<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 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
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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
incorporation or organization) Identification Number)
450 Broadway Street
Redwood City, California 94063
(Address of principal executive (Zip Code)
offices)
(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 [_]
<TABLE>
<CAPTION>
As of
October 31, 2000
----------------
<S> <C>
Number of shares of Series A Common Stock outstanding.......... 317,608,496
Number of shares of Series B Common Stock outstanding.......... 86,595,578
</TABLE>
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<PAGE>
AT HOME CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements--Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999........................................... 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 1999............... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 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.......................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 46
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................... 47
Item 2. Changes in Securities and Use of Proceeds....................... 47
Item 3. Defaults Upon Senior Securities................................. 48
Item 4. Submission of Matters to a Vote of Security Holders............. 48
Item 5. Other Information............................................... 48
Item 6. Exhibits and Reports on Form 8-K................................ 48
Signatures............................................................... 49
</TABLE>
2
<PAGE>
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>
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited) (*)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 152,512 $ 224,548
Short-term investments............................. 180,369 300,675
---------- ----------
Total cash, cash equivalents and short-term
investments..................................... 332,881 525,223
Accounts receivable, net............................ 69,136 52,200
Accounts receivable--related parties................ 34,704 18,332
Other current assets................................ 51,833 35,151
---------- ----------
Total current assets............................. 488,554 630,906
Property, equipment and improvements, net........... 336,494 176,077
Investments in affiliated companies................. 36,127 19,015
Other investments................................... 192,104 273,005
Distribution agreements, net........................ 676,755 313,557
Goodwill and other intangible assets, net........... 6,100,490 7,615,062
Other assets........................................ 125,801 76,657
---------- ----------
Total assets..................................... $7,956,325 $9,104,279
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 114,160 $ 44,491
Accounts payable--related parties.................. 12,710 23,206
Accrued compensation and related expenses.......... 22,608 15,632
Deferred revenue................................... 46,308 56,844
Other accrued liabilities.......................... 89,209 62,540
Current portion of capital lease and other
obligations....................................... 61,923 38,666
---------- ----------
Total current liabilities...................... 346,918 241,379
Convertible notes and debentures.................... 741,678 736,294
Capital lease and other obligations, less current
portion............................................ 75,341 52,552
Other liabilities................................... 9,936 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--8,269 in 2000 and
10,134 in 1999.................................. 311,410 397,019
Common stock, $0.01 par value:
Authorized shares--1,110,000,000
Issued and outstanding shares--404,204,074 in
2000 and 384,754,355 in 1999.................... 10,199,733 9,312,700
Deferred compensation............................... (39,605) (50,493)
Accumulated other comprehensive income.............. 9,211 92,594
Accumulated deficit................................. (3,698,297) (1,684,803)
---------- ----------
Total stockholders' equity..................... 6,782,452 8,067,017
---------- ----------
Total liabilities and stockholders' equity..... $7,956,325 $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
<PAGE>
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues(/1/)..................... $ 160,533 $ 112,562 $ 447,317 $ 208,202
Costs and expenses(/2/):
Operating costs................. 80,365 45,260 206,967 92,944
Product development and
engineering.................... 23,818 16,834 71,606 34,582
Sales and marketing............. 79,244 48,179 210,424 81,129
General and administrative...... 19,535 9,028 48,057 19,554
Cost and amortization of
distribution agreements........ 24,350 43,932 146,481 77,655
Amortization of goodwill,
intangible assets and deferred
compensation and other
acquisition-related costs ..... 591,042 447,569 1,753,492 653,753
--------- --------- ----------- ---------
Total costs and expenses...... 818,354 610,802 2,437,027 959,617
--------- --------- ----------- ---------
Loss from operations.............. (657,821) (498,240) (1,989,710) (751,415)
Interest and other income, net.... 5,700 2,556 9,751 7,839
Investment gain from business
combination...................... -- -- -- 12,566
Equity share of losses of
affiliated companies............. (16,589) (2,876) (33,535) (3,618)
--------- --------- ----------- ---------
Net loss.......................... $(668,710) $(498,560) $(2,013,494) $(734,628)
========= ========= =========== =========
Net loss per share--basic and
diluted.......................... $ (1.67) $ (1.37) $ (5.10) $ (2.47)
========= ========= =========== =========
Shares used in per share
computation--basic and diluted... 401,191 362,885 394,976 297,002
========= ========= =========== =========
(/1/) Revenues from related
parties........................ $ 12,256 $ 8,916 $ 36,494 $ 21,321
========= ========= =========== =========
(/2/) Depreciation and
amortization included in costs
and
expenses, excluding amortization
of distribution
agreements and acquisition-
related amounts................. $ 31,921 $ 15,293 $ 75,148 $ 31,563
========= ========= =========== =========
</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>
Nine Months Ended
September 30,
-----------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss.............................................. $(2,013,494) $ (734,628)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization........................ 74,383 30,771
Amortization of distribution agreements.............. 70,931 54,241
Cost of distribution agreements...................... 75,550 23,414
Amortization of deferred and stock-based
compensation........................................ 16,252 792
Amortization of goodwill and other intangible
assets.............................................. 1,729,237 606,751
Accretion of discount on convertible debentures...... 7,251 5,175
Compensation expense from accelerated stock option
vesting............................................. -- 7,900
Recognition of non-cash gain on investment........... -- (12,566)
Purchased in-process research and development........ -- 34,400
Equity share of losses of affiliated companies....... 33,535 3,618
Changes in assets and liabilities:
Accounts receivable................................ (30,994) (25,697)
Other assets....................................... (22,434) 24,142
Accounts payable................................... 27,859 23,251
Accrued liabilities................................ 33,246 30,624
Deferred revenues.................................. (18,609) 9,867
Other long-term liabilities........................ 2,317 --
----------- ----------
Cash provided by (used in) operating activities....... (14,970) 82,055
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of short-term investments (110,786) (355,198)
Sales and maturities of short-term investments........ 231,092 155,664
Purchases of other investments........................ (28,420) --
Sales of other investments............................ 34,420 --
Net purchases of property, equipment and
improvements......................................... (110,477) (46,079)
Payments under backbone agreement..................... (45,965) (27,058)
Investment in joint ventures.......................... (53,934) --
Business combinations, net of cash received........... (6,397) 34,341
----------- ----------
Cash used in investing activities..................... (90,467) (238,330)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of
repurchases.......................................... 76,555 39,006
Payments on capital lease obligations................. (43,154) (21,249)
----------- ----------
Cash provided by financing activities................. 33,401 17,757
----------- ----------
Net decrease in cash and cash equivalents............. (72,036) (138,518)
Cash and cash equivalents, beginning of period........ 224,548 300,702
----------- ----------
Cash and cash equivalents, end of period.............. $ 152,512 $ 162,184
=========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid........................................ $ 19,802 $ 9,170
=========== ==========
Acquisition of equipment under capital leases........ $ 89,200 $ 47,155
=========== ==========
Warrants to purchase Series A common stock earned by
cable partners under distribution agreements and
capitalized as intangibles.......................... $ 434,129 $ 187,588
=========== ==========
Conversion of preferred stock to common stock........ $ 161,867 $ --
=========== ==========
Mergers and acquisitions:
Issuance of common and preferred stock and assumed
options and warrants exercisable for common
stock............................................. $ 213,889 $7,165,646
=========== ==========
Liabilities assumed................................ $ 6,969 $ 105,743
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed 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 consolidated 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 and nine months ended September 30, 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, as amended, 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 Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss..................... $(668,710) $(498,560) $(2,013,494) $(734,628)
========= ========= =========== =========
Weighted average shares of
common stock outstanding.... 402,408 368,430 396,824 303,131
Less weighted average shares
of common stock subject to
repurchase.................. (1,217) (5,545) (1,848) (6,129)
--------- --------- ----------- ---------
Shares used in per share
calculations................ 401,191 362,885 394,976 297,002
========= ========= =========== =========
Net loss per share--basic and
diluted..................... $ (1.67) $ (1.37) $ (5.10) $ (2.47)
========= ========= =========== =========
</TABLE>
Segment Reporting
Our key operating segments are organized around our customers and services
and aggregated into the reported business segments based upon how our
management organizes, manages and internally reports our
6
<PAGE>
revenues. As of September 30, 2000, our reported business segments consisted of
Media and Advertising Services, Subscriber Network and Other Services, and
International. 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.
The following represents revenues for our reported business segments (in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Media and Advertising Services.......... $ 77,731 $ 73,687 $228,691 $119,464
Subscriber Network and Other Services... 74,584 34,848 196,276 81,364
International........................... 8,218 4,027 22,350 7,374
-------- -------- -------- --------
Total consolidated revenues........... $160,533 $112,562 $447,317 $208,202
======== ======== ======== ========
</TABLE>
Media and Advertising Services revenue was derived predominantly from
customers located in the United States for both the three and nine months ended
September 30, 2000 and 1999. Subscriber Network and Other Services revenue
derived from customers located outside the United States and excluded from
International consisted primarily of revenue from cable partners and their
cable customers located in Canada, and accounted for approximately 13% of
Subscriber Network and Other Services revenue for both the three and nine
months ended September 30, 2000 and approximately 12% for both the three and
nine months ended September 30, 1999. International revenue earned from our
unconsolidated joint ventures was $5.7 million and $2.8 million for the three
months ended September 30, 2000 and 1999, respectively, and was $14.7 million
and $6 million for the nine months ended September 30, 2000 and 1999,
respectively. International revenue earned by our consolidated operations
outside of North America was $2.6 million and $1.3 million for the three months
ended September 30, 2000 and 1999, respectively, and was $7.7 million and $1.4
million for the nine months ended September 30, 2000 and 1999, respectively.
Revenue from International excludes revenue earned by Excite Japan and Excite
UK, joint ventures in which we obtained a majority ownership interest during
2000, due to accounting rules that prohibit consolidation prior to exercising
control over these entities. No single customer accounted for more than 10% of
total consolidated revenues for the three and nine months ended September 30,
2000 and 1999.
Revenue from Related Parties
Revenue from related parties was $12.3 million, or 8% of total revenues, for
the three months ended September 30, 2000, as compared to $8.9 million, or 8%
of total revenues, for the three months ended September 30, 1999. For the nine
months ended September 30, 2000 and 1999, revenue from related parties was
$36.5 million and $21.3 million, respectively. One component of revenue from
related parties consists of revenue from our principal cable partners which is
generated from advertising arrangements, support services such as customer
support, local area content development, development of set-top devices and
pre-commercial deployment consulting. Revenue from our principal cable partners
was $5.6 million for the three months ended September 30, 2000 and $5.8 million
for the three months ended September 30,1999, and was $19.5 million and $14.8
million for the nine months ended September 30, 2000 and 1999, respectively.
