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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 June 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
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 offices) (Zip Code)
(650) 556-5000
(The Registrant's telephone number, including area code)
FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:
Not applicable.
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of July 31, 2000
-------------------
Number of shares of Series A Common Stock outstanding: .... 371,476,237
Number of shares of Series B Common Stock outstanding: .... 30,800,000
Number of shares of Series K Common Stock outstanding: .... --
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AT HOME CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 ..................................................... 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999 ................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 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 ................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................ 42
Item 2. Changes in Securities and Use of Proceeds ................................ 42
Item 3. Defaults Upon Senior Securities .......................................... 43
Item 4. Submission of Matters to a Vote of Security Holders ...................... 43
Item 5. Other Information ........................................................ 44
Item 6. Exhibits and Reports on Form 8-K ......................................... 45
Signatures ......................................................................... 46
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -------------
ASSETS (Unaudited) (*)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 157,508 $ 224,548
Short-term investments............................................................... 231,224 300,675
------------ -------------
Total cash, cash equivalents and short-term investments...................... 388,732 525,223
Accounts receivable, net............................................................. 57,355 52,200
Accounts receivable-- related parties................................................ 34,226 18,332
Other current assets................................................................. 53,759 35,151
------------ -------------
Total current assets......................................................... 534,072 630,906
Property, equipment and improvements, net.............................................. 292,418 176,077
Investments in affiliated companies.................................................... 52,242 19,015
Other investments...................................................................... 192,785 273,005
Distribution agreements, net........................................................... 280,021 313,557
Goodwill and other intangible assets, net.............................................. 6,664,349 7,615,062
Other assets........................................................................... 92,832 76,657
------------ -------------
Total assets................................................................. $ 8,108,719 $ 9,104,279
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 93,056 $ 44,491
Accounts payable-- related parties................................................... 9,015 23,206
Accrued compensation and related expenses............................................ 19,914 15,632
Deferred revenue..................................................................... 56,481 56,844
Other accrued liabilities............................................................ 78,103 62,540
Current portion of capital lease and other obligations............................... 71,848 38,666
------------ -------------
Total current liabilities.................................................... 328,417 241,379
Convertible notes and debentures....................................................... 739,853 736,294
Capital lease and other obligations, less current portion.............................. 61,530 52,552
Other liabilities...................................................................... 8,968 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-- 9,857 in 2000 and 10,134 in 1999.................. 373,271 397,019
Common stock, $0.01 par value:
Authorized shares-- 719,719,414
Issued and outstanding shares-- 399,952,419 in 2000 and
384,754,355 in 1999............................................................ 9,687,461 9,312,700
Deferred compensation................................................................ (44,583) (50,493)
Accumulated other comprehensive income............................................... (16,611) 92,594
Accumulated deficit.................................................................. (3,029,587) (1,684,803)
------------ -------------
Total stockholders' equity................................................... 6,969,951 8,067,017
------------ -------------
Total liabilities and stockholders' equity................................... $ 8,108,719 $ 9,104,279
============ =============
</TABLE>
(*) The condensed consolidated balance sheet as of December 31, 1999 has been
derived from audited financial statements as of that date but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements
3
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AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues(1)............................................... $ 148,721 $ 70,542 $ 286,784 $ 95,640
Costs and expenses(2):
Operating costs......................................... 69,363 29,084 126,602 47,684
Product development and engineering..................... 26,813 11,281 47,788 17,748
Sales and marketing..................................... 74,254 25,274 131,180 32,950
General and administrative.............................. 17,798 6,423 28,522 10,526
Cost and amortization of distribution agreements........ 28,166 18,703 122,131 33,723
Amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs...... 589,317 199,451 1,162,450 206,184
-------------- ------------- -------------- -------------
Total costs and expenses.................................. 805,711 290,216 1,618,673 348,815
-------------- ------------- -------------- -------------
Loss from operations...................................... (656,990) (219,674) (1,331,889) (253,175)
Interest and other income, net............................ 858 2,472 4,051 5,283
Investment gain from business combination................. -- -- -- 12,566
Equity share of losses of affiliated companies............ (12,131) (742) (16,946) (742)
--------------- -------------- -------------- --------------
Net loss.................................................. $ (668,263) $ (217,955) $ (1,344,784) $ (236,068)
=============== ============= =============== =============
Net loss per share-- basic and diluted.................... $ (1.69) $ (0.76) $ (3.43) $ (0.89)
============== ============= ============== =============
Shares used in per share computation-- basic and diluted.. 396,092 287,155 391,868 264,060
============== ============= ============== =============
------------------
(1)Revenues from related parties.......................... $ 12,144 $ 6,966 $ 24,238 $ 12,405
============== ============= ============== =============
(2)Depreciation and amortization included in costs and
expenses, excluding amortization of distribution
agreements and acquisition-related amounts............ $ 23,638 $ 8,815 $ 43,227 $ 16,270
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
4
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AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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<CAPTION>
Six Months Ended June 30,
2000 1999
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss.......................................................................... $ (1,344,784) $ (236,068)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 42,717 15,733
Amortization of distribution agreements......................................... 46,581 33,463
Cost of distribution agreements................................................. 75,550 260
Amortization of deferred and stock-based compensation........................... 10,745 537
Amortization of goodwill and other intangible assets............................ 1,148,421 160,104
Accretion of discount on convertible debentures................................. 4,769 3,421
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.................................. 16,946 742
Changes in assets and liabilities:
Accounts receivable........................................................... (19,880) (20,387)
Other assets.................................................................. (37,661) (3)
Accounts payable.............................................................. 24,927 12,978
Accrued liabilities........................................................... 20,418 13,536
Deferred revenues............................................................. (5,205) 8,319
Other long-term liabilities................................................... 1,734 --
------------- ------------
Cash provided by (used in) operating activities................................... (14,722) 22,369
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of short-term investments............................................... (97,265) (298,562)
Sales and maturities of short-term investments.................................... 166,716 93,248
Purchases of other investments.................................................... (28,170) --
Sales of other investments........................................................ 15,711 --
Net purchases of property, equipment and improvements............................. (78,733) (25,483)
Payments under backbone agreement................................................. (11,970) (27,058)
Investment in joint ventures...................................................... (49,935) --
Business combinations, net of cash received....................................... (6,565) 34,341
-------------- -----------
Cash used in investing activities................................................. (90,211) (223,514)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of repurchases........................ 63,733 25,918
Payments on capital lease obligations............................................. (25,840) (8,228)
-------------- ------------
Cash provided by financing activities............................................. 37,893 17,690
------------- ------------
Net decrease in cash and cash equivalents......................................... (67,040) (183,455)
Cash and cash equivalents, beginning of period.................................... 224,548 300,702
------------- ------------
Cash and cash equivalents, end of period.......................................... $ 157,508 $ 117,247
============= ============
SUPPLEMENTAL DISCLOSURES
Interest paid................................................................... $ 16,964 $ 5,795
============= ============
Acquisition of equipment under capital leases................................... $ 68,000 $ 14,701
============= ============
Warrants to purchase Series A common stock earned by cable partners
under distribution agreements and capitalized as intangibles.................. $ 13,045 $ 81,589
============= ============
Conversion of preferred stock to common stock................................... $ 100,006 $ --
============= ============
Mergers and acquisitions:
Issuance of common and preferred stock and assumed options and warrants
exercisable for common stock................................................ $ (197,384) $(7,165,646)
============= ===========
Liabilities assumed........................................................... $ (2,352) $ (105,743)
============= ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
5
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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 six months ended June 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):
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<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
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Net loss............................................. $ (668,263) $ (217,944) $ (1,344,784) $ (236,068)
============= ============= ============= ==============
Weighted average shares of common stock
outstanding........................................ 397,806 293,248 394,009 270,970
Less weighted average shares of common stock
subject to repurchase.............................. (1,714) (6,093) (2,141) (6,910)
-------------- -------------- ------------- --------------
Shares used in per share calculations................ 396,092 287,155 391,868 264,060
============= ============= ============= ==============
Net loss per share--basic and diluted................. $ (1.69) $ (0.76) $ (3.43) $ (0.89)
============= ============= ============= ==============
</TABLE>
Segment Reporting
Our key operating segments are aggregated into the reported business
segments based upon how our management organizes, manages and internally reports
our operations. As of June 30, 2000, our reported business segments consisted of
Media and Advertising Services, Subscriber Network and Other Services, and
International. Previously, International was reported as a component primarily
of Subscriber Network and Other Services. Our segment disclosures include
revenues for our reported business segments, but costs and expenses, loss from
operations, net loss and assets and liabilities are not reported separately for
each segment because this information is not produced or used internally by
management in reviewing operations and in allocating resources.
6
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The following represents revenues for our reported business segments (in
thousands):
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<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Media and Advertising Services............ $ 74,737 $ 42,315 $150,960 $45,777
Subscriber Network and Other Services..... 66,248 26,429 121,693 46,516
International............................. 7,736 1,798 14,132 3,347
-------- -------- -------- -------
Total consolidated revenues.......... $148,721 $ 70,542 $286,785 $95,640
======== ======== ======== =======
</TABLE>
Media and Advertising Services revenues were derived predominantly from
customers located in the United States for both the three and six months ended
June 30, 2000 and 1999. Subscriber Network and Other Services revenues derived
from customers located outside the United States and excluded from the
International segment consisted primarily of revenues from cable partners and
their cable customers located in Canada, and accounted for approximately 12% of
Subscriber Network and Other Services revenues for both the three and six months
ended June 30, 2000 and 22% for both the three and six months ended June 30,
1999. International revenues earned from our unconsolidated joint ventures were
$4.9 million and $1.7 million for the three months ended June 30, 2000 and 1999,
respectively, and were $9 million and $3.2 million for the six months ended June
30, 2000 and 1999, respectively. International revenues earned by our
consolidated operations outside of North America were $2.8 million and $0.1
million for the three months ended June 30, 2000 and 1999, respectively, and
were $5.1 million and $0.1 million for the six months ended June 30, 2000 and
1999, respectively. No single customer accounted for more than 10% of total
consolidated revenues for the three and six months ended June 30, 2000 and 1999.
Revenues from Related Parties
Revenues from related parties were $12.1 million, or 8% of total revenues,
for the three months ended June 30, 2000, as compared to $7 million, or 10% of
total revenues, for the three months ended June 30, 1999. For the six months
ended June 30, 2000 and 1999, revenues from related parties were $24.2 million
and $12.4 million, respectively. One component of revenues from related parties
consists of revenues from our principal cable partners which are generated from
advertising arrangements, support services such as customer support, local area
content development, development of set-top devices and pre-commercial
deployment consulting. Revenues from our principal cable partners were $6.9
million and $5.1 million for the three months ended June 30, 2000 and 1999,
respectively, and were $13.9 million and $9 million for the six months ended
June 30, 2000 and 1999, respectively. The remaining revenues from related
parties of $5.2 million and $1.9 million for the three months ended June 30,
2000 and 1999, respectively, and $10.3 million and $3.4 million for the six
months ended June 30, 2000 and 1999, respectively, were earned primarily from
consulting and other services rendered to our international joint ventures
reimbursed on a cost-plus basis.
