL-LIABILITY-AND-EQUITY> 8,724,685
<SALES> 0
<TOTAL-REVENUES> 138,063
<CGS> 0
<TOTAL-COSTS> 57,239
<OTHER-EXPENSES> 755,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,031)
<INCOME-PRETAX> (676,521)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (676,521)
<EPS-BASIC> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
