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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File No. 000-22697
AT HOME CORPORATION
(Exact name of the Registrant as specified in its charter)
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Delaware 77-0408542
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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450 Broadway Street
Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
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(650) 556-5000
(The Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Series A Common Stock, $0.01 par value per share
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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As of February 29, 2000
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Aggregate market value of the voting stock held by non-
affiliates of the Registrant based on the closing
price per share as reported on the Nasdaq Stock Market
on such date(/1/):.................................... $9,870,661,228
Number of shares of Series A Common Stock
outstanding:.......................................... 351,954,355
Number of shares of Series B Common Stock
outstanding:.......................................... 30,800,000
Number of shares of Series K Common Stock
outstanding:.......................................... 2,000,000
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(/1/Shares)of common stock held by each executive officer and director and by
each person or entity that owns 10% or more of the outstanding common stock
have been excluded in that such persons or entities may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes.
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AT HOME CORPORATION
1999 ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 36
Item 3. Legal Proceedings........................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......................... 37
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PART II
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Item 5. Market for Registrant's Common Equity and Related Shareholder Matters....... 38
Item 6. Selected Financial Data..................................................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Item 7. Operations.................................................................. 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 57
Item 8. Financial Statements and Supplementary Data................................. 59
Changes in and Disagreements With Accountants on Accounting and Financial
Item 9. Disclosure.................................................................. 93
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PART III
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Item 10. Directors and Executive Officers of the Registrant.......................... 93
Item 11. Executive Compensation...................................................... 97
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 100
Item 13. Certain Relationships and Related Transactions.............................. 103
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PART IV
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Exhibits, Financial Statements, Financial Statement Schedule and Reports on
Item 14. Form 8-K.................................................................... 108
Signatures.............. ............................................................................ 114
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PART I
Item 1. Business
We make many statements in this annual report, such as statements regarding
our plans, objectives, expectations and intentions, that are 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
anticipated in these forward-looking statements as a result of various factors,
including those we discuss in "Risk Factors" and elsewhere in this annual
report. These forward-looking statements speak only as of the date of this
annual 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 in this annual report.
Overview
At Home Corporation, or Excite@Home, is a global media company offering
broadband Internet connectivity, personalized, web-based content and targeted
advertising services. We are the leading provider of broadband Internet
services, with approximately 1.1 million subscribers to our @Home service and
over 5,100 @Work business access customers as of December 31, 1999. The Excite
Network, our primary content offering, has 51 million registered users and in
December 1999 had the fifth-widest reach among all Internet properties
according to Media Metrix.
The @Home service is a broadband Internet service delivered to consumers via
the hybrid fiber-coaxial (HFC) cable infrastructure and accessed via cable
modems. Subscribers have access to Internet content and services, including our
proprietary multimedia programming, at speeds up to 50 times faster than
typical 56 kilobits-per-second connections. The service is "always on," meaning
that users do not have to go through dial-up procedures and do not experience
busy signals. The foundation of the @Home service is our scalable, distributed,
intelligent private network, which avoids bottlenecks frequently encountered on
the public Internet. Elements of this network include a national, optical-fiber
Internet protocol backbone, regional data centers, local caching servers and a
national network operations center. Our network design facilitates end-to-end
network management, provides for a high level of security and stores data close
to the user in order to minimize the need to retrieve data from the public
Internet. Our network interconnects with the networks of our 22 cable partners,
through which we had access to approximately 72 million homes worldwide as of
December 31, 1999. Of these homes, approximately 24 million were served by
upgraded, two-way cable capable of carrying our broadband service. Our
principal cable partners include AT&T, Comcast, Cox, Cablevision, Rogers, Shaw
and others. Our @Work division further utilizes our network by providing a
range of Internet services for businesses, including high-speed connectivity,
web hosting and development and hosting of e-commerce solutions.
Our primary content offering is the Excite Network, an Internet portal
providing users a broad array of information in categories such as news,
finance and entertainment, as well as services such as search, e-mail, chat,
voice mail and address books. In December 1999, the Excite Network reached 27.7
million unique visitors according to Media Metrix. Excite customers can create
a personalized My Excite Start Page that allows them to specify the content and
the layout of the information that they see each time they visit Excite. We
provide our consumers with content from a variety of partners, which include
Intuit, Inc., Sportsline USA, Inc., Tickets.com, Inc. and WebMD, Inc. In March
2000, we launched @Home 2000, which extends the benefits of personalized Excite
content to our broadband customers, combining Excite information with the rich
multimedia content made possible by broadband connectivity.
For advertisers, we offer a variety of broadband and narrowband advertising
packages, ad targeting, serving and reporting services, and assistance with
creative development and campaign management. In the fourth quarter of 1999 we
had over 1,900 advertisers on the Excite Network. Our MatchLogic subsidiary
owns
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a database of over 72 million unique anonymous user profiles and 9.5 million
profiles of people who have agreed to receive promotional messages via e-mail.
Using the targeting capabilities provided by these databases, MatchLogic served
over 15 billion Internet advertising impressions and delivered over 50 million
targeted e-mails during the fourth quarter of 1999.
Strategy
Our objective is to be the world's leading provider of broadband services.
We believe that broadband connections will become the principal means of
Internet access, and we have invested in technology and formed strategic
relationships that we believe position us to be the leading global broadband
access provider. We also believe that content is a critical part of the online
experience; this was the primary reason for the merger with Excite. We are
applying our expertise in Internet content programming to deliver a compelling
online service for our broadband customers. We intend to monetize our broadband
traffic through subscription fees, advertising and e-commerce transactions. Our
experience in creating rich-media advertisements combined with our MatchLogic
targeting capability positions us to provide valuable services to our
advertising customers.
We believe that narrowband Internet services will remain important for years
to come, and we intend to remain competitive as a portal service on the web by
continuing to develop the Excite Network with new content and applications.
This will include the addition of content elements targeted at users of medium-
and high-speed connections other than our own broadband service.
Our strategy includes the following key elements:
Increase Our Broadband Subscriber Base
We plan to increase the number of subscribers to our @Home broadband service
as a way to generate both subscription and media revenue. We are working with
our cable partners, technology partners and distributors to make the @Home
broadband service available throughout our global footprint of 72 million
homes, and to make the service easy to buy and install so that it becomes a
mass-marketable product. As of December 31, 1999, approximately 24 million of
our homes were upgraded to two-way cable, giving us a large potential market.
The availability of the DOCSIS standard cable modems through retail channels
allows customers to buy and install our broadband services themselves, which we
believe will facilitate the more rapid deployment of cable modems in homes. To
this end, we have distribution agreements with several large retailers,
including Circuit City, Office Depot, CompUSA and The Good Guys!, as well as
original equipment manufacturers such as Compaq and Dell Computer. We use our
databases of 51 million registered Excite customers and 9.5 million e-mail
profiles to generate inexpensive online marketing leads for the @Home service.
We believe that this generated a significant number of qualified marketing
leads in 1999 and expect that it will provide us with a low-cost means of
acquiring customers in the future.
Deliver Compelling Broadband Content and Services
We believe that delivering compelling content and services in addition to
high-speed connections is critical to building relationships with our customers
and to deriving advertising revenues from our broadband traffic. The default
start page for our broadband customers will be our new @Home 2000 service,
which we launched in March 2000. Providing the foundation for this service are
the content and capabilities of the Excite Network. For example, the core
philosophy behind our content offerings is personalization, which we believe is
critical to building customer loyalty. We offer the My Excite Start Page, which
allows users to arrange information such as weather, stock portfolios and news
in a modular fashion so that they receive exactly the information they want in
a familiar format each time they visit the My Excite Start Page. Users of @Home
2000 will enjoy these same personalization capabilities. In fact, Excite users
who have personalized their start pages will be able to view that same
information in the broadband environment. @Home 2000 also includes a custom
browser designed for broadband usage, which comes with the latest multimedia
features and provides easier and quicker access to personalized national and
local content and utilities such as search and e-mail. We
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continue to develop our Excite services with a focus on broadband applications.
For example, our acquisition of Bluemountain.com adds online greeting cards to
our portfolio of services. We believe that online greetings will be enhanced by
the inclusion of multimedia elements such as audio and video, increasing their
attractiveness as a broadband application. Our acquisition of Webshots gives us
a leading position in the distribution of digital photos, another application
that we believe will be attractive to broadband users.
Leverage Our Network Investment to Offer Broadband on Platforms Other Than HFC
and To Serve Commercial Customers
We designed and built the @Home network to provide broadband Internet
connectivity over the cable facilities of our cable partners. The network uses
our dedicated OC-48 Internet protocol backbone to achieve high data
transmission speeds. This backbone can be upgraded easily as new wave-division
multiplexing technology becomes available. We have private Internet access
arrangements with most major Internet backbone providers, ensuring both faster
and less expensive data transfers than possible through use of public access
points. We use leading caching technologies to store data close to our
customers, thereby reducing redundant data requests from the public Internet
and improving network efficiency. Local news feeds and customer e-mail
accounts, as well as other information, are stored in a distributed fashion in
our 25 regional data centers around the world. We monitor the entire network
from our national network operations center in California.
This network architecture includes thousands of servers deployed in hundreds
of cable head-ends, and is tied together by thousands of telecommunications
circuits. We believe that this infrastructure represents an efficient means of
providing broadband services over HFC networks and creates an opportunity to
extend beyond residential HFC to non-HFC broadband platforms such as digital
subscriber lines (DSL) and wireless. We are currently exploring ways of
delivering our broadband services to consumers using these technologies to the
degree permitted by our exclusive agreements with our cable partners.
We also utilize our network investment to provide broadband services to
commercial customers. Our @Work division was serving about 5,100 business
customers with HFC, DSL and high-speed private lines as of December 31, 1999.
@Work also serves customers with private-label shared web-hosting and e-
commerce hosting services. As a result of our acquisition of iMALL in October
1999, we offer merchants the ability to create online storefronts complete with
credit card payment processing. This capability enables us to expand the
shopping services available on the Excite Network.
Expand the Reach of Our Narrowband Service
We intend to increase the number of unique users, or reach, of our
narrowband media properties in order to offer our advertisers a broader
audience and to increase our advertising and direct marketing-related revenue
streams. In addition, we believe increased reach builds a larger base of
customers to which we can market our broadband services. We will pursue
additional reach through increased marketing efforts and strategic
relationships and with acquisitions of Internet properties. Our acquisition of
Bluemountain.com increased our reach by over 50%, adding 9.6 million
unduplicated users (based on Media Metrix reports for December 1999) to our
Excite Network customer base.
Continue Our International Expansion
We are aggressively pursuing opportunities to capitalize on the growth of
broadband services and the Internet outside of North America. We believe that
expansion outside of North America will be the principal means of expanding our
footprint. We have joint ventures with cable partners in Australia, Japan and
the Netherlands and distribution agreements in Belgium and Germany. These
ventures encompass approximately 13.5 million homes, 11.5 million of which we
added in 1999. All of these joint ventures are exclusive, seven-year access
agreements. We launched broadband service in the Netherlands in mid-1999 and in
Australia in January 2000, with launches in Japan, Belgium and Germany planned
for 2000. In addition, we offer Excite-
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branded portal sites with locally sourced content in Australia, Canada, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom.
Build Upon Our Advantage in Monetizing Traffic
We believe that our expertise in targeted Internet advertising provides us
with a significant competitive advantage. Our MatchLogic subsidiary utilizes
its databases of 72 million anonymous profiles and 9.5 million e-mail profiles
as well as its rich media capabilities to help advertisers maximize returns
through precision placement of interactive advertisements and through targeted
e-mail campaigns. MatchLogic served over 15 billion Internet advertising
impressions and delivered over 50 million targeted e-mails during the fourth
quarter of 1999. As a result of these capabilities, we believe we are a leader
in the industry in revenue efficiency measures such as revenue per page view
and revenue per reach point. We intend to maintain our leadership position by
continuing to build our databases and by offering new tools that are designed
to address advertisers' desire for highly targeted marketing. Our base of 1.1
million broadband customers also enables us to offer advertisers access to a
unique audience capable of viewing eye-catching, highly interactive
advertisements.
Expand Our Services Into Other Devices
We intend to provide our customers with access to our content and services
at any time and from any Internet-enabled device. We have invested substantial
resources in developing advanced television services including program guides,
e-mail, shopping and web access. We have announced advanced-television
technology relationships with Microsoft Corp. and Liberate Technologies, and
currently plan to distribute these services through two of our cable partners,
AT&T and Cox. In addition, we intend to offer personalized Excite content on a
variety of other devices, including wireless phones and personal information
devices. Excite content is currently available on the Palm VII wireless
handheld device, and we have announced an agreement to offer Excite content
through AT&T's PocketNet wireless data service.
Excite@Home Services
Our service offerings fall into two primary categories: subscriber network
services and media and advertising services. Subscriber network services
include our @Home broadband Internet access service for consumers, as well as
our @Work services, which are end-to-end managed connectivity services for
businesses. Media and advertising services encompass content and interactive
applications on our broadband and narrowband Internet networks, as well as ad
serving, targeted marketing and e-commerce solutions across those and other
third-party Internet destinations. We operate extensive network and computing
facilities that carry and support our services, and maintain 24-hours a day, 7-
days a week technical support and customer care operations for our broadband
services.
Subscriber Network Services
@Home Service
We provide consumers with broadband Internet access through our cable
partners' infrastructure. We partner with local cable operators who upgrade
their networks to two-way HFC in order to deliver our services. By connecting
via a cable modem to the @Home broadband network through the local cable
infrastructure, subscribers to the @Home service can achieve peak data
transmission speeds of 2 to 5 megabits-per-second, which is over 50 times
faster than the peak data transmission speed of a 56 kilobits-per-second dial-
up modem. This higher transmission rate enables multimedia applications such as
audio and video, rich-media advertising and multi-player games. We intend to
provide these elements through the @Home 2000 service, which combines Excite-
branded national content programmed by us with content sourced locally by our
cable partners. The @Home service also provides easy access to the Internet and
other online services, as well as other standard Internet service provider
(ISP) functionality, including web page hosting for subscribers,
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multiple e-mail accounts and remote access. We also offer the ability to share
Internet access across multiple PCs in the home for an additional monthly fee.
A critical differentiator of the @Home service is that it is "always on,"
providing instantaneous access to the Internet and eliminating the need for a
time-consuming dial-up procedure using the telephone network utilized by
traditional ISPs.
Our cable partners are the primary distributors of the @Home service. Our
cable partners install the service at prices generally ranging from $75 to
$150, though installation fees are frequently waived or discounted by the cable
partner as promotional incentives. Generally, our cable partners offer the
service at a flat monthly fee of approximately $40, which typically includes a
cable modem provided by the cable partner. We believe that this business model
will change as self-installable DOCSIS cable modems become more widely
available. Modems will be offered for sale by retailers or through original
equipment manufacturers, reducing the need for cable companies to provide them
and moving the point-of-sale for the @Home service to retail locations. Upon
installation, a new subscriber receives @Home client software, which provides
access to the @Home start page as well as other online services and Internet
content.
We have contracts with 22 cable companies whose systems include
approximately 72 million homes worldwide as of December 31, 1999, including
58.7 million homes in North America in approximately 130 markets. As of
December 31, 1999, we had approximately 1.1 million subscribers worldwide,
including recently acquired broadband Internet subscribers in the process of
being converted to the @Home service. These subscribers are being converted to
the @Home service. In the United States, subject to certain exceptions, our
agreements with cable partners, including AT&T, Comcast, Cox and Cablevision,
provide that our partners may only offer the @Home service, and not competing
broadband residential Internet services, over their cable systems through June
4, 2002. The exclusivity of other cable partners in the United States expires
on various dates between 2002 and 2005. In Canada, our cable partners have
agreed to market and promote the @Home service on an exclusive basis into 2003.
Please see "Risk Factors--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." Upon the expiration of
these exclusivity obligations, other companies may be allowed to offer Internet
services on the networks of our cable partners. However, we believe that the
customer base, network deployment and expertise gained during the period of
exclusivity will position us to compete effectively in this environment. The
following table lists our cable partners as of December 31, 1999:
Cable Partners
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Outside
North America North America
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AT&T Bresnan Jones Essent
Comcast Century MidContinent Jupiter
Cox Charter Prime Optus
Cablevision Cogeco Videon Sumitomo
Rogers Garden State Tele-Columbus
Shaw Insight Telenet
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Under current arrangements with our U.S. cable partners, we receive 35% of
both the basic monthly fees and the fees for premium services, such as Internet
access across multiple personal computers in the home. Our partners retain the
remaining 65% as well as any fees charged for installation. In Canada, we
receive a smaller percentage of the monthly subscription fees billed by our
Canadian partners, who are responsible for various costs not borne by our cable
partners in the United States. These include the costs of providing additional
customer support, data transport within Canada, and national marketing and
content programming.
Outside North America, we have exclusive agreements with six cable operators
whose systems serve approximately 13.5 million homes. Subscriber pricing and
revenue or royalty splits with cable system operators outside North America
vary across these markets based on differences in services and content provided
by the international cable system operators, data transport costs and
regulatory environments. To the extent that we
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offer terms of distribution and other services to international cable system
operators that are more favorable than those offered to AT&T, Comcast, Cox and
Cablevision, these principal U.S. cable partners have the right to obtain those
favorable terms.
Of the approximately 72 million homes in our global footprint, approximately
24 million were served by upgraded two-way HFC cable as of December 31, 1999.
Our cable partners are in the process of implementing major infrastructure
investments to continue deploying two-way HFC cable. However, each cable
partner's infrastructure investments could be subject to change, delay or
cancellation. Please see "Risk Factors--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."
In an effort to increase the deployment of the @Home service in North
American homes and businesses, we have established a joint venture with cable
operators, technology suppliers and systems integrators to encourage small and
medium-sized cable operators to offer the @Home service. Known as @Home
Solutions, the venture provides smaller operators a full range of services,
including financing of cable and network equipment, expanded customer service,
billing systems, service installation and marketing support. @Home Solutions
has secured the participation of six cable operators (not included in the cable
partners listed in the above table) whose systems pass over one million homes
in the United States. Other equity participants in @Home Solutions include
Cisco Systems, Inc., General Instrument Inc. and Motorola, Inc.