Revenues 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 @Work and @Home
subscribers. Services provided in connection with these arrangements generally
consist of the delivery of advertising impressions, e-commerce sponsorship
agreements and revenue share arrangements on our web sites. Revenues under these
arrangements are recognized based upon the fair value of the services provided
and were $16.2 million and $7.3 million for the three months ended June 30, 2000
and 1999, respectively, and were $28.5 million and $8.3 million for the six
months ended June 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 Revenues
Revenues 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, were $10.2 million and $6.4 million for the three
months ended June 30, 2000 and 1999, respectively, and were $18.6 million and
$6.4 million for the six months ended June 30, 2000 and 1999, respectively.
Revenues from barter transactions are recorded at the lower of the fair value of
the services provided or the services or products received. Barter transactions
involving the exchange of services generally result in the recognition of
equivalent amounts of revenue and expense.
7
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New Accounting Pronouncements
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 will be required to adopt SAB
101 in the fourth quarter of 2000. We are currently in the process of evaluating
the impact of SAB 101 on our financial position and results of operations, but
we do not expect SAB 101 to have a material effect thereon.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
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. We do not expect FIN 44 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. We are
currently in the process of evaluating the impact of this consensus on our
financial position and results of operations, but we do not expect the consensus
to have a material effect thereon.
2. New Distribution Agreements with Principal Cable Partners
On March 28, 2000, we entered into a letter agreement and term sheets with
AT&T, Comcast and Cox, our principal cable partners. Among other things, this
agreement provides for the extension of our relationship with AT&T until June 4,
2008, and the extension of our relationship with Comcast and Cox until June 4,
2006. Under the letter agreement, the existing master distribution agreement and
local cable operator agreements between us and our principal cable partners
remain in effect until June 4, 2002. However, Comcast or Cox may terminate the
mutual exclusivity obligations of the existing master distribution agreement, or
the entire agreement and the local cable operator agreements, at any time on or
after June 4, 2001 by providing at least 6 months' prior written notice.
On June 19, 2000, Cablevision filed a lawsuit in the Delaware Chancery Court
against Excite@Home, AT&T, Comcast, Cox and affiliated entities alleging, among
other things, that certain provisions of the letter agreement constitute an
amendment to the stockholders' agreement to which Cablevision is a party and
that Cablevision's consent is required for any such amendment. On June 22, 2000,
the parties amended the letter agreement in response to the Cablevision lawsuit.
As stated in the amendment, the court in the Cablevision action was advised that
the parties to the letter agreement have agreed not to consummate the new
distribution arrangements until at least the conclusion of the trial on the
merits in the Cablevision lawsuit. In addition, the date on which the parties
may first terminate the letter agreement if the new distribution arrangements
have not yet become effective was extended from September 30, 2000 to the
earlier of November 15, 2000 or 30 days after the final judgment in the
Cablevision litigation is no longer subject to appeal or review by the Delaware
courts. On June 30, 2000, we filed a counterclaim alleging that Cablevision has
breached its existing agreement with us. We believe that there is no legal merit
to Cablevision's claim, and we will continue to vigorously defend this action.
However, if Cablevision prevails, we may be required to amend or terminate the
letter agreement, or Cablevision may be allowed to terminate our distribution
agreement while retaining the right to exercise warrants for approximately 20.5
million shares of our Series A common stock. An unfavorable outcome may have a
material adverse effect on our financial position and results of operations.
On June 20, 2000, our stockholders approved an amendment to our fifth
amended and restated certificate of incorporation, satisfying one of the
requirements to the effectiveness of the letter agreement. This amendment, when
filed, will result in Comcast and Cox no longer having certain rights under the
stockholders' agreement. These rights currently include the right to designate a
director to our board and the right to veto a board action by voting together
against a board action. As of the effective date of the letter agreement, the
designees of Comcast and Cox that are currently on our board will resign their
board positions and AT&T will acquire voting control over all board actions.
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 issuance of these
8
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warrants will become effective subject to the effectiveness of the letter
agreement. The exercise price for the warrants is $29.54 per underlying share.
Warrants issued to AT&T for approximately 55 million shares in aggregate will
become 100% vested and exercisable, with limited exceptions, 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 approximately 17% per year.
Warrants issued to Comcast and Cox with respect to an estimated 45 million
shares of our Series A common stock will vest as to approximately 17% of the
total shares on June 4, 2001 and as to approximately an additional 8% 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, upon the effectiveness of the letter agreement, we will issue
to AT&T one share of our Series B common stock, each share of which entitles its
holder to 10 votes, in exchange for each share of our Series A common stock
surrendered by AT&T to us. We expect to issue approximately 50 million shares of
our Series B common stock in this exchange, which, when considered together with
the above warrants, would result in AT&T holding approximately 25% of the total
outstanding shares of our common stock and approximately 74% of our voting
power, each on a fully-diluted basis.
Under the agreement, AT&T has granted Comcast and Cox the right to sell
their shares of our Series A common stock to AT&T for a minimum price of $48 a
share at any time between January 1, 2001, and June 4, 2002, up to a maximum of
$1.5 billion for Comcast and $1.4 billion for Cox.
3. Significant Business Combinations
On February 10, 2000, we completed the acquisition of Kendara, Inc., a
Delaware corporation, for approximately 1.5 million shares of our Series A
common stock, 202 shares of our Series B non-voting preferred stock and 1,279
shares of our Series C non-voting preferred stock, with a fair value of $104.8
million. The Series B preferred stock is being held in escrow for one year and
will automatically convert into approximately 0.2 million shares of our Series A
common stock upon the expiration of the one year escrow period. The Series C
preferred stock is convertible into approximately 1.3 million shares of Series A
common stock, subject to a vesting schedule and one year escrow period. We also
assumed Kendara's outstanding stock options, which were converted into options
to purchase approximately 0.1 million shares of our Series A common stock, with
a fair value of $4.2 million. The total purchase consideration of $109.6 million
also includes approximately $0.6 million of direct acquisition costs. The total
purchase consideration was allocated to cash of $3.9 million, accounts
receivable and other assets of $0.1 million, 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 assumed employee stock options
to purchase approximately 0.5 million shares of Series A common stock. As of
December 31, 1999, approximately $150 million of the additional purchase
consideration was determinable and was therefore recorded in the consolidated
financial statements. Based on determination of the remaining portion of
additional purchase consideration during the first quarter of 2000, the total
purchase consideration was increased by $32.3 million to $1,002.3 million as of
March 31,
9
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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.
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 and we have contributed approximately $14.2 million to date.
We have made investments of approximately $49.9 million during the six months
ended June 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.
We have agreed with our Excite Chello (Note 8) partners to combine our joint
ventures outside of North America with the operations of chello broadband to
create a new joint venture. In our consolidated financial statements through
June 30, 2000, we continue to account under the equity method for 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 made payments of approximately
$12 million during the six months ended June 30, 2000 and we are required to
make additional payments of approximately $33 million in 2000. Our payments
under the backbone agreement are capitalized as they are made and are amortized
by charges to operations over the term of the agreement or the estimated useful
life of the equipment purchased. We will also be required to make additional
payments of up to $5 million annually during the term of the agreement for
co-location space, equipment and support and maintenance fees.
We will be required to make cash contributions of 100 million Euros, or
approximately $94 million based on current exchange rates, to the recently
announced Excite Chello (Note 8) joint venture during the next several months.
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 $0.3
million during the six months ended June 30, 2000 and 1999, respectively.
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<PAGE>
Exercises of warrants resulted in the net issuance of approximately 1.3 million
shares during the six months ended June 30, 2000. Remaining outstanding warrants
for approximately 5.4 million shares were all earned and exercisable as of June
30, 2000.
Warrants Subject to Distribution Agreements
As of June 30, 2000, performance-based warrants issued to certain cable
partners, including joint venture partners, as incentives under exclusive
distribution agreements were outstanding as to approximately 38.7 million shares
of our Series A common stock, of which approximately 25.1 million shares were
earned and may be exercised. The warrants have exercise prices ranging from
$0.25 to $32.50. During the six months ended June 30, 2000, warrants were earned
with respect to approximately 1.3 million shares, and approximately 0.3 million
shares previously earned were cancelled due to transfers of cable systems
covered by certain warrants. As a result, we recorded $13 million as
distribution agreements and $1.3 million as investments in affiliated companies
in our consolidated balance sheets during the six months ended June 30, 2000
representing the number of warrants earned at fair value. We are amortizing the
distribution agreements ratably over their remaining exclusive terms, which
expire at various dates through 2004. Amortization of distribution agreements
was $46.6 million and $33.5 million during the six months ended June 30, 2000
and 1999, respectively, and accumulated amortization as of June 30, 2000 was
$182.9 million. There were no exercises of these warrants during the six months
ended June 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 June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net loss......................................... $(668,263) $(217,944) $(1,344,784) $(236,068)
Unrealized gain (loss) on available-for-sale
investments.................................... (101,506) 62,331 (109,347) 70,344
Foreign currency translation gain................ 11 44 142 44
--------- --------- ----------- ---------
Comprehensive loss............................... $(769,758) $(155,569) $(1,453,989) $(165,680)
========= ========= =========== =========
</TABLE>
8. Subsequent Events
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 employee stock options with a fair value of approximately
$0.3 million. Deferred compensation of approximately $0.5 million will be
recorded and 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. DataInsight is an online and offline
database marketing systems and applications provider. We will account for this
acquisition as a purchase.
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 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 $94 million at current exchange rates, 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.
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<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 June
30, 2000, we had approximately 1.8 million worldwide subscribers to our @Home
service, which provides high-speed Internet access to consumers utilizing the
cable television infrastructure. Beginning in the fourth quarter of 2000, we
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 and
media, information, communications 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 recently agreed with Cox,
Comcast and AT&T to terms that will extend our relationship with these cable
partners on a favorable but non-exclusive basis through 2006 and in the case of
AT&T, through 2008. The new agreements also provide that we will issue
additional warrants to these cable partners for an estimated 100 million shares
of our common stock and that AT&T will obtain voting control over all board
actions. Cablevision has filed a lawsuit regarding these new agreements and the
court in this matter has been advised that the parties to the letter agreement
have agreed not to consummate the new distribution arrangements until at least
the conclusion of the trial on the merits in the Cablevision lawsuit. Please see
Risk Factors for further information related to these agreements and our
relationship with our cable partners. Including our DSL agreement with Rhythms
NetConnections, the footprint of our @Home service was approximately 74 million
homes in North America as of June 30, 2000. Approximately 28 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 June 30, 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. The @Home service has been commercially
launched in Australia, Belgium, the Netherlands and Japan with a launch planned
in Germany later in 2000. We recently announced an agreement with UPC and its
parent company, UnitedGlobalCom, 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, including our international joint ventures
and wholly-owned subsidiaries. Excite Chello is expected to have a footprint of
over 30 million homes outside North America under long-term contract including
our 13.5 million home international footprint.