The remaining revenue from related parties of $6.7 million and $3.1 million for
the three months ended September 30, 2000 and 1999, respectively, and $17
million and $6.5 million for the nine months ended September 30, 2000 and 1999,
respectively, was earned primarily from consulting and other services rendered
to our international joint ventures on a cost-plus basis.
Revenue Related to Our Strategic Investments
We have made minority investments in certain companies for strategic
purposes, primarily in connection with expanding our Internet content and
services and providing improved broadband connectivity to our
7
<PAGE>
@Work and @Home subscribers. In conjunction with most of these investments, we
provide services to these companies consisting of the delivery of advertising
impressions, e-commerce sponsorships and revenue share arrangements on our web
sites. Revenue under these arrangements is recognized based upon the fair value
of the services provided and was $18.8 million and $5.7 million for the three
months ended September 30, 2000 and 1999, respectively, and was $47.3 million
and $14 million for the nine months ended September 30, 2000 and 1999,
respectively. Investments under these arrangements are recorded at their fair
values. The fair values of investments in non-public companies are determined
based upon the price per share paid by an independent third party in the same
round of financing in which we participate.
Barter Revenue
Revenue from the exchange of our media and advertising services for the
products and services of third parties, a substantial portion of which is
advertising in other media, was $4.6 million and $8.9 million for the three
months ended September 30, 2000 and 1999, respectively, and was $23.2 million
and $15.3 million for the nine months ended September 30, 2000 and 1999,
respectively. Revenue from barter transactions is recorded at the fair value of
the services provided unless the fair value of the services or products
received can be more reliably measured. Barter transactions involving the
exchange of services generally result in the recognition of equivalent amounts
of revenue and expense.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Financial Instruments and Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. We are required to adopt SFAS 133, as
amended, effective January 1, 2001, and we do not believe that it will have a
material effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. We are required to adopt SAB 101
in the fourth quarter of 2000. We do not expect SAB 101 to have a material
effect on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation." FIN 44 clarifies the
application of Accounting Principles Board Opinion No. 25 for certain issues
relating to stock compensation and is effective July 1, 2000. FIN 44 has not
had, and we do not expect it to have, a material effect on our financial
position or results of operations.
In May 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue 00-2, "Accounting for Web Site Development Costs." This
consensus provides guidance on the types of costs incurred to develop websites
that should be capitalized or expensed. The consensus is effective for website
development costs incurred starting in the third quarter of 2000. The consensus
has not had, and we do not expect it to have, a material effect on our
financial position or results of operations.
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 in the United States. 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.
8
<PAGE>
On June 20, 2000, our stockholders approved an amendment to our fifth
amended and restated certificate of incorporation. The amendment was filed on
August 28, 2000 and the letter agreement became effective on that date. As a
result, Comcast and Cox no longer have certain rights under the stockholders'
agreement, such as the right to designate a director to our board and the right
to veto a board action by voting together against a board action. The board
designees of Comcast and Cox resigned from our board effective September 1,
2000 and AT&T formally acquired voting control over all board actions on that
date.
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. The letter agreement entered into in
connection with the issuance of these warrants became effective on August 28,
2000. The exercise price for the warrants is $29.54 per underlying share.
Warrants issued to AT&T for approximately 55.8 million shares in aggregate will
become 100% vested and exercisable, subject to regulatory compliance, on June
4, 2002 for one share of Series A common stock and one share of Series B common
stock for each home passed. Shares acquired through exercise of these warrants
are subject to volume limitations on disposition at a rate of 16.67% per year.
Warrants issued to Comcast and Cox with respect to approximately 44.3 million
shares of our Series A common stock will vest as to 16.67% of the total shares
on June 4, 2001 and as to an additional 8.33% 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 the letter agreement. We will
record the fair values of these warrants at the time that they are earned by
the cable partners and we will amortize such amounts to operations over the
respective terms of the 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, on August 28, 2000, we issued 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
issued approximately 55.8 million shares of our Series B common stock in this
exchange, which, when considered together with the above warrants, 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.
3. Business Combinations
Completed 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
9
<PAGE>
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, net property and equipment of $0.9 million, goodwill of $99.5 million,
other identifiable 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 an increase
in the number of employee stock options we assumed in the acquisition of
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.
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 804 shares of our Series B non-voting
preferred stock, with an aggregate fair value of approximately $47.6 million.
The Series B preferred stock will convert into approximately 0.8 million shares
of 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 Worldprints' outstanding debt plus interest prior to the
completion of the acquisition and assumed loans that we previously made to
Worldprints, net of other cash transactions, for an aggregate of $8.8 million.
The total purchase consideration of approximately $67.3 million included
approximately $0.9 million of direct acquisition cost and was allocated to cash
of $1.4 million, net property and equipment of $0.1 million, goodwill of $66.9
million and liabilities assumed of $1.1 million. Worldprints is the operator of
a web site that offers photos and screensavers over the Internet. We accounted
for this acquisition as a purchase.
On July 14, 2000, we completed the acquisition of DataInsight, Inc., a
Colorado corporation, for approximately 0.7 million shares of our Series A
common stock with a fair value of approximately $14.2 million. We also assumed
DataInsight's options, which were converted into options to purchase
approximately 0.3 million shares of our Series A common stock. The purchase
price included vested and unvested employee stock options with a fair value of
approximately $0.3 million and $0.5 million, respectively. Deferred
compensation of approximately $0.5 million was recorded and will be amortized
over the four-year vesting period of unvested options assumed in the
acquisition. In addition, we will issue up to approximately 0.7 million
additional shares of our Series A common stock as well as additional employee
stock options if DataInsight achieves certain revenue and profit performance
targets on July 31, 2001. The total purchase consideration of approximately
$15.1 million included approximately $0.6 million of direct acquisition cost
and was allocated to cash of $0.1 million, accounts receivable and other assets
of $0.5 million, goodwill of $9.7 million, purchased technology of $2.8
million, other identified intangible assets of $2.3 million, deferred
compensation of $0.5 million and liabilities assumed of $0.8 million.
DataInsight is an online and offline database marketing systems and
applications provider. We accounted for this acquisition as a purchase.
10
<PAGE>
Business Combinations in Progress
On August 31, 2000, we announced our intention to acquire Pogo.com, Inc., a
Delaware corporation, for shares of our Series A common stock. The number of
shares of our Series A common stock to be issued will be determined by
multiplying the number of shares of Pogo capital stock held by Pogo
stockholders by an exchange ratio. The exchange ratio equals the quotient
obtained by dividing $125 million less certain obligations of Pogo by the
number of shares of Pogo stock and options and warrants convertible into Pogo
stock outstanding immediately before the merger, divided by the average closing
price of our Series A common stock prior to the merger. In addition,
outstanding warrants and options for Pogo stock will be converted to options
and warrants for our Series A common stock based on the exchange ratio and
assumed by us, and Pogo may issue up to 5 million additional options for shares
of Pogo stock prior to the merger which would also be converted to options for
our Series A common stock based on the exchange ratio and assumed by us. Pogo
stockholders may be entitled to receive additional payments contingent upon
revenue performance requirements for the six months following the closing and
the continuation of the employment of specified key executives of Pogo until
October 15, 2001. The maximum value of each of the two contingent payments, to
be issued in the form of shares of our Series A common stock determined based
on the exchange ratio described above, is $12.5 million. We have also entered
into a convertible bridge note with Pogo under which Pogo has borrowed $5
million and is entitled to an additional $1.3 million to pay certain
obligations. In addition, we have agreed to loan Pogo, upon their request, $1.8
million per month between November 1, 2000 and the effective time of the
merger, which is expected to occur by the end of 2000 and is subject only to
Pogo stockholder approval. We will not be able to calculate the total purchase
consideration until the closing of the merger because the number of shares of
our Series A common stock to be issued and the number of options and warrants
for our Series A common stock that we will assume cannot be determined prior to
that date. We expect the purchase consideration to be allocated primarily to
goodwill. Pogo is a provider of family games and interactive leisure time
activities on the Internet. We will account for this acquisition as a purchase.
Amortization of Goodwill, Intangible Assets and Deferred Compensation and Other
Acquisition-Related Costs
Acquisition-related charges were as follows for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
----------------- -------------------
2000 1999 2000 1999
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Amortization of goodwill and other
intangible assets.................... $580,815 $446,647 $1,729,237 $606,751
Amortization of acquisition-related
deferred compensation................ 5,252 -- 15,487 --
Write-off of purchased in-process
research and development............. -- -- -- 34,400
Compensation expense from acquisition-
related acceleration of stock option
vesting.............................. -- -- -- 7,900
Other acquisition-related costs....... 4,975 922 8,768 4,702
-------- -------- ---------- --------
Total acquisition-related costs and
expenses............................. $591,042 $447,569 $1,753,492 $653,753
======== ======== ========== ========
</TABLE>
Amortization of goodwill and intangible assets
Amortization of goodwill and other intangible assets during the three and
nine months ended September 30, 2000 was $580.8 million and $1,729.2 million,
respectively, as compared to $446.6 million and $606.8 million during the
respective periods in 1999. Goodwill and other intangible assets resulted
primarily from our acquisitions of Excite in May 1999, iMALL and Webshots in
October 1999, Bluemountain.com in December 1999, Kendara in February 2000,
Worldprints in April 2000 and DataInsight in July 2000.
11
<PAGE>
Amortization of deferred compensation
Amortization of deferred compensation related to acquisitions was $5.3
million and $15.5 million for the three and nine months ended September 30,
2000; there was no amortization of acquisition-related deferred compensation
for the three and nine months ended September 30, 1999. The acquisition-related
deferred compensation resulted from our assumption of stock-based awards held
by employees prior to the acquisition of Bluemountain.com and Webshots in the
fourth quarter of 1999 and represents the difference between the exercise price
of unvested awards and the fair market value of our Series A common stock at
the time of the acquisition. Deferred compensation is amortized over the
vesting terms of the stock-based awards. Amortization of deferred compensation
related to issuance of restricted stock to employees under stock purchase
agreements was approximately $0.5 million during both the nine months ended
September 30, 2000 and 1999 and was included in the category of costs and
expenses in which the related employee salaries were recorded.
Write-off of purchased in-process research and development
The cost of purchased in-process research and development for which
technological feasibility has not been achieved and which has no alternative
future use is charged to operations at the date of acquisition. The cost of
$34.4 million for the nine months ended September 30, 1999 was related to the
Excite acquisition.
Compensation expense from acquisition-related acceleration of stock option
vesting
The vesting of certain stock options issued to employees was accelerated as
a result of our acquisition of Excite in May 1999 and the $7.9 million
intrinsic value of these options was charged to operations during the nine
months ended September 30, 1999.