In December 1999, we entered into strategic relationships with Cox,
Microsoft and Liberate Technologies for the development and advancement of
interactive television technologies and applications and advanced television
services. We intend to leverage our high-speed backbone and distributed
broadband platform to accelerate the design of advanced set-top box devices and
software optimized for delivery of interactive television services. We believe
that the interactive television experience provides opportunities for expanding
the reach of our broadband services, including personalized content, rich
multimedia and communications and information services.
@Work Services
@Work offers commercial customers high-speed managed connectivity, web
hosting, virtual private networking and telecommuting services. Using the same
national transport facilities and other infrastructure used to provide the
@Home service, @Work serves over 5,100 customers with high-speed access
services over digital telecommunications lines, HFC cable and digital
subscriber lines.
In October 1999, we completed our acquisition of iMALL, a provider of e-
commerce solutions to online merchants. In conjunction with this acquisition,
we entered into a 10-year agreement with First Data Merchant Services Corp., a
former shareholder and marketing partner of iMALL, under which First Data will
market and distribute our e-commerce services to its merchant base. Merchants
using these e-commerce services will be able to establish a storefront and
feature their products on the Excite Shopping Service, and we also intend to
offer these services to our current merchants. As a result of enabling small
and medium-sized businesses to conduct integrated online sales, we expect to
increase the number and variety of products offered through our shopping
services.
In September 1999, we introduced Work.com, a portal service designed
specifically for the needs of business professionals and their companies.
Capitalizing on our experience in the portal business, this effort is the first
phase of an initiative to develop a comprehensive business portal featuring
vertical industry content, communities, business applications and services
customizable to business users' needs. In February 2000, we announced the next
phase of this effort, an agreement with Dow Jones & Co. to form a joint venture
for the further development of the Work.com portal. In addition to cash
funding, both Dow Jones and we will contribute operating assets, content,
technology and business-related Internet properties to the joint venture. The
new company will focus on creating a comprehensive Internet portal offering
news, information and business services to small and medium-sized businesses
and professionals.
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Media and Advertising Services
Our media and advertising services extend across our narrowband and
broadband services and include two primary activities, the development and
aggregation of content and value-added services and the sale of advertising
within our online networks, as well as other advertising-related activities
such as ad serving, ad content creation and online campaign management.
Advertising sales are conducted by our own sales force, and our ad serving and
other advertising-related services are offered by our MatchLogic subsidiary.
Narrowband Content and Services
Excite@Home offers content for both narrowband and broadband Internet media.
The Excite Network is a global Internet media network offering comprehensive
Internet navigation services with extensive personalization capabilities. The
primary site of the Excite Network is www.excite.com, the narrowband portal
site that consistently has been ranked as one of the top ten destinations on
the Internet. The Excite Network consists of a suite of specialized information
services, organized under easily accessible topical channels that combine
proprietary search technology, aggregated content from third parties, bulletin
boards, chat, editorial web reviews and other community features. The Excite
Network has recently introduced communications and information management
services such as online address books and calendars, voice chat and voice mail.
We offer portal web sites with locally sourced content in Australia, Canada,
France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United
Kingdom.
Key features of the Excite Network designed to increase user loyalty and
time spent on the network include:
. Personalization. The Excite Network delivers a personalized Internet
experience for users by allowing them to personalize their home page
Internet interface and choose the information they want delivered. Users
can program their own My Excite Start Page, allowing consumers to create
a personal profile which selects and automatically updates information of
interest such as personalized stock quotes, news stories, sports scores,
horoscopes, local and national weather, television listings and special
reminders. We believe this engenders user loyalty, increases switching
costs and provides data and an access channel for targeted advertising.
. Excite Search. We maintain an extensive index of Internet documents,
which we refresh automatically on a regular basis. Our search technology
allows consumers to search the Internet in multiple ways, including by
keyword, phrase, concept, Boolean logic or proper name. The Excite "More
Like This" feature, which utilizes query-by-example technology, allows
users who find a document of interest to find similar documents with the
click of a button. In addition, our automatic abstract technology
provides consumers with a brief and accurate abstract of each document
returned by a search. Excite Search also permits users to search news
articles, Usenet newsgroups and the Excite City.Net travel index.
. Excite Communications and Information Management Services. In order to
increase the utility of the Excite portal to our customers, we have
developed a set of services designed to help customers manage personal
information and communicate with friends and family. Information
management services include the Excite Planner, an online address book,
calendar and task list, and Excite Assistant, a desktop window providing
an Excite customer access to the most relevant information in his or her
account without the need for a browser window. Communications services
include Excite VoiceMail, the only web-based voicemail system offered by
an Internet portal, and Excite VoiceChat.
. Excite Content and Communities. The channels-based format of the Excite
Network provides consumers with an intuitive interface that reflects the
way they navigate through other forms of media, such as television. By
combining existing services with specialized information and services
from leading content providers, the Excite Network provides channel-
specific content including topical news, links to related web sites,
products and services and directories. The Excite Shopping Channel offers
a safe and convenient online shopping service for consumers. The Excite
Auctions site is a part of the
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FairMarket Auction Network, a network of auction sites giving users access
to products for sale across all member sites. This format enables
advertisers and retailers to more effectively reach target consumers.
Community-building services, such as Excite Communities, Excite Boards and
Excite Chat, allow users to join communities of other users with similar
interests or needs, thereby enhancing the user experience within the
Excite Network with the goal of improving customer retention.
As part of our strategy to offer enhanced content and services, develop
capabilities suited to broadband and expand our narrowband reach, we acquired
Bluemountain.com, a leading provider of online greeting card services, in
December 1999. This acquisition increased the reach of the Excite Network by
over 50% in December 1999. According to Media Metrix, Bluemountain.com had
approximately 18 million unique users in December 1999 and was the eighth-most
frequently visited web site during that time. Although December is
historically one of the busiest months for online greeting card services and
therefore is not indicative of traffic levels for other months, we expect
Bluemountain.com to contribute significantly to Internet traffic on the Excite
Network throughout the year. We intend to integrate our Excite communications
services into the Bluemountain.com service and offer Excite shopping services
to Bluemountain.com customers, each of whom is involved in a potential gift-
giving transaction when sending a greeting card. In conjunction with this
announcement, we also announced distribution agreements with three gift-
related e-commerce companies whose products will be promoted on
Bluemountain.com.
Broadband Content and Services
In March 2000, we launched @Home 2000, a broadband online service that
combines the high-speed access of our @Home service with a new Excite
broadband portal enhanced with rich media and personalized content aimed at
helping our subscribers manage their daily lives. The @Home 2000 broadband
Internet service offers an attractive combination of benefits to our
subscribers, including speed, "always-on" connectivity, personalization,
utility and rich media. Speed reduces the time it takes for web pages to load
and gives customers access to an enhanced content experience, including high
quality audio and video. An always-on connection means customers do not have
to dial-up to connect to the service, which turns the computer into a readily
accessible information appliance. Personalization allows customers to select
specific content, including stock quotes and news. @Home 2000's new integrated
browser makes personalized and local content and services such as e-mail more
easily accessible. The combination of speed and content offer customers easy
access to rich media on the Internet.
The new custom browser available with @Home 2000 features an integrated
package customized for the broadband experience. The browser is based on
Internet Explorer 5.0 and includes the latest technology, providing integrated
access to customers' personalized national and local content and utilities
such as e-mail and search. The @Home service has also been enhanced with
multiple e-mail accounts, 70 megabytes of personal storage space, online help
utilizing video tutorials and support for personal home networks of up to five
Web-enabled computers or devices.
The content and navigation of the Excite narrowband portal have been
enhanced to create a broadband Web portal that enables access to rich media
and personalization. Broadband customers will be able to enjoy the benefits of
the personalized Excite portal on a broadband platform. For example, customers
can view local weather from an animated Doppler radar. Additionally, the
Excite broadband portal enables Web sites to perform in a similar manner to
user-friendly software applications, such as allowing for home pages to be
personalized using "drag and drop". Also, roll-over menus provide visual aids
to help consumers learn more about a service without having to add more links.
Broadband content has been integrated on the new Excite portal and includes
such features as news clips, short animation films and links to broadband
content on the Web.
We believe that the introduction of @Home 2000 and the Excite broadband
portal represents a significant achievement made possible by our merger with
Excite in May 1999. We intend to further leverage the personalization and
content of the Excite Network and the high-speed access of our @Home service
by
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continuing to enhance our broadband products and services over multiple
platform, including advanced set-top devices and mobile devices, and multiple
delivery channels, such as DSL and wireless.
Advertising Services
Through our various advertising programs, advertisers can combine multiple
advertising packages tailored for their specific needs.
. Banner Advertisements. Banner advertisements are prominently displayed
throughout the Excite Network. Excite offers a variety of banner-
advertising programs that enable advertisers to target various market
segments. Mass-market placements deliver general rotation banner
advertisements throughout the Excite Network but do not have any
particular market segmentation. Targeted advertising addresses an
audience with a specific content interest on one of our services; these
advertisers can target general interest topics such as "sports" or more
specific sub-categories such as "college basketball" or a particular
team. We charge higher per-impression fees for advertising products based
upon the specificity of the target audience.
On the @Home broadband service, we also sell advertising through several
formats, including half-banners and the "B*box", a broadband audio/video
advertising space. With the B*box, advertisers can broaden their creative
presentation using video clips, audio and animation. Advertisers have the
ability to enhance their message by using multimedia tools and
technologies such as Enliven, Flash, Quicktime Video, Real Audio and
Shockwave. Advertisers' ability to present more compelling messages to
online users has resulted in advertising rates greater than those charged
for banner advertising on the narrowband web sites.
We also sell advertising placements and links outside of the space
normally reserved for banner advertisements. These arrangements are known
as sponsorships because they typically involve the placement of an
advertisement or link in a topical channel as though the advertiser was
sponsoring the content on a specific page. These arrangements have a
longer term than traditional banner advertising agreements. The ad or
link is programmed to appear prominently in the same spot on the page
each time the user calls for that page of channel content. Some of our
sponsors include Amazon.com, AT&T, autobytel.com, Barnes & Noble and
Charles Schwab.
. Targeted Marketing Services. We also provide ad serving, targeted
marketing, campaign management and other advertising-related services
through the operations of our MatchLogic subsidiary. MatchLogic maintains
a database of consumer demographic, purchasing and other data relevant to
marketers, which as of December 31, 1999, consisted of approximately 72
million unique anonymous profiles and 9.5 million e-mail profiles. Using
MatchLogic's targeting services, advertisers or advertising agencies can
deliver ads based on a user's particular demographic traits, geographic
location, connection capabilities and/or keyword and virtual keyword data
input. MatchLogic serves ad campaigns simultaneously to multiple web
sites in the form of banner advertisement and to e-mail audiences via
targeted e-mail messages. MatchLogic measures results immediately,
produces consolidated results reports on the success of the entire
campaign, and analyzes these results to enable advertisers to quickly
assess the effectiveness of the campaign. MatchLogic can dynamically
adjust campaigns in order to maximize the effectiveness of the
advertiser's investment.
MatchLogic also provides assistance to advertisers in the use of rich media
advertising techniques such as animation and sound to improve the appeal and
interactive nature of their advertisements on narrowband and broadband web
sites.
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Network and Computing Facilities
Residential subscribers access our broadband services primarily through
high-speed cable modems, which attach to their personal computers via a
standard Ethernet connection, while businesses can also connect through
telecommunications networks. The four key principles of our network strategy
are end-to-end network management, "always-on" service, scalability and moving
data closer to the user:
. End-to-End Network Management. The @Home broadband network architecture
allows us to monitor our network all the way to the subscriber's home.
Because the @Home broadband network is centrally managed, we can
dynamically identify and enhance network quality, service and
performance, or address issues before they affect the user experience.
. ""Always-on" Service. Unlike dial-up Internet access services, the @Home
broadband network is "always on." The user has an uninterrupted
connection to the Internet as long as his or her computer and cable modem
are on. This eliminates the need for a time-consuming connection process,
making our content and content on the Internet more readily available and
convenient.
. Scalability. The @Home service is designed to be scalable to handle
increasing numbers of subscribers without degradation. As subscriber
penetration increases, the cable operator has multiple cost-effective
alternatives to increase capacity. These include allocating additional 6
MHz channels for the @Home service and reducing the number of subscribers
sharing a given bandwidth by expanding nodes, thereby allocating more
bandwidth to a given number of subscribers.
. Moving Data Closer to the User. The @Home broadband network utilizes
caching and replication technologies to store information closer to
users. These techniques recognize a fundamental weakness of the Internet,
namely duplicative data transfers. By caching a given data file in a
local server the first time it is requested by a user, we ensure that the
same file can be delivered to the next user to request it without once
again retrieving it from the public Internet. This reduces traffic on our
backbone and speeds download time for subscribers.
The primary components of the @Home broadband network are our high-speed
private national backbone, regional data centers, regional networks, headends
where caching servers are located, network connections, cable modems and our
Network Operations Center.
Private National Backbone
We operate our own private national backbone, which consists of two
dedicated OC-48 private-line circuits under a 20-year agreement with AT&T. This
nationwide Internet protocol network enables us to support up to five million
broadband users initially, and can be upgraded to higher bandwidths as demand
requires. These circuits connect our regional data centers and regional
networks with content providers and the Internet. This backbone can be viewed
as a high-speed "parallel Internet" that connects via our routers to the
Internet at multiple network access points with "Tier-One" peering status,
which permits us to exchange Internet traffic with other nationwide ISPs.
Regional Data Centers
The regional data centers act as service hubs for defined geographic areas,
such as major metropolitan areas. The regional data centers are used to provide
services such as e-mail, news groups and chat, monitor network performance,
replicate content and applications, and provide a cost-efficient infrastructure
to cache and multicast data throughout each region. Regional data centers also
house local content and subscribers' web pages. We currently have 25 regional
data centers in operation worldwide.
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Regional Networks
The regional networks consist of network routers and switches that
interconnect our regional data centers and national backbone to multiple cable
headend facilities. These networks generally take advantage of cable operators'
fiber optic infrastructures that are normally used to transport cable
television signals from master headend facilities to other headends within a
region. This approach often allows us to avoid the high cost of leasing
conventional high-speed communication services from local telephone companies
when deploying high-speed connectivity in a region.
Headends
The cable system headends are connected to each regional data center through
the regional network. In order to move data as close to the subscriber as
possible and to avoid repetitive transmission of data, the headends employ
high-performance caching servers that store frequently accessed content
locally, thereby greatly reducing the amount of data transmission (and
corresponding transport costs) in higher layers of the network. In addition,
local caching servers can compile far more comprehensive usage data than is
normally attainable on the Internet, which can be used for network
troubleshooting, tuning performance and tailoring the @Home service.
Network Connections
The last leg of the network connection is from the headend to the consumer
over a cable operator's cable system. Fiber optic lines carry the signal from
the headend out to cable nodes in each neighborhood, which in turn connect
through traditional coaxial cable to the home. These fiber optic nodes
typically service from 300 to 2,000 homes in a relatively modern cable system.
In such a system, each television channel requires 6 MHz of the 450-750 MHz of
total system capacity. Downstream transmission of the @Home service utilizes a
similar channel. Upstream transmission, however, utilizes a frequency range not
used for traditional broadcast by cable systems. This range is more prone to
interference than downstream channels, which effectively limits the peak
upstream transmission speed.
Cable Modems
In the home, a cable modem connects to the cable television coaxial wiring
and attaches to the user's personal computer via standard Ethernet connections.
The data transmission speed of a cable modem depends on the specific model and
can range from 10 to 27 megabits-per-second downstream and 0.7 to 10 megabits-
per-second upstream. The actual performance that subscribers experience is
often constrained by the capacity of their personal computers, the capacity of
the server being accessed and the type of network architecture utilized. As a
result, downstream transmission speeds are generally limited to 2 to 5
megabits-per-second. In addition, in some markets, we have limited users'
upstream bandwidth in order to prevent abuse of our systems by users, and we
expect to continue to limit upstream bandwidth in additional portions of our
network. The North American cable industry has adopted DOCSIS to support the
delivery of data services utilizing interoperable cable modems. We believe that
this new standard and the distribution of DOCSIS-compliant modems through
retail stores will facilitate the growth of the cable modem industry. Please
see "Risk Factors--If we cannot maintain the scalability and speed of our @Home
broadband network, customers will not accept our broadband services" and "If
new DOCSIS-compliant cable modems are not deployed timely and successfully, our
subscriber growth could be constrained."
Network Operations Center
We provide end-to-end network management through our network operations
center. The network operations center uses advanced network management tools
and systems to monitor the network infrastructure on a 24-hours a day, 7-days a
week basis, enhancing our ability to address performance bottlenecks before
they affect the user experience. From the network operations center, we can
manage the @Home broadband network
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from end-to-end, including the backbone, regional data centers, regional
networks, headend facilities, servers and other components of the network
infrastructure to the user's home. Please see "Risk Factors--Our dependence on
our network to provide our broadband services exposes us to a significant risk
of system failure."
Customer Support
Our customer care organization provides a variety of support functions for
our cable partners and their customers, @Home customers and Excite users. These
services generally are available 24-hours a day, 7-days a week. This
organization is also responsible for the Help and Member Services areas within
the @Home broadband services.
There are two levels of support provided to our @Home broadband customers.
When customers need help with their @Home broadband service, they contact the
Tier 1 customer support organization, typically managed by the cable partner in
their area. Customers needing assistance beyond the capability of the cable
partner Tier 1 organization are transferred to the @Home Tier 2 customer
support team. The Tier 2 team provides computer and network technical support
to resolve customers' problems. The Tier 2 team employs a variety of experts
familiar with the @Home Network, including technical support representatives,
lead technicians and product specialists to identify and solve the customer's
problems. Each cable partner's support team and our customer support work
together to resolve any customer issues.
We also provide Tier 1 customer support services for some of the smaller
cable partners that do not have the scale to provide Tier 1 customer support.
Typically, our Tier 1 customer support representatives help customers with the
following: ordering the service, billing questions, password inquiries, simple
browser functionality and simple use of the Internet. Currently, we provide
this service to eight cable partners.