We expanded our media and advertising services in 1999 by acquiring Excite,
a leading consumer Internet portal, MatchLogic, a subsidiary of Excite
specializing in targeted advertising services, Bluemountain.com, the most-used
online greeting card service according to Media Metrix, and other media
properties that deliver entertainment, shopping and information services to our
users. Our other acquisitions, including Webshots in 1999 and Kendara and
Worldprints in 2000 will enable us to deliver enhanced Internet-based shopping,
community and photo services to
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<PAGE>
our users. The Excite Network encompasses the above web properties and offers
comprehensive search, news and information, shopping, community and
communications services that can be customized and personalized to users'
preferences. Additionally, Excite provides website content services such as
website development.
We intend to utilize the intellectual property, knowledge and capabilities
that we have obtained through our acquisitions to create new and comprehensive
Internet services that take advantage of personalization, multi-location access
and the speed of broadband to deliver a compelling experience to Internet users
worldwide. Our @Home 2000 service is a significant step toward our goal of
delivering this experience. @Home 2000 is currently available to @Home
subscribers in North America and features a custom browser utilizing the latest
multimedia and security features and a broadband portal incorporating the
personalization capabilities of Excite with multimedia content made possible by
a high-speed connection. @Home 2000 has enabled us to increase the rate at which
we form strategic partnerships with online providers of broadband-enabled
services and content, including content delivery networks, streaming audio and
video entertainment and information services, gaming and entertainment networks,
and online advertisers. In addition, since the Excite Network is the basis for
the @Home 2000 service, Excite users can effortlessly integrate the broadband
platform into their existing routines. Since a broadband connection is not
always available to our customers, we offer 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's services complement the Excite Network by providing targeted
advertising services including online campaign management and marketing of
online data. Our recent acquisition of DataInsight will enhance our ability to
provide e-commerce and online marketing relationship management services.
Utilizing our online advertising space on the Excite Network, the MatchLogic and
DataInsight marketing databases and our marketing program development and
management expertise, we are able to create comprehensive marketing campaigns
for advertisers interested in reaching our 76.5 million registered Excite users,
72 million anonymous behavioral profiles, 11.4 million opt-in e-mail profiles,
users of our Webshots and Bluemountain.com services, our 1.8 million @Home
subscribers and the potential broadband subscribers in our 28 million home
upgraded cable footprint in North America.
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.
We had approximately 7,600 @Work access customers as of June 30, 2000. @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. We believe that offering
third parties wholesale access to our network is a significant opportunity and,
in addition to representing a new source of revenue, benefits @Home subscribers
by optimizing the delivery of broadband content. Our subscriber growth and the
introduction of @Home 2000 have resulted in substantial increases in traffic
across our network, which is expected to benefit our strategy of selling
bandwidth. We are also developing information and e-commerce services for small
and medium-size businesses, including our recently formed joint venture with Dow
Jones to develop Work.com, a comprehensive Internet portal for businesses.
Additionally, we acquired iMALL in 1999 to provide comprehensive e-commerce
solutions and hosting services for businesses. We recently integrated these
services into the Excite Network under ExciteStores and enhanced them with the
introduction of Freetailer, a free online storefront appealing to startup
e-commerce businesses that cannot afford, and do not yet need, fee-based
solutions. iMALL also develops e-commerce solutions for third parties, such as
the design and development of e-commerce payment gateways.
We believe that the growth potential of the Internet, especially broadband
online services, outside North America represents a compelling opportunity to
deploy our expertise on an international scale. The recently announced Excite
Chello joint venture is intended to combine our international operations and
assets with those of chello broadband in order to realize anticipated synergies
between our respective services, create economies of scale and secure funding
for aggressive expansion. The initial funding of Excite Chello will consist of
up to 400 million Euros, of which our share is 100 million Euros, or $94 million
at current exchange rates. Excite Chello will be equally owned and jointly
controlled by Excite@Home and UPC/UnitedGlobalCom. 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. As a result, we do not
13
<PAGE>
expect to report segment revenues, or the related costs and expenses, from
International starting in the fourth quarter of 2000. In addition to
contributing our @Home operations in five countries, we plan to contribute our
Excite-branded portal sites with locally-sourced content in Australia, Canada,
France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United
Kingdom. These assets and operations are generally managed through joint venture
operations with local partners in each country.
We believe that our future operating results will be impacted primarily by
the level of growth in our broadband subscriber base, monetizing broadband, and
to a lesser extent narrowband, traffic through media and advertising services,
developing e-commerce services on broadband platforms and leveraging our
broadband assets in other ways such as providing wholesale access to our
network, as well as the related costs and expenses required to achieve these
results.
Our upgraded cable footprint of 28 million North American homes and 4
million international homes, as well as the additional potential homes that are
expected to be upgraded by our cable partners in the near future, represent an
opportunity to accelerate our efforts to grow our broadband subscriber base.
These efforts include increased advertising and marketing to potential
customers, accelerated deployment of systems to support the availability through
retail channels and personal computer manufacturers of cable modems that are
based on the DOCSIS standard and are self-installable, development of
self-provisioning systems to enable customers to initiate the @Home service
without requiring a service technician, development and deployment of advanced
set-top systems utilizing the @Home service, expanding our customer care
organization and making infrastructure investments designed to stabilize and
scale our network to support subscriber growth. As a result of these efforts, we
expect increased levels of costs and expenses in the categories of operating
costs, product development and engineering and sales and marketing. Please see
Risk Factors for discussion of the risks and uncertainties regarding our
broadband services, subscriber business and cable partners, all of which could
negatively impact the growth and viability of our broadband subscriber base.
We believe that the growth of our broadband media and advertising service
revenues will be impacted by the growth in our broadband subscriber base and the
introduction of new services that leverage high-speed connectivity. During the
first half of 2000, the number of advertisers and other parties interested in
accessing our broadband subscriber base has increased. We plan to continue the
advertising and marketing of the Excite Network since we believe it represents a
viable revenue stream, provides a significant audience for all of our Internet
services and creates opportunities to promote awareness of existing and future
broadband services to narrowband users. Our strategy also includes providing
enhanced and upgraded features on our narrowband and broadband web properties
and making multiple access platforms available, such as our mobile and free
dialup services. The increased level of costs associated with these efforts are
expected to be sustained in the future and will result in higher costs and
expenses in the categories of operating costs, product development and
engineering and sales and marketing. Please see Risk Factors for discussion of
the risks and uncertainties regarding our business and our broadband and
narrowband services, all of which could negatively impact our ability to
generate revenues from broadband and narrowband media services and the growth in
users and market acceptance of these services.
We plan to expand our business-to-business services such as @Work, iMALL's
e-commerce solutions and hosting, wholesale access to our network, online
marketing and campaign management and website and e-commerce gateway development
as our broadband subscriber base grows. We intend to enhance existing services
and design new products and services leveraging our broadband subscribers and
other broadband assets and we therefore expect to incur increased levels of
costs and expenses to support these efforts.
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 for any of the periods ended
June 30, 2000 and 1999 to other periods are not relevant for the purposes of
indicating revenue growth in 2000 and future periods.
As of June 30, 2000, our reported business segments consisted of Media and
Advertising Services, Subscriber Network and Other Services, and International.
Previously, International was reported as a component primarily of
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<PAGE>
Subscriber Network and Other Services. International includes revenues derived
from our operations outside of North America consisting primarily of revenues
earned by our consolidated subsidiaries and revenues earned from our
unconsolidated joint ventures in Australia, Japan and several European
countries. The following represents revenues for our reported business segments
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 Change 1999
----------- -------- -----------
<S> <C> <C> <C>
Media and Advertising Services................................. $ 74,737 77% $42,315
Subscriber Network and Other Services.......................... 66,248 151% 26,429
International.................................................. 7,736 330% 1,798
-------- --- -------
Total consolidated revenues............................... $148,721 111% $70,542
======== === =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 Change 1999
----------- -------- -----------
<S> <C> <C> <C>
Media and Advertising Services................................. $150,960 230% $45,777
Subscriber Network and Other Services.......................... 121,692 162% 46,516
International.................................................. 14,132 322% 3,347
-------- --- -------
Total consolidated revenues............................... $286,784 200% $95,640
======== === =======
</TABLE>
Media and Advertising Services
Revenues derived from Media and Advertising Services were $74.7 million, or
50% of total revenues, for the three months ended June 30, 2000 as compared to
$42.3 million, or 60% of total revenues, for the three months ended June 30,
1999. A portion of the increase in Media and Advertising Services revenues 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 increase is primarily
a result of increased traffic on the Excite Network as measured by page views,
which increased by 69% from an average of approximately 81 million per day in
June 1999 to an average of approximately 137 million per day in June 2000.
However, a significant portion of the increase in average daily page views
resulted from Bluemountain.com, which was added to the Excite Network in
December 1999 and did not historically generate significant revenues, and as a
result, currently has substantially lower revenues per page view as compared to
most other areas of the Excite Network. Our average daily page views on the
Excite Network have generally increased over prior periods, although there was a
decrease from 144 million during March 2000 to 137 million during June 2000. The
level of average daily page views is subject to various factors, including among
others, seasonality in our business and Internet usage in general and
competition from other Internet services. While our average revenue per page
view in narrowband has declined in 2000, our pricing has remained stable.
Revenues generated from Media and Advertising Services prior to the acquisition
of Excite were primarily from advertising and related services provided over the
@Home broadband portals.
Revenues derived from Media and Advertising Services were $151 million, or
53% of total revenues, for the six months ended June 30, 2000 as compared to
$45.8 million, or 48% of total revenues, for the six months ended June 30, 1999.
This increase is due primarily to the acquisition of Excite in May 1999 as well
as the increase in traffic on the Excite Network in the 2000 periods as compared
to 1999.
We expect to generate Media and Advertising Services revenues in the future
primarily as a result of advertising delivered through online means, such as e-
mail, the Excite Network and the @Home 2000 broadband portal and as measured
primarily by average daily page views and average time spent online. Our @Home
2000 service features a broadband version of the Excite portal as the default
broadband home page for @Home subscribers. We believe that our Media and
Advertising Services revenues from broadband will increase at a greater rate
going forward than from narrowband as our pricing and average revenue per
thousand page views are significantly higher for broadband. Also, we intend to
increase our product development efforts toward broadband and utilize our
narrowband services for online marketing of our broadband services. Please see
Risk Factors for further discussion of factors that may affect our ability to
generate revenues from Media and Advertising Services in the future.
Subscriber Network and Other Services
Revenues from Subscriber Network and Other Services increased to $66.2
million, or 45% of total revenues, for the three months ended June 30, 2000,
from $26.4 million, or 37% of total revenues, for the three months ended June
30, 1999. Such revenues increased to $121.7 million, or 42% of total revenues,
for the six months ended June 30,
15
<PAGE>
2000, from $46.5 million, or 49% of total revenues, for the six months ended
June 30, 1999. These increases in Subscriber Network and Other Services revenues
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 revenues for both the three and six months ended June
30, 2000 and 70% for both the three and six months ended June 30, 1999.
Subscriber Network and Other Services revenues generated by the @Home service
increased by approximately 180% and 200% for the three and six months,
respectively, ended June 30, 2000 as compared to the same periods in 1999,
primarily due to the growth in the number of subscribers. The number of @Home
subscribers increased by approximately 250% from 330,000 as of December 31, 1998
to approximately 1.1 million as of December 31, 1999 and by approximately 190%
from 620,000 as of June 30, 1999 to approximately 1.8 million as of June 30,
2000. Revenues from the @Home service vary by cable partner and market, but
typically represent 35% of the average $40 per month fee collected from each
subscriber by our cable partners. 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%. Also, subscribers that choose to purchase their own modems
pay a reduced monthly fee, and our cable partners may offer incentives to new
subscribers including reduced price or free service for up to several months. As
a result of the above factors, revenues from the @Home service may not correlate
directly with subscriber growth rates and may lag the growth in subscribers.