Other acquisition-related costs
Costs directly associated with our acquisitions that were not capitalized as
part of the purchase consideration, primarily resulting from our acquisitions
of Excite, iMALL, Bluemountain.com, Kendara and Worldprints, were $5 million
and $0.9 million for the three months ended September 30, 2000 and 1999,
respectively, and were $8.8 million and $4.7 million for the nine months ended
September 30, 2000 and 1999. These costs were primarily related to integration
costs for personnel, systems and technology and also included costs during the
three months ended September 30, 2000 for a pre-acquisition contingency related
to Excite that required an adjustment more than 12 months after the
acquisition.
4. Investments in Affiliated Companies
Investments in affiliated companies consist primarily of joint ventures in
which we share ownership and control with strategic partners. Our joint venture
agreements generally authorize the boards of the joint ventures to determine
the timing and amount of cash contributions to be made by the joint venture
partners to fund operations. The cash contributions are generally made in
proportion to each partner's ownership interest in the joint venture. Under the
joint venture agreement for At Home Australia, which was merged with the Excite
Asia Pacific Pty Ltd joint venture in March 2000 and renamed Excite@Home
Australia Pty Limited, our joint venture partner and we may each be required to
contribute up to approximately 32 million Australian dollars, or approximately
$20 million, to the joint venture, of which we have contributed approximately
$14.3 million to date. We have made investments of approximately $53.9 million
during the nine months ended September 30, 2000 to increase our ownership
interest above 50% in the Excite Japan and Excite UK joint ventures as well as
to fund the operations of Excite Japan, Excite UK, At Home Japan, Excite@Home
Australia Pty Limited and Work.com.
On July 18, 2000, we announced an agreement with UPC and its parent company,
UnitedGlobalCom (together, the "United Group"), to form a joint venture, to be
named Excite Chello, which would combine
12
<PAGE>
UPC's chello broadband subsidiary with our assets and operations outside North
America, including our international joint ventures and wholly-owned
subsidiaries. We have agreed to invest approximately 100 million euros, or
approximately $88 million, in this joint venture. Excite Chello will be equally
owned and jointly controlled by Excite@Home and the United Group. We will
account for our investment in Excite Chello under the equity method, and we
will record our share of the net losses of the new joint venture. The closing
of this transaction is subject to several conditions, including regulatory
approval, obtaining third-party consents and contributions by the joint venture
partners. In our consolidated financial statements through September 30, 2000
and pending the proposed contribution of our interest in international joint
ventures to the Excite Chello joint venture, we continue to account under the
equity method for international joint ventures in which we have increased our
ownership interest to more than 50% during 2000.
5. Commitments and Contingencies
Under our backbone agreement with AT&T, we have made payments of
approximately $34 million and $46 million during the three and nine months
ended September 30, 2000, respectively. Although we have completed our payment
obligations related to the original facility, we will be required to make
additional future payments as we extend the backbone further. 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.
We will be required to make cash contributions totaling up to 100 million
euros, or approximately $88 million, to the Excite Chello joint venture (Note
4) subsequent to the closing of the transaction.
On May 26, 2000, a purported class action suit was initiated in the San
Mateo County Superior Court by an alleged Excite@Home stockholder against
Excite@Home, AT&T Corp., Comcast Corporation and Cox Communications, Inc., as
well as each member of our board of directors. The complaint alleges that the
defendants breached fiduciary duties to Excite@Home stockholders by approving
or entering into, as applicable, the letter agreement among Excite@Home, AT&T,
Comcast and Cox on March 28, 2000, and by agreeing to consummate the
transactions contemplated by this agreement. In the complaint, the plaintiffs
seek a court order nullifying the letter agreement, monetary damages, and a
court order establishing a stockholders' committee comprised of unidentified
class members to provide input regarding the transactions contemplated by the
letter agreement. We believe this action is without merit, and intend to defend
against this action vigorously. If the plaintiffs prevail, a court may not
allow us to proceed under the terms of the letter agreement or we may have to
pay damages, either of which could seriously harm our business.
6. Stockholders' Equity
Cable System Operator Performance Warrants
In February 1998, we issued performance warrants for 10 million shares to
Rogers and Shaw, our principal cable partners in Canada, 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 $75.6 million and $52.9
million during the nine months ended September 30, 2000 and 1999, respectively.
Exercises of warrants resulted in the net issuance of approximately 1.3 million
shares during the nine months ended September 30, 2000. Remaining outstanding
warrants for approximately 5.4 million shares were all earned and exercisable
as of September 30, 2000.
Warrants Subject to Distribution Agreements
As of September 30, 2000, performance-based warrants issued to certain cable
partners, including joint venture partners, as incentives under exclusive and
non-exclusive distribution agreements were outstanding as
13
<PAGE>
to approximately 138.9 million shares of our Series A common stock, of which
approximately 25.9 million shares were earned and may be exercised. The
warrants have exercise prices ranging from $0.25 to $32.50. During the nine
months ended September 30, 2000, warrants were earned with respect to
approximately 2.1 million shares, and approximately 0.3 million shares
previously earned were cancelled due to transfers of cable systems covered by
certain warrants. In addition, warrants for approximately 55.8 million shares
issued to AT&T were recorded as distribution agreements at a fair value of
$416.7 million related to the letter agreement that became effective on August
28, 2000. We recorded an aggregate of $434.1 million as distribution agreements
and $1.3 million as investments in affiliated companies in our consolidated
balance sheets during the nine months ended September 30, 2000 representing the
number of warrants measured at fair value. We will begin amortizing the AT&T
distribution agreement in June 2002 and we are amortizing the other
distribution agreements ratably over their remaining exclusive terms, which
expire at various dates through 2004. Amortization of distribution agreements
was $70.9 million and $24.7 million during the nine months ended September 30,
2000 and 1999, respectively, and accumulated amortization as of September 30,
2000 was $207.2 million. There were no exercises of these warrants during the
nine months ended September 30, 2000.
7. Comprehensive Loss
The components of our comprehensive loss for each period presented are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss..................... $(668,710) $(498,560) $(2,013,494) $(734,628)
Unrealized gain (loss) on
available-for-sale
investments................. 25,774 (46,753) (83,573) 23,591
Foreign currency translation
gain (loss)................. 48 (328) 190 (284)
--------- --------- ----------- ---------
Comprehensive loss........... $(642,888) $(545,641) $(2,096,877) $(711,321)
========= ========= =========== =========
</TABLE>
14
<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 several 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.
Description of Business and Recent Developments
Excite@Home is the leading provider of broadband online services. As of
September 30, 2000, we had approximately 2.3 million worldwide subscribers to
our @Home service, which provides high-speed Internet access to consumers
utilizing the cable television infrastructure. We also expect to offer the
@Home service over digital subscriber lines (DSL) in partnership with Rhythms
NetConnections. The @Home service offers an "always on" connection with speeds
many times faster than 56 kilobits-per-second dialup modems and features a
scalable, distributed, intelligent private network designed to avoid
bottlenecks frequently encountered on the public Internet. Elements of this
advanced data network include a national, optical fiber Internet protocol
backbone, regional data centers and local caching servers. We intend to
leverage our broadband connectivity services to deliver a comprehensive
broadband experience to our customers, including entertainment, information,
communications, e-commerce and other services.
We have long-term agreements with many of the largest cable companies in
North America to carry the @Home service. Our agreements provide that we are
the exclusive provider of broadband Internet connectivity through at least June
2002 with respect to AT&T, Cox and Comcast, and through various dates from 2002
to 2006 with respect to other cable partners. We have entered into an agreement
that will extend our relationships on a favorable but non-exclusive basis with
Cox and Comcast through 2006 and with AT&T through 2008. Under this agreement,
we have issued warrants to these cable partners for approximately 100 million
shares of our common stock and AT&T has obtained voting control over all board
actions. Approximately 30 million of the 59 million homes in our North American
cable footprint were served by upgraded two-way cable capable of carrying our
@Home service as of September 30, 2000. Our DSL agreement with Rhythms
NetConnections adds 15 million homes for a total footprint of 74 million homes
in North America. We believe that our recently introduced QuickStart Kit, a
suite of consumer-friendly self-installation tools and services, will simplify
the installation of the @Home service and reduce the reliance of subscriber
growth on the availability of installation technicians. The QuickStart Kit will
be available in a number of retail locations including Radio Shack starting in
the fourth quarter of 2000.
We also have agreements with cable partners in Australia, Belgium, Germany,
Japan and the Netherlands to provide the @Home service in those countries under
exclusive, seven-year arrangements. To date, the @Home service has been
commercially launched in Australia, Belgium, the Netherlands and Japan.
We have enhanced our online media and advertising services by acquiring
Excite, a leading consumer Internet destination, MatchLogic, a subsidiary of
Excite specializing in targeted advertising services, Bluemountain.com, an
online greeting card service, and other companies such as Webshots, Kendara and
Worldprints. In addition, we have recently agreed to acquire Pogo, a leading
online game site. The Excite Network includes all of our web properties and
delivers Internet-based search, communications, news and information,
entertainment, community, photo, shopping and other services to our users that
can be customized
15
<PAGE>
and personalized to users' preferences. We recently introduced @Home 2000 to
our subscribers in North America. @Home 2000 includes a custom browser,
expanded features such as additional e-mail accounts and a broadband version of
the Excite service incorporating the personalization capabilities of Excite
with multimedia content made possible by a high-speed connection. Since a
broadband connection is not always available to our customers, we provide
Internet-based services using handheld wireless devices through our recent
introduction of Excite Mobile and we also offer a free dialup Internet service
called FreeLane powered by Excite. These services enable customers to access
our online offerings from multiple locations and represent additional
opportunities to raise awareness for our broadband online services.
MatchLogic provides targeted advertising services including online campaign
management, e-mail and sweepstakes promotions, and marketing of e-mail and
online data. The recent acquisition of DataInsight is expected to enhance our
ability to provide e-commerce and online marketing relationship management
services. The combination of online advertising on the Excite Network,
MatchLogic e-mail and online marketing databases, DataInsight relationship
management tools, and extensive expertise in the development of marketing
programs, we are able to create comprehensive marketing campaigns for
advertisers interested in targeted and results-oriented solutions.
Our @Work service provides end-to-end managed connectivity 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.
@Work also offers Internet content providers and delivery networks, such as
iBEAM, Akamai and Microcast, direct access to our broadband subscribers by
connecting their data centers into our network, putting data closer to our
broadband users and bypassing the public Internet. These content delivery
networks have agreed to pay us for bandwidth usage based on the amount of their
customers' content that flows to our subscribers across our backbone. These
relationships are expected to benefit both the content delivery networks and
@Home subscribers by optimizing the delivery of broadband content. We are also
developing information and e-commerce services for businesses, including our
recently formed joint venture with Dow Jones to develop Work.com, a
comprehensive Internet portal for small and medium size businesses.