Excite users interact with our Excite support team primarily through e-mail.
The team provides information and guidance to our Excite customers on the many
applications available on the Excite Network and also provides assistance to
third parties that seek to make their web sites available through the Excite
Network. We offer web and e-mail based support for our My Excite Start Page,
Excite Voice Mail, Excite Chat, Excite PAL and Excite Communities services.
Sales and Marketing
We have a direct sales organization with professionals located in Chicago,
Dallas, Detroit, Los Angeles, New York, Boston, Denver, Philadelphia and San
Francisco. This direct sales force sells to advertisers and advertising
agencies and is responsible for selling banner advertisements and sponsorships
on the Excite Network and the @Home broadband service.
For our subscriber network services, we currently rely primarily on our
cable partners to sell the @Home service. In addition, using MatchLogic, we are
marketing our broadband services to users of our Excite narrowband services.
Our cable partners conduct local and regional advertising and marketing
campaigns targeted to geographic areas in which the service is available. These
activities include bill inserts and local television advertising, among others.
We have engaged in nationwide marketing of the service through promotional
activities such as mall tours in which potential customers have the opportunity
to "test drive" the service at a display in a local shopping mall and to sign
up for the service on the spot. Our ability to market the service broadly has
been limited by the availability of the service; as our partners complete
further upgrades to their facilities and the @Home service becomes more widely
available, our cable partners will be able to market the service in a broader
fashion.
A key initiative for us and our cable partners is to make the @Home service
available through retail stores such as electronics and office supplies stores,
and through original equipment manufacturers such as computer manufacturers. To
date, we have reached agreements with electronics retailers including Circuit
City,
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CompUSA and The Good Guys! and with office products retailers including Office
Depot, Staples and OfficeMax, who will offer the @Home pre-installation kit
alongside a demonstration of the service. This allows potential customers to
try the service and contact their cable company to schedule an installation
appointment. Also, we have announced agreements with Dell and Compaq under
which these original equipment manufacturers will promote the @Home service and
assist their customers in scheduling installation appointments with their cable
companies. Dell and Compaq will also ship computers pre-configured for the
@Home service, including a pre-installed network interface card.
International Operations
We have agreements with several cable operators outside of North America who
have agreed to distribute local versions of the @Home service over their cable
systems on an exclusive basis. As of December 31, 1999, we had launched service
in the Netherlands, Belgium and Australia, with launches scheduled in Germany
and Japan in 2000.
We believe that international expansion will be the principal means of
expanding our global footprint. We have portals with locally sourced content in
Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Spain,
Sweden, and the United Kingdom.
Product Development, Technology and Engineering
Our product development and engineering efforts focus on: (1) design and
development of new technologies and products to increase the speed and
efficiency of our broadband network architecture and to facilitate the
development and distribution of high bandwidth content and commercial value-
added applications; (2) adaptation of our network services for use over non-HFC
access technologies, such as DSL; (3) development of software tools and
enabling platforms for the creation and distribution of enhanced content
optimized for our broadband network; and (4) transferring the appropriate
components of our broadband network to TV-based Internet devices and developing
software, e-mail support and related services for these devices.
Product development and engineering expenses for the years ended December
31, 1999, 1998 and 1997 were $54.8 million, $17.0 million and $12.0 million,
respectively. Research and development expenses related to Excite from the date
of its acquisition in May 1999 to December 31, 1999 were approximately $20.4
million. We believe that developing new and enhanced services and technology is
necessary to remain competitive. Accordingly, we intend to continue to make
investments in research and development, including developing, licensing or
acquiring new technologies.
The markets in which we compete are characterized by rapidly changing
technologies, evolving industry standards, frequent new service and product
announcements, introductions and enhancements and changing customer demands.
These market characteristics are exacerbated by the emerging nature of the
Internet and the desire of companies from a multitude of industries to offer
Internet-based products and services. Accordingly, our future success will
depend on our ability to stay ahead of rapidly changing technologies and to
adapt our services to evolving industry standards. In addition, we will need to
regularly improve the performance, features and reliability of our network in
response to competitive service and product offerings and the evolving demands
of the marketplace. Our failure to adapt to such changes and evolution could
seriously harm our business. In addition, if new Internet, networking or
telecommunications technologies are adopted or if other technological changes
occur, we may incur substantial expenses to modify or adapt our services or
infrastructure.
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Competition
Broadband
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. Time Warner Inc. and Media
One Group have deployed high-speed Internet access services over their
local cable networks through their own cable-based Internet service, Road
Runner. We currently compete with Road Runner to establish distribution
arrangements with cable system operators and we may compete for
subscribers in the future if and when our cable partners cease to be
subject to their exclusivity obligations to us. However, we do not
compete directly with Road Runner for broadband customers since the cable
networks of our cable partners do not generally overlap with those of
Time Warner and Media One. If the merger between Time Warner and America
Online announced in January 2000 is completed, we expect the Road Runner
service to be aggressively marketed to America Online customers in Time
Warner's cable markets which could result in an acceleration of Road
Runner's subscriber growth rates and increased competition in forming
alliances with broadband content providers and advertisers. The proposed
merger may also result in increased competition for broadband Internet
access service subscribers after our exclusivity arrangements with our
principal cable partners expire. We also 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 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; and
. Internet and online service providers. We compete with Internet service
providers that provide basic Internet access services and with online
service providers such as America Online and other Internet portals and
online services that have announced broadband strategies, such as Yahoo!.
Narrowband
The market for narrowband and broadband services and Internet advertising is
intensely competitive. There are no substantial barriers to entry in these
markets and we expect competition to intensify. We believe that the number of
companies relying on fees from web-based advertising has increased
substantially during the past year. Accordingly, we may face increased pricing
pressure for the sale of advertisements on our network, which may seriously
harm our business. We believe the main competitive factors in this market are
brand recognition, user base, performance, ease of use, variety of value-added
services, features and quality of support.
We compete with a number of companies both for users and advertisers. We
expect this competition will intensify, particularly because there are few
barriers to entry in our market. Our competitors include:
. Internet "portals" such as Lycos, AOL.com, Yahoo!, Alta Vista and NBCi;
. online service providers such as America Online, CompuServe, Microsoft's
MSN and Prodigy services;
. large media companies such as CBS, NBC and Time Warner, who have
announced initiatives to develop web services; and
. other smaller companies providing Internet-based and advertising-
supported content.
In addition, we face increasing competition from a large number of
businesses which offer Internet services such as e-mail, stock quotes, news and
chat features and who publish information and content on the Internet.
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We also expect to compete with Internet and online service providers, web
site operators, providers of Internet browser software such as Netscape or
Microsoft, and other Internet services and products that incorporate search and
retrieval features into their offerings. Many of these potential competitors
have announced plans to offer competing Internet services and may take actions
that make it more difficult for consumers to find and use the Excite Network.
We also compete with traditional advertising media such as print, radio and
television for a share of advertisers' total advertising budgets. If
advertisers do not perceive Internet advertising to be as effective as
traditional media, our business may be adversely affected.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the online market, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. Such 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. These competitors may develop web
search and retrieval services or other online services that are equal or
superior to that of ours or that achieve greater market acceptance than our
offerings.
As the market continues to develop and competition intensifies, our
competitors may merge or form strategic alliances that would increase their
ability to compete with us for traffic and advertisers. These relationships may
also negatively impact our ability to form or maintain strategic relationships
with those companies. Mergers between Internet and traditional media companies,
such as the proposed merger of America Online and Time Warner Inc., would
create large, diverse media conglomerates with significantly greater Internet
service delivery capabilities and access to content than we have. Please see
"Risk Factors--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."
Many providers of web services have been entering into distribution
arrangements, co-branding arrangements, content arrangements and other
strategic partnering arrangements with Internet and 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, and thereby making
their web sites more attractive to web advertisers while also making it more
difficult for consumers to access our services. In addition, many large media
companies have either launched or have announced that they are contemplating
developing Internet navigation services and are attempting to become web
"gateway" sites for web users. For example, Infoseek Corporation and the Walt
Disney Company have partnered to launch Go Network, which features ABCNEWS.com
for news, ESPN.com for sports, Disney.com for families and kids, Infoseek for
search, and Disney and ABC for entertainment, and which will compete directly
with the Excite Network for user traffic and advertisers. Also, NBC has created
NBCi, which operates the xoom.com gateway, and both Time-Warner and CBS have
announced initiatives to develop web services to have their web sites become
the starting point for users navigating the web. In the event these companies
develop such "gateway" sites, we could lose a substantial portion of our user
traffic, which would have a material adverse affect on our advertising revenues
and on our business.
Intellectual Property
We regard our technology as proprietary and we attempt to protect it under
copyrights, trademarks, trade secret laws, restrictions on disclosure and
transferring title and other methods, and we have been issued patents with
respect to certain aspects of our searching and indexing technology. We
currently have several new patent applications pending. These applications may
not result in a patent being issued. Furthermore, any patents that may be
issued from these pending applications may not be sufficiently broad to protect
our technology. In addition, despite having patents, it is possible that our
patents may be challenged, invalidated or circumvented.
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The failure of any patents to protect our technology may make it easier for our
competitors to offer technology equivalent or superior to our technology.
We also generally enter into confidentiality or license agreements with our
employees and consultants, and generally control access to and distribution of
our documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
services or technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Policing
unauthorized use of our technology is difficult. The steps taken by us may not
prevent misappropriation or infringement of our technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation may result in substantial
costs and diversion of resources and may have a material adverse affect on our
financial condition.
Many parties, including our competitors, are actively developing
personalization, search, indexing and related web technologies. Some of these
parties have taken, and we believe that others will take, steps to protect
these technologies, including seeking patent protection and enforcement of such
patents through licensing and litigation. As a result, we believe that disputes
regarding the use of such technologies are likely to arise in the future.
Competitors or others may initiate lawsuits against us asserting patent
infringement. We may not be able to defend successfully any such litigation
either on the grounds that patents are invalid or that our search technology
does not infringe on patents of others. Even if we are successful, there can be
no assurance that the costs and resources required to defend any such
litigation will not have a material adverse affect on our financial condition
or results of operations.
In addition, from time to time, we have received, and may receive in the
future, notice of claims of infringement of other parties' proprietary rights,
including claims for infringement resulting from users downloading of materials
by the services operated by us. Although we investigate claims and respond as
we deem appropriate, there can be no assurance that infringement or invalidity
claims, or claims for indemnification resulting from infringement claims, may
not be asserted or prosecuted against us or that any assertions or prosecutions
will not materially and adversely affect our financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, we would incur significant costs and diversion of resources to defend
any such claims which may have a material adverse affect on our financial
condition and results of operations. If any claims or actions were asserted
against us, we might seek to obtain a license under a third party's
intellectual property rights. Such a license may not be available on
commercially reasonable terms, or at all.
We also license certain of our technologies from third parties. As we
continue to introduce new services that incorporate new technologies, we may be
required to license additional technology from others. These third-party
technology licenses may not be available on commercially reasonable terms, if
at all. If we do not obtain any of these technology licenses, we may experience
delays or reductions in the introduction of new services or the performance of
our services may be materially and adversely affected until equivalent
technology could be identified, licensed and integrated. Any such delays or
reductions in the introduction of services or adverse impact on service quality
may materially and adversely affect our business.
Employees
As of December 31, 1999, Excite@Home had 2,319 employees, excluding
temporary personnel and consultants. Of the total, 793 were employed in
networking, engineering and operations; 339 were employed in customer care; 980
were employed in sales, marketing and related activities; 53 supported our
international operations; and 154 were employed in general and administrative
activities. Our acquisition of iMALL added approximately 170 employees,
primarily to networking, engineering and operations and Bluemountain.com added
approximately 90 employees, primarily to sales, marketing and related
activities. None of our employees are represented by a labor union, and we
consider our relations with our employees to be good. Our ability to
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achieve our financial and operational objectives depends in large part upon the
continued service of our senior management and key technical personnel and our
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such qualified personnel in our industry
and geographical location in the San Francisco Bay Area is intense,
particularly in software development, network engineering, cable engineering
and product management personnel. Please see "Risk Factors--Our future success
depends on our ability to attract, retain and motivate highly skilled
employees."
Risk Factors
The risks described below are not the only ones facing our company.
Additional risks not presently known to us, or that we currently deem
immaterial, may also impair our business operations. Our business, financial
condition or results of operations could be seriously harmed by any of these
risks. The trading price of our Series A common stock could decline due to any
of these risks.
Risks Related to Excite@Home's Business
We may fail to integrate our business and technologies with the business and
technologies of Bluemountain.com and the other companies we have recently
acquired or may acquire.
We have completed several acquisitions recently, including our acquisitions
of iMALL, Inc. in October 1999, Bluemountain.com in December 1999 and others.
We intend to pursue additional acquisitions in the future. If we fail to
integrate these businesses, our quarterly and annual results may be adversely
affected. Integrating acquired organizations and products and services could be
expensive, time-consuming and a strain on our resources. Risks we could face
with respect to acquisitions include:
. the difficulty of integrating acquired technology or content and rights
into our services;
. the difficulty of assimilating the personnel of the acquired companies;
. the difficulty of coordinating and integrating geographically-dispersed
operations;
. our ability to retain customers of an acquired company;
. the potential disruption of our ongoing business and distraction of
management;
. the maintenance of brand recognition of acquired businesses;
. the failure to successfully develop acquired in-process technology;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
. the impairment of relationships with employees and customers as a result
of the integration of new management personnel.
In addition, we may be unable to identify future acquisition targets and we
may be unable to complete future acquisitions on reasonable terms.
Our @Home 2000 service may experience unforeseen problems as deployment
continues, and we may not be successful in integrating other aspects of
Excite's Internet services with the @Home service.
Although we have launched @Home 2000, which integrates the technology
platform of the @Home network broadband services with Excite's Internet
services, we have not fully integrated these services. In addition, @Home 2000
has not experienced significant traffic to date due to its recent release and
we cannot ensure that problems will not occur in widespread deployment. Further
integration of the Excite and MatchLogic services with the @Home network
broadband platform poses a number of technical challenges, including
difficulties associated with providing reliable updating and personalization of
content over @Home's
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broadband services and the difficulties associated with applying the
advertising services and targeting technologies of Excite's MatchLogic
subsidiary over the @Home broadband services. This is particularly challenging
because it is more difficult to provide regularly updated and personalized
information from distributed regional data centers, which we rely upon to
deliver our broadband services, than it is to deliver services from a central
data center, as Excite and MatchLogic currently do, in delivering their
narrowband services. We may not be able to achieve the same level of
reliability in providing updated and personalized Excite broadband content over
the @Home service as we have achieved with the Excite narrowband service.
Recently-acquired businesses may not be successful.
We have recently acquired companies in an early stage of development and
with unproven business models. Acquired features, functions, products or
services may not achieve market acceptance.
iMALL. Prior to August 1998, substantially all of iMALL's revenues were
attributable to its seminar business. This business was discontinued in August
1998. iMALL has yet to achieve significant revenue from its current business of
providing turnkey electronic commerce services to online merchants or its other
shopping-oriented web sites. A market for iMALL's services may not develop, and
iMALL's services may not become widely accepted.
Bluemountain.com. The acquisition of Bluemountain.com also involves a number
of risks. For example, prior to the acquisition, the Bluemountain.com
electronic greeting card service only sold limited advertising on its web
sites. Bluemountain.com users may not accept a service that displays
advertising. Bluemountain.com users may not continue to use the
Bluemountain.com service for other reasons. For instance, competitive
electronic greeting card sites have increased in popularity. Also, the
popularity of electronic greeting card services could decline generally.
Additionally, advertisers may not choose to advertise on the Bluemountain.com
service if users do not accept advertising or purchase goods or services
advertised on Bluemountain.com in sufficient quantities.
During the first quarter of 2000, we acquired Kendara, Inc. and Rucker
Design Group and we expect to acquire several other companies during 2000.
These companies have specific technology and other capabilities that we may not
be able to successfully integrate with our services or transition to our online
platforms. As a result, we may incur unexpected integration and product
development expenses that could harm our results of operations. We may also be
required to record charges to operations related to the impairment of acquired
technology or other intangible assets.
We have incurred and expect to continue to incur substantial losses.
At Home Corporation was incorporated in March 1995, commenced operations in
August 1995, and has incurred net losses in each fiscal period since its
inception. As of March 31, 2000, we had an accumulated deficit of $2,361
million, which includes depreciation and amortization, cost and amortization of
acquisition-related intangibles and deferred compensation and cost and
amortization of distribution agreements of approximately $2,317 million since
inception. In addition, we currently intend to increase capital expenditures
and operating expenses in order to expand our network, market and provide our
broadband services to potential subscribers and expand our international
operations. As a result of the acquisitions of Excite, iMALL, Bluemountain.com
and other companies, we anticipate that we will incur substantial non-cash
charges including those relating to the amortization of goodwill and other
intangible assets in future periods. Therefore, we anticipate that we will
incur significant net losses for the foreseeable future.
Our quarterly operating results may fluctuate because of a number of factors.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control.
These factors include:
. the level of usage of the Internet in general and portal web sites in
particular;
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. subscriber growth rates and prices charged by our cable partners;
. demand for Internet advertising;
. the addition or loss of advertisers;
. the level of user traffic on our web sites used for our narrowband
services;
. the mix of types of advertising we sell, such as the mix of targeted
advertising as compared to general rotation advertising;
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. the introduction of new products or services by us or our competitors;
. pricing changes for Internet-based advertising;
. the timing of marketing expenditures to promote our brands;
. costs incurred with respect to acquisitions;
. seasonality during the first quarter of each year associated with the
advertising business and Bluemountain.com; and
. general economic conditions.
Our expense levels are based in part on expectations of future revenue and,
to a large extent, are fixed. We may be unable to adjust spending quickly
enough to compensate for any unexpected revenue shortfall.
Our Internet advertising revenue is subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters,
and user traffic for our narrowband services has historically been lower during
the summer and during year-end vacation and holiday periods.
Due to all of the foregoing factors and the other risks described in this
section, you should not rely on quarter-to-quarter comparisons of our results
of operations as an indication of future performance, particularly in light of
the number of acquisitions we have completed. It is possible that in some
future periods our results of operations may be below the expectations of
public market analysts and investors. In this event, the price of our Series A
common stock may fall.