The number of markets and households that our cable partners upgrade to
receive our services and the subscriber penetration rates in those markets will
determine the source and amount of revenues from the @Home service in future
periods. As of June 30, 2000, the markets of our cable partners in North America
included approximately 59 million households, of which approximately 47% were
capable of receiving our services. Please see Risk Factors for further
discussion of factors that may affect our ability to generate Subscriber Network
and Other Services revenues from the @Home service in the future.
@Work Service. The @Work service represented approximately 20% of Subscriber
Network and Other Services revenues for both the three and six months ended June
30, 2000 and 30% for both the three and six months ended June 30, 1999. @Work
Subscriber Network and Other revenues increased by approximately 80% for both
the three and six months ended June 30, 2000 as compared to the same periods in
1999, primarily as a result of the increase in the number of @Work customers.
The number of @Work customers grew by approximately 200% from 1,700 as of
December 31, 1998 to 5,100 as of December 31, 1999 and by approximately 150%
from 3,100 as of June 30, 1999 to 7,600 as of June 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 used by customers. Network
traffic generated from @Work customers, including content delivery networks, can
be estimated by average bandwidth sold on our backbone. Average bandwidth sold
increased by approximately 300% from approximately 0.3 gigabits per second as of
June 30, 1999 to 1.1 gigabits per second as of June 30, 2000. We expect that
content delivery networks and other parties that need access to bandwidth over a
private network will impact average bandwidth sold in the future.
International
Revenues from International increased to $7.7 million, or 5% of total
revenues, for the three months ended June 30, 2000, from $1.8 million, or 3% of
total revenues, for the three months ended June 30, 1999. International revenues
increased to $14.1 million, or 5% of total revenues, for the six months ended
June 30, 2000 from $3.3 million, or 3% of total revenues, for the six months
ended June 30, 1999. International revenues earned from our unconsolidated joint
ventures were $4.9 million and $1.7 million for the three months ended June 30,
2000 and 1999, respectively, and were $9 million and $3.2 million for the six
months ended June 30, 2000 and 1999, respectively. International revenues earned
by our consolidated operations outside of North America were $2.8 million and
$0.1 million for the three months ended June 30, 2000 and 1999, respectively,
and were $5.1 million and $0.1 million for the six months ended June 30, 2000
and 1999, respectively. The increase in International revenues was due primarily
to more consulting services provided to our international joint ventures in the
three and six months ended June 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.
Revenues from International exclude revenues 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
16
<PAGE>
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 June 30, 2000, the markets of our international joint ventures
included approximately 13.5 million cable households in five countries, of which
approximately 33% were upgraded to receive the @Home service, and approximately
0.1 million subscribers were using or being converted to the @Home service.
Local versions of the Excite portal are available in ten 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
revenues, as well as the related costs and expenses, will be substantially
reduced.
Revenues from related parties
Revenues from related parties were $12.1 million, or 8% of total revenues,
for the three months ended June 30, 2000, as compared to $7 million, or 10% of
total revenues, for the three months ended June 30, 1999. For the six months
ended June 30, 2000 and 1999, revenues from related parties were $24.2 million
and $12.4 million, respectively. One component of revenues from related parties
consists of revenues from our principal cable partners which are generated from
advertising arrangements, support services such as customer support, local area
content development, development of set-top devices and pre-commercial
deployment consulting. Revenues from our principal cable partners were $6.9
million and $5.1 million for the three months ended June 30, 2000 and 1999,
respectively, and were $13.9 million and $9 million for the six months ended
June 30, 2000 and 1999, respectively. The remaining revenues from related
parties of $5.2 million and $1.9 million for the three months ended June 30,
2000 and 1999, respectively, and $10.3 million and $3.4 million for the six
months ended June 30, 2000 and 1999, respectively, were earned primarily from
consulting and other services rendered to our international joint ventures
reimbursed on a cost-plus basis.
Revenues 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 @Work and @Home
subscribers. Services provided in connection with these arrangements generally
consist of the delivery of advertising impressions, e-commerce sponsorship
agreements and revenue share arrangements on our web sites. Revenues under these
arrangements are recognized based upon the fair value of the services provided
and were $16.2 million and $7.3 million for the three months ended June 30, 2000
and 1999, respectively, and were $28.5 million and $8.3 million for the six
months ended June 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 revenues
Revenues 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, were $10.2 million and $6.4 million for the three
months ended June 30, 2000 and 1999, respectively, and were $18.6 million and
$6.4 million for the six months ended June 30, 2000 and 1999, respectively.
Revenues from barter transactions are recorded at the lower of the fair value of
the services provided or the services or products received. Barter transactions
involving the exchange of services generally result in the recognition of
equivalent amounts of revenue and expense.
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 for any of the periods ended June 30, 2000 and 1999 to other periods
are not relevant for purposes of indicating the trend of our costs and expenses
in 2000 and future periods.
17
<PAGE>
Our costs and expenses were as follows for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 Change 1999
----------- ----- -----------
<S> <C> <C> <C>
Costs and expenses:
Operating costs....................................................... $ 69,363 138% $ 29,084
Product development and engineering................................... 26,813 138% 11,281
Sales and marketing................................................... 74,254 194% 25,274
General and administrative............................................ 17,798 177% 6,423
----------- ----- -----------
Total costs and expenses excluding costs and amortization
related to acquisitions and distribution agreements................... 188,228 161% 72,062
Cost and amortization of distribution agreements...................... 28,166 51% 18,703
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-related costs........... 589,317 195% 199,451
----------- ----- -----------
Total costs and expenses................................................. $ 805,711 178% $ 290,216
=========== ===== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 Change 1999
----------- ----- -----------
<S> <C> <C> <C>
Costs and expenses:
Operating costs....................................................... $ 126,602 166% $ 47,684
Product development and engineering................................... 47,788 169% 17,748
Sales and marketing................................................... 131,180 298% 32,950
General and administrative............................................ 28,522 171% 10,526
----------- ----- -----------
Total costs and expenses excluding costs and amortization
related to acquisitions and distribution agreements................... 334,092 207% 108,908
Cost and amortization of distribution agreements...................... 122,131 262% 33,723
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-related costs........... 1,162,450 464% 206,184
----------- ----- -----------
Total costs and expenses................................................. $ 1,618,673 364% $ 348,815
=========== ===== ===========
</TABLE>
Operating costs
Operating costs are primarily related to maintaining the @Home network and
our Internet web sites and include telecommunication, web hosting and technical
support costs such as personnel, access fees and equipment depreciation, as well
as royalties, license agreements and revenue sharing arrangements for content
and other services. Operating costs in our media and advertising business are
typically lower than the operating costs related to the @Home broadband network.
Operating costs increased by 138% to $69.4 million, or 47% of total revenues,
for the three months ended June 30, 2000, from $29.1 million, or 41% of total
revenues, for the three months ended June 30, 1999. Operating costs increased by
166% to $126.6 million, or 44% of total revenues, for the six months ended June
30, 2000, from $47.7 million, or 50% of total revenues, for the six months
ended June 30, 2000. Of the total increase for both the three months and six
months ended June 30, 2000 over the same periods in 1999, approximately
three-fourths was due to higher customer service, technical support and
telecommunications costs to support the increase in our @Home subscriber base,
@Work customers and users of the Excite Network, and approximately one-fourth
was due directly 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 to $79.4 million, or 53% of total revenues, for the three
months ended June 30, 2000, from $41.5 million, or 59% of total revenues, for
the quarter ended June 30, 1999. Gross margin increased to $160.2 million, or
56% of total revenues, for the six months ended June 30, 2000 from $48 million,
or 50% of total revenues, for the six months ended June 30, 1999. The increase
in gross margin for the three and six months ended June 30, 2000 over the same
periods in 1999 was primarily due to economies of scale created by our growing
subscriber base as well as a greater amount of media and advertising revenues
recorded in the 2000 periods due to
18
<PAGE>
our acquisition of Excite in May 1999. Media and advertising revenues
historically have lower direct costs than subscriber network revenues.
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 138% to $26.8 million, or 18% of total
revenues, for the three months ended June 30, 2000, from $11.3 million, or 16%
of total revenues, for the three months ended June 30, 1999. Product development
and engineering expenses increased by 169% to $47.8 million, or 17% of total
revenues, for the six months ended June 30, 2000 from $17.7 million, or 19% of
total revenues, for the six months ended June 30, 1999. Approximately one-half
of the increase in product development and engineering costs during both the
three and six months ended June 30, 2000 as compared to the same periods in 1999
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. The
remaining one-half of the increase was primarily related to development and
engineering costs associated with enhancing the stability and scalability of the
@Home broadband network.
We anticipate that product development and engineering expenses will
continue to increase in the future on an absolute dollar basis, and as a
percentage of revenues in 2000, 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, iMALL, 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 194% to $74.3 million, or 50% of
total revenues, for the three months ended June 30, 2000, from $25.3 million, or
36% of total revenues, for the three months ended June 30, 1999. Sales and
marketing expenses increased by 298% to $131.2 million, or 46% of total
revenues, for the six months ended June 30, 2000 from $33 million, or 34% of
total revenues, for the six months ended June 30, 1999. Approximately two-thirds
of the increase in sales and marketing expenses for both the three and six
months ended June 30, 2000 as compared to the same periods in 1999 was related
to our acquisition of Excite in May 1999, including a higher level of sales,
marketing and advertising costs related to the Excite Network in the current
year. The remainder of the increase was attributable to increases in sales and
marketing costs in equal amounts related to @Home subscriber acquisition
efforts, our commercial services which include @Work and iMall and international
expansion.
19
<PAGE>
We expect that sales and marketing expenses will continue to increase on an
absolute dollar basis in the future, and as a percentage of revenues in 2000,
primarily due to:
. an increase in our sales efforts with respect to our broadband media
services, such as the @Home 2000 broadband portal;
. expanded marketing campaigns and greater use of media advertising and
promotions in an effort to create and maintain brand loyalty among
narrowband and broadband subscribers;
. 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 177% to $17.8 million, or 12% of total
revenues, for the three months ended June 30, 2000, from $6.4 million, or 9% of
total revenues, for the three months ended June 30, 1999. General and
administrative expenses increased by 171% to $28.5 million, or 10% of total
revenues, for the six months ended June 30, 2000 from $10.5 million, or 11% of
total revenues, for the six months ended June 30, 1999. The increase in general
and administrative expenses for both the three and six months ended June 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 was $28.2 million and $18.7
million for the three months ended June 30, 2000 and 1999, respectively, and was
$122.1 million and $33.7 million for the six months ended June 30, 2000 and
1999, respectively. Cost and amortization of distribution agreements consist
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 issued to cable partners as incentives under exclusive distribution
agreements are recorded as intangible assets at fair value when the performance
criteria are met, and the intangible assets are amortized over the remaining
terms of the distribution agreements, which expire at various dates through
2005. We recorded distribution agreements of $13 million and $81.6 million
during the six months ended June 30, 2000 and 1999, respectively. Amortization
of distribution agreements was $23.4 million and $18.8 million during the three
months ended June 30, 2000 and 1999, respectively, and was $46.6 million and
$33.5 million for the six months ended June 30, 2000 and 1999, respectively. The
increase in amortization of distribution agreements for both the three and six
months ended June 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.