We recently announced an agreement with UPC and its parent company,
UnitedGlobalCom, to form a joint venture to be named Excite Chello, subject to
regulatory approval and other conditions of closing, which would combine UPC's
chello broadband subsidiary with our assets and operations outside North
America, including our international joint ventures and wholly owned
subsidiaries. Excite Chello is expected to have a broadband footprint of over
30 million homes outside North America under long-term contracts including our
13.5 million home international footprint.The initial funding of Excite Chello
will consist of up to 400 million euros, of which our share is 100 million
euros, or approximately $88 million. Excite Chello will be equally owned and
jointly controlled by Excite@Home and UPC. We expect to account for our
investment in Excite Chello under the equity method and record our share of the
net losses of the new joint venture. In addition to contributing our @Home
operations in five countries, we plan to contribute our Excite-branded portal
sites with locally sourced content in 13 countries outside North America, three
of which were introduced in the third quarter of 2000.
We believe that our future operating results will be impacted primarily by
the level of growth in our broadband subscriber base, which we expect will
require the expansion of our customer care and technical support organization
and additional infrastructure investments designed to stabilize and scale our
network to support subscriber growth. We expect that our costs and expenses
will increase in the areas of operating costs, product development and
engineering, and sales and marketing as a result of the above and due to
anticipated increases in advertising and marketing of our products and
services, deployment of self-installation and self-provisioning systems for the
@Home service, development of advanced set-top and interactive application and
services utilizing the broadband platform, and upgrading of features and
development of new services related to the Excite Network.
16
<PAGE>
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
its acquisition. Therefore, comparisons of revenues that include any period
ended June 30, 2000 or earlier are not relevant for the purposes of indicating
revenue growth in 2000 and future periods.
Our key operating segments are organized around our customers and services
and aggregated into the reported business segments based upon how our
management organizes, manages and internally reports our revenues. As of
September 30, 2000, our reported business segments consisted of Media and
Advertising Services, Subscriber Network and Other Services, and International.
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. 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.
The following represents revenues for our reported business segments for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Media and Advertising Services.......... $ 77,731 $ 73,687 $228,691 $119,464
Subscriber Network and Other Services... 74,584 34,848 196,276 81,364
International........................... 8,218 4,027 22,350 7,374
-------- -------- -------- --------
Total consolidated revenues........... $160,533 $112,562 $447,317 $208,202
======== ======== ======== ========
</TABLE>
Media and Advertising Services
Revenue derived from Media and Advertising Services increased by 5% to $77.7
million, or 48% of total revenues, for the three months ended September 30,
2000 from $73.7 million, or 65% of total revenues, for the three months ended
September 30, 1999. This increase over the prior period was due to an increase
of approximately 70% in traffic on the Excite Network, partially offset by a
decrease of approximately 40% in revenue per page view. In addition,
advertising revenue from other sources such as MatchLogic was higher during the
three months ended September 30, 2000 as compared to the same period in 1999.
The increase in traffic on the Excite Network is primarily the result of the
acquisitions of Webshots and Bluemountain in late 1999. Average daily page
views on the Excite Network increased to approximately 149 million during the
three months ended September 30, 2000 from approximately 89 million during the
comparable period in the prior year. The decrease in revenue per page view is
due to lower online advertising rates resulting from softening demand by
Internet companies as well as the lack of advertising on portions of the
Webshots and Bluemountain sites, which historically did not contain
advertising. The level of traffic on the Excite Network is subject to various
factors, including among others, the breadth and quality of content,
seasonality in our business and Internet usage in general, and competition from
other Internet services.
Revenue derived from Media and Advertising Services increased by 91% to
$228.7 million, or 51% of total revenues, for the nine months ended September
30, 2000 from $119.5 million, or 57% of total revenues, for the nine months
ended September 30, 1999. A significant portion of this increase in Media and
Advertising Services revenue over the prior period was a result of the Excite
acquisition, which was completed on May 28, 1999. Under the purchase method of
accounting, our results of operations include the operations of Excite from the
date of its acquisition. The remaining portion of the increase is due to the
factors discussed above related to the three months ended September 30, 2000
and 1999. Revenue generated from Media and Advertising Services prior to the
acquisition of Excite was primarily from advertising and related services
derived by @Home from broadband portal deals with cable partners.
17
<PAGE>
We expect that future growth in traffic on the Excite broadband portal and
demand for targeted advertising services such as those provided by MatchLogic
will account for an increasing portion of our Media and Advertising Services
revenue in the future. Our @Home 2000 service features a broadband version of
the Excite portal as the default broadband home page for @Home subscribers, and
we believe that our broadband mediums will support more robust advertising
solutions and higher rates than narrowband. Please see Risk Factors for further
discussion of factors that may affect our ability to generate revenue from
Media and Advertising Services in the future.
Subscriber Network and Other Services
Revenue from Subscriber Network and Other Services increased by 114% to
$74.6 million, or 46% of total revenues, for the three months ended September
30, 2000, from $34.8 million, or 31% of total revenues, for the three months
ended September 30, 1999. This revenue increased by 141% to $196.3 million, or
44% of total revenues, for the nine months ended September 30, 2000, from $81.4
million, or 39% of total revenues, for the nine months ended September 30,
1999. These increases were primarily attributable to the growth of subscribers
to the @Home service and customers of the @Work service.
@Home Service. The @Home service represented approximately 80% of Subscriber
Network and Other Services revenue for both the three and nine months ended
September 30, 2000 and approximately 70% for both the three and nine months
ended September 30, 1999. Subscriber Network and Other Services revenue
generated by the @Home service increased by approximately 120% and 160% for the
three and nine months, respectively, ended September 30, 2000 as compared to
the same periods in 1999, due primarily to the growth in the number of
subscribers. We added 510,000 @Home subscribers during the three months ended
September 30, 2000 as compared to 220,000 during the three months ended
September 30, 1999, and the total number of subscribers increased by
approximately 170% from 843,000 as of September 30, 1999 to approximately 2.3
million as of September 30, 2000.
Revenue from the @Home service varies by cable partner and market in the
United States, but typically represents 35% of the average $40 per month fee
collected from each subscriber by the cable partner. Our Canadian cable
partners perform a significant portion of the customer and infrastructure
support of the @Home service, and as a result, our percentage of Canadian
subscriber fees is approximately 20%. Canadian cable partners also typically
charge approximately $30 per month for the @Home service and as a result our
revenue from Canadian @Home subscribers is approximately 50% of the revenue
from @Home subscribers in the United States. In addition, subscribers that
choose to purchase their own modems may pay a reduced monthly fee. Since our
cable partners may offer incentives to new subscribers including reduced price
or free service for up to several months and subscribers are likely not added
in a ratable manner during any particular period, revenue from the @Home
service may significantly lag subscriber growth rates and may not correlate
with subscribers averaged over any particular period. Additionally, revenue
from international subscribers is recorded by our unconsolidated joint ventures
and is not included in Subscriber Network and Other Services revenue.
The number of markets and households that our cable partners upgrade to
receive the @Home service and the subscriber penetration rates in those markets
will be a factor in determining the amount of revenue from the @Home service in
future periods. As of September 30, 2000, the markets of our cable partners in
North America included approximately 59 million households, of which
approximately 30 million, or more than 50%, were capable of receiving the @Home
service. In general, we expect the percentage growth rate in subscribers to
decrease as the number of subscribers increases, but we anticipate that the
total number of subscribers added in future periods will increase as the @Home
service becomes more widely available. Please see Risk Factors for further
discussion of factors that may affect our ability to generate Subscriber
Network and Other Services revenue from the @Home service in the future.
@Work Service and Other Commercial Services. The @Work service and other
commercial services represented approximately 20% of Subscriber Network and
Other Services revenue for both the three and nine
18
<PAGE>
months ended September 30, 2000 and 30% for both the three and nine months
ended September 30, 1999. @Work Subscriber Network and Other revenue increased
by approximately 100% for both the three and nine months ended September 30,
2000 as compared to the same periods in 1999, primarily as a result of the
increase in the number of @Work customers as well as iMALL's development of an
e-commerce platform for a third party. We added 1,370 @Work customers during
the three months ended September 30, 2000 as compared to 1,100 during the three
months ended September 30, 1999, and the total number of customers grew by
approximately 110% from approximately 4,200 as of September 30, 1999 to
approximately 8,950 as of September 30, 2000. In addition to the number of
customers, the level of revenues generated by the @Work service depends on the
speed and type of Internet connections selected by customers. The level of
network traffic generated on our backbone by @Work customers, including content
delivery networks, can be estimated by net bandwidth sold. Net bandwidth sold
increased by approximately 800% from approximately 0.2 gigabits per second as
of September 30, 1999 to approximately 1.8 gigabits per second as of September
30, 2000. We expect that an increasing portion of net bandwidth sold in the
future will be accounted for by content delivery networks and other parties
that need access to bandwidth over an intelligent private network.
International
Revenue from International increased by 104% to $8.2 million, or 5% of total
revenues, for the three months ended September 30, 2000, from $4 million, or 4%
of total revenues, for the three months ended September 30, 1999. International
revenue increased by 203% to $22.4 million, or 5% of total revenues, for the
nine months ended September 30, 2000 from $7.4 million, or 4% of total
revenues, for the nine months ended September 30, 1999. International revenue
earned from our unconsolidated joint ventures was $5.7 million and $2.8 million
for the three months ended September 30, 2000 and 1999, respectively, and was
$14.7 million and $6 million for the nine months ended September 30, 2000 and
1999, respectively. International revenue earned by our consolidated operations
outside of North America was $2.6 million and $1.3 million for the three months
ended September 30, 2000 and 1999, respectively, and was $7.7 million and $1.4
million for the nine months ended September 30, 2000 and 1999, respectively.
The increase in International revenue was due primarily to an increase in
consulting services provided to our international joint ventures in the three
and nine months ended September 30, 2000 as compared to the same periods in
1999 and the impact of Excite's international joint ventures and consolidated
operations. Excite's revenues have been included in our results of operations
commencing on May 28, 1999, the date of its acquisition.
Revenue from International excludes revenue earned by Excite Japan and
Excite UK, joint ventures in which we obtained a majority ownership interest
during 2000, due to accounting rules that prohibit consolidation prior to
exercising control over these entities. In July 2000, we entered into an
agreement with UPC and UnitedGlobalCom to contribute our operations and assets
outside North America to a newly formed joint venture, Excite Chello, in
exchange for equal ownership of the joint venture. As of September 30, 2000,
the markets of our international joint ventures included approximately 13.5
million cable households in five countries, of which approximately 35% were
upgraded to receive the @Home service, and approximately 0.2 million
subscribers were using or being converted to the @Home service. Local versions
of the Excite portal are available in 13 countries. Upon the completion of the
transaction, we will record our equity share of the net losses of Excite Chello
and we will no longer account for the contributed joint ventures and
subsidiaries separately. As a result, future International revenue, as well as
the related costs and expenses, will be substantially reduced.