If we do not develop new and enhanced features, products and services for our
narrowband and broadband services, we may not be able to attract and retain a
sufficient number of users.
Because of the competitiveness of our market, we believe it is important to
introduce additional or enhanced features, products and services in the future
in order to differentiate our services and retain our current users and attract
new users. Acquiring or developing new features, products and services may
require a substantial investment of personnel and financial and other
resources. If we introduce a feature, product or service that is not favorably
received by our current users, they may not continue using our services as
frequently and they may choose a competing service.
We must also continually enhance our products and services to incorporate
rapidly changing Internet technologies. We could incur substantial development
costs if we need to modify our products, services or infrastructure to adapt to
changes in Internet technologies. Our business could be harmed if we incur
significant costs to adapt to these changes. If we cannot adapt to these
changes, users may discontinue using our services. Additionally, a new feature,
product or service may not gain acceptance with users and we may not achieve a
return on our investment.
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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 identify 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
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technology that shields e-mail addresses, cookies and other electronic means of
identification could become commercially accepted. Any reduction or limitation
in the use of cookies through legislation, new technology or otherwise, could
limit the effectiveness of our ad targeting, which could harm our business.
We could face liability related to the privacy of personal information about
our users.
Our narrowband services use cookies to deliver targeted advertising, help
compile demographic information about users and limit the frequency with which
an advertisement is shown to the user. Cookies are placed on the user's hard
drive, often without the user's knowledge or consent. We could face liability
relating to the collection and use of this information, as well as other
misuses such as unauthorized marketing. The Federal Trade Commission and some
states have been investigating Internet companies regarding their use of
personal information, and some groups have initiated legal action against
Internet companies regarding their privacy practices. In addition, the United
States federal and various state governments have proposed new laws restricting
the collection and use of information regarding Internet users. We could incur
additional expenses if new regulations regarding the use of personal
information are introduced or if government agencies choose to investigate our
privacy practices.
The sponsorship advertising we sell subjects us to financial and other risks.
We derive a substantial portion of our revenues from sponsorship
arrangements. These are advertising relationships under which third parties
receive sponsored services and placements on our services in addition to
traditional banner advertisements across our services. These arrangements
expose us to potential financial risks, including the risk that we fail to
deliver required minimum levels of user impressions, that third party sponsors
do not perform their obligations under these agreements, or that they do not
renew the agreements at the end of their term. These arrangements also require
us to integrate sponsors' content with our services, which can require the
dedication of resources and programming and design efforts to accomplish. We
may not be able to attract additional sponsors or renew existing sponsorship
arrangements when they expire.
In addition, we have granted exclusivity provisions to some of our sponsors,
and may in the future grant additional exclusivity provisions. These
exclusivity provisions may have the effect of preventing us from accepting
advertising or sponsorship arrangements from certain advertisers during the
term of the agreements. Our inability to enter into further sponsorship or
advertising arrangements as a result of any exclusivity arrangements could harm
our business.
Our equity investments in other companies may not yield any returns.
We have made equity investments in many Internet companies, including joint
ventures in other countries. In most instances, these investments are in the
form of illiquid securities of private companies. These companies typically are
in an early stage of development and may be expected to incur substantial
losses. Due to recent market volatility, some of these companies may alter
plans to go public, and others that have gone public have experienced or may
experience significant decreases in the trading prices of their common stock.
Our investments in these companies may not yield any return. Furthermore, if
these companies are not successful, we could incur charges related to write-
downs or write-offs of assets. We also record and continue to record a share of
the net losses in some of these companies, up to our cost basis, if they are
our affiliates. 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.
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The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications over the
Internet. Any well-publicized compromise of security could deter more people
from using the Internet or our services to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Because many of our advertisers seek to encourage people to use the Internet to
purchase goods or services, our business could be harmed if this were to occur.
We may also incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by these breaches.
Our limited experience with international operations may prevent us from
growing our business outside the United States.
A key component of our strategy is to expand into international markets and
offer broadband and narrowband services in those markets. We have limited
experience in developing localized versions of our products and services and in
developing relationships with international cable system operators. We may not
be successful in expanding our product and service offerings into foreign
markets. Some of our investments in international joint ventures include an
option to purchase the interests of other joint venture stockholders which, if
not exercised by a specified date, gives the other joint venture stockholders
the right to purchase our interest in the joint venture for a nominal price. In
addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, we face specific
risks related to providing broadband and narrowband services in foreign
jurisdictions, including:
. regulatory requirements, including the regulation of Internet access;
. legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions;
. potential inability to use European customer information due to new
European governmental regulations; and
. lack of a developed cable infrastructure in many international markets.
We may be liable for our links to third-party web sites.
We could be exposed to liability with respect to the third-party web sites
that may be accessible through our services. These claims may allege, among
other things, that by linking to web sites operated by third parties, we may be
liable for copyright or trademark infringement or other unauthorized actions by
third parties through these web sites. Other claims may be based on errors or
false or misleading information provided by our services. Our business could be
harmed due to the cost of investigating and defending these claims, even to the
extent these types of claims do not result in liability.
We may face potential liability from our electronic commerce-related
advertising arrangements.
Some of our advertising relationships provide that we may receive payments
based on the amount of goods or services purchased by consumers clicking from
our services to a seller's web site. These arrangements may expose us to legal
risks and uncertainties, including potential liabilities to consumers of the
advertised products and services. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to indemnify us for all liability that may be imposed.
Some of the liabilities that may result from these arrangements include:
. potential liabilities for illegal activities that may be conducted by the
sellers;
. product liability or other tort claims relating to goods or services sold
through third-party e-commerce sites;
. claims for consumer fraud and false or deceptive advertising or sales
practices;
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. breach of contract claims relating to purchases; and
. claims that items sold through these sites infringe third-party
intellectual property rights.
Even to the extent that these claims do not result in material liability,
investigating and defending these claims could harm our business.
Protection of our intellectual property rights is costly and difficult.
We regard our intellectual property, including our patents, copyrights,
trademarks, trade secrets, and similar intellectual property as critical to our
success. We rely upon patents, trademark and copyright law, trade secret
protection and confidentiality and license agreements to protect our
proprietary rights. Effective protection of intellectual property may not be
available in every country in which our products and services are available. We
cannot guarantee that the steps we have taken to protect our proprietary rights
will be adequate.
We may be subject to intellectual property infringement claims which are costly
to defend and could limit our ability to use certain technologies in the
future.
Many parties are actively developing Internet-related technologies. We
believe that these parties will continue to take steps to protect these
technologies, including seeking patent protection. As a result, we believe that
disputes regarding the ownership of these technologies are likely to arise in
the future. From time to time, parties assert patent infringement claims
against us in the form of letters, lawsuits and other forms of communications.
In addition to patent claims, third parties may assert claims against us
alleging infringement of copyrights, trademark rights, trade secret rights or
other proprietary rights or alleging unfair competition.
We may incur substantial expenses in defending against third-party
infringement claims regardless of the merit of the claims. In the event that
there is a determination that we have infringed third-party proprietary rights,
we could incur substantial monetary liability and be prevented from using the
rights in the future.
Our business depends on the continued growth in Internet use.
We operate in a new and rapidly evolving market. Our business may be
adversely affected if usage of the Internet or other online services does not
continue to grow. This growth could be hindered by a number of factors
including the adequacy of the Internet's infrastructure to meet increased usage
demands, privacy and security concerns and the availability of cost-effective
services. Any of these issues could cause the Internet's performance or level
of usage to decline.
Our substantial leverage and debt service obligations may adversely affect our
cash flow.
We have substantial amounts of outstanding indebtedness, primarily from our
convertible subordinated debentures due 2018 and our 4 3/4% convertible
subordinated notes due 2006. We may be unable to generate cash sufficient to
pay the principal of, interest on and other amounts due in respect of our
indebtedness when due. As of March 31, 2000, the total principal amount of our
debt outstanding was $942 million. Our substantial leverage could have
significant negative consequences, including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
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Future acquisitions could result in dilutive issuances of stock and the need
for additional financing.
We have typically paid for our acquisitions by issuing shares of our capital
stock. In the future, we may effect other large or small acquisitions by using
stock, and this will dilute our stockholders. We may also use cash to buy
companies or technologies in the future, as we did for a portion of the
purchase price for Bluemountain.com, and we may need to incur additional debt
to pay for these acquisitions. Acquisition financing may not be available on
favorable terms or at all. In addition, we will likely be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which will have a material effect on our results of
operations.
We must manage our growth.
Our growth and recent acquisitions have placed a significant strain on our
managerial, operational, and financial resources. For example, we have grown
from 570 employees at December 31, 1998 to more than 2,400 employees at March
31, 2000. In addition, we plan to continue to hire additional personnel. To
manage our growth, we must continue to implement and improve our operational
and financial systems and to expand, train and manage our employee base. Any
failure to manage growth effectively could harm our business.
Government regulation and legal uncertainties relating to the Internet could
hinder the popularity of the Internet.
New Internet privacy and other laws. There are currently few laws or
regulations that specifically regulate communications or commerce on the
Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, content and the characteristics
and quality of products and services. For example:
. The United States federal government and various state governments have
proposed limitations on the collection and use of information regarding
Internet users. In October 1998, the European Union adopted a directive
that may result in limitations on our ability to collect and use
information regarding Internet users in Europe.
. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. This could
increase the cost of transmitting data over the Internet.
. A portion of the Telecommunications Act, which has since been ruled
unconstitutional, sought to prohibit transmitting certain types of
information and content over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the
Internet could harm our business.
Tax laws. The tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made at the federal, state
and local level and by certain foreign governments that could impose taxes on
the sale of goods and services and certain other Internet activities. Our
business may be harmed by the passage of laws in the future imposing taxes or
other burdensome regulations on online commerce.
Other jurisdictions. Because our service is available in multiple states and
foreign countries, these jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of these states and
foreign countries. If we fail to qualify as a foreign corporation in a
jurisdiction where we are required to do so, we could be subject to taxes and
penalties.
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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.
Additionally, it is often more difficult to attract employees once a company's
stock is publicly traded because the exercise price of equity awards such as
stock options are based on the public market, which is highly volatile. 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. This risk is compounded by the fact
that we are controlled by our principal cable partners or by AT&T alone if the
transactions contemplated by the agreements with our cable partners become
effective, and therefore we may not have the same flexibility as a typical
Silicon Valley company to pursue initiatives proposed by management.
Furthermore, certain key employees possess marketing, technical and other
expertise which is important to the operations of our business, and if these
employees leave, we may not be able to replace them with employees possessing
comparable skills.
Risks Relating to Excite@Home's Broadband Services
Our broadband business is unproven, and it may not achieve profitability.
The profit potential of our broadband business model is unproven and our
broadband services may not achieve widespread consumer or commercial
acceptance. We have had difficulty predicting whether the pricing models or
revenue sharing arrangements with our cable partners for our broadband services
will prove to be viable, whether demand for our broadband services will
continue at the prices our cable partners charge for our broadband services, or
whether current or future pricing levels will be sustainable. If these pricing
levels are not achieved or sustained or if our broadband services do not
achieve or sustain broad market acceptance, our business will be significantly
harmed.
Growth of our broadband service may be inhibited by factors beyond our control.
Our ability to increase the number of subscribers to our broadband service
to achieve our business plans and generate future revenues will depend on many
factors which are beyond our control. For instance, some of our cable partners
have not achieved the subscriber levels that we had originally anticipated.
Other factors include:
. the rate at which our current and future cable partners upgrade their
cable infrastructures for two-way data services;
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. our ability and the ability of our cable partners to coordinate timely
and effective marketing campaigns with the availability of cable
infrastructure upgrades;
. the success of our cable partners in marketing and installing the @Home
service in their local cable areas;
. the prices that our cable partners set for the @Home service and for its
installation;
. the speed at which our cable partners can complete the installations
required to initiate service for new subscribers;
. the commercial availability of self-installable, two-way modems that
comply with the recently adopted interface standards known as DOCSIS, and
the success of the roll-out of these products with the @Home service; and
. the quality of customer and technical support our cable partners provide.
We need to add subscribers at a rapid rate for our broadband business to
succeed, but we may not achieve our subscriber growth goals.
Our actual revenues or the rate at which we add new subscribers may differ
from our forecasts. We may not be able to increase our subscriber base enough
to meet our internal forecasts or the forecasts of industry analysts or to a
level that meets the expectations of investors. The rate at which subscribers
have increased in the past does not necessarily indicate the rate at which
subscribers may be expected to grow in the future.
Our broadband subscriber growth is limited by installation and price
constraints.
Installation of the @Home service generally requires a customer service
representative employed by a cable partner to install a cable modem at a
customer's location and therefore can be time consuming. If we are unable to
speed the installation of our service, our subscriber growth could be
constrained. Moreover, the @Home service is currently priced at a premium to
many other online services, and large numbers of subscribers may not be willing
to pay a premium for the service. Recently, companies have begun to offer free
Internet access with the purchase of personal computers and some Internet
service providers have reduced or eliminated Internet access charges in
exchange for placing advertisements on a customer's computer screen. If these
promotions become more widely used, or if Internet access fees decline,
consumers may be less willing to pay a premium for broadband services, or our
broadband services in particular.
If we cannot maintain the scalability and speed of our @Home broadband network,
customers will not accept our broadband services.
Due to the limited deployment of our broadband services, the ability of our
broadband network to connect and manage a substantial number of subscribers at
high transmission speeds is unknown. Therefore, we face risks related to our
network's ability to be scaled up to accommodate increased subscriber levels
while maintaining performance. Our network may be unable to achieve or maintain
a high speed of data transmission, especially as the number of our subscribers
increases. Because of our reliance on regional data centers and the cable
infrastructure located in particular geographic areas to support our broadband
services, our and our cable partners' infrastructure must also be able to
accommodate increased subscribers in a particular area. If the existing
infrastructure for a geographic area does not accommodate additional
subscribers, network performance for an area could decline causing us to lose
subscribers in that area, especially if a cable partner was unwilling to
upgrade its infrastructure in that area.
In recent periods, the performance of the @Home network has experienced some
deterioration in some markets partially as a result of subscriber abuse of the
@Home service. While we are seeking to eliminate this abuse by enforcing our
acceptable-use policy and by limiting users' upstream bandwidth, our failure to
do so may result in slower network performance and reduced customer demand for
our services.
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If new "DOCSIS" compliant and self-installable cable modems are not deployed
timely and successfully, our subscriber growth could be constrained.
Currently, each of our subscribers must typically obtain a cable modem from
a cable partner to access the @Home service. The North American cable industry
has recently adopted interface standards known as DOCSIS for hardware and
software to support the delivery of data services over the cable infrastructure
utilizing compatible cable modems. Some of our cable partners have chosen to
delay deployments of the @Home service until the commercial availability of
DOCSIS-compliant cable modems is widespread, among other reasons. Subscriber
growth could be constrained and our business could be significantly harmed if
our cable partners choose to slow the deployment of the @Home service because
they are not able to obtain a sufficient quantity of DOCSIS-compliant modems
and if such modems do not become widely available through other channels.
We believe that our ability to meet our subscriber goals depends on the
degree to which two-way cable modems become widely available in channels such
as personal computer manufacturers and retail outlets. Currently, this
widespread availability has not yet occurred. 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. In addition, these modems must be easy for consumers to install
themselves, rather than requiring a customer service representative to perform
the installation. If two-way cable modems do not become quickly available in
outlets other than through cable television companies, or if they cannot be
installed easily by consumers, it would be difficult for us to attract large
numbers of additional subscribers and our business would be harmed.
Our broadband business may be impacted by cable access proposals and other
government regulation.
Currently, our broadband services are not directly subject to regulations of
the Federal Communication Commission or any other federal, state or local
communications regulatory agency. However, there may be changes in the
regulatory environment relating to the Internet, cable television or
telecommunications markets. These changes could require regulatory compliance
by us, impact our exclusivity arrangements or limit our ability to provide
broadband services to our subscribers, and therefore could adversely affect our
revenues and results of operations. Such possible government regulations
include the following:
. The FCC or local agencies could require our cable partners to grant
competitors access to their cable systems. GTE, MindSpring Enterprises,
Inc., Consumers Union and other parties have requested Congress, the
Federal Communications Commission and state and local authorities to
require cable operators to provide Internet and online service providers
with unbundled access to their cable systems. Some parties have also
attempted to petition for unbundled access under existing cable
franchising rules, such as those for local programming access. If we or
our cable partners are classified as common carriers, or if government
authorities require third-party access to cable networks or unaffiliated
Internet service providers, our competitors may be able to provide
service over our cable partners' systems. The rates that our cable
partners charge for this third-party access, or for the @Home services,
could also be subject to rate regulation or tariffing requirements.
. Local governmental proceedings. Some local jurisdictions, including
Portland and Multnomah County, Oregon and Broward County, Florida, have
imposed third-party access requirements on AT&T and other cable companies
operating in those communities. The imposition of these requirements has
been challenged in Federal Courts. In June 1999, a U.S. District Court
upheld the third-party access requirement imposed on AT&T by Portland and
Multnomah County. This decision was appealed to the U.S. Court of Appeals
for the Ninth Circuit and arguments were presented to the court in
November 1999. Although appeals decisions have no time limit, most
rulings occur within three to twelve months after the date arguments are
presented. Numerous other local jurisdictions have considered or are
considering imposing similar third-party access requirements and other
municipalities may consider imposing similar requirements in the future.
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. Other litigation. In October 1999, GTE filed a lawsuit in a U.S. District
Court and in November 1999, a class action was filed, each alleging
violations by us of the federal antitrust laws. Although it is too early
to predict the outcome of this litigation, we could be forced to pay
damages, allow other service providers to utilize our network, otherwise
alter the way we do business or incur significant costs in defending
these litigations. Any of these outcomes could harm our business. In
addition, others could initiate litigation on similar legal theories in
the future.
. Federal regulation. Regulatory changes that affect telecommunications
costs, limit usage of subscriber-related information or increase
competition from telecommunications companies could affect our pricing or
ability to market our broadband services successfully. For example,
changes in the regulation of cable television rates may affect the speed
at which our cable partners upgrade their cable systems to carry our
broadband services.