Warrants that vest based on performance incentives, but were not issued in
connection with an exclusive distribution agreement, are charged to operations
as such warrants are earned, amounting to $4.9 million for the three months
ended June 30, 2000; there were no such charges for the three months ended June
30, 1999. Cost of warrants charged to operations was $75.6 million and $0.3
million for the six months ended June 30, 2000 and 1999, respectively. The
increase in the cost of these performance incentives in 2000 compared to 1999
was primarily attributable to our cable partners achieving performance
milestones which significantly increased the number of warrants earned.
20
<PAGE>
We will incur a minimum of approximately $24 million per quarter for
amortization of our distribution agreements through the first half of 2002 and
lesser amounts thereafter until our distribution agreements fully expire in
2005. In addition, our new distribution agreements with AT&T, Comcast and Cox
provide for the issuance of warrants to purchase approximately 100 million
shares of our common stock. 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.
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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Amortization of goodwill and acquired intangible
assets.............................................. $ 581,074 $ 153,371 $ 1,148,422 $ 160,104
Amortization of acquisition-related deferred
compensation........................................ 5,331 -- 10,235 --
Write-off of purchased in-process research and
development......................................... -- 34,400 -- 34,400
Compensation expense from acquisition-related
acceleration of stock option vesting................ -- 7,900 -- 7,900
Other acquisition-related costs....................... 2,912 3,780 3,793 3,780
------------ ------------ ------------- ------------
Total acquisition-related costs and expenses.......... $ 589,317 $ 199,451 $ 1,162,450 $ 206,184
============ ============ ============= ============
</TABLE>
Amortization of goodwill and intangible assets. Amortization of goodwill and
acquired intangible assets during the three and six months ended June 30, 2000
was $581.1 million and $1,148.4 million, respectively, as compared to $153.4
million and $160.1 million during the respective periods in 1999. Goodwill and
acquired intangible assets resulted primarily from our acquisition of Excite in
May 1999, iMALL in October 1999 and Bluemountain.com in December 1999. We expect
to incur goodwill and intangible asset amortization charges of 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 intangible asset amortization charges
related to our acquisitions of Kendara, Worldprints, DataInsight and other
acquisitions in the future.
Amortization of deferred compensation. Amortization of deferred compensation
related to acquisitions was $5.3 million and $10.2 million for the three and six
months ended June 30, 2000; there was no amortization of acquisition-related
deferred compensation for the three and six months ended June 30, 1999.
Acquisition-related deferred compensation resulted from our assumption of stock-
based awards held by employees of Bluemountain.com and Webshots prior to the
acquisition of these entities 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. 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 six months ended June 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. Such cost consisted of $34.4
million for the three and six months ended June 30, 1999 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
three months ended June 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 acquisition of Excite, iMALL and Bluemountain.com,
were $3.3 million and $3.8 million for the three months ended June 30, 2000 and
1999, respective, and were $3.8 million for both the six months ended June 30,
2000 and 1999. Such costs were primarily related to integration costs
21
<PAGE>
for personnel, systems and technology. We expect to incur additional integration
and other costs in the future related to our acquisitions.
Interest and Other Income, Net
Our net interest and other income consisted of the following amounts for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------
2000 Change 1999
----------- --------- ---------
<S> <C> <C> <C>
Interest and other income........................................ $ 11,989 111% $ 5,682
Interest and other expense....................................... (11,131) 247% (3,210)
----------- --------- ---------
Total interest and other income, net........................... $ 858 (65)% $ 2,472
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
2000 Change 1999
----------- --------- ---------
<S> <C> <C> <C>
Interest and other income........................................ $ 26,213 143% $ 10,789
Interest and other expense....................................... (22,162) 303% (5,506)
----------- --------- ---------
Total interest and other income, net........................... $ 4,051 (23)% $ 5,283
=========== ========= =========
</TABLE>
Net interest and other income decreased to $0.9 million for the three months
ended June 30, 2000 from $2.5 million for the three months ended June 30, 1999
and decreased to $4 million for the six months ended June 30, 2000 from $5.3
million for the six months ended June 30, 1999. The decrease in net interest and
other income for both the three and six months ended June 30, 2000 from the same
periods in 1999 was due primarily to the faster increase in interest and other
expense as compared to the increase in interest and other income. The increase
in interest and other income for both the three and six months ended June 30,
2000 as compared to the same periods in 1999 was primarily due to higher market
interest rates in 2000 and higher short-term investment balances in 2000
resulting from the funds received in our private offering of convertible
subordinated debt in December 1999. The increase in interest and other expense
for both the three and six months ended June 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
are used to fund operations and for non-interest bearing investment purposes.
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 $12.1 million and $0.7 million for the three months ended
June 30, 2000 and 1999, respectively, and was $16.9 million and $0.7 million for
the six months ended June 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 consider these affiliated companies to be related
parties. Our net investments under the equity method were $52.2 million as of
June 30, 2000 and $19 million as of December 31, 1999. The increase generally
represents cash investments made by us during the six months ended June 30, 2000
net of our equity share of losses during that period. 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.
Realized Gain on Investment
We recognized a gain of $12.6 million during the six months ended June 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.
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes during the three and six months ended June 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 June 30, 2000.
22
<PAGE>
Net Loss
Our net losses for the three months ended June 30, 2000 and 1999 were $668.3
million and $217.9 million, respectively. For the six months ended June 30, 2000
and 1999, our net losses were $1,344.8 million and $236.1 million, respectively.
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 income (loss) was $(38.6) million and $1 million
for the three months ended June 30, 2000 and 1999, respectively, and was $(43.3)
million and $(8) million for the six months ended June 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 June 30, 2000, our principal
source of liquidity was approximately $388.7 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 $67 million from $224.5 million
as of December 31, 1999 to $157.5 million as of June 30, 2000. This decrease
resulted from cash used in operating activities of $14.7 million, cash used in
investing activities of $90.2 million and cash provided by financing activities
of $37.9 million during the six months ended June 30, 2000. Cash used in
operating activities of $14.7 million included a net loss of $1,344.8 million
offset by non-cash charges of $1,345.7 million related to depreciation and
amortization of distribution agreements, acquisition-related amounts, deferred
compensation and other amounts, and a net increase of $15.6 million in operating
assets and liabilities utilizing cash. Cash used in investing activities of
$90.2 million included net purchases of equipment of $78.7 million, net
purchases of other investments of $12.5 million, payments under our backbone
agreement of $12 million, investment in joint ventures of $49.9 million and cash
paid in business combinations net of cash received of $6.6 million, offset by
net sales and maturities of short-term investments of $69.5 million. Cash
provided by financing activities of $37.9 million included net proceeds from the
issuance of common stock of $63.3 million offset by payments under capital
leases of $25.8 million.
We intend to make investments in our infrastructure of approximately $250
million in 2000, including investments in our network designed to provide
stability and scalability. Such investments for the six months ended June 30,
2000 were $116.5 million, including purchases of property, equipment and
improvements, payment 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. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. Financing may not be available on terms acceptable to us or at
all.
23
<PAGE>
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 are required to make remaining
payments totaling $45 million in 2000. We have paid approximately $12 million to
date in 2000 and will make additional payments of $33 million during the year.
We expect to make additional disbursements of approximately $5 million per year
during the 20-year term of this agreement for co-location space, equipment and
support and maintenance fees.
As of June 30, 2000, we had commitments under our capital leases and other
equipment financings to repay approximately $133 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 June 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 approximately $94 million, at current exchange
rates, in Excite Chello over the next several months.
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 milion per
month.
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 because of a number of factors.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control.
These factors include:
. subscribers 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;
24
<PAGE>
. 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;
. 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 June 30, 2000, we had an accumulated deficit of 3,030 million,
which includes depreciation and amortization, cost and amortization of
acquisition-related intangibles and deferred compensation and cost and
amortization of distribution agreements of approximately 2,955 million since
inception. In addition, we currently intend to increase capital expenditures and
operating expenses in order to expand our network, market and provide our
broadband services to potential subscribers and expand our international
operations. As a result of the acquisitions of Excite, iMALL, Bluemountain.com
and other companies, we anticipate that we will incur substantial non-cash
charges including 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;
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. 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
purchase goods or services advertised on Bluemountain.com in sufficient
quantities.
During 2000, we have acquired Kendara, Inc., Worldprints.com International,
Inc., DataInsight, Inc. and Join Systems, Inc., and we may acquire other
companies during 2000. These companies have specific technology and other
capabilities that we may not be able to successfully integrate with our services
or transition to our online platforms. As a result, we may incur unexpected
integration and product development expenses that could harm our results of
operations. We may also be required to record charges to operations related to
the impairment of acquired technology or other intangible assets.
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.
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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 depend on the sale of advertisements on our services, and if online
advertising does not become accepted, or if users employ new technology to block
or filter online advertising, our business would be harmed.
We expect to derive a substantial amount of our revenues from the sale of
advertising on our services for the foreseeable future. No standards have been
widely accepted to measure the effectiveness of online advertising. If standards
do not develop, existing advertisers may not continue their current levels of
online advertising. Furthermore, advertisers that have traditionally relied upon
other advertising media may be reluctant to advertise online. Advertisers that
already have invested substantial resources in other advertising methods may be
reluctant to adopt a new strategy. Our business would be harmed if the market
for online advertising fails to develop or develops more slowly than expected.
Different pricing models are used to sell online advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project future advertising rates and revenues. For
example, advertising rates based on the number of "click throughs," or user
requests for additional information made by clicking on the advertisement,
instead of rates based solely on the number of impressions, or number of times
an advertisement is displayed, could adversely affect our revenues because
impression-based advertising comprises a substantial majority of our current
advertising revenues. Our advertising revenues could be harmed if we are unable
to adapt to new forms of online advertising.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to a web user's computer are available. Other software programs
are able to hide a web user's identity and prevent "cookies" from being written
to, or read from, the user's hard drive. Cookies are bits of information keyed
to a specific memory location and passed to a web site server through the user's
browser software. This software prevents the proper operation of our services,
including personalization of the My Excite Start Page and targeted banner
advertising. Widespread adoption of software products such as these could reduce
the attractiveness of our personalization features and harm the commercial
viability of online advertising.
We must develop and maintain the awareness of our brands to attract consumers
and advertisers.
Maintaining and strengthening our brands is critical to achieving widespread
acceptance of our services by consumers and advertisers, particularly in light
of the competitive nature of our markets. Promoting and positioning our brands
will depend largely on the success of our marketing efforts and our ability to
provide high quality services. We may find it necessary to increase our
marketing budget or otherwise increase our financial commitment to creating and
maintaining brand loyalty among users. If we fail to promote and maintain our
brands or incur excessive expenses in an attempt to promote and maintain our
brands, our business could be harmed.