Revenue from Related Parties, Strategic Investments and Barter Transactions
Revenue from related parties, which include our principal cable partners and
unconsolidated joint ventures, was $12.3 million, or 8% of total revenues, for
the three months ended September 30, 2000, as compared to $8.9 million, or 8%
of total revenues, for the three months ended September 30, 1999. For the nine
months ended September 30, 2000 and 1999, revenue from related parties was
$36.5 million and $21.3 million, respectively.
19
<PAGE>
Revenue from providing services to companies in which we have made minority
investments for strategic purposes was $18.8 million and $5.7 million for the
three months ended September 30, 2000 and 1999, respectively, and was $47.3
million and $14 million for the nine months ended September 30, 2000 and 1999,
respectively.
Barter revenue from the exchange of our media and advertising services for
the products and services of third parties, a substantial portion of which is
advertising in other media, was $4.6 million and $8.9 million for the three
months ended September 30, 2000 and 1999, respectively, and was $23.2 million
and $15.3 million for the nine months ended September 30, 2000 and 1999,
respectively.
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 its acquisition. Therefore, comparisons of our costs and
expenses that include any period ended June 30, 2000 or earlier are not
relevant for the purposes of indicating the trend of our costs and expenses in
2000 and future periods.
Our costs and expenses were as follows for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
2000 Change 1999
------------- ----------------------
<S> <C> <C> <C>
Costs and expenses:
Operating costs.......................... $ 80,365 78% $ 45,260
Product development and engineering...... 23,818 41% 16,834
Sales and marketing...................... 79,244 64% 48,179
General and administrative............... 19,535 116% 9,028
------------- ------ -----------
Total costs and expenses excluding costs
and amortization related to acquisitions
and distribution agreements............... 202.962 70% 119,301
Cost and amortization of distribution
agreements.............................. 24,350 (45%) 43,932
Amortization of goodwill, intangible
assets and deferred compensation and
other acquisition-related costs......... 591,042 32% 447,569
------------- ------ -----------
Total costs and expenses............... $ 818,354 34% $ 610,802
============= ====== ===========
<CAPTION>
Nine Months Ended September 30,
------------------------------------
2000 Change 1999
------------- ----------------------
<S> <C> <C> <C>
Costs and expenses:
Operating costs.......................... $ 206,967 123% $ 92,944
Product development and engineering...... 71,606 107% 34,582
Sales and marketing...................... 210,424 159% 81,129
General and administrative............... 48,057 146% 19,554
------------- ------ -----------
Total costs and expenses excluding costs
and amortization related to acquisitions
and distribution agreements............... 537,054 135% 228,209
Cost and amortization of distribution
agreements.............................. 146,481 89% 77,655
Amortization of goodwill, intangible
assets and deferred compensation and
other acquisition-related costs......... 1,753,492 168% 653,753
------------- ------ -----------
Total costs and expenses............... $ 2,437,027 154% $ 959,617
============= ====== ===========
</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
20
<PAGE>
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 78% to
$80.4 million, or 50% of total revenues, for the three months ended September
30, 2000, from $45.3 million, or 40% of total revenues, for the three months
ended September 30, 1999. Operating costs increased by 123% to $207 million, or
46% of total revenues, for the nine months ended September 30, 2000, from $92.9
million, or 45% of total revenues, for the nine months ended September 30,
1999. Approximately one-third of the increase in operating costs for the three
months ended September 30, 2000 over the same period in 1999 was due to higher
customer service and technical support costs related to the increase in @Home
and @Work customers and approximately two-thirds was due to higher
telecommunications and other costs related to the same increase in @Home and
@Work customers. Approximately one-fourth of the increase in operating costs
for the nine months ended September 30, 2000 over the same period in 1999 was
due to higher customer service and technical support costs related to the
increase in @Home and @Work customers and approximately one-half was due to
higher telecommunications and other costs related to the same increase in @Home
and @Work customers. The remaining one-fourth increase in the nine-month period
was due to our acquisition of Excite in May 1999.
We expect operating costs to increase in the future as we scale our
operations to support the growth of our subscriber base and users of our online
services, as we make new acquisitions and as we develop and introduce new
products and services.
Gross Margin. 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 by 19% to $80.2 million, or 50% of total revenues, for
the three months ended September 30, 2000, from $67.3 million, or 60% of total
revenues, for the three months ended September 30, 1999. Gross margin increased
by 109% to $240.4 million, or 54% of total revenues, for the nine months ended
September 30, 2000 from $115.3 million, or 55% of total revenues, for the nine
months ended September 30, 1999. The increase in gross margin for the three and
nine months ended September 30, 2000 over the same periods in 1999 was
primarily due to the growth of our subscriber base and related revenues. In
addition, the increase for the nine months ended September 30, 2000 over the
same period in 1999 was due to a greater amount of media and advertising
revenues recorded in the 2000 periods due to our acquisition of Excite in May
1999. Media and advertising revenues historically have lower direct costs than
subscriber network revenues. The decrease in gross margin percentage from the
prior periods is due to higher depreciation expense from equipment deployed in
the network to provide stability and scalability in advance of subscriber
growth.
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 could 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 41% to $23.8 million, or 15% of total
revenues, for the three months ended September 30, 2000, from $16.8 million, or
15% of total revenues, for the three months ended September 30, 1999. Product
development and engineering expenses increased by 107% to $71.6 million, or 16%
of total revenues, for the nine months ended September 30, 2000 from $34.6
million, or 17% of total revenues, for the nine months ended September 30,
1999. Of the increase in product development and engineering costs during
21
<PAGE>
the three months ended September 30, 2000 as compared to the same period in
1999, approximately one-half was related to development and engineering costs
associated with enhancing the stability and scalability of the @Home broadband
network, approximately one-fourth was related to product development for the
Excite Network and the remaining one-fourth was related to miscellaneous
increases in product development and engineering costs. Of the increase in
product development and engineering costs during the nine months ended
September 30, 2000 as compared to the same period in 1999, approximately one-
half was related to development and engineering costs associated with enhancing
the stability and scalability of the @Home broadband network and the remaining
one-half was related to our acquisition of Excite in May 1999, including a
higher level of product development in the current year related to the Excite
Network.
We anticipate that product development and engineering expenses will
continue to increase in the future on an absolute dollar basis, due in part to:
. an increase in technology design and development efforts related to the
stability and scalability of our broadband 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; and
. additional technology development efforts and integration of acquired
technologies from Excite, Bluemountain.com and other companies acquired.
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 in order to create and maintain brand loyalty among customers.
Sales and marketing expenses increased by 64% to $79.2 million, or 49% of
total revenues, for the three months ended September 30, 2000, from $48.2
million, or 43% of total revenues, for the three months ended September 30,
1999. Sales and marketing expenses increased by 159% to 210.4 million, or 47%
of total revenues, for the nine months ended September 30, 2000 from $81.1
million, or 39% of total revenues, for the nine months ended September 30,
1999. Of the increase in sales and marketing expenses for the three months
ended September 30, 2000 as compared to the same period in 1999, approximately
one-third each was related to additional subscriber acquisition marketing,
sales and marketing costs related to new products such as e-commerce and the
broadband portal, and international marketing of the Excite Network. Of the
increase in sales and marketing expenses for the nine months ended September
30, 2000 as compared to the same period in 1999, approximately one-half was
related directly to the acquisition of Excite in May 1999 and the remainder was
split approximately evenly between additional subscriber acquisition marketing,
sales and marketing costs related to new products such as e-commerce and the
broadband portal, and international marketing of the Excite Network.
We expect that sales and marketing expenses will continue to increase on an
absolute dollar basis in the future primarily due to:
. an increase in our sales efforts with respect to our broadband media
services;
. expanded marketing campaigns and greater use of media advertising and
promotions in an effort to create and maintain brand loyalty among
narrowband and broadband subscribers;
22
<PAGE>
. more sponsorship and content arrangements to enhance our narrowband and
broadband Internet services; and
. acceleration of marketing activities related to @Home and @Work
subscriber acquisitions, including expanded retail and self-installation
initiatives.
General and administrative
General and administrative expenses consist primarily of administrative,
legal and executive personnel costs, fees for professional services and the
costs of facilities and computer systems to support our operations. General and
administrative expenses increased by 116% to $19.5 million, or 12% of total
revenues, for the three months ended September 30, 2000, from $9 million, or 8%
of total revenues, for the three months ended September 30, 1999. General and
administrative expenses increased by 146% to $48.1 million, or 11% of total
revenues, for the nine months ended September 30, 2000 from $19.6 million, or
9% of total revenues, for the nine months ended September 30, 1999. The
increase in general and administrative expenses for both the three and nine
months ended September 30, 2000 over the same periods in 1999 was related
primarily to our acquisition of Excite in May 1999 and the increase of
personnel, expansion of facilities and higher information technology costs 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.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements consists primarily of
charges and amortization related to warrants to purchase our common stock
issued to certain cable partners in connection with distribution agreements and
as performance incentives for distributing the @Home service. Warrants that
vest based on performance incentives, but were not issued in connection with an
exclusive distribution agreement, are charged to operations as cost of
distribution agreements at the time that such warrants are earned. 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 charged to operations as amortization of
distribution agreements over their remaining terms, which expire at various
dates through 2005. Cost and amortization of distribution agreements decreased
by 45% to $24.4 million from $43.9 million for the three months ended September
30, 2000 and 1999, respectively, and increased by 89% to $146.5 million from
$77.7 million for the nine months ended September 30, 2000 and 1999,
respectively.
Amortization of distribution agreements was $24.4 million and $20.8 million
during the three months ended September 30, 2000 and 1999, respectively, and
was $70.9 million and $54.3 million for the nine months ended September 30,
2000 and 1999, respectively. We recorded distribution agreements of $434.1
million and $187.6 million during the nine months ended September 30, 2000 and
1999, respectively. The increase in amortization of distribution agreements for
both the three and nine months ended September 30, 2000 as compared to the same
periods in 1999 was due to an increase in the number of warrants earned by
cable partners that met certain performance milestones.
Cost of distribution agreements was $23.1 million for the three months ended
September 30, 1999, and there were no such charges for the three months ended
September 30, 2000. Cost of distribution agreements was $75.6 million and $23.4
million for the nine months ended September 30, 2000 and 1999, respectively.
The decrease in these costs for the three months ended September 30, 2000 as
compared to 1999 and the increase in these costs for the nine months ended
September 30, 2000 as compared to 1999 was attributable to our cable partners
achieving performance milestones during certain periods in each year, which
significantly increased the number of warrants earned in those periods.
23
<PAGE>
We will incur a minimum of approximately $24 million per quarter for
amortization of our exclusive distribution agreements through the first half of
2002 and lesser amounts thereafter until our distribution agreements fully
expire in 2005. In addition, under our new distribution agreements with AT&T,
Comcast and Cox, we have issued warrants to purchase approximately 100 million
shares of our common stock. We have recorded the fair value of the warrant
issued to AT&T for 55.8 million shares at $416.7 million and we will begin
amortizing this amount at a rate of approximately $17 million per quarter
starting in June 2002. We will record the fair values of warrants issued to Cox
and Comcast at the time that they are earned and we will amortize such amounts
to operations over the respective terms of the distribution agreements.