. Regulation by local franchise authorities. Many of our United States
cable partners' local cable affiliates have elected to classify the
provision of the @Home service as an additional cable service under their
local franchise agreements, and to pay franchise fees under those
agreements. Local franchise authorities may attempt to subject cable
systems to higher or different franchise fees, taxes or other
requirements in connection with their distribution of the @Home service.
There are thousands of franchise authorities, and thus it would be
difficult or impossible for us or our cable partners to operate without a
uniform set of franchise requirements.
We could lose subscribers, distribution relationships and revenues related to
broadband services to our competitors.
The markets for consumer and business broadband services are extremely
competitive, and we expect that competition will intensify in the future. Our
most direct competitors for broadband services include the following:
. Providers of cable-based Internet services. Media One Group, which AT&T
has agreed to acquire, and Time Warner Inc. have deployed high-speed
Internet access services over their local cable networks through their
own cable-based Internet service, Road Runner. We currently compete with
Road Runner to establish distribution arrangements with cable system
operators and we may compete for subscribers in the future if and when
our cable partners cease to be subject to their exclusivity obligations.
In addition, we compete with other providers of cable-based Internet
services, such as ISP Channel, Inc. and High Speed Access Corporation.
. Telecommunications providers. We compete with national long-distance and
local exchange carriers that offer high-speed, Internet access services
such as asymmetric digital subscriber line, known as DSL. Recently, these
services have been offered in a number of areas and at lower prices than
in the past. If the advanced services offered by these companies are
deregulated, this would further enhance the ability of these companies to
compete against our services.
. Internet and online service providers. We compete with Internet service
providers that provide basic Internet access services, online service
providers such as America Online, and other Internet portals and online
services that have announced broadband strategies, such as Yahoo!.
Many of our competitors and potential competitors have substantially greater
financial, technical and marketing resources, larger subscriber bases, longer
operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than we
do. These competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote more resources to
developing Internet services or online content than we can. We may not be able
to compete successfully against current or future competitors. Competitive
pressures could significantly impact the growth of our broadband subscriber
base and our ability to renew and enter into new distribution agreements and as
a result may hurt our revenues.
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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, will have a substantial
ownership interest in Time Warner and Road Runner if its proposed merger with
MediaOne is completed. This relationship between America Online, AT&T, Time
Warner and Road Runner creates further uncertainties about which cable markets
we will be able to serve and under what terms. The proposed merger would also
give America Online, the dominant dial-up Internet service provider, the
ability to utilize Road Runner's technology as a basis for leveraging its
marketing prowess and extensive subscriber base to compete for customers in our
cable markets once our exclusivity agreements have expired. As a result, we may
face intense long-term competition for customers in previously exclusive cable
markets.
Our dependence on our network to provide our broadband services exposes us to a
significant risk of system failure.
Our broadband service operations are dependent upon our ability to support
our highly complex network infrastructure and avoid damage from fires,
earthquakes, floods, power losses, telecommunications failures and similar
events. The occurrence of a natural disaster or other unanticipated problem at
our network operations center or at a number of our regional data centers could
cause interruptions in our broadband services. Additionally, failure of our
cable partners or companies from which we obtain data transport services to
provide the data communications capacity that we require, for example as a
result of natural disaster or operational disruption, could cause interruptions
in our broadband services. Any damage or failure that causes interruptions in
our network operations could harm our business.
Risks Related to Our Relationships With Our Cable Partners
The success of our business depends on our relationships with our cable
partners. We recently announced extended and modified distribution agreements
with AT&T, Comcast and Cox, which are subject to stockholder and regulatory
approvals, and we also have distribution agreements with other cable partners.
Additionally, we have agreed not to provide a variety of Internet services in
the areas covered by our cable partners. Our agreements with our cable partners
are complex and some of the risks associated with these relationships are set
forth below. Please also refer to "Item 13. Certain Relationships and Related
Transactions" for a further description of the recently announced agreements.
We depend on our cable partners to upgrade to the two-way cable infrastructure
necessary to support the @Home service; the availability and timing of these
upgrades are uncertain.
Transmission of our broadband services depends on the availability of high-
speed two-way hybrid fiber coaxial cable infrastructure. However, only a
portion of existing cable plant in the United States and in some international
markets has been upgraded to two-way hybrid fiber coaxial cable, and even less
is capable of high-speed two-way transmission. As of March 31, 2000,
approximately 43% of our North American cable partners' cable infrastructure
was capable of delivering the @Home service. Our cable partners have announced
and are implementing major infrastructure investments in order to deploy two-
way hybrid fiber coaxial cable. However, these investments have placed a
significant strain on the financial, managerial, operating and other resources
of our cable partners, most of which are already highly leveraged. Therefore,
these infrastructure investments have been, and we expect will continue to be,
subject to change, delay or cancellation. Furthermore, because of consolidation
in the cable television industry, as well as the sale or transfer of cable
assets among cable television operators, many cable companies have delayed
upgrading particular systems that they plan to sell or transfer. If these
upgrades are not completed in a timely manner, our broadband services may not
be available on a widespread basis and we may not be able to increase our
subscriber base at the rate we anticipate. Although our commercial success
depends on the successful and timely completion of these infrastructure
upgrades, most of our cable partners are under no obligation to upgrade systems
or to introduce, market or promote our broadband services. As has happened in
the past, even if a cable partner upgrades its
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cable infrastructure, the upgraded infrastructure may not function properly,
and therefore may cause a delay in the availability of our broadband services
for particular areas. The failure of our cable partners to complete these
upgrades in a timely and satisfactory manner, or at all, would prevent us from
delivering broadband services and would significantly harm our business.
Our cable partners are not generally obligated to carry our broadband services,
and the exclusivity obligations that prevent them from carrying competing
services may be terminated.
Most of our cable partners are currently subject to exclusivity obligations
that prohibit them from obtaining high-speed, greater than 128 kilobits per
second, residential consumer Internet services from any source other than us.
However, our cable partners are generally under no affirmative obligation to
carry any of our broadband services. The current exclusivity obligations of our
principal cable partners, AT&T, Comcast, Cox and Cablevision, expire on June 4,
2002, and may be terminated sooner under some circumstances, as follows:
. under the new agreements, Comcast or Cox may terminate their exclusivity
obligations to us, or their entire relationship with us, at any time on
or after June 4, 2001 by providing six months' prior written notice, with
the termination to become effective on the first June 4 or December 4
following this notice period, provided that they forfeit newly-issued
warrants to purchase shares of our Series A common stock;
. under the new agreements, Comcast may terminate its current exclusivity
obligations at any time if required to do so by Microsoft pursuant to an
agreement between those companies, in which case we may repurchase a
portion of Comcast's equity interest in Excite@Home;
. any principal cable partner may terminate all of its exclusivity
obligations upon a change in law that materially impairs its rights;
. Comcast or Cox may terminate all exclusivity obligations of our principal
cable partners at any time if there is a change of control of TCI that
results within 12 months in the incumbent TCI directors no longer
constituting a majority of TCI's board. AT&T, TCI, Comcast and Cox have
agreed, however, that AT&T's acquisition of TCI did not constitute a
change of control under the terms of the original agreement; and
. Comcast or Cox may terminate the exclusivity provisions of our principal
cable partners as of June 4 of each year if AT&T and its affiliates do
not meet specified subscriber penetration levels for the @Home service.
Under the new agreements, Comcast and Cox were granted the right to sell
their shares of our Series A common stock to AT&T for a minimum price of $48 a
share at any time between January 1, 2001 and June 4, 2002. This right could
make it easier for Comcast or Cox to terminate their relationship with us
should they choose to do so.
Additionally, under the new agreements, once the current exclusivity
obligations expire on June 4, 2002, these cable partners have agreed to use us
as their provider of platform and connectivity services used in delivering
their high-speed Internet access services over their cable systems in the
United States through June 4, 2008 with respect to AT&T, and through June 4,
2006 with respect to Comcast and Cox. However, these agreements do not prohibit
these cable partners from offering consumers a choice to use other service
providers after June 4, 2002, or sooner with respect to Comcast or Cox if they
terminate their exclusivity obligations. Comcast or Cox may terminate this new
agreement at any time by providing six months' prior written notice, with the
termination to become effective on the first June 4 or December 4 following
this notice period.
If the exclusivity obligations of our cable partners or our new agreements
with these cable partners are terminated, our business could be harmed
significantly and our stock price may suffer an immediate drop.
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Our cable partners may offer services that compete with the @Home service, but
we are prohibited from offering competing services.
Many of our cable partners' exclusivity obligations are limited to high-
speed residential Internet services and do not extend to various services that
they may offer without us. These services include, but are not limited to,
telephony services, commercial and business services similar to our @Work
service, Internet services that do not use the cable television infrastructure
or do not require use of an Internet backbone and limited Internet services
including streaming video and other downstream-only services. By providing
these services, most cable partners can compete, directly or indirectly, with
our broadband delivery activities.
Until the expiration of our principal cable partners' exclusivity
obligations, we may not offer the services described above using their plant,
or to residences in the geographic areas served by their cable systems, without
their consent. These restrictions apply even if we have integrated such a
service with the @Home service in another geographic area. For example, in
order to provide streaming video longer than 10 minutes in duration, we must
seek a principal cable partner's consent or negotiate a separate agreement,
including a new revenue split, if applicable, prior to offering the service. We
must similarly obtain our cable partners' consent or execute a separate
agreement to provide broadband services over alternate platforms including
fixed wireless, cellular or DSL infrastructures to any residential customers in
the cable partners' geographic area. If our principal cable partners do not
allow us to offer broadband services over alternate platforms, our market for
such services will be severely limited and our business could be harmed.
We depend on our cable partners to promote our services and obtain new
subscribers.
The rate at which we are able to obtain new subscribers depends not only on
the degree to which our cable partners upgrade their cable systems but also on
the level and effectiveness of the efforts of our cable partners to promote our
services. Our cable partners have achieved different levels of subscriber
penetration. In Canada, for example, where our cable partners have high levels
of upgraded cable systems and faced early competition from other providers of
high speed data services, we have relatively high levels of subscriber
penetration (exceeding those in the United States). Among our principal U.S.
cable partners, AT&T, Cox and Comcast are actively promoting our services and
are beginning to increase their penetration rates. Cablevision, however, has
deployed our service to only a small number of subscribers and continues to
offer its own online service called Optimum Online to the majority of
subscribers in cable systems deployed to date. We cannot predict the rate at
which our cable partners will add new subscribers to our services. If our cable
partners do not actively and effectively promote our services, we will not be
able to reach the level of subscribers necessary to achieve a profitable
business model.
We are currently controlled by our principal cable partners, and may become
subject to control by AT&T, and our interests may not always align with AT&T or
our other principal cable partners.
AT&T controls approximately 55% of our voting power. Currently, four of our
eleven directors are directors, officers or employees of AT&T or its
affiliates. AT&T currently owns all 30.8 million outstanding shares of our
Series B common stock, each of which carries ten votes per share. This Series B
common stock ownership gives AT&T the right to elect five Series B directors,
one of which is designated by Comcast and one of which is designated by Cox.
Currently, our board may take action only if approved by the board and by at
least 75%, or four of the five, of our Series B directors. As a result,
corporate actions generally require the approval of AT&T's three Series B
directors and one, or in some cases both, of the directors designated by
Comcast and Cox. Therefore, Comcast and Cox, acting together, may veto any
board action.
Under our new agreements with these cable partners, AT&T will acquire
additional voting control over us. If the transactions contemplated by these
agreements become effective, AT&T will have the right to elect at least a
majority of the board of directors. Comcast and Cox will waive their right to
elect directors to our board and their designees will resign their board
positions. All board actions will be decided by a majority vote of the board.
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Currently, we depend on a continuing cooperative relationship with our
principal cable partners in order to approve board action and in order to take
action that requires stockholder consent. If the transactions contemplated by
our new agreements with our cable partners become effective, we will be subject
to both board and stockholder voting control by AT&T. It is possible that the
objectives of these companies, or AT&T if the transactions contemplated by our
new agreements become effective, will diverge from what management considers to
be our optimum strategy.
Warrants issued to our cable partners may result in additional dilution to our
stockholders.
We have entered into agreements with Cablevision, Rogers, Shaw and other
cable partners under which we issued warrants to purchase shares of our Series
A common stock. Under these agreements, warrants to purchase approximately 29.7
million shares of our Series A common stock at an average price of $2.09 per
share were exercisable as of March 31, 2000.
Under our new agreements with our principal cable partners, we granted or
will grant warrants to Comcast and Cox to purchase two shares of Series A
common stock and warrants to AT&T to purchase one share of Series A common
stock and one share of Series B common stock, for each home passed by the cable
systems located in the United States operated by each respective cable partner.
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
incur accounting charges with respect to these warrants, although we have not
yet determined the exact timing and amount of these charges.
To the extent that our principal cable partners, Cablevision, Rogers, Shaw
or other cable partners become eligible to and exercise their warrants, our
stockholders would experience substantial dilution. We also may issue
additional stock, or warrants to purchase stock, at prices equal to or less
than fair market value in connection with efforts to expand distribution of the
@Home service.
Risks Related to Our Narrowband Services
Our narrowband services could lose users, advertisers and revenues to
competitors.
Our narrowband services compete with a number of companies both for users
and advertisers and, therefore, for revenues. We expect this competition will
intensify, particularly because there are few barriers to entry in this market.
These competitors include:
. Internet portal companies such as Disney's Go Network, Lycos, Netscape's
Netcenter, NBCi and Yahoo!;
. online service providers such as America Online and Microsoft's MSN
service;
. large media companies such as CBS, NBC, Time Warner and USA Networks,
Inc., who have announced initiatives to develop web services or partner
with web companies; and
. 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
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experience increases in traffic and page views, or the traffic and page views
on our narrowband services could remain constant or decline, either of which
could harm our business by making these web sites appear more attractive to
advertisers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. These competitors may be able
to undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, distribution
partners, advertisers and content providers. Further, it is possible that our
competitors could develop search and retrieval services or other online
services that are equal or superior to ours or that achieve greater market
acceptance than our offerings.
The Internet in general, and our narrowband services specifically, also must
compete with traditional advertising media, such as print, radio and
television, for a share of advertisers' total advertising budgets. To the
extent that the Internet is not perceived as an effective advertising medium,
advertisers may be reluctant to devote a significant portion of their
advertising budgets to Internet advertising.
The proposed merger between Time Warner Inc. and America Online announced in
January 2000 would create a very large, diverse media conglomerate. The
combined companies may be able to use their diverse media holdings and Internet
service delivery capabilities to develop or expand Internet services and
content that could attract a significant number of new users and increased
traffic. Additionally, America Online will likely use Time Warner's
subscription-based services as an advertising mechanism to attract users to the
Internet access services provided by America Online and Road Runner. Increased
competition for users of Internet services and content may result in lower
subscriber growth rates for our online and Internet services and lower
advertising rates and decreased demand for advertising space on our web sites.
If usage of Internet portal sites by Internet users declines, our business
could be harmed.
The success of our Internet portal web sites is also dependent on Internet
users continuing to use "portal" web sites for their information needs. Some
Internet measurement services have reported that the number of unique users of
Internet portal sites has been decreasing in recent periods. If Internet users
begin to become less dependent on portal sites, and instead go directly to
particular web sites, our traffic levels could decrease as measured by unique
users, reach and pages views. As a result, the number of advertising
impressions and the attractiveness of our sites to advertisers could be
impacted, which would harm our media and advertising revenues.
Our systems may not be able to accommodate increases in the number of users of
our narrowband services.
Our web sites for the Excite Network are currently hosted and operated on a
computer network infrastructure separate from our broadband services. The
Excite Network must accommodate a high volume of traffic and deliver
frequently-updated information. The web sites for the Excite Network have in
the past, and may in the future, experience slower response times or other
problems for a variety of reasons. We also depend on third party information
providers to provide updated information and content for these services on a
timely basis. The Excite Network could experience disruptions or interruption
in service due to the failure or delay in the transmission or receipt of this
information. In addition, the users of these Excite Network services depend on
Internet service providers, online service providers and other web site
operators for access to the Excite Network. Each of these parties has
experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
These types of occurrences could cause users to perceive the Excite Network as
not functioning properly and therefore cause them to use other services.
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
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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.
Item 2. Properties
We are headquartered in facilities consisting of approximately 670,000
square feet in Redwood City, California, which we occupy under 12 to 15 year
leases. Our headquarters facilities include buildings constructed during 1999
and new facilities that we occupied at the beginning of 2000 as a result of
build-to-suit options we exercised in September 1997 and March 1998. All
facilities constructed under our build-to-suit options are subject to leases of
up to 15 years in length, have base rents determined in relation to
construction costs and include tenant improvements paid for by us. The build-
to-suit options that have been exercised to date provide for monthly rental
payments that begin upon the phased completion of the buildings. In addition to
our build-to-suit options, in December 1998 we exercised our right to purchase
one land parcel from the landlord. The purchase price of the exercised option
included a payment of $5.2 million in 1999. We also lease space at smaller
facilities in various locations throughout the United States as well as in
several international locations. These facilities primarily house our regional
support and sales offices in locations such as New York, Chicago, Los Angeles,
Philadelphia and San Francisco, as well as the operations of businesses we have
acquired, including the offices of Excite's MatchLogic subsidiary in
Westminster, Colorado and in Waltham, Massachusetts, iMALL's offices in Provo,
Utah and Santa Monica, California, Bluemountain.com's offices in Boulder,
Colorado, and other small offices in various domestic and international
locations. In January 2000, we also entered into agreements for the
construction of additional facilities near our headquarters which are expected
to be completed in late 2001. We believe that our existing facilities and the
facilities planned for construction will be adequate to accommodate our growth
for the foreseeable future.