Privacy concerns could lead to legislation or new technology that could make it
more difficult for us to deliver targeted advertising.
Due to privacy concerns, some Internet commentators, consumer advocates and
governmental officials have suggested that the use of cookies be limited or
eliminated. In addition, certain currently available web browsers allow a user
to delete cookies or prevent cookies from being stored on the user's hard drive,
and technology that shields e-mail addresses, cookies and other electronic means
of identification could become commercially accepted. Any reduction or
limitation in the use of cookies through legislation, new technology or
otherwise, could limit the effectiveness of our ad targeting, which could harm
our business.
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We could face liability related to the privacy of personal information about our
users.
Our narrowband services use cookies to deliver targeted advertising, help
compile demographic information about users and limit the frequency with which
an advertisement is shown to the user. Cookies are placed on the user's hard
drive, often without the user's knowledge or consent. We could face liability
relating to the collection and use of this information, as well as other misuses
such as unauthorized marketing. The Federal Trade Commission and some states
have been investigating Internet companies regarding their use of personal
information, and some groups have initiated legal action against Internet
companies regarding their privacy practices. In addition, the United States
federal and various state governments have proposed new laws restricting the
collection and use of information regarding Internet users. We could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if government agencies choose to investigate our privacy
practices.
The sponsorship advertising we sell subjects us to financial and other risks.
We derive a substantial portion of our revenues from sponsorship
arrangements. These are advertising relationships under which third parties
receive sponsored services and placements on our services in addition to
traditional banner advertisements across our services. These arrangements expose
us to potential financial risks, including the risk that we fail to deliver
required minimum levels of user impressions, that third party sponsors do not
perform their obligations under these agreements, or that they do not renew the
agreements at the end of their term. These arrangements also require us to
integrate sponsors' content with our services, which can require the dedication
of resources and programming and design efforts to accomplish. We may not be
able to attract additional sponsors or renew existing sponsorship arrangements
when they expire.
In addition, we have granted exclusivity provisions to some of our sponsors,
and may in the future grant additional exclusivity provisions. These exclusivity
provisions may have the effect of preventing us from accepting advertising or
sponsorship arrangements from certain advertisers during the term of the
agreements. Our inability to enter into further sponsorship or advertising
arrangements as a result of any exclusivity arrangements could harm our
business.
Our equity investments in other companies may not yield any returns.
We have made 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 equity investments. We intend to continue to invest
in illiquid securities of private companies and in joint ventures in the future.
Losses or charges resulting from these investments could harm our operating
results.
We must maintain the security of our networks.
We have in the past experienced security breaches in our networks. We have
taken steps to prevent these breaches, to prevent users from sharing files via
the @Home service and to protect against bulk unsolicited e-mail. However,
actual problems with, as well as public concerns about, the security, privacy
and reliability of our networks may inhibit the acceptance of our services.
The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications over the
Internet. Any well-publicized compromise of security could deter more people
from using the Internet or our services to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Because many of our advertisers seek to encourage people to use the Internet to
purchase goods or services, our business could be harmed if this were to occur.
We may also incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by these breaches.
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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 $94
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, 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 we have announced intentions 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 by the joint venture partners.
We may be liable for our links to third-party web sites.
We could be exposed to liability with respect to the third-party web sites
that may be accessible through our services. These claims may allege, among
other things, that by linking to web sites operated by third parties, we may be
liable for copyright or trademark infringement or other unauthorized actions by
third parties through these web sites. Other claims may be based on errors or
false or misleading information provided by our services. Our business could be
harmed due to the cost of investigating and defending these claims, even to the
extent these types of claims do not result in liability.
We may face potential liability from our electronic commerce-related advertising
arrangements.
Some of our advertising relationships provide that we may receive payments
based on the amount of goods or services purchased by consumers clicking from
our services to a seller's web site. These arrangements may expose us to legal
risks and uncertainties, including potential liabilities to consumers of the
advertised products and services. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or may not be adequate
to indemnify us for all liability that may be imposed.
Some of the liabilities that may result from these arrangements include:
. potential liabilities for illegal activities that may be conducted by
the sellers;
. product liability or other tort claims relating to goods or services
sold through third-party e-commerce sites;
. claims for consumer fraud and false or deceptive advertising or sales
practices;
. breach of contract claims relating to purchases; and
. claims that items sold through these sites infringe third-party
intellectual property rights.
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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 prevented from using the
rights in the future.
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 4.75% 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 June 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.
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 2,500 employees at June 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.
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Government regulation and legal uncertainties relating to the Internet could
hinder the popularity of the Internet.
New Internet privacy and other laws. There are currently few laws or
regulations that specifically regulate communications or commerce on the
Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, content and the characteristics
and quality of products and services. For example:
. The United States federal government and various state governments have
proposed limitations on the collection and use of information regarding
Internet users.
. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. This could
increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the Internet
could harm our business.
Tax laws. The tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made at the federal, state
and local level and by certain foreign governments that could impose taxes on
the sale of goods and services and certain other Internet activities. Our
business may be harmed by the passage of laws in the future imposing taxes or
other burdensome regulations on online commerce.
Other jurisdictions. Because our service is available in multiple states and
foreign countries, these jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each of these states and foreign
countries. If we fail to qualify as a foreign corporation in a jurisdiction
where we are required to do so, we could be subject to taxes and penalties.
We could face liability for defamatory or indecent content provided on our
services.
Claims could be made against Internet and online service providers under
both United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of the
materials disseminated through their networks. Several private lawsuits seeking
to impose this liability are currently pending against Internet and online
services providers. Our insurance may not adequately protect us from these types
of claims.
In addition, legislation has been proposed that prohibits, or imposes
liability for, transmission over the Internet of indecent content. The
imposition upon Internet and online service providers of potential liability for
information carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to this liability. This may require
that we expend substantial resources or discontinue service or product
offerings. The increased focus on liability issues as a result of these lawsuits
and legislative proposals could impact the growth of Internet use. Furthermore,
governments of some foreign countries, such as Germany, have enacted laws and
regulations governing content distributed over the Internet that are more strict
than those currently in place in the United States. One or more of these factors
could significantly harm our business.
Our future success depends on our ability to attract, retain and motivate highly
skilled employees.
Our future success depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in the Internet industry is
intense, particularly in the Silicon Valley where we are headquartered. Due to
the recent decline in the trading price of our common stock, we may face
challenges in attracting and retaining employees. Additionally, the exercise
price of a significant portion of our equity awards such as stock options may be
higher than the current trading price of our stock, and such stock options may
not retain the incentive effect intended at the time of issuance. We may issue
additional equity awards from time to time to retain employees and this may
dilute existing shareholders. We may be unable to attract, assimilate or retain
other highly qualified employees in the future. We have from time to time
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. Recently, several
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members of executive management have resigned from our company, and although we
have replaced most of these employees, the new employees have generally not had
previous experience working with each other or other members of executive
management. The risk of attracting and retaining qualified employees is
compounded by the fact that we are controlled by our principal cable partners or
by AT&T alone if the new distribution agreements with our cable partners become
effective, and therefore we may not have the same flexibility as a typical
Silicon Valley company to pursue initiatives proposed by management.
Furthermore, certain key employees possess marketing, technical and other
expertise which is important to the operations of our business, and if these
employees leave, we may not be able to replace them with employees possessing
comparable skills.
Risks Relating to Excite@Home's Broadband Services
Our broadband business is unproven, and it may not achieve profitability.
The profit potential of our broadband business model is unproven and our
broadband services may not achieve 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.
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 scalability and speed of our @Home broadband network,
customers will not accept our broadband services.
Due to the limited deployment of our broadband services, the ability of our
broadband network to connect and manage a substantial number of subscribers at
high transmission speeds is unknown. Therefore, we face risks related to our
network's ability to be scaled up to accommodate increased subscriber levels
while maintaining performance. Our network may be unable to achieve or maintain
a high speed of data transmission, especially as the number of our subscribers
increases. Because of our reliance on regional data centers and the cable
infrastructure located in particular geographic areas to support our broadband
services, our and our cable partners' infrastructure must also be able to
accommodate increased subscribers in a particular area. If the existing
infrastructure for a geographic area does not accommodate additional
subscribers, network performance for an area could decline causing us to lose
subscribers in that area, especially if a cable partner was unwilling to upgrade
its infrastructure in that area.
In recent periods, the performance of the @Home network has experienced some
deterioration in some markets partially as a result of subscriber abuse of the
@Home service. While we are seeking to eliminate this abuse by
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enforcing our acceptable-use policy and by limiting users' upstream bandwidth,
our failure to do so may result in slower network performance and reduced
customer demand for our services.
If new "DOCSIS" compliant and self-installable cable modems are not deployed
timely and successfully, our subscriber growth could be constrained.
Currently, each of our subscribers must typically obtain a cable modem from
a cable partner to access the @Home service. The North American cable industry
has adopted interface standards known as DOCSIS for hardware and software to
support the delivery of data services over the cable infrastructure utilizing
compatible cable modems. Some of our cable partners have chosen to delay
deployments of the @Home service until the commercial availability of
DOCSIS-compliant cable modems is widespread, among other reasons. Also, cable
modem manufacturers have experienced, and may continue to experience, production
and delivery problems with cable modem components that may restrict the number
of modems available. 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. 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 and if such modems do not become widely
available through channels such as retail and pre-installment by personal
computer manufacturers.
We believe that our ability to meet our subscriber goals depends on the
degree to which two-way cable modems become widely available in channels such as
personal computer manufacturers and retail outlets. Currently, this widespread
availability has not yet occurred. In addition, these modems must be easy for
consumers to install themselves, rather than requiring a customer service
representative to perform the installation. Additionally, the success of
self-installable cable modems depends on our ability to deploy systems that
allow customers to self-provision the @Home service through online and other
means. If two-way cable modems do not become quickly available in outlets other
than through cable television companies, 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.
Our broadband business may be impacted by cable access proposals and other
government regulation.
Currently, our broadband services are not directly subject to regulations of
the Federal Communication Commission or any other federal, state or local
communications regulatory agency. However, there may be changes in the
regulatory environment relating to the Internet, cable television or
telecommunications markets. These changes could require regulatory compliance by
us, impact our exclusivity arrangements or limit our ability to provide
broadband services to our subscribers, and therefore could adversely affect our
revenues and results of operations. Such possible government regulations include
the following:
. The FCC 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 imposed third-party access requirements on AT&T and other cable
companies operating in those communities. The U.S. 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 these circuit court decisions are
not binding on other circuits, courts in those circuits could decide
that their local jurisdictions have rights to
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impose third-party access requirements. In addition, local jurisdictions
could try to impose similar requirements under various other legal
theories.
. Other litigation. In October 1999, GTE filed a lawsuit in a U.S.
District Court and in November 1999, a class action was filed, each
alleging violations by us of the federal antitrust laws. Although it is
too early to predict the outcome of this litigation, we could be forced
to pay damages, allow other service providers to utilize our network,
otherwise alter the way we do business or incur significant costs in
defending these litigations. Any of these outcomes could harm our
business. In addition, others could initiate litigation on similar legal
theories in the future.