Amortization of goodwill, intangible assets and deferred compensation and other
acquisition-related costs
Acquisition-related charges were as follows for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Amortization of goodwill and other
intangible assets..................... $ 580,815 $ 446,647 $1,729,237 $606,751
Amortization of acquisition-related
deferred compensation................. 5,252 -- 15,487 --
Write-off of purchased in-process
research and development.............. -- -- -- 34,400
Compensation expense from acquisition-
related acceleration of stock option
vesting............................... -- -- -- 7,900
Other acquisition-related costs........ 4,975 922 8,768 4,702
--------- --------- ---------- --------
Total acquisition-related costs and
expenses.............................. $ 591,042 $ 447,569 $1,753,492 $653,753
========= ========= ========== ========
</TABLE>
Amortization of goodwill and intangible assets. Amortization of goodwill and
other intangible assets during the three and nine months ended September 30,
2000 was $580.8 million and $1,729.2 million, respectively, as compared to
$446.6 million and $606.8 million during the respective periods in 1999.
Goodwill and other intangible assets resulted primarily from our acquisitions
of Excite in May 1999, iMALL and Webshots in October 1999, Bluemountain.com in
December 1999, Kendara in February 2000, Worldprints in April 2000 and
DataInsight in July 2000. We expect to incur goodwill and intangible asset
amortization charges of approximately $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 other intangible asset amortization charges related to our pending
acquisition of Pogo and other possible acquisitions in the future.
Amortization of deferred compensation. Amortization of deferred compensation
related to acquisitions was $5.3 million and $15.5 million for the three and
nine months ended September 30, 2000; there was no amortization of acquisition-
related deferred compensation for the three and nine months ended September 30,
1999. The acquisition-related deferred compensation resulted from our
assumption of stock-based awards held by employees prior to the acquisition of
Bluemountain.com and Webshots in the fourth quarter of 1999 and represents the
difference between the exercise price of unvested awards and the fair market
value of our Series A common stock at the time of the acquisition. Deferred
compensation is amortized over the vesting terms of the stock-based awards and
is expected to be approximately $5 million per quarter through the end of 2001,
when the awards begin to fully vest. Amortization of deferred compensation
related to issuance of restricted stock to employees under stock purchase
agreements was approximately $0.5 million during both the nine months ended
September 30, 2000 and 1999 and was included in the category of costs and
expenses in which the related employee salaries were recorded.
Write-off of purchased in-process research and development. The cost of
purchased in-process research and development for which technological
feasibility has not been achieved and which has no alternative future use is
charged to operations at the date of acquisition. The cost of $34.4 million for
the nine months ended September 30, 1999 was related to the Excite acquisition.
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<PAGE>
Compensation expense from acquisition-related acceleration of stock option
vesting. The vesting of certain stock options issued to employees was
accelerated as a result of our acquisition of Excite in May 1999 and the $7.9
million intrinsic value of these options was charged to operations during the
nine months ended September 30, 1999.
Other acquisition-related costs. Costs directly associated with our
acquisitions that were not capitalized as part of the purchase consideration,
primarily resulting from our acquisitions of Excite, iMALL, Bluemountain.com,
Kendara and Worldprints, were $5 million and $0.9 million for the three months
ended September 30, 2000 and 1999, respectively, and were $8.8 million and $4.7
million for the nine months ended September 30, 2000 and 1999. These costs were
primarily related to integration costs for personnel, systems and technology
and also included costs during the three months ended September 30, 2000 for a
pre-acquisition contingency related to Excite that required an adjustment more
than 12 months after the acquisition. We expect to incur additional integration
and other costs in the future related to our acquisitions.
Interest and Other Income, Net
Net interest and other income increased by 119% to $5.7 million for the
three months ended September 30, 2000 from $2.6 million for the three months
ended September 30, 1999 and increased by 26% to $9.8 million for the nine
months ended September 30, 2000 from $7.8 million for the nine months ended
September 30, 1999. Interest and other income increased by 161% to $17.5
million for the three months ended September 30, 2000 from $6.7 million for the
three months ended September 30, 1999 and increased by 141% to $43.7 million
for the nine months ended September 30, 2000 from $18.1 million for the nine
months ended September 30, 1999. The increase in interest and other income for
both the three and nine months ended September 30, 2000 as compared to the same
periods in 1999 was primarily due to higher market interest rates in 2000,
higher short-term investment balances in 2000 resulting from the funds received
in our private offering of convertible subordinated debt in December 1999 and
gains from the sale of investment securities from our portfolio. Interest and
other expense increased by 188% to $11.8 million for the three months ended
September 30, 2000 from $4.1 million for the three months ended September 30,
1999 and increased by 229% to $33.9 million for the nine months ended September
30, 2000 from $10.3 million for the nine months ended September 30, 1999. The
increase in interest and other expense for both the three and nine months ended
September 30, 2000 as compared to the same periods in 1999 was due primarily to
higher capital lease obligations in 2000 and the interest expense on the debt
issued in December 1999. Net interest and other income is expected to decrease
in the future as our short-term investments decrease but may fluctuate if we
sell additional investment securities from our portfolio.
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 $16.6 million and $2.9 million for the three months ended
September 30, 2000 and 1999, respectively, and was $33.5 million and $3.6
million for the nine months ended September 30, 2000 and 1999, respectively.
Our equity interests in Excite Japan and Excite UK are above 50% and for the
remaining entities are generally 50% or less. We account for Excite Japan and
Excite UK under the equity method because the accounting rules do not permit
consolidation. We expect to contribute our joint ventures outside North America
to Excite Chello in the near future and will record our equity share of losses
in the new joint venture. We consider our affiliated companies to be related
parties. Our net investments under the equity method were $36.1 million as of
September 30, 2000 and $19 million as of December 31, 1999. The increase
generally represents cash investments made by us, net of our equity share of
losses during the nine months ended September 30, 2000.
Realized Gain on Investment
We recognized a gain of $12.6 million during the nine months ended September
30, 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.
25
<PAGE>
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes during the three and nine months ended September 30,
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 September 30, 2000.
Net Loss
Our net losses increased by 34% to $668.7 million for the three months ended
September 30, 2000 from $498.6 million for the three months ended September 30,
1999. Our net losses increased by 174% to $2,013.5 million for the nine months
ended September 30, 2000 from $734.6 million for the nine months ended
September 30, 1999. Our net losses for all periods are due primarily to the
cost and amortization of distribution agreements and the amortization of
goodwill, acquisition-related intangibles and deferred compensation and other
acquisition-related costs, the substantial portion of which did not require
cash outlay. In addition, our net losses include other non-operating items such
as our equity share of losses of affiliated companies and a realized gain on an
investment we hold. Excluding all such items, our operating net loss was $36.7
million and $4.2 million for the three months ended September 30, 2000 and
1999, respectively, and was $80 million and $12.2 million for the nine months
ended September 30, 2000 and 1999, respectively.
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 the level of our
future revenues and the costs and expenses required to generate those revenues.
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 September 30, 2000, our
principal source of liquidity was approximately $332.9 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 32% from $224.5 million as of
December 31, 1999 to $152.5 million as of September 30, 2000. This decrease
resulted from cash used in operating activities of $15 million, cash used in
investing activities of $90.5 million and cash provided by financing activities
of $33.4 million during the nine months ended September 30, 2000. For the nine
months ended September 30, 1999, cash provided by operating activities was $82
million, cash used in investment activities was $238.3 million and cash
provided by financing activities was $17.8 million. For the nine months ended
September 30, 2000, cash used in operating activities of $15 million included a
net loss of $2,013.5 million offset by non-cash charges of $2,007.1 million
related to depreciation and amortization of distribution agreements,
acquisition-related amounts, deferred compensation and other amounts, and a net
decrease of $8.6 million in operating assets and liabilities utilizing cash.
Cash used in investing activities of $90.5 million included net purchases of
equipment of $110.4 million, payments under our backbone agreement of $46
million, investment in joint ventures of $54 million and cash paid in business
combinations net of cash received of $6.4 million, offset by net sales and
maturities of short-term investments of $120.3 million and net sales of other
investments of $6 million. Cash provided by financing activities of $33.4
million included net proceeds from the issuance of common stock of $76.6
million offset by payments under capital leases of $43.2 million.
26
<PAGE>
We intend to make investments in our infrastructure of approximately $250
million during 2000, including investments in our network designed to provide
stability and scalability. Of this amount, we had invested $199.6 million
during the nine months ended September 30, 2000, including purchases of
property, equipment and improvements, payments on capital lease obligations and
payments under our backbone agreement. We believe that we have sufficient
liquidity to continue 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.
Financing may not be available on terms acceptable to us or at all. The sale of
additional equity or convertible debt securities may result in additional
dilution to our stockholders.
Commitments
In December 1998, we entered into a backbone agreement with AT&T to create a
nationwide network utilizing AT&T's approximately 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 fulfilled our remaining
payment obligations of $46 million in 2000. 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 September 30, 2000, we had commitments under our capital leases and
other equipment financings to repay approximately $137.3 million plus interest
over the next 36 months with a substantial portion of this amount due within 12
months.
Under our 4.75% convertible subordinated notes due 2006, we are required to
make semi-annual interest payments in each of September and December of
approximately $12 million.
Under our joint venture agreements, we may be required to make periodic cash
contributions to fund joint venture operations, and our Excite@Home Australia
Pty Limited joint venture requires additional funding of up to approximately $6
million. Our obligations to make cash contributions to joint ventures outside
North America will be assumed by Excite Chello, our recently announced joint
venture with UPC, upon our contribution of these joint ventures to Excite
Chello. We are required to invest up to 100 million euros, or approximately $88
million, in Excite Chello after the closing of the transaction.
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 comprised of approximately 250,000 square feet with monthly rental
payments of approximately $0.9 million. 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 $0.4 million 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, and you may lose all or part of your investment.
Risks Related to Excite@Home's Business
Our quarterly operating results may fluctuate.
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:
. subscriber growth rates and prices charged by our cable partners;
. the level of usage of the Internet in general and portal web sites in
particular;
. the introduction of new products or services by us or our competitors;
. demand for Internet advertising;
. pricing changes for Internet-based 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;
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. the timing of marketing expenditures to promote our brands;
. costs incurred with respect to acquisitions;
. integration of new services, features and functionality with existing
services;
. seasonality 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.
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 September 30, 2000, we had an accumulated
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deficit of $3,698 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 $3,597
million since inception. In addition, we currently intend to increase capital
expenditures and operating expenses in order to expand our network and market
and provide our broadband services to potential subscribers. As a result of our
acquisitions of Excite, iMALL, Bluemountain.com and other companies, and our
proposed acquisition of Pogo.com, we anticipate that we will incur substantial
non-cash charges including charges 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.