Item 3. Legal Proceedings
Sheldon Pittleman and Ralph Zonies each filed derivative lawsuits on behalf
of Excite@Home against AT&T and Messrs. Armstrong, Petrillo, Roberts, Woodrow,
Doerr, Hearst, Bell, Malone, Shaw and Jermoluk, all of whom were our directors
when the lawsuits were initiated on October 15, 1999, in the Court of Chancery
of the State of Delaware. We are named as a nominal defendant in each
complaint. Each complaint alleges breaches of fiduciary duty to Excite@Home and
its public stockholders. We have not yet filed responsive pleadings in either
matter. Each of Messrs. Pittleman and Zonies seeks an injunction requiring us
to alter our corporate governance, including appointing new, unaffiliated
directors, as well as payment of monetary damages, costs and attorneys' fees.
If we do not prevail in this action, we may be required to alter our corporate
governance and pay substantial damages, which could seriously harm our
business.
GTE Internetworking Incorporated and GTE Intelligent Network Services
Incorporated filed a lawsuit against TCI (now a subsidiary of AT&T), Comcast
Corporation and us in the United States District Court for the Western District
of Pennsylvania on October 25, 1999. The complaint alleges violations of the
federal antitrust laws. GTE is seeking an injunction prohibiting continued
performance under our exclusive distribution and sales arrangements with our
cable partners, damages (including treble damages), costs and attorneys' fees.
We filed an answer to the complaint in this matter on December 15, 1999, which
was amended on December 21, 1999, denying the allegations of unlawful conduct
in the complaint. If we do not prevail in this action, our cable partners, when
providing high speed data transport to residential consumers, may be required
to offer the services of other Internet service providers in addition to the
@Home service. We may also be required to pay substantial damages. Either of
these results could seriously harm our business and could encourage others to
initiate litigation on similar legal theories in the future.
Fred and Roberta Lipschutz, Arthur Simon and John Galley, III, as named
plaintiffs, filed a class action against us, AT&T, ServiceCo L.L.C. and
entities affiliated with eight other cable companies in the United States
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District Court for the Central District of California on November 10, 1999. The
complaint alleges violations of the federal antitrust laws. The plaintiffs seek
an injunction prohibiting the alleged acts, damages (including treble damages),
costs and attorneys' fees. We filed an answer to the complaint in this matter
on January 21, 2000, denying the allegations of unlawful conduct in the
complaint. If we do not prevail in this action, we may be required to pay
substantial damages, or we may be forced to alter the way we do business.
Either of these results could seriously harm our business and could encourage
others to initiate litigation on similar legal theories in the future.
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 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market for the Registrant's Common Equity
Our Series A common stock trades on the Nasdaq National Market under the
symbol "ATHM." The following table sets forth, on a per share basis, the high
and low sales prices of the Series A common stock for the periods indicated, as
reported by the Nasdaq National Market. The prices in the table have been
adjusted to reflect our two-for-one stock split effective June 1999.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter.............................................. $19.06 $10.25
Second Quarter............................................. $28.63 $14.88
Third Quarter.............................................. $27.47 $11.75
Fourth Quarter............................................. $42.38 $17.25
Fiscal Year Ended December 31, 1999:
First Quarter.............................................. $81.75 $37.25
Second Quarter............................................. $99.00 $39.00
Third Quarter.............................................. $59.63 $33.13
Fourth Quarter............................................. $59.75 $36.69
</TABLE>
As of December 31, 1999, the number of stockholders of record was
approximately 3,000. We have never declared or paid any cash dividends on our
Series A common stock. We presently intend to retain future earnings, if any,
for use in our business and, therefore, we do not anticipate paying any cash
dividends on our capital stock in the foreseeable future.
Recent Sales of Unregistered Securities
On October 27, 1999, in consideration for amending an e-commerce services
agreement between iMall, which we acquired the same day, and First Data
Merchant Services, a subsidiary of First Data Corporation, we issued fully-
vested warrants to purchase 2,300,000 shares of our Series A common stock in a
private transaction that was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act.
On October 27, 1999, in connection with our acquisition of Webshots
Corporation, we issued 2,050,326 shares of our Series A common stock to the
shareholders of Webshots in a private transaction that was exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act.
On December 13, 1999, in connection with our acquisition of
Bluemountain.com, we issued 10,674 shares of our Series A preferred stock to
the shareholders of Hartford House, Ltd., the operator of the Bluemountain.com
web site, in a private transaction that was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act.
On December 15, 1999, we issued $500 million principal amount of Convertible
Subordinated Notes due 2006 in a transaction that was exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act. Morgan
Stanley & Co. Incorporated, Goldman, Sachs & Co., Deutsche Bank Securities
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist
LLC and BancBoston Robertson Stephens Inc. acted as initial purchasers and
offered the notes primarily to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. Each note was issued in denominations of
$1,000 or multiples of $1,000 and is convertible at any time into Series A
common stock at a conversion price of $56.52 per share, subject to adjustment
in specified circumstances. We may redeem these notes on or after December 20,
2002 by giving note holders at least 30 days' notice. We received net proceeds
of $485.7 million from the offering.
Use of Proceeds from Sales of Registered Securities
Not applicable.
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<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes appearing elsewhere in this annual report. The selected
consolidated balance sheet data as of December 31, 1999 and 1998 and the
selected consolidated statement of operations data for each of the three years
in the period ended December 31, 1999 are derived from our consolidated
financial statements appearing elsewhere in this annual report. Consolidated
statement of operations and balance sheet data as of and for the year ended
December 31, 1999 includes the results of operations and financial condition of
Excite, which we acquired on May 28, 1999. Therefore, comparisons of our
results of operations and financial condition for periods prior to and
subsequent to our acquisition of Excite are not indicative of future results.
In addition, historical results are not necessarily indicative of future
results. Selected financial data as of and for the period from our inception on
March 28, 1995 to December 31, 1995 are not presented because our financial
condition and results of operations as of and for that period were
insignificant. Share and per share data have been adjusted to reflect our two-
for-one stock split effective June 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997 1996
----------- --------- --------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Consolidated Statement Of
Operations Data:
Revenues(/1/)..................... $ 336,955 $ 48,045 $ 7,437 $ 676
Costs and expenses(/2/):
Operating costs.................. 143,056 46,965 22,459 6,969
Product development and
engineering..................... 54,805 17,009 11,984 6,312
Sales and marketing.............. 130,725 18,091 11,863 6,368
General and administrative....... 30,276 12,429 10,635 6,054
Cost and amortization of
distribution agreements......... 291,967 101,385 9,246 --
Amortization of goodwill,
intangible assets and deferred
compensation and other
acquisition-related costs....... 1,157,009 2,758 -- --
----------- --------- --------- --------
Loss from operations.............. (1,470,883) (150,592) (58,750) (25,027)
Interest and other income, net.... 10,253 6,413 3,033 514
Realized gain on investment....... 12,566 -- -- --
Equity share of losses of
affiliates....................... (9,574) -- -- --
----------- --------- --------- --------
Net loss.......................... $(1,457,638) $(144,179) $ (55,717) $(24,513)
=========== ========= ========= ========
Net loss per share -- basic and
diluted.......................... $ (4.61) $ (0.63) $ (0.27) $ (0.13)
=========== ========= ========= ========
Shares used in per share
calculation...................... 316,441 228,479 207,086 192,240
=========== ========= ========= ========
Supplemental Consolidated
Statement of Operations Data:
(/1/)Revenues from related
parties.......................... $ 28,821 $ 10,458 $ 2,948 $ 634
=========== ========= ========= ========
(/2/)Depreciation and amortization
included in costs and expenses,
excluding amortization of
distribution agreements and
acquisition-related amounts...... $ 49,467 $ 15,029 $ 8,913 $ 1,903
=========== ========= ========= ========
Loss from operations before cost
and amortization of distribution
agreements and costs and
amortization related to
acquisitions..................... $ (21,097) $ (46,449) $ (49,504) $(25,027)
=========== ========= ========= ========
- --------
<CAPTION>
As of December 31,
-------------------------------------------
1999 1998 1997 1996
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and
short-term investments........... $ 525,223 $ 419,289 $ 120,379 $ 16,770
Working capital................... 389,023 390,324 101,390 10,573
Distribution agreements, net of
accumulated amortization......... 313,772 186,247 163,345 --
Total assets...................... 9,104,279 780,631 323,928 33,388
Convertible debentures............ 736,294 229,344 -- --
Capital lease obligations, less
current portion and other long-
term liabilities................. 57,552 14,356 15,735 5,654
Stockholders' equity.............. 8,067,017 493,866 282,407 18,317
</TABLE>
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<PAGE>
Item 7. 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 financial statements and
related notes contained in Item 8 of this annual report. This discussion
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. We may identify these
statements by the use of words such as "believe", "expect", "anticipate",
"intend", "plan" and similar expressions. These forward-looking statements
involve several risks and uncertainties. Our actual results could differ
materially from those set forth in these forward-looking statements as a result
of a number of factors, including those described under the caption "Risk
Factors" in "Item 1. Business" and elsewhere in this annual report. These
forward-looking statements speak only as of the date of this annual 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 in this annual report.
Overview
Excite@Home is a global media company offering broadband Internet
connectivity, personalized web-based content and targeted advertising services.
Our @Home service provides broadband Internet access from consumers' homes over
the cable television infrastructure and offers end-to-end managed connectivity
services for businesses over both cable and digital telecommunications lines.
Our @Work division further utilizes our network by providing a range of
Internet services for businesses, including high-speed connectivity, web
hosting and development and hosting of e-commerce solutions. Our media services
include the Excite Network, a leading consumer Internet portal, MatchLogic, our
targeted advertising service, 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. The Excite
Network offers search, content, community, communications services and commerce
functionality to Internet users. Excite's media services focus on comprehensive
navigation, global reach and personalization technology to attract and retain
users and achieve market share. MatchLogic provides advertisers with targeted
ad campaign management and other advertising-related services designed to
improve the effectiveness of their advertising campaigns. Bluemountain.com
enables Internet users to select from a wide range of online greeting cards on
its web site, which can then be personalized and accessed by recipients through
a link in an electronic mail message.
Media and Advertising Services
The Excite Network contains a wide variety of specialized narrowband and
broadband information services, organized under numerous topical channels that
combine proprietary search technology as well as content, community features
and information management services. For over two years, the Excite Network has
been ranked by Media Metrix as one of the top ten destinations on the Internet
and during December 1999 reached over 27.7 million unique users, as reported by
Media Metrix. We provide our consumers compelling content from our content
partners which include Intuit, Sportsline, Tickets.com and WebMD. For
advertisers, we offer a variety of broadband and narrowband advertising options
including banner advertising and sponsorships, allowing them to develop an
advertising plan designed to optimize their reach, frequency of exposure and
consumer response.
Subscriber Network Services
We are the leading provider of broadband Internet services with
approximately 1.1 million subscribers to our @Home service and over 5,100 @Work
business access customers as of December 31, 1999. Subscribers have access to
Internet content and services, including our proprietary multimedia
programming, at speeds up to 50 times faster than typical 56 kilobits-per-
second connections. The service is "always on," meaning that users do not have
to go through dial-up procedures and do not experience busy signals. The
foundation of the @Home service is our scalable, distributed, intelligent
private network, which is designed to avoid bottlenecks frequently encountered
on the public Internet. Elements of this network include a national, optical
fiber Internet
40
<PAGE>
protocol backbone, regional data centers and local caching servers. Our network
design facilitates end-to-end network management, provides for a high level of
security and stores data close to the user in order to minimize the need to
retrieve data from the public Internet. Our network interconnects with the
networks of our 22 cable partners, through which we had access to approximately
72 million homes worldwide as of December 31, 1999. Of these homes,
approximately 23.8 million were served by upgraded two-way cable capable of
carrying our broadband service. Our principal cable partners include AT&T,
Comcast, Cox, Cablevision, Rogers, Shaw and others. Our @Work division further
utilizes our network by providing a range of Internet services for businesses,
including high-speed connectivity, web hosting and development and hosting of
e-commerce solutions.
In March 2000, we introduced @Home 2000, a broadband portal which
incorporates the high-speed connection of our @Home service with the
personalized content of Excite to help our subscribers manage their daily lives
in an easily accessible and media rich environment. Utilizing enhanced features
and a custom browser, @Home 2000 offers a personalized broadband experience to
@Home subscribers.
Recent Events
The following developments, starting with the most recent, occurred during
the fourth quarter of 1999 and the first quarter of 2000.
Announcement of Work.com Joint Venture
On February 22, 2000, we entered into a preliminary agreement with Dow Jones
& Co., Inc. to form a joint venture for the purpose of establishing and
operating an Internet site providing news, information and business services to
small and medium-sized businesses. Under the agreement, we will contribute to
the joint venture approximately $16 million in cash, our Work.com web site
including the related technology and certain of our business-related
advertising and content relationships, in exchange for a 50% equity interest.
Under a separate agreement, we will receive a percentage of the advertising
revenues generated by the joint venture over a three-year term up to a total of
$31 million. The joint venture will be accounted for as an investment under the
equity method.
Acquisition of Kendara, Inc.
On February 20, 2000, we completed our 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. We also assumed Kendara's
outstanding stock options, which were converted into options to purchase
approximately 128,000 shares of our Series A common stock. The merger
consideration is approximately $120 million. Each share of Series B preferred
stock is being held in escrow for one year and will automatically convert into
1,000 shares of our Series A common stock upon the expiration of the escrow
period. Each share of Series C preferred stock is also convertible into 1,000
shares of our Series A common stock, subject to a vesting schedule and escrow.
Kendara provides browser-based marketing services. We accounted for this
acquisition as a purchase.
Issuance of Convertible Subordinated Notes
On December 15, 1999, we issued $500 million principal amount of Convertible
Subordinated Notes in a private offering primarily to qualified institutional
buyers. The notes bear interest at an annual rate of 4.75%. Each $1,000 note is
convertible at any time into Series A common stock at a conversion price of
$56.52 per share. We may redeem these notes on or after December 20, 2002 by
giving note holders at least 30 days' notice. We received net proceeds of
$485.7 million from the offering, of which we used $350 million to finance the
cash component of our acquisition of Bluemountain.com. We intend to use the
remainder of the proceeds for working capital and general corporate purposes.
41
<PAGE>
Acquisition of Bluemountain.com
On December 13, 1999, we completed our merger with Hartford House, Ltd., a
Delaware corporation, the operator of the Bluemountain.com web site.
Bluemountain.com is a leading provider of online greeting card services. In the
merger, we paid $350 million in cash and issued 10,674 shares of our non-voting
Series A preferred stock, which is convertible into approximately 10.7 million
shares of our Series A common stock as the restrictions on resale lapse. Of the
Series A convertible preferred stock issued in this transaction, approximately
50% may not be converted into our Series A common stock and resold until a
period of two years after the closing of the transaction. The remaining
initially issued shares may only be resold at a rate of 500,000 shares of
Series A common stock per month. We also assumed options to purchase shares of
Hartford House common stock, which were converted into options to purchase
approximately 3 million shares of our Series A common stock. The preliminary
purchase consideration of $970 million included $150 million related to our
Series A common stock issuable contingently upon the achievement of certain
performance goals, which were achieved by the Bluemountain.com web site during
December 1999. We accounted for this acquisition as a purchase.
Based upon the achievement of these and a portion of additional performance
goals in December 1999, we issued in the first quarter of 2000 approximately
3.5 million additional shares of our Series A common stock to Hartford House
stockholders and also issued additional options and shares related to the
assumed stock option plan for an aggregate of 542,000 shares of Series A
common. The shares are freely tradable upon issuance. The fair value of this
contingent consideration did not differ significantly from the amount recorded
as of December 31, 1999.
In addition, we also entered into distribution relationships with former
affiliates of Hartford House, including Proflowers.com, Inc., an online flower
company, Dan's Chocolates, an online gift company, and Lucidity, Inc., an
online electronic gift certificate company. These three agreements provide for
us to receive aggregate revenues of up to approximately $34 million over the
three-year terms of the agreements. Revenue recorded during the year ended
December 31, 1999 related to these relationships was not significant.
Acquisition of iMALL, Inc.
On October 27, 1999, we acquired iMALL, Inc., a Nevada corporation, for
approximately 9.3 million shares of our Series A common stock. We also assumed
iMALL's outstanding options and warrants, which were converted into options to
purchase approximately 1.5 million shares and 159,000 shares our Series A
common stock, respectively, and issued to First Data Corporation a warrant to
purchase 2.3 million shares of our Series A common stock at an exercise price
of $36.96 per share. This warrant is immediately exercisable and will expire on
October 30, 2003. The allocation of the total purchase consideration of
approximately $637 million included a charge related to acquired in-process
research and development of $1.9 million. iMALL provides electronic commerce
services and solutions to small and medium-sized businesses enabling them to
sell their products over the Internet. We accounted for this acquisition as a
purchase.
Acquisition of Webshots Corporation
On October 27, 1999, we acquired Webshots Corporation, a California
corporation, for approximately 2.1 million shares of our Series A common stock,
of which 30% is subject to a restriction on resale that will lapse ratably over
the 24 months following the completion of the acquisition. The allocation of
the total purchase consideration of approximately $83 million included a charge
of $425,000 related to acquired in-process research and development. Webshots
operates a website that offers free copyrighted digital photographs that are
viewable with Webshots' proprietary software. We accounted for this acquisition
as a purchase.
Acquisition of Assets of Perspecta, Inc.
On October 25, 1999, we acquired certain assets and technology of Perspecta,
Inc., a California corporation, for approximately $8.7 million in cash.
Perspecta develops software for mapping large databases. We accounted for this
acquisition as a purchase.
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<PAGE>
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
We accounted for the Excite acquisition as a purchase and Excite's revenues
have been included in our results of operations commencing on May 28, 1999, the
date of the acquisition. Therefore, we believe that comparisons of our revenues
in 1999 to prior years are not relevant for purposes of indicating revenue
growth in 1999 and future years.
Our revenues are derived from our two business segments, media and
advertising services and subscriber network and other services. Media and
advertising revenues are generated from advertising, sponsorship commerce
agreements and ad serving and targeting services on our narrowband portal
resulting primarily from our acquisition of Excite in May 1999, as well as our
acquisitions of other companies, and our advertising and related services on
the broadband portals accessible by subscribers of the @Home service.