. Federal regulation. Regulatory changes that affect telecommunications
costs, limit usage of subscriber-related information or increase
competition from telecommunications companies could affect our pricing
or ability to market our broadband services successfully. For example,
changes in the regulation of cable television rates may affect the speed
at which our cable partners upgrade their cable systems to carry our
broadband services.
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. Media One 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. If the advanced services offered by these
companies are deregulated, this would further enhance the ability of
these companies to compete against our services.
. Internet and online service providers. We compete with Internet service
providers that provide basic Internet access services, online service
providers such as America Online, and other Internet portals and online
services that have announced broadband strategies, such as Yahoo!.
. 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.
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The proposed merger between America Online and Time Warner Inc. creates
uncertainties about which cable markets will be served by Road Runner on an
exclusive or non-exclusive basis, and the merger may improve Road Runner's
ability to negotiate distribution agreements with cable system operators.
Additionally, our principal shareholder, AT&T, has a substantial ownership
interest in Time Warner and Road Runner due to AT&T's recent acquisition of
MediaOne. This relationship between America Online, AT&T, Time Warner and Road
Runner creates further uncertainties about which cable markets we will be able
to serve and under what terms. The proposed merger would also give America
Online, the 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.
Our dependence on our network to provide our broadband services exposes us to a
significant risk of system failure.
Our broadband service operations are dependent upon our ability to support
our highly complex network infrastructure and avoid damage from fires,
earthquakes, floods, power losses, telecommunications failures and similar
events. The occurrence of a natural disaster or other unanticipated problem at
our network operations center or at a number of our regional data centers could
cause interruptions in our broadband services. Additionally, failure of our
cable partners or companies from which we obtain data transport services to
provide the data communications capacity that we require, for example as a
result of natural disaster or operational disruption, could cause interruptions
in our broadband services. Any damage or failure that causes interruptions in
our network operations could harm our business.
Risks Related to Our Relationships With Our Cable Partners
The success of our business depends on our relationships with our cable
partners. We recently announced extended and modified distribution agreements
with AT&T, Comcast and Cox, which have not yet become effective, 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 June 30, 2000,
approximately 47% 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.
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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 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, we may not be able to
proceed with the transactions proposed by the letter agreement, which could
seriously harm our business.
On June 19, 2000, Cablevision filed a lawsuit in the Delaware Chancery Court
against Excite@Home, AT&T, Comcast, Cox and affiliated entities alleging, among
other things, that certain provisions of the letter agreement constitute an
amendment to the stockholders' agreement to which Cablevision is a party and
that Cablevision's consent is required for any such amendment. On June 22, 2000,
the parties amended the letter agreement in response to the Cablevision lawsuit.
As stated in the amendment, the court in the Cablevision action was advised that
the parties to the letter agreement have agreed not to consummate the new
distribution arrangements until at least the conclusion of the trial on the
merits in the Cablevision lawsuit. In addition, the date on which the parties
may first terminate the letter agreement if the new distribution arrangements
have not yet become effective was extended from September 30, 2000 to the
earlier of November 15, 2000 or 30 days after the final judgment in the
Cablevision litigation is no longer subject to appeal or review by the Delaware
courts. On June 30, 2000, we filed a counterclaim alleging that Cablevision has
breached its existing agreement with us. We believe that there is no legal merit
to Cablevision's claim, and we will continue to vigorously defend this action.
However, if Cablevision prevails, we may be required to amend or terminate the
letter agreement, or Cablevision may be allowed to terminate our distribution
agreement while retaining the right to exercise warrants for approximately 20.5
million shares of our Series A common stock, both of which could seriously harm
our business.
Our cable partners are not generally obligated to carry our broadband services,
and the exclusivity obligations that prevent them from carrying competing
services may be terminated.
Most of our cable partners are currently subject to exclusivity obligations
that prohibit them from obtaining high-speed, greater than 128 kilobits per
second, residential consumer Internet services from any source other than us.
However, our cable partners are generally under no affirmative obligation to
carry any of our broadband services. The current exclusivity obligations of our
principal cable partners, AT&T, Comcast, Cox and Cablevision, expire on June 4,
2002, and may be terminated sooner under some circumstances, as follows:
. under the new agreements, Comcast or Cox may terminate their exclusivity
obligations to us, or their entire relationship with us, at any time on
or after June 4, 2001 by providing six months' prior written notice,
with the termination to become effective on the first June 4 or December
4 following this notice period, provided that they forfeit newly-issued
warrants to purchase shares of our Series A common stock;
. under the new agreements, Comcast may terminate its current exclusivity
obligations at any time if required to do so by Microsoft pursuant to an
agreement between those companies, in which case we may repurchase a
portion of Comcast's equity interest in Excite@Home;
. any principal cable partner may terminate all of its exclusivity
obligations upon a change in law that materially impairs its rights;
. Comcast or Cox may terminate all exclusivity obligations of our
principal cable partners at any time if there is a change of control of
TCI that results within 12 months in the incumbent TCI directors no
longer constituting a majority of TCI's board. AT&T, TCI, Comcast and
Cox have agreed, however, that AT&T's acquisition of TCI did not
constitute a change of control under the terms of the original
agreement; and
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. Comcast or Cox may terminate the exclusivity provisions of our principal
cable partners as of June 4 of each year if AT&T and its affiliates do
not meet specified subscriber penetration levels for the @Home service.
Under the new agreements, Comcast and Cox were granted the right to sell
their shares of our Series A common stock to AT&T for a minimum price of $48 a
share at any time between January 1, 2001 and June 4, 2002. This right could
make it easier for Comcast or Cox to terminate their relationship with us should
they choose to do so.
Additionally, under the new agreements, once the current exclusivity
obligations expire on June 4, 2002, these cable partners have agreed to use
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 months' prior written notice, with the
termination to become effective on the first June 4 or December 4 following this
notice period.
If the exclusivity obligations of our cable partners or our new agreements
with these cable partners are terminated, our business could be harmed
significantly and our stock price would likely suffer an immediate drop.
We depend on our cable partners to promote our services and obtain new
subscribers.
The rate at which we are able to obtain new subscribers depends not only on
the degree to which our cable partners upgrade their cable systems but also on
the level and effectiveness of the efforts of our cable partners to promote our
services. Our cable partners have achieved different levels of subscriber
penetration. In Canada, for example, where our cable partners have high levels
of upgraded cable systems and faced early competition from other providers of
high speed data services, we have relatively high levels of subscriber
penetration (exceeding those in the United States). Among our principal U.S.
cable partners, AT&T, Cox and Comcast are actively promoting our services and
are beginning to increase their penetration rates. Cablevision, however, has
deployed our service to only a small number of subscribers and continues to
offer its own online service called Optimum Online to the majority of
subscribers in cable systems deployed to date. We cannot predict the rate at
which our cable partners will add new subscribers to our services. If our cable
partners do not actively and effectively promote our services, we will not be
able to reach the level of subscribers necessary to achieve a profitable
business model.
Our cable partners may offer services that compete with the @Home service, but
we are prohibited from offering competing services.
Many of our cable partners' exclusivity obligations are limited to
high-speed residential Internet services and do not extend to various services
that they may offer without us. These services include, but are not limited to,
telephony services, commercial and business services similar to our @Work
service, Internet services that do not use the cable television infrastructure
or do not require use of an Internet backbone and limited Internet services
including streaming video and other downstream-only services. By providing these
services, most cable partners can compete, directly or indirectly, with our
broadband delivery activities.
Until the expiration of our principal cable partners' exclusivity
obligations, we may not offer the services described above using their plant, or
to residences in the geographic areas served by their cable systems, without
their consent. These restrictions apply even if we have integrated such a
service with the @Home service in another geographic area. For example, in order
to provide streaming video longer than 10 minutes in duration, we must seek a
principal cable partner's consent or negotiate a separate agreement, including a
new revenue split, if applicable, prior to offering the service. We must
similarly obtain our cable partners' consent or execute a separate agreement to
provide broadband services over alternate platforms including fixed wireless,
cellular or DSL infrastructures to any residential customers in the cable
partners' geographic area. If our principal cable partners do not allow us to
offer broadband services over alternate platforms, our market for such services
will be severely limited and our business could be harmed.
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We are currently controlled by our principal cable partners, and may become
subject to control by AT&T, and our interests may not always align with AT&T or
our other principal cable partners.
AT&T controls approximately 55% of our voting power. Currently, five of our
eleven directors are directors, officers or employees of AT&T or its affiliates.
AT&T currently owns all 30.8 million outstanding shares of our Series B common
stock, each of which carries ten votes per share. This Series B common stock
ownership gives AT&T the right to elect five Series B directors, one of which is
designated by Comcast and one of which is designated by Cox. Currently, our
board may take action only if approved by the board and by at least 75%, or four
of the five, of our Series B directors. As a result, corporate actions generally
require the approval of AT&T's three Series B directors and one, or in some
cases both, of the directors designated by Comcast and Cox. Therefore, Comcast
and Cox, acting together, may veto any board action.
Under our new agreements with these cable partners, AT&T will acquire
additional voting control over us. If these agreements become effective, AT&T
will have the right to elect at least a majority of the board of directors.
Comcast and Cox will waive their right to elect directors to our board and their
designees will resign their board positions. All board actions will be decided
by a majority vote of the board.
Currently, we depend on a continuing cooperative relationship with our
principal cable partners in order to approve board action and in order to take
action that requires stockholder consent. If the new agreements with our cable
partners become effective, we will be subject to both board and stockholder
voting control by AT&T. It is possible that the objectives of these companies,
or AT&T if the new agreements become effective, will diverge from what
management considers to be our optimum strategy.
Warrants issued to our cable partners may result in additional dilution to our
stockholders.
We have entered into agreements with Cablevision, Rogers, Shaw and other
cable partners under which we issued warrants to purchase shares of our Series A
common stock. Under these agreements, warrants to purchase approximately 30.9
million shares of our Series A common stock at an average price of $2.20 per
share were exercisable as of June 30, 2000.
Under our new agreements with our principal cable partners, we granted or
will grant warrants to Comcast and Cox to purchase two shares of Series A common
stock and to AT&T to purchase one share of Series A common stock and one share
of Series B common stock, for each home passed by the cable systems located in
the United States operated by each respective cable partner. Warrants for an
estimated 100 million shares in aggregate will be issued, and each warrant will
have an exercise price of $29.54 per share. We may grant additional warrants in
the future depending on increases in homes passed by cable systems owned by
these cable partners. Additionally, approximately 50 million shares of Series A
common stock held by AT&T will be converted into shares of Series B common
stock, each share of which entitles AT&T to 10 votes and which will therefore
result in additional voting power for AT&T. We will record the fair values of
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.
To the extent that our cable partners become eligible to and exercise their
warrants, our stockholders would experience substantial dilution. We also may
issue additional stock, or warrants to purchase stock, at prices equal to or
less than fair market value in connection with efforts to expand distribution of
the @Home service.
Risks Related to Our Narrowband Services
Our narrowband services could lose users, advertisers and revenues to
competitors.
Our narrowband services compete with a number of companies both for users
and advertisers and, therefore, for revenues. We expect this competition will
intensify, particularly because there are few barriers to entry in this market.