We may fail to integrate our business and technologies with the business and
technologies of companies we have recently acquired or may acquire.
We have completed several acquisitions recently, and 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. In addition, we may be
unable to identify future acquisition targets and we may be unable to complete
future acquisitions on reasonable terms. 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; and
. the impairment of relationships with employees and customers as a result
of the integration of new management personnel.
Recently acquired businesses may not be successful.
Our recently acquired companies are in an early stage of development and
have 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 do not purchase goods or services
advertised on Bluemountain.com in sufficient quantities.
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Pogo.com. We expect to complete the acquisition of Pogo.com by the end of
December 2000. Pogo derives substantially all of its revenue from the sale of
advertising on its web site and on the web pages of distribution partners that
feature Pogo's games, and is therefore subject to many of the same risks
related to online advertising sales that Excite@Home faces. Many of Pogo's
customers have limited operating histories, are unprofitable and may not be
able to meet their payment obligations or may reduce their online marketing
expenditures, which could harm Pogo's revenue. If Pogo fails to obtain new
advertisers and retain existing advertisers, does not continue to attract and
retain users, or fails to maintain its key third party distribution
relationships, its revenue may decline.
During 2000, we have acquired Kendara, Inc., Worldprints.com International,
Inc., DataInsight, Inc. and Join Systems, Inc., and we may acquire other
companies in the near future. 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.
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.
We and other Internet advertisers have experienced a recent softening in the
demand for Internet advertising services, and if we are unable to continue to
grow our Internet advertising revenues, our operating results would be harmed
and our stock price may decline.
We derive a substantial amount of our revenues from the sale of advertising
on our Internet services. We have recently experienced a softening in the
demand for our advertising services, which has caused us to lower our
advertising rates. As a result, we have attempted to increase our marketing of
advertising services towards companies in traditional lines of business rather
than Internet companies. Advertisers that have traditionally relied upon other
media may be reluctant to advertise online, or may not be willing to pay the
same rates as Internet companies. Advertisers that already have invested
substantial resources in other advertising methods
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may be reluctant to adopt a new strategy, as few standards have developed that
measure the effectiveness of online advertising. In addition, these advertisers
often have substantially different requirements and expectations than Internet
companies with respect to advertising programs. If we are unsuccessful in
adapting to the needs of our advertisers and in selling our services to new
customers in traditional lines of business, this could materially harm our
operating results and financial condition.
Additionally, part of our strategy for increasing our advertising revenues
involves pricing advertising at premium rates on our broadband services.
However, we have only recently introduced this pricing structure to the market,
and we cannot be certain whether advertisers will be willing to pay premium
rates for this exposure. If the market for broadband advertising fails to
develop in accordance with our expectations, or develops more slowly than
expected, our business would be harmed.
No standard has emerged for online advertising pricing, and changes in current
pricing models could materially impact our operating results.
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 lead to a decrease in 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.
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.
New technology or current or future legislation addressing privacy concerns
could make it more difficult for us to deliver online advertising generally and
targeted advertising in particular.
"Filter" software programs that limit or prevent advertising from being
delivered to a web user's computer are available. Filter software may prevent
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.
Due to privacy concerns, some Internet commentators, consumer advocates and
governmental officials have suggested that the use of cookies be limited or
eliminated. Cookies are bits of information keyed to a specific memory location
and passed to a web site server through the user's browser software. Currently
available web browsers allow users to hide their identity and to prevent
cookies from being written to, or read from, 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.
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We could face liability related to the privacy of personal information about
our users.
Our 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 October 2000, a
purported class action suit was filed against our Math Logic Subsidiary,
alleging unauthorized access, interception and misuse of customer data based on
our advertising targeting technology. 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.
The sponsorship advertising we sell subjects us to financial and other risks.
We derive a substantial portion of our revenues from sponsorship and
promotion 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 and plan to continue to make 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 accounted for under the equity method of
investment. 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
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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.
Excite Chello, our new international joint venture with UPC and
UnitedGlobalCom, is an unproven business and may not achieve revenue and
subscriber growth targets.
In July 2000, we agreed with UPC and its parent company, UnitedGlobalCom
(together, the "United Group"), to form a joint venture, to be named Excite
Chello, which would combine UPC's chello broadband subsidiary with our assets
and operations outside North America. We have agreed to invest approximately
100 million euros in this joint venture. Excite Chello will be equally owned
and jointly controlled by Excite@Home and the United Group. We will account for
our investment in Excite Chello under the equity method, and we will record our
share of the net losses of the new joint venture, which will likely be higher
than our share of net losses that we have taken to date on the joint ventures
to be contributed. The expected higher losses are due to the accelerated
expansion of international operations. Although intentions have been announced
to publicly offer shares in Excite Chello at a future date, a number of factors
may prevent the consummation of an initial public offering, including adverse
changes in the financial markets, in general economic conditions, or in the
operations of the new joint venture. Excite Chello will be a new business, and
its ability to achieve revenue and subscriber growth targets is unproven.
Excite Chello will face many of the same risks facing our company. In addition,
Excite Chello faces specific risks related to providing broadband and
narrowband services in foreign jurisdictions, including:
. regulatory requirements, including the regulation of Internet access;
. legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions;
. potential inability to use European customer information due to new
European governmental regulations; and
. lack of a developed cable infrastructure in many international markets.
This transaction is not yet completed. The closing of this transaction is
subject to several conditions, including regulatory approval, obtaining third
party consents and contributions of joint venture interests and funds.
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 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. In other advertising relationships, we are
compensated based on the number of times users view the advertisements on our
web sites. These arrangements may expose us to legal claims based on the
content of the advertisements or the association of the advertisement with
specific web searches conducted by users. 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.
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Some of the liabilities that may result from these arrangements include:
. claims that advertisements displayed on our web sites infringe third
party intellectual property rights or are false, misleading or
defamatory;
. 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.
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 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 forced to make changes to
the services and products we provide and the way that we provide them.
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 in respect of our
indebtedness when due. As of September 30, 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.
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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 2,800 employees at
September 30, 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.
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; and
. a number of communications 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, which could
increase the cost of transmitting data 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, indecent or infringing 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
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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 our headquarters is located.
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
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 stockholders. 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 our executive management team have
resigned, and our Chief Executive Officer has announced his intention to resign
this position. Although we have replaced most of these employees, the new
employees have generally not had previous experience working with each other or
other members of our executive management team. The risk of attracting and
retaining qualified employees is compounded by the fact that we are controlled
by AT&T, 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 Related 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 the level of consumer or commercial
acceptance that we have forecasted. 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.
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
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.
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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. Some companies 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 reliability, scalability and speed of our @Home
broadband network, our relationships with our cable partners and customer
demand for our broadband services will suffer.
Due to the rapid deployment of our broadband services, the ability of our
broadband network to connect and manage a very large 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' infrastructures 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 is unwilling to upgrade
its infrastructure in that area.
The satisfactory performance, reliability and availability of our network is
critical to our ability to attract and retain large numbers of subscribers. In
recent periods, the performance of the @Home network has deteriorated in some
markets. For example, we recently suffered performance problems with our e-mail
services. If we experience frequent or persistent degradation in system
performance, our reputation and brand could be permanently harmed. Because our
cable partners are generally not required to offer the @Home service, if this
service does not meet the reliability levels that our cable partners seek, they
may choose not to offer the service, or may offer it at a lower rate.
We have been taking steps to increase the reliability and redundancy of our
network. In addition, we are seeking to eliminate subscriber abuse of the @Home
service, which has contributed to degradation in the performance of our
network. Our failure to timely address these issues may result in disputes with
our cable partners 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 generally obtain a cable modem to
access the @Home service. The North American cable industry has 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. We believe that our ability to meet our subscriber goals depends
on the degree to which these cable modems become more widely available in
channels such as personal computer manufacturers and retail outlets. In
addition, these modems must be easy for consumers to install themselves, rather
than requiring a customer service representative to perform the installation.
At the same time, we must deploy systems that allow customers to self-provision
the @Home service through online and other means to increase the attractiveness
and usefulness of these modems. If these cable modems do not become more widely
available quickly, if they cannot be installed easily by consumers, or if
customers are not able to initiate the @Home service themselves, it would be
difficult for us to attract large numbers of additional subscribers and our
business would be harmed.
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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. For example, the supply of certain key
components required in the manufacture of cable modems was severely constrained
during the first half of 2000 when a key parts supplier experienced a factory
fire. Cable modem manufacturers may also delay the production or delivery of
cable modems for various economic or other reasons. Delays due to component
shortages or other reasons could materially impact our subscriber growth on a
quarterly basis or longer.
Some of our cable partners have chosen to delay deployments of the @Home
service until commercial availability of DOCSIS-compliant cable modems is
widespread, among other reasons. Subscriber growth could be constrained and our
business could be significantly harmed if our cable partners slow the
deployment of the @Home service because they are not able to obtain a
sufficient quantity of DOCSIS-compliant modems.
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 Communications 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 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. 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 prior to the expiration of our exclusivity agreements. 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
attempted to impose third-party access requirements on AT&T and other
cable companies operating in those communities. The United States Court
of Appeals has decided in two of its circuits that cable broadband
services are telecommunications services subject to regulation at the
federal level. As a result, local and state jurisdictions in these two
circuits are prevented from imposing third-party access or carriage
requirements for cable broadband service. It is possible, however, that
local jurisdictions in other circuits may try to impose similar
requirements in the future. Since the circuit court decisions that have
been made to date are not binding on other circuits, courts in other
circuits could decide that their local jurisdictions have the right to
impose third-party access requirements. In addition, local jurisdictions
could try to impose similar requirements under various other legal
theories.
. Other litigation. In November 1999, a class action was filed 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 this
litigation. 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.
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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:
. Providers of cable-based Internet services. MediaOne Group, which was
recently acquired by AT&T, 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. These advanced services are offered by a number of Internet
service providers in conjunction with local exchange carriers, which may
result in additional marketing, installation and customer service
resources for DSL.
. 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!.
. Cable and fiber-optic system over-builders. We compete with companies
that have obtained franchises from local authorities to build their own
coaxial cable and fiber-optic networks to deliver bundled
telecommunications services to residential customers. These companies,
such as RCN Corp., act as exclusive providers of broadband Internet,
phone and cable television services over their own advanced local network
infrastructure. Although these systems have been built in limited
geographic areas to date, widespread availability of bundled services by
system over-builders would represent significant competition against our
services.
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 stockholder, AT&T, has a substantial ownership
interest in Time Warner and Road Runner due to AT&T's recent acquisition of
MediaOne. This relationship among 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 largest dial-up Internet service provider, the ability to utilize
Road Runner's technology as a basis for leveraging its marketing 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.