Subscriber network and other revenues are derived primarily from monthly
customer subscription fees from the @Home and @Work services and from support
services provided to cable system operators, such as customer support, network
maintenance, local area content development, development fees for set-top
devices, and pre-commercial deployment consulting. The following represents our
revenues by business segment for the years indicated (in thousands):
<TABLE>
<CAPTION>
1999 Change 1998
-------- ------ -------
<S> <C> <C> <C>
Revenues:
Media and advertising services.................... $203,714 3,642% $ 5,444
Subscriber network and other services............. 133,241 213% 42,601
-------- ----- -------
Total revenues................................... $336,955 601% $48,045
======== ===== =======
</TABLE>
Media and advertising revenues
Media and advertising revenues increased to $203.7 million, or 60% of total
revenues, for the year ended December 31, 1999 as compared to $5.4 million, or
11% of total revenues, for the year ended December 31, 1998. The increase in
media and advertising revenue in 1999 over 1998 was attributable primarily to
our acquisition of Excite. Under the purchase method of accounting, our results
of operations include the operations of Excite commencing on May 28, 1999, the
date of the acquisition. Given the above, comparisons of total media and
advertising revenue for periods prior to and subsequent to May 1999 are not
relevant for purposes of indicating the trend of our media and advertising
revenues in 1999 and future years. Excluding the impact of Excite, the increase
in media and advertising revenues in 1999 over 1998 was generated by our @Home
service offering and our acquisitions other than Excite. Approximately two-
thirds of the increase, excluding the impact of Excite, in media and
advertising revenues in 1999 compared to 1998 resulted from growth in traffic
and page views related to our broadband portals accessible by subscribers of
our @Home service; this growth was generally commensurate with the growth in
broadband Internet subscribers. Several acquisitions, including Narrative in
the fourth quarter of 1998 and Webshots, iMALL and Bluemountain.com in the
fourth quarter of 1999, generated the remaining one-third of the increase in
1999 media and advertising revenues excluding Excite. These acquisitions were
accounted for using the purchase method of accounting, under which our results
of operations include the results of operations of each acquired entity
commencing on the date of its acquisition.
As a result of our acquisition of Excite, traffic on our Internet sites
increased to approximately 125 million page views per day in December 1999,
from less than one million page views per day in December 1998. Our acquisition
of Bluemountain.com contributed significantly to the number of page views per
day in December 1999. Further, the reach of our Internet properties including
Bluemountain.com, as measured by Media Metrix, was approximately 27.7 million
unique visitors, or 42.5% of total domestic Internet users for the month of
43
<PAGE>
December 1999. In addition, the number of advertisers on our Internet sites
increased to more than 1,900 as of the end of 1999 from approximately 50 as of
the end of 1998. Our ability to generate media and advertising revenues in the
future will depend partially on the traffic on our Internet sites as measured
by page views, and increasingly by average time spent per page, as well as the
number of unique visitors to our sites and the number of advertisers and ad
placements on our sites. Please see "Risk Factors" in "Item 1. Business" of
this annual report for further discussion of factors that may affect our
ability to generate media and advertising revenues in the future.
Subscriber network and other revenues
Subscriber network and other revenues increased to $133.2 million, or 40% of
total revenues, for the year ended December 31, 1999, from $42.6 million, or
89% of total revenues, for the year ended December 31, 1998. The increase in
1999 was primarily attributable to an increase in the number of subscribers to
the broadband Internet services of @Home and @Work.
@Home service. The @Home service represented approximately 70% of subscriber
network and other revenues for the year ended December 31, 1999 as compared to
approximately 60% for the year ended December 31, 1998. Subscriber network and
other revenues generated by the @Home service during 1999 increased by
approximately 290% over the prior year due primarily to the number of @Home
subscribers, which increased by 247% to 1.1 million as of December 31, 1999
from 331,000 as of December 31, 1998. The @Home subscriber base was 50,000 at
the end of 1997. For the year ended December 31, 1999, the geographic source of
@Home subscriber network and other revenues was: 78% from cable partners and
subscribers in the United States; 16% from cable partners and subscribers in
Canada; and 6% from our international joint ventures. For the year ended
December 31, 1998, these percentages were 78% for the United States and 22% for
Canada. 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 of our subscriber network and other revenues in future
years. As of December 31, 1999, the markets of our cable partners in North
America included approximately 58.7 million households, of which approximately
40% were capable of receiving our services. The markets of our international
joint ventures included approximately 13.5 million households, of which
approximately 10% were upgraded to receive our services. Please see "Risk
Factors" in "Item 1. Business" of this annual report for further discussion of
factors that may affect our ability to generate subscriber network and other
revenues from our @Home service in the future.
@Work service. Subscriber network and other revenues from the @Work service
represented approximately 30% of total subscriber network and other revenues
for the year ended December 31, 1999 as compared to approximately 40% for the
year ended December 31, 1998. @Work subscriber network and other revenues
increased for the year ended December 31, 1999 by approximately 90% over the
prior year as a result of the growth in the number of @Work customers, which
increased by 200% to approximately 5,100 as of December 31, 1999 from
approximately 1,700 as of December 31, 1998. There were approximately 330 @Work
customers at the end of 1997.
Revenues from related parties
Revenues from related parties were $28.8 million, or 9% of total revenues,
for the year ended December 31, 1999, as compared to $10.5 million, or 22% of
total revenues, for the year ended December 31, 1998. Revenues from related
parties included $18.3 million in 1999 and $10.5 million in 1998 generated from
support services such as customer support, local area content development,
development of set-top devices and pre-commercial deployment consulting
provided to our cable partners that are also our stockholders. The remaining
$10.5 million of revenues from related parties in 1999 were earned primarily
from consulting and other services rendered to our international joint ventures
reimbursed on a cost-plus basis.
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<PAGE>
Revenues related to our strategic investments
We have made investments in certain companies for strategic purposes,
primarily in connection with expanding content and services available on our
narrowband and broadband portals and providing improved broadband services to
our @Work and @Home subscribers. Revenues from these strategic investments
generally consist of purchased sponsorship or advertising space and revenue
share arrangements on our narrowband or broadband portals, and we expect
revenues from some of our strategic investments to equal or exceed our cash
investment. Revenues related to our strategic investments were $26.1 million
and $780,000 for the years ended December 31, 1999 and 1998, respectively.
Barter revenues
Revenues from the exchange of media and advertising services related to our
Internet sites for advertising in other media were less than 10% of total
revenues for the year ended December 31, 1999; such revenues were insignificant
in 1998. Revenues from these exchanges are recorded at the lower of the fair
value of the services provided or the services received.
Total Costs and Expenses
We accounted for the Excite acquisition as a purchase and Excite's costs and
expenses have been included in our results of operations commencing on May 28,
1999, the date of the acquisition. Therefore, we believe that comparisons of
our costs and expenses in 1999 to prior years are not relevant for purposes of
indicating the trend of our costs and expenses in 1999 and future years.
Our costs and expenses were as follows for the years indicated (in
thousands):
<TABLE>
<CAPTION>
1999 Change 1998
---------- ------ --------
<S> <C> <C> <C>
Costs and expenses:
Operating costs................................. $ 143,056 205% $ 46,965
Product development and engineering............. 54,805 222% 17,009
Sales and marketing............................. 130,725 623% 18,091
General and administrative...................... 30,276 144% 12,429
---------- ---- --------
Total costs and expenses excluding costs and
amortization of acquisitions and distribution
agreements...................................... 358,862 280% 94,494
Costs and amortization of distribution
agreements..................................... 291,967 188% 101,385
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-
related costs.................................. 1,157,009 n/a 2,758
---------- ---- --------
Total costs and expenses......................... $1,807,838 810% $198,637
========== ==== ========
</TABLE>
Operating costs
Operating costs are primarily related to providing services to customers,
maintaining the @Home broadband network, royalties, license agreements and
revenue sharing arrangements for content and other services. In addition,
operating costs include hosting costs related to the maintenance and technical
support of our Internet portals, including Excite, and are comprised
principally of personnel costs, telecommunications costs and equipment
depreciation. 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 205% to $143.0 million, or 42% of total
revenues, for the year ended December 31, 1999, from $47.0 million, or 98% of
total revenues, for the year ended December 31, 1998. A significant portion of
the increase in operating costs in 1999 was related to our acquisition of
Excite on May 28, 1999. The increase in operating costs in 1999, including
Excite, was primarily attributable to the following factors in the proportions
indicated:
. approximately 22% related to hosting costs for our Internet portals and
ad serving and target marketing services which resulted predominantly
from the acquisition of Excite on May 28, 1999;
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<PAGE>
. approximately 24% related to maintenance and depreciation of capital
equipment and telecommunications costs required for the expansion of our
broadband network;
. approximately 14% related to royalties, license agreements and revenue
sharing arrangements for content and other services for content and other
services for our Internet portals, which resulted predominantly from the
acquisition of Excite on May 28, 1999;
. approximately 16% related to costs of customer service operations to
support a larger @Home subscriber base;
. approximately 24% related to increases in operating costs of @Work and
our international operations, as well as costs allocated for facilities
and other miscellaneous costs, due to the expansion of our operations.
We expect operating costs to increase on an absolute dollar basis in the
future as our subscriber base grows, as we continue to make investments in
network infrastructure and customer service operations, as a result of
consolidating results of operations of international joint ventures previously
accounted for under the equity method and as our results of operations will
reflect Excite for an entire year. Recent acquisitions, such as iMALL and
Bluemountain.com, as well as future acquisitions, expansion into international
markets and deployment of advanced technologies will result in further
increases in operating costs due to additional personnel, equipment
depreciation, royalties and revenue sharing arrangements.
Operating costs as a percentage of total revenues. Total revenues net of
operating costs increased to $194.0 million, or 58% of total revenues, for the
year ended December 31, 1999, from $1.0 million, or 2% of total revenues, for
the year ended December 31, 1998. The increase in total revenues net of
operating costs and operating costs as a percentage of total revenues in 1999
was primarily due to an increase in media and advertising revenues related to
our acquisition of Excite in May 1999, and efficiencies derived from scaling
the deployment of the @Home service to approximately 1.1 million subscribers.
Media and advertising revenues historically have lower direct costs than
subscriber network services.
In the future, the types of advertising revenues generated and the revenue
sharing provisions of distribution and content agreements may affect operating
costs as a percentage of total revenues. Additionally, the expansion of our
subscriber network services may require higher operating costs, or conversely,
may reduce incremental operating costs, and as a result affect gross margin. We
believe that the continued expansion of our operations is critical to the
achievement of our goals and we anticipate that operating costs will increase
in the future; specifically, we expect to significantly increase operating
costs to continue building out our infrastructure to improve our operational
readiness. Nonetheless, 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 222% to $54.8 million, or 16% of total
revenues, for the year ended December 31, 1999, from $17.0 million, or 35% of
total revenues, for the year ended December 31, 1999. A significant portion of
the increase in product development and engineering costs in 1999 was related
to our acquisition of Excite on May 28, 1999. The increase in product
development and engineering expenses in 1999, including Excite, was primarily
attributable to the following factors in the proportions indicated:
. approximately 33% related to the development and introduction of new
services and functionality on our Internet portals, which resulted
predominantly from the acquisition of Excite on May 28, 1999;
. approximately 27% related to the continued development of the @Home
backbone to incorporate new telecommunications and server technologies
and efforts to incorporate Internet technologies into advanced digital
set-top boxes;
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<PAGE>
. approximately 17% related to the development of ad serving and targeted
marketing technologies for advertisers on the Internet, which resulted
predominantly from the acquisition of Excite on May 28, 1999; and
. approximately 23% related to development of technologies for our @Work
offering and e-commerce initiatives, as well as costs allocated for
facilities and other miscellaneous costs, due to the expansion of product
development and engineering efforts.
We anticipate that product development and engineering expenses will
continue to increase on an absolute dollar basis in the future due in part to:
. increased technology development efforts related to our broadband
network, including continuing design and deployment costs and costs
related to providing the Excite personalized service, the @Home broadband
lateral service and the recently-announced @Home 2000 service;
. development and introduction of new content and services on our Internet
sites, in order to create and maintain brand loyalty among customers and
users of our narrowband and broadband Internet services;
. additional technology development efforts and integration of acquired
technologies from Excite, iMALL, Bluemountain.com and other companies
acquired in the future; and
. our results of operations reflecting Excite for an entire year.
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 and the
@Home broadband Internet service to advertisers and advertising agencies. For
our subscriber network services, we currently rely 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 623% to $130.8 million, or 39% of
total revenues, for the year ended December 31, 1999, from $18.0 million, or
38% of total revenues, for the year ended December 31, 1998. A significant
portion of the increase in sales and marketing expenses in 1999 was related to
our acquisition of Excite on May 28, 1999. Excite maintains a direct sales
force and engages in marketing activities to promote its brands and customer
loyalty. The increase in sales and marketing expenses in 1999, including
Excite, was primarily attributable to the following factors in the proportions
indicated:
. approximately 30% related to public relations and costs of promotions,
marketing and advertising in various media, primarily resulting from our
acquisition of Excite on May 28, 1999;
. approximately 21% related to costs of internal advertising sales
activities directly undertaken for the generation of media and
advertising revenues, primarily resulting from our acquisition of Excite
on May 28, 1999;
. approximately 16% related to sponsorship and content arrangements for the
continued expansion of our Internet portals' market reach and number of
users, primarily resulting from our acquisition of Excite on May 28,
1999;
. approximately 5% related to @Home subscriber acquisitions; and
. approximately 28% related to marketing costs for @Work and our ad serving
and targeting services, as well as costs allocated for facilities and
other miscellaneous costs, due to the expansion of our services.
47
<PAGE>
We expect sales and marketing expenses will continue to increase on an
absolute dollar basis in the future primarily due to:
. an increase in our direct sales force, which sells banner advertisements
and sponsorships on the Excite Network and on the @Home broadband service
to advertisers and advertising agencies;
. expanded marketing campaigns and greater use of media advertising and
promotions in an effort to create and maintain brand loyalty among
customers and expand market reach;
. more sponsorship and content arrangements to enhance our narrowband and
broadband Internet services;
. acceleration of marketing activities related to @Home and @Work
subscriber acquisitions, including expanded retail and self-installation
initiatives; and
. our results of operations reflecting Excite for an entire year.
General and administrative
General and administrative expenses consist primarily of administrative and
executive personnel costs, fees for professional services and the costs of
computer systems to support our operations. General and administrative expenses
increased by 144% to $30.3 million, or 9% of total revenues, for the year ended
December 31, 1999, from $12.4 million, or 26% of total revenues, for the year
ended December 31, 1998. A significant portion of the increase in general and
administrative expenses in 1999 was related to our acquisition of Excite on May
28, 1999. The decrease in general and administrative expense as a percentage of
revenue was primarily attributable to increased revenues from the Excite
acquisition. The increase in general and administrative expenses in 1999,
including Excite, was attributable to the addition of personnel from Excite and
other acquisitions and expenditures related to facilities and information
technology to support the expansion and infrastructure of our operations and
business strategy.
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 and assimilate acquired
technologies and businesses.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements were $292 million and
$101.4 million for the years ended December 31, 1999 and 1998, respectively,
and consisted primarily of charges and amortization related to warrants to
purchase our common stock issued to some of our cable partners in connection
with distribution agreements and performance incentives for distributing our
broadband Internet services. Warrants that vest based on future performance
under an exclusive distribution agreement are recorded as intangible assets at
fair value when the performance criteria are met, and the intangible assets are
amortized to expense over the remaining term of the distribution agreement,
representing approximately $77.4 million in 1999 and $51.6 million in 1998. The
increase in amortization of distribution agreements in 1999 compared to 1998
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 that were not negotiated as part of an exclusive distribution
agreement are charged to operations as such warrants are earned, amounting to
$213.1 million in 1999 and $49.8 million in 1998. The increase in the cost of
these performance incentives in 1999 compared to 1998 was primarily
attributable to our cable partners achieving performance milestones which
significantly increased the number of warrants earned.
We will incur a minimum of approximately $23.5 million per quarter for
amortization of our distribution agreements through the first half of 2002.
This amount may increase if AT&T transfers specific cable systems to
Cablevision. In addition, during any particular quarter or year, the cost of
performance incentives may fluctuate significantly in the future depending upon
our cable partners further achieving performance milestones.
48
<PAGE>
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs
Amortization of goodwill and intangible assets. During the year ended
December 31, 1999, we incurred approximately $1,103.6 million of goodwill and
intangible asset amortization related to acquisitions accounted for as
purchases, including our acquisitions of Narrative in December 1998, Excite in
May 1999, iMALL and Webshots in October 1999 and Bluemountain.com in December
1999, as well as other less-significant acquisitions. There were no
significant goodwill and intangible amortization charges related to
acquisitions in 1998. We expect to incur goodwill and intangible asset
amortization charges of over $550.0 million per quarter until the goodwill and
intangible asset balances from each of our acquisitions become fully amortized
starting in 2003. In addition, we expect to incur additional goodwill and
intangible asset amortization charges related to future acquisitions, all of
which will be accounted for as purchases.
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, and consisted of $36.7 million and $2.8 million
for the years ended December 31, 1999 and 1998, respectively. In connection
with the purchase of Excite, we charged $34.4 million to in-process research
and development during the second quarter of 1999 and we charged an additional
$2.3 million to in-process research and development during the fourth quarter
of 1999 related to our acquisitions of iMALL and Webshots. The charge in 1998
was related primarily to our acquisition of Narrative.
The cost of acquired in-process research and development is based on a fair
value allocation of the purchase price we paid to acquire a particular entity.
The fair value allocation to in-process research and development was
determined by identifying the research projects for which technological
feasibility had not been achieved and which had no alternative future use at
the date of acquisition, assessing the stage and expected date of completion
of the research and development effort at the acquisition date, and
calculating the net present value of cash flows expected to result from the
successful deployment of the new technology or product resulting from the in-
process research and development effort.
The stages of completion were determined by estimating the costs and time
incurred to date relative to the costs and time to be incurred to develop the
in-process technology into a commercially viable technology or product. In
general, the percentage of completion of in-process technology acquired in
1999 was less than 50% at the date of acquisition and was substantially
completed at December 31, 1999. Costs incurred after the date of acquisition
to develop acquired in-process technology into viable products represented a
significant portion of the increase in 1999 compared to 1998 of product
development and engineering costs and expenses.