These competitors include:
. Internet portal companies such as 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., who 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 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 for the Excite Network are currently hosted and operated on a
computer network infrastructure separate from our broadband services. The Excite
Network must accommodate a high volume of traffic and deliver frequently-updated
information. The web sites for the Excite Network have in the past, and may in
the future, experience slower response times or other problems for a variety of
reasons. We also depend on third party information providers to provide updated
information and content for these services on a timely basis. The Excite Network
could experience disruptions or interruption in service due to the failure or
delay in the transmission or receipt of this information. In addition, the users
of these Excite Network services depend on Internet service providers, online
service providers and other web site operators for access to the Excite Network.
Each of these parties has experienced significant outages in the past, and could
experience outages, delays and other difficulties
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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 narrowband web sites. We are not
guaranteed of recouping our investments in these agreements through additional
users or advertising revenues, and we may have to pay penalties for terminating
agreements early. Some of these third parties could become our competitors, or
provide their services to our competitors, upon termination of such
relationships. If these relationships are terminated and we are not able to
replace them, we could lose users or advertisers.
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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 $231.2 million as of June 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 June 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 June 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
$239.9 million as of June 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 June 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 June 30, 2000 at $192.8 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 in the next several months to contribute 100
million Euros, or approximately $94 million at current exchange rates, to Excite
Chello, our recently announced international joint venture, and we may decide to
hedge the foreign currency risk of this transaction in response to fluctuations
in exchange rates.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
On June 19, 2000, Cablevision filed a lawsuit in the Delaware Chancery Court
against Excite@Home, AT&T, Comcast, Cox and affiliated entities alleging, among
other things, that certain provisions of the March 28, 2000 letter agreement
constitute an amendment to the stockholders' agreement to which Cablevision is a
party and that Cablevision's consent is required for any such amendment. On June
22, 2000, the parties amended the letter agreement in response to the
Cablevision lawsuit. As stated in the amendment, the court in the Cablevision
action was advised that the parties to the letter agreement have agreed not to
consummate the new distribution arrangements until at least the conclusion of
the trial on the merits in the Cablevision lawsuit. In addition, the date on
which the parties may first terminate the letter agreement if the new
distribution arrangements have not yet become effective was extended from
September 30, 2000 to the earlier of November 15, 2000 or 30 days after the
final judgment in the Cablevision litigation is no longer subject to appeal or
review by the Delaware courts. On June 30, 2000, we filed a counterclaim
alleging that Cablevision has breached its existing agreement with us. We
believe that there is no legal merit to Cablevision's claim, and we will
continue to vigorously defend this action.
If the plaintiffs in any of the above actions prevail, we may not be able to
proceed with the transactions proposed by the letter agreement, which could
seriously harm our business.
We cannot assure you that we will prevail in any litigation. Regardless of
the outcome, any litigation may require us to incur significant litigation
expenses and may result in significant diversion of management.
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 is described below but
which is not yet effective, we agreed to issue warrants to purchase
approximately 100 million shares to our principal cable partners and to issue
approximately 50 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 currently held by AT&T, upon
the effectiveness of these new agreements. When considered together with the
issuance of the warrants, upon the effectiveness of these new agreements, AT&T
will hold 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 issued warrants to purchase an estimated total of 100
million shares of our Series A common stock at an exercise price of $29.54 per
underlying share in connection with our new agreements with our principal cable
partners. Upon the effectiveness of these agreements, the warrants to purchase
an estimated 55 million shares held by AT&T will instead become exercisable for
27.5 million shares of Series A common stock and 27.5 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 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
42
<PAGE>
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 April 5, 2000, in connection with our acquisition of Worldprints.com
International, Inc., we issued approximately 0.8 million shares of our Series A
common stock and 804 shares of our Series B non-voting preferred stock to the
stockholders of Worldprints 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
Holders of our Series A common stock and Series K common stock are entitled
to one vote for each share and holders of our Series B common stock are entitled
to ten votes for each share, for a total of 674,322,185 eligible votes based on
holders of our common stock of record at the close of business on April 28,
2000.
On June 20, 2000, we held our annual meeting of stockholders. The matters
voted upon and approved by the stockholders at the meeting, and the number of
votes cast with respect to each such matter, were as follows:
1. Amendments to our fifth amended and restated certificate of
incorporation to:
(i) increase the authorized number of shares of Series B common stock
from 30,800,000 to 110,000,000;
For Against Abstain
------------- ---------------- ----------
492,612,285 2,384,614 396,420
(ii) increase the authorized number of shares of Series A common stock
from 683,700,000 to 1,000,000,000;
For Against Abstain
------------- ---------------- ----------
492,424,853 2,581,027 387,439
(iii) eliminate the authorized shares of Series K common stock;
For Against Abstain
------------- ---------------- ----------
492,945,307 1,143,874 499,521
(iv) provide that holders of Series B common stock, voting together as
a separate series, will be entitled to elect a majority of the
board of directors, that holders of shares of Series A common
stock, voting together as a separate series, will be entitled to
elect two directors, and that any additional directors will be
elected by the holders of all outstanding voting shares of our
capital stock, voting together as a single class;
For Against Abstain
------------- ---------------- ----------
492,711,753 2,181,623 503,293
(v) change the minimum number of directors on the board such that, so
long as there are at least 10 million shares of Series B common
stock outstanding, the minimum number of directors will be seven,
and otherwise that the minimum number of directors will be three;
For Against Abstain
------------- ---------------- ----------
492,711,774 1,540,965 536,815
43
<PAGE>
(vi) eliminate all supermajority and unanimous board voting
requirements and special voting requirements for related party
transactions, and instead provide that all board actions be
approved by the vote of a majority of the board of directors or
the vote of the majority of the relevant committee of the board;
and
For Against Abstain
------------- ---------------- ----------
492,177,580 2,425,543 529,012
(vii) eliminate the .Com committee of the board.
For Against Abstain
------------- ---------------- ----------
494,177,580 996,752 515,712
Although our stockholders have approved these amendments, we have not
yet filed an amended certificate with the Delaware Secretary of State, and
therefore these amendments are not yet effective.
2. The election of eleven directors, consisting of two Series A directors,
five Series B directors and four additional directors, as follows:
Series A Directors For Against
--------------------- ---------------- ----------
William R. Hearst III 612,538,961 1,256,741
Edward S. Rogers 612,497,066 1,298,636
Series B Directors For Against
--------------------- ---------------- ----------
C. Michael Armstrong 612,390,707 1,404,995
John C. Petrillo 612,351,685 1,351,685
Brian L. Roberts 612,467,085 1,328,617
Daniel E. Somers 612,452,404 1,343,298
David M. Woodrow 612,465,395 1,390,407
Additional Directors For Against
---------------------- ---------------- ----------
George Bell 612,452,989 1,342,713
Mohan Gyani 612,405,295 1,390,407
Thomas A. Jermoluk 612,146,644 1,649,058
Richard Roscitt 612,432,789 1,362,913
3. An amendment to our 1997 Equity Incentive Plan to increase the number of
shares reserved for issuance under this plan by 40,000,000 shares.
For Against Abstain
------------- ---------------- ----------
574,302,909 39,031,728 379,152
4. An amendment to our 1999 Employee Stock Purchase Plan to increase the
number of shares reserved for issuance under this plan by 3,000,000 shares.
For Against Abstain
------------- ---------------- ----------
610,470,214 2,879,947 364,979
5. Ratification of the selection of Ernst & Young LLP as our independent
auditors for 2000.
For Against Abstain
------------- ---------------- ----------
612,771,692 675,763 254,771
Item 5. Other Information
On May 8, 2000, George Bell was named Chairman of the Board of Directors, in
addition to his other positions of Chief Executive Officer and President. Thomas
Jermoluk, the former Chairman, remains on the board of directors.
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On July 10, 2000, Mark A. McEachen was named Executive Vice President and
Chief Financial Officer, succeeding Kenneth A. Goldman in that capacity
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed in the accompanying exhibit index are
filed as part of this report.
(b) Current Reports on Form 8-K.
On April 3, 2000, we filed a current report on Form 8-K announcing under
Item 5 that (1) on March 28, 2000, we agreed with our principal cable
partners--AT&T Corp., Comcast Corporation and Cox Communications, Inc.--to new
extended distribution agreements and a reorganization of our corporate
governance structure.
On June 2, 2000, we filed a current report on Form 8-K announcing under Item
5 that (1) on May 26, 2000, a purported class action suit was initiated against
us and certain other parties alleging that the defendants breached fiduciary
duties to Excite@Home stockholders by approving or entering into, as applicable,
the March 28, 2000 letter agreement and (2) we have received notice from
Cablevision asserting that the March 28, 2000 letter agreement violates the
terms of our agreements with Cablevision and that its consent is required before
we can proceed with the transactions contemplated by that agreement.
On June 29, 2000, we filed a current report on Form 8-K announcing under
Item 5 that (1) on June 20, 2000, our stockholders approved our amendments to
our Fifth Amended and Restated Certificate of Incorporation, satisfying one of
the requirements to the effectiveness of the extension of our distribution
relationships with AT&T, Comcast and Cox under the March 28, 2000 letter
agreement, (2) on June 19, 2000, Cablevision filed a lawsuit against us and our
principal cable partners alleging that certain provisions of the letter
agreement constitute an amendment to the Stockholders' Agreement to which
Cablevision is a party and that Cablevision's consent is required for any such
amendment, and (3) on June 22, 2000, the parties amended the letter agreement to
(a) acknowledge that the court was being advised that the parties to the letter
agreement have agreed not to consummate the extension of the distribution
agreements until at least the conclusion of the trial on the merits in the
Cablevision lawsuit and (b) extend, from September 30, 2000 to the earlier of
November 15, 2000 or 30 days after the final judgment in the Cablevision
litigation is no longer subject to appeal or review by the Delaware courts, the
date on which the parties may first terminate the letter agreement if the
distribution agreement extension has not become effective.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT HOME CORPORATION
(Registrant)
Date: August 14, 2000 By: /s/ MARK A. MCEACHEN
----------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Incorporated by Reference Filed
Exhibit No. Exhibit Description Form File No. Exhibit Filing Date Herewith
------------ ------------------- ------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
4.01 Amendment to Letter Agreement, dated June 8-K -- 99.01 06/29/00
22, 2000, between the Registrant and AT&T
Corp., Comcast Corporation and Cox
Communications, Inc.
10.01 Form of Amendment to IRU Capacity X
Agreement, dated April 30, 1999, between
Registrant and AT&T Corp.
10.02 Form of Amendment Number Three to IRU X
Capacity Agreement, dated March 29, 2000,
between Registrant and AT&T Corp.
10.03 Form of Amendment Number Four to IRU X
Capacity Agreement, dated May 17, 2000,
between Registrant and AT&T Corp.
10.04 Triple Net Building Lease, dated February X
25, 2000, between Registrant and Pacific
Shores Center LLC (Building 7)
10.05 Triple Net Building Lease, dated February X
25, 2000, between Registrant and Pacific
Shores Center LLC (Building 8)
10.06 DataInsight, Inc. 1998 Equity Incentive X
Compensation Plan and related forms of
agreements*
27.01 Financial Data Schedule for six months X
ended June 30, 2000 (EDGAR version only).
</TABLE>
* Management contracts or compensatory plans required to be filed as an
exhibit to this quarterly report.