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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 have entered into new distribution agreements with AT&T, Comcast
and Cox, 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 also refer to our proxy statement for our 2000 annual
stockholders meeting for a further description of these 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 plants in the United States and in some international
markets have been upgraded to two-way hybrid fiber coaxial cable, and even less
are capable of high-speed two-way transmission. As of September 30, 2000,
approximately 50% 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.
The letter agreement that we entered into with AT&T, Comcast and Cox on March
28, 2000 may subject us to legal risks.
On May 26, 2000, a purported class action suit was initiated in the San
Mateo County Superior Court by an alleged Excite@Home stockholder against
Excite@Home, AT&T Corp., Comcast Corporation and Cox Communications, Inc., as
well as each member of our board of directors. The complaint alleges that the
defendants breached fiduciary duties to Excite@Home stockholders by approving
or entering into, as applicable, the letter agreement among Excite@Home, AT&T,
Comcast and Cox on March 28, 2000, and by
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agreeing to consummate the transactions contemplated by this agreement. In the
complaint, the plaintiffs seek a court order nullifying the letter agreement,
monetary damages, and a court order establishing a stockholders' committee
comprised of unidentified class members to provide input regarding the
transactions contemplated by the letter agreement. We believe this action is
without merit, and intend to defend against this action vigorously. If the
plaintiffs prevail, a court may not allow us to proceed under the terms of the
letter agreement or we may have to pay damages, either of which could seriously
harm our business.
Our cable partners may terminate the exclusivity obligations that prevent them
from offering services that compete with our broadband services.
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.
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 March 28, 2000 letter agreement, Comcast or Cox may terminate
their current 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 obligations 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.
In addition, Rogers Cablesystems Limited and Shaw Cablesystems Ltd. are
subject to similar exclusivity obligations that extend into 2003, subject to
early termination in limited circumstances.
Under the letter agreement, 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. Without this put,
if Comcast or Cox desired to sell the shares of our Series A common stock that
they hold, they may not be able to find a buyer, or the market price that they
could demand for the shares may drop, due to the large number of shares held by
these cable partners. Therefore, the put rights 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, AT&T, Comcast and Cox have agreed to use
Excite@Home 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
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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 letter agreement with these cable
partners is terminated, our business could be harmed significantly and our
stock price would likely suffer an immediate drop.
If our cable partners decide not to offer broadband services, if they decide to
offer our broadband services at discount prices, or if they decide to offer
their own broadband services in the future, our operating results will be
harmed.
Although our cable partners have agreed not to carry services that compete
with our broadband services, they are generally under no affirmative obligation
to offer any broadband services at all. Additionally, our cable partners are
generally free to offer our broadband services at discount prices at their
discretion. In particular, under our current agreement with AT&T, Comcast and
Cox, AT&T is obligated to meet certain subscriber targets relative to Comcast
and Cox, and this agreement places only limited restrictions on AT&T's freedom
to price our broadband services lower to facilitate meeting these subscriber
goals. Because our agreements with each of our cable partners provide that we
will receive a percentage of the revenues that our cable partners receive from
sales of our broadband services, if AT&T or our other cable partners offer our
broadband services at discount prices, we will receive less revenue.
In addition, Comcast, Cox or our other cable partners may determine in the
future that they can provide broadband services themselves, rather than
offering our services. Our letter agreement provides for an implementation plan
that would, at the election of Comcast or Cox, require us to transfer certain
subsystems and network elements to Comcast or Cox to enable them to offer
certain subsystems of the @Home service themselves, in which event we would
negotiate a new revenue split to reflect the expenses that are no longer
incurred by us due to the transfer. The agreement also provides for an exit
plan that would, in the event that either Comcast or Cox decides to terminate
its relationship with us, require us to transfer to Comcast or Cox certain
assets used by us in delivering our broadband services to them. In addition,
the letter agreement provides that Comcast and Cox can terminate their
exclusivity obligations with us after June 4, 2001 by giving proper notice. If
Comcast or Cox, or other cable partners, attempt to offer broadband services
similar to our own, we may no longer receive revenues from customers served by
these companies, which could have a material impact on our business and
operating results.
Our cable partners may currently 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.
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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 United
States 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 controlled by AT&T, and our interests may not always align with AT&T's
interests.
AT&T controls approximately 74% of our voting power. Currently, six of our
ten directors are directors, officers or employees of AT&T or its affiliates.
AT&T currently owns all 86.6 million outstanding shares of our Series B common
stock, each of which carries ten votes per share. This Series B common stock
ownership gives AT&T the right to elect a majority of our board of directors.
Therefore, we are subject to both board and stockholder voting control by AT&T.
It is possible that AT&T's objectives will diverge from what our management
considers to be our optimum strategy. On October 25, 2000, AT&T announced that
it will restructure its operations into four separate companies and AT&T's
interest in Excite@Home will be held by one of these companies. Excite@Home
cannot predict what impact, if any, this restructuring may have on Excite@Home.
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 31.6
million shares of our Series A common stock at an average price of $2.27 per
share were exercisable as of September 30, 2000.
Under our new agreements with our principal cable partners, we granted
warrants to AT&T, Comcast and Cox to purchase an aggregate of 72.2 million
shares of our Series A common stock and 27.9 million shares of our Series B
common stock, each at 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. We will amortize the fair values
of these warrants to operations over the respective terms of the new
distribution agreements.
To the extent that our cable partners become eligible to and exercise their
warrants, our stockholders will 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 Yahoo!;
. online service providers such as America Online and Microsoft's MSN
service;
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. large media companies such as CBS, NBC, Time Warner and USA Networks,
Inc., which have announced initiatives to develop web services or partner
with web companies; and
. 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 other 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 other 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 on 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 on the Excite Network have in the past, and
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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.
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 our web sites. We have no guarantees that
we will recoup 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.
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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 $180.4 million as of September 30, 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 of 10
percent in market interest rates from levels at September 30, 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 September 30, 2000, we had two issuances of long-term convertible debt
outstanding. The outstanding balance of our convertible debentures issued in
December 1998, net of unamortized original issue discount, was approximately
$241.7 million as of September 30, 2000 and bears an effective interest rate of
approximately 4%. Our convertible notes issued in December 1999 had an
outstanding balance of $500 million as of September 30, 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 private and public companies. We generally value
our investments in private companies at cost and write-down such investments
when there is a permanent decline in value. We value our investments in public
companies using the closing fair market value stated in the Wall Street Journal
for the last day of each month. As a result, we reflected these investments in
our consolidated balance sheet as of September 30, 2000 at $192.1 million as
compared to $273 million as of December 31, 1999. We report unrealized gains
and losses 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 are from
customers in the United States. Therefore, our foreign currency exchange rate
risk is primarily limited to funding commitments to our international joint
ventures. Because the timing and amount of the required contributions is not
predictable, we do not typically hedge against foreign currency exchange rate
changes. However, we are required to contribute up to 100 million euros to
Excite Chello after the closing of the transaction, and we have partially
hedged the foreign currency risk of this commitment by purchasing a contract
for the forward delivery of euros against the anticipated funding date.
46
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Dilutive Effects of New Agreements with our Principal Cable Partners
On March 28, 2000, we entered into new agreements with our principal cable
partners. These agreements are described in our proxy statement for our 2000
annual meeting of stockholders. In addition to the amendment to our fifth
amended and restated certificate of incorporation, which became effective on
August 28, 2000, we have issued warrants to purchase approximately 100 million
shares of our common stock to our principal cable partners and we have also
issued approximately 55.8 million shares of our Series B common stock, each
share of which entitles its holder to 10 votes, to AT&T in exchange for the
surrender of an equal number of shares of Series A common stock. When
considered together with the issuance of the warrants, AT&T holds approximately
25% of the total outstanding shares of our common stock and approximately 74%
of our voting power, each on a fully-diluted basis.
Recent Sales of Unregistered Securities
On March 28, 2000, we granted warrants to purchase approximately 100 million
shares of our Series A common stock at an exercise price of $29.54 per share in
connection with our new agreements with our principal cable partners. Upon the
effectiveness of these agreements on August 28, 2000, the warrants held by AT&T
were converted into warrants for approximately 27.9 million shares of Series A
common stock and 27.9 million shares of Series B common stock. AT&T's warrants
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 will
vest as to 1/6 of the total shares on June 4, 2001 and as to an additional 1/12
each nine months thereafter so long as the existing master distribution
agreement, the letter agreement or superceding definitive agreements, as
applicable, have been
47
<PAGE>
continuously in effect up to such date. These warrants were issued in private
transactions that were exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act or Regulation D thereunder.
On July 14, 2000, in connection with our acquisition of DataInsight, Inc.,
we issued approximately 0.7 million shares of our Series A common stock to the
stockholders of DataInsight 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.
On July 14, 2000, in connection with our acquisition of Join Systems, Inc.,
we issued approximately 0.1 million shares of our Series A common stock to the
stockholders of Join Systems 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
On July 10, 2000, Mark A. McEachen was named Executive Vice President and
Chief Financial Officer, succeeding Kenneth A. Goldman in that capacity
On September 19, 2000, George Bell announced plans to resign as our Chief
Executive Officer once a replacement is found. Mr. Bell announced that he will
maintain his position as Chairman of the Board at least through the end of
2001.
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.
None.
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<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)
Dated: November 14, 2000 By: /s/ Mark A. McEachen
----------------------------------
Mark A. McEachen
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Manford Leonard
----------------------------------
Manford Leonard
Vice President and
Corporate Controller
(Principal Accounting Officer)
49
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Incorporated by Reference
---------------------------------- Filed
Exhibit No. Exhibit Description Form File No. Exhibit Filing Date Herewith
----------- ------------------- ---- --------- ------- ----------- --------
<C> <S> <C> <C> <C> <C> <C>
3.01 Certificate of Amendment S-8 333-44780 4.02 08/30/00
of Fifth Amended and
Restated Certificate of
Incorporation, filed
with the Delaware
Secretary of State on
August 28, 2000.
3.02 The Registrant's Third S-3 333-43156 4.03 09/25/00
Amended and Restated
Bylaws, effective as of
August 28, 2000.
10.01 Form of Executive X
Retention and Severance
Agreement, dated
September 7, 2000,
between the Registrant
and George Bell, Mark
McEachen, Mark Stevens,
Byron Smith, and Mark
O'Leary*
10.02 Offer Letter, dated June X
29, 2000, between the
Registrant and Mark
McEachen.*
10.03 Letter Agreement, dated X
September 18, 2000,
between the Registrant
and George Bell.*
10.04 Loan and Security X
Agreement, dated August
17, 2000, between the
Registrant, Mark
McEachen and Joanne
McEachen.*
10.05 Loan and Security X
Agreement, dated July
28, 2000, between the
Registrant, Byron Smith
and Beth Smith.*
27.01 Financial Data Schedule X
for nine months ended
September 30, 2000
(EDGAR version only).
</TABLE>
--------
* Management contracts or compensatory plans required to be filed as an exhibit
to this quarterly report.
50