The estimated net present value of cash flows was based on incremental
future cash flows from revenues expected to be generated by technology and
products in the process of research and development, taking into account the
characteristics and applications of the technology or product, the size and
growth rate of existing and future markets and an evaluation of past and
anticipated technology and product life cycles. Estimated net future cash
flows also included allocations of operating costs, sales and marketing,
general and administrative expenses, fixed charges, the portion of product
development costs related to maintenance and the net impact of income taxes.
Estimated net future cash flows were discounted to arrive at a net present
value and were allocated to in-process research and development based on the
percentage of completion at the date of acquisition. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of in-process technology projects.
If we do not successfully deploy commercially-accepted technology or
products based on the acquired in-process research and development, our
operating results could be adversely affected in future periods.
Amortization of deferred compensation. Amortization of deferred
compensation related to acquisitions was $2.4 million for the year ended
December 31, 1999 and none for the year ended December 31, 1998. Acquisition-
related deferred compensation resulted from our assumption of stock-based
awards issued to employees of Bluemountain.com and Webshots immediately prior
to the acquisition and represents the difference between the exercise price of
unvested awards and the fair market value of our Series A common
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<PAGE>
stock. Deferred compensation is amortized over the vesting term of the award
and is expected to be approximately $5.0 million per quarter until the end of
2001 when the stock-based awards begin to fully vest. Amortization of deferred
compensation related to issuance of restricted stock in the ordinary course of
business to employees under stock purchase agreements was approximately $1.0
million during both 1999 and 1998 and is included in the category of costs and
expenses in which the related employee salaries are recorded.
Other acquisition-related costs. Costs directly associated with our
acquisitions that were not capitalized as part of the purchase consideration,
primarily resulting from our acquisition of Excite, were $14.3 million for the
year ended December 31, 1999; there were no such costs in 1998. Such costs
included $8.1 million in employee severance and retention costs, $1.8 million
of systems integration costs, $1.4 million of professional fees and $3.0
million in other related costs. We expect to continue to incur additional
integration and other costs in the future related to our acquisitions.
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 $9.6 million and none for the years ended December 31, 1999
and 1998, respectively. These companies include Excite's international joint
ventures in which Excite has not made cash investments and that were recorded
at a fair value of $20.8 million as part of the allocation of the purchase
consideration for Excite. Our equity interest in these affiliated companies
range from 20% to 50% and we consider such affiliated companies to be related
parties. Our investments under the equity method were $19.0 million as of
December 31, 1999 and none as of December 31, 1998 and included international
joint ventures to provide Excite-branded Internet services as well as domestic
and international joint ventures related to the distribution and delivery of
our @Home service. We expect to record further losses related to our equity
share in these affiliated companies in the future.
Realized Gain on Investment
We recognized a gain of $12.6 million in February 1999 as a result of an
investee, a privately held company that we had accounted for under the cost
method, being acquired in a common stock acquisition by a publicly traded
company.
Interest and Other Income, Net
Our net interest and other income consisted of the following amounts for the
years indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 Change 1998
-------- ------ -------
<S> <C> <C> <C>
Interest and other income, net:
Interest and other income......................... $ 26,021 209% $ 8,410
Interest and other expense........................ (15,769) 690% (1,997)
-------- ---- -------
Total interest and other income, net............. $ 10,252 60% $ 6,413
======== ==== =======
</TABLE>
Interest and other income, net increased to $10.3 million for the year ended
December 31, 1999 compared to $6.4 million for the year ended December 31,
1998. The increase in 1999 was due primarily to an increase in interest income
earned on higher cash and investment balances as a result of the funds received
from our secondary public offering in August 1998 and private offering of
convertible subordinated debentures in December 1998, as well as realized gains
from our sale of equity securities in publicly held companies. The increase in
interest and other income in 1999 compared to 1998 was partially offset by an
increase in interest expense and other expenses, primarily due to higher
capital lease obligations in 1999 and the interest expense on the convertible
subordinated debentures issued in December 1998 which were outstanding for the
entire year
50
<PAGE>
in 1999. Interest expense will be higher commencing in 2000 due to the issuance
in December 1999 of $500 million in convertible notes bearing interest at
4.75%.
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes in 1999 or 1998. As of December 31, 1999 and 1998,
we had net deferred tax assets of $528.1 million and $92.5 million,
respectively, principally relating to net operating loss carryforwards and the
temporary difference relating to the cost and amortization of distribution
agreements recorded in 1999, 1998 and 1997. Realization of deferred tax assets
is dependent on future earnings, if any, the timing and amount of which are
uncertain. A valuation allowance has been recorded for the net deferred tax
assets as of December 31, 1999 and 1998, since we lack an earnings history.
Accordingly, we have not recorded any income tax benefit for net losses
incurred for any period from inception through December 31, 1999.
Net Loss
Our net loss for the years ended December 31, 1999 and 1998 was $1,457.6
million and $144.2 million, respectively. The net loss in 1999 was due
predominantly to the cost and amortization of distribution agreements of $292
million and the amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs of $1,157 million, the
substantial portion of which did not require cash outlay. Net loss before such
costs and expenses was $8.7 million in 1999 and $40.0 million in 1998. The
decrease in net loss before costs and amortization related to acquisitions and
distribution agreements was due to an increase in revenues in 1999 at a faster
rate than the increase in operating costs and expenses due to improved
operating results of Excite.
We will continue to generate net losses in the foreseeable future due to the
significant non-cash charges associated with the costs and amortization related
to acquisitions and distribution agreements. The amount of future net loss or
income before such costs and amortization will depend on our future revenues
and the costs and expenses required to generate those revenues.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Our revenues during 1998 and 1997 consisted primarily of monthly
subscription fees for the @Home residential service and installation and
monthly access fees for @Work services, as well as fees for advertising,
content placement and content development related to our broadband portals. Our
revenues by business segment were as follows for the years indicated (in
thousands):
<TABLE>
<CAPTION>
1998 Change 1997
------- ------ ------
<S> <C> <C> <C>
Revenues:
Media and advertising services....................... $ 5,444 624% $ 752
Subscriber network and other services................ 42,601 473% 6,685
------- ---- ------
Total revenues...................................... $48,045 546% $7,437
======= ==== ======
</TABLE>
Media and advertising revenues
Media and advertising revenues were $5.4 million, or 11% of total revenues,
for the year ended December 31, 1998 and $752,000, or 10% of total revenues,
for the year ended December 31, 1997. Media and advertising revenues increased
in 1998 primarily as a result of the increase in consulting and development
agreements with our cable partners and from sales of advertisements on our
broadband portals to approximately 50 advertisers as of December 31, 1998 as
compared to approximately 30 advertisers as of December 31, 1997. Average daily
page views on our broadband portals increased from an insignificant amount as
of December 31, 1997 to almost 1 million as of December 31, 1998.
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<PAGE>
Subscriber network and other revenues
Subscriber network and other revenues increased to $42.6 million, or 89% of
total revenues, for the year ended December 31, 1998, from $6.7 million, or 90%
of total revenues, for the year ended December 31, 1997. The increase in 1998
was primarily attributable to an increase in the number of subscribers to the
broadband Internet services of @Home and @Work.
@Home service. The @Home service represented approximately 60% of subscriber
network and other revenues for the year ended December 31, 1998 as compared to
approximately 70% for the year ended December 31, 1997. Subscriber network and
other revenues generated by the @Home service increased during 1998 primarily
due to the number of @Home subscribers, which increased 562% to approximately
331,000 at the end of 1998 from approximately 50,000 at the end of 1997. For
the year ended December 31, 1998, the geographic source of @Home subscriber
network and other revenues was 78% from the United States and 22% from Canada.
@Work service. Subscriber network and other revenues from the @Work service
represented approximately 40% of total subscriber network and other revenues
for the year ended December 31, 1998 as compared to approximately 30% for the
year ended December 31, 1997. The increase in @Work subscriber network and
other revenues during 1998 resulted from the 415% increase in the number of
@Work customers to approximately 1,700 as of December 31, 1998 from
approximately 330 as of December 31, 1997.
Revenues from related parties
Revenues from related parties were $10.5 million, or 22% of total revenues,
for the year ended December 31, 1998, as compared to $3.0 million, or 40% of
total revenues, for the year ended December 31, 1997. Revenues from related
parties in 1998 and 1997 were generated from support services such as customer
support, local area content development, development of set-top devices and
pre-commercial deployment consulting provided to our cable partners that are
Excite@Home stockholders.
Revenues related to our strategic investments
Our investments in 1998 included investments in certain companies for
strategic purposes, primarily in connection with expanding content and services
available on our broadband portals and providing improved broadband services to
our @Work and @Home subscribers. Revenues from these strategic investments
generally consisted of purchased sponsorship or advertising space and revenue
share arrangements on our broadband portals. Revenues related to our strategic
investments were $780,000 for the year ended December 31, 1998; such revenues
were insignificant for the year ended December 31, 1997.
Total Costs and Expenses
Our costs and expenses were as follows for the years indicated (in
thousands):
<TABLE>
<CAPTION>
1998 Change 1997
-------- ------ -------
<S> <C> <C> <C>
Costs and expenses:
Operating costs.................................... $ 46,965 109% $22,459
Product development and engineering................ 17,009 42% 11,984
Sales and marketing................................ 18,091 52% 11,863
General and administrative......................... 12,429 17% 10,635
-------- ---- -------
Total costs and expenses excluding costs and
amortization of acquisitions and distribution
agreements......................................... 94,494 66% 56,941
Cost and amortization of distribution agreements... 101,385 997% 9,246
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-
related costs..................................... 2,758 n/a --
-------- ---- -------
Total costs and expenses............................ $198,637 200% $66,187
======== ==== =======
</TABLE>
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Operating costs
Operating costs for years ended December 31, 1998 and 1997 were primarily
related to providing services to customers, maintaining the @Home broadband
network, generating content programming for the @Home portal and deploying the
@Home service in Europe. Operating costs increased to $47.0 million for 1998,
or 98% of total revenues, from $22.5 million for 1997, or 302% of total
revenues. This increase of $24.5 million, or 109%, in operating costs was
primarily attributable to the following factors in the proportions indicated:
. approximately 25% related to costs of customer service operations to
support a larger subscriber base;
. approximately 20% related to telecommunications costs required to connect
the @Home broadband network to additional areas;
. approximately 15% related to telecommunications costs related to our
@Work business;
. approximately 15% related to maintenance and depreciation of capital
equipment required for our network; and
. approximately 25% related to increases in operating costs of our
international operations, as well as costs allocated for facilities and
other miscellaneous costs, due to the expansion of our operations.
Operating costs as a percentage of total revenues. Total revenues net of
operating costs increased to $1.0 million, or 2% of total revenues, for the
year ended December 31, 1998, from $(15.0) million for the year ended December
31, 1997. The increase in total revenues net of operating costs in 1998 was
primarily due to the increase in revenues from subscriber growth and expansion
of advertising services on our broadband portals, which was achieved with a
proportionally lower rate of increase in operating costs.
Product development and engineering
Product development and engineering expenses for the years ended December
31, 1998 and 1997 consisted primarily of salaries and related expenses for
personnel, fees to outside contractors and consultants and the allocated cost
of facilities. Product development and engineering expenses increased to $17.0
million, or 35% of total revenues, for 1998, from $12.0 million, or 161% of
total revenues, for 1997. The increase of $5.0 million, or 42%, in product
development and engineering expenses was primarily attributable to the
following factors in the proportions indicated:
. approximately 45% related to expenditures focused on the continued
development of the @Home backbone to incorporate new telecommunications
and server technologies;
. approximately 45% related to efforts to incorporate Internet technologies
into advanced digital set-top boxes; and
. approximately 10% related to development of technologies for our @Work
offering, as well as costs allocated for facilities and other
miscellaneous costs, due to the expansion of product development and
engineering efforts.
Sales and marketing
Sales and marketing expenses for the years ended December 31, 1998 and 1997
consisted primarily of personnel costs, commissions and promotional and
advertising expenses. Sales and marketing expenses increased to $18.1 million,
or 38% of total revenues, for 1998, from $11.9 million, or 160% of total
revenues, for 1997. The increase of $6.2 million, or 52%, in sales and
marketing expenses in 1998 was primarily attributable to the following factors
in the proportions indicated:
. approximately 40% related to additional spending to support the expansion
of @Work services;
. approximately 25% related to advertising and content partnering
arrangements and regional deployments of the @Home service; and
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. approximately 35% related to costs allocated for facilities and other
miscellaneous costs, due to the expansion of our services.
General and administrative
General and administrative expenses during the years ended December 31,
1998 and 1997 consisted primarily of administrative and executive personnel
costs, fees for professional services and the costs of computer systems to
support our operations. General and administrative expenses increased by 17%
to $12.4 million, or 26% of total revenues, in 1998 from $10.6 million, or
143% of total revenues, in 1998. The increase in general and administrative
expenses in 1999 was attributable primarily to the hiring of additional
finance, human resources and facilities personnel.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements were $101.4 million and
$9.2 million for the years ended December 31, 1998 and 1997, respectively, and
consisted primarily of charges and amortization related to warrants to
purchase our common stock issued to some of our cable partners in connection
with distribution agreements and performance incentives for distributing our
broadband Internet services. Warrants that vest based on future performance
under an exclusive distribution agreement are recorded at fair value as
intangible assets and amortized over the remaining term of the distribution
agreement, representing approximately $51.6 million in 1998 and $9.2 million
in 1997. The increase in amortization of distribution agreements in 1998
compared to 1997 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 that are not part of an exclusive distribution
agreement are charged to operations as such warrants are earned, amounting to
$49.8 million in 1998 and none in 1997. The increase in the cost of these
performance incentives in 1998 compared to 1997 was primarily attributable to
our cable partners achieving performance milestones which significantly
increased the number of warrants earned.
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs consisted of a charge of $2.8 million for the
year ended December 1998 related to purchased in-process research and
development; there were no charges in 1997. 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, and consisted of $2.8 million related primarily to
our acquisition of Narrative in December 1998. In general, the percentage of
completion of in-process technology acquired in 1998 was approximately 15% at
the date of acquisition and the projects were substantially complete at June
30, 1999. Costs incurred after the date of our acquisition of Narrative to
develop acquired in-process technology into viable products represented a
portion of the product development and engineering costs and expenses recorded
during the first half of 1999.
Please see discussion under Purchased in-process research and development
in the section entitled Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998 for further discussion about the methodologies we use to
determine purchased in-process research and development charges.
Interest and Other Income, Net
Interest income, net during the years ended December 31, 1998 and 1997
represented interest and realized gains earned on our cash and cash
equivalents and short-term investments less interest expense on debt
obligations, including our convertible subordinated debentures. Interest
income, net was $6.4 million for 1998 and $3.0 million for 1997. Interest
income for 1998 was $8.4 million compared to $4.2 million for 1997. This
increase was principally due to the increased cash balances available for
investment following our secondary public offering in August 1998. Interest
expense for 1998 was $2.0 million compared to $1.2 million for 1997. This
increase was due primarily to increases in capital lease obligations
associated with our leasing of capital equipment.
54
<PAGE>
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes in 1998 or 1997. As of December 31, 1998 and 1997,
we had net deferred tax assets of $92.5 million and $33.7 million,
respectively, relating principally to net operating loss carryforwards and the
temporary difference relating to the cost and amortization of distribution
agreements recorded in 1998 and 1997. Realization of deferred tax assets is
dependent on future earnings, if any, the timing and amount of which are
uncertain. A valuation allowance has been recorded for the net deferred tax
assets reducing such amounts to zero as of December 31, 1998 and 1997, since we
lack an earnings history. Accordingly, we did not record any income tax benefit
for net losses incurred for any period from inception through December 31,
1998.
Net Loss
Our net loss for the years ended December 31, 1998 and 1997 was $144.2
million and $55.7 million, respectively. A significant portion of the net loss
in 1998 and 1997 was due to the cost and amortization of distribution
agreements which amounted to $101.4 million in 1998 and $9.2 million in 1998.
Additionally, net loss in 1998 included a charge of $2.8 million for in-process
research and development. Excluding these costs and charges, a substantial
portion of which did not require a cash outlay, net loss was $40.0 million in
1998 and $46.5 million in 1997. The decrease in net loss before costs and
amortization related to acquisitions and distribution agreements was due to an
increase in revenues in 1998 at a faster rate than the increase in operating
costs and expenses.
Liquidity and Capital Resources
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 and other financing arrangements. At December 31,
1999, our principal source of liquidity was approximately $525.2 million of
cash, cash equivalents and short-term investments, compared with $419.3 million
at December 31, 1998. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 Change 1998
-------- ------ --------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents..................... $224,548 (25)% $300,702
Net cash provided by (used in) operating ac-
tivities..................................... 112,403 n/a (30,212)
Net cash used in investing activities......... (708,201) 1,193 % (54,778)
Net cash provided by financing activities..... 519,644 52 % 341,479
</TABLE>
Operating Activities
Net cash provided by operating activities during the year ended December 31,
1999 was $112.4 million compared to net cash used in operating activities of
$30.2 million for the year ended December 31, 1998. Net cash provided by
operating activities during 1999 reflects a net loss of $1,457.6 million
compared to $144.2 million during 1998. Charges to operations included in net
loss that do not require the use of cash amounted to $1,495.3 million during
1999 compared to $116.4 million during 1998. This increase in non-cash charges
during 1999 included: amortization of goodwill and other intangible assets of
$1,103 million related to the our acquisitions in 1999 and 1998; cost and
amortization of distribution agreements of $292 million; depreciation and other
amortization charges of $49.5 million; purchased in-process research and
development of $36.7 million related to our acquisitions; and various other
items netting to $14.1 million. Net cash provided by operating activities after
non-cash charges for the year ended December 31, 1999 compared to net cash used
55
<PAGE>
in operating activities for the year ended December 31, 1998 also reflects the
impact of accounts receivable and other assets and accounts payable and other
liabilities, which decreased on a net basis by $74.8 million during 1999
compared to a net increase of $5.2 million during 1998.
Investing Activities
Net cash used in investing activities for the year ended December 31, 1999
was $708.2 million compared to $54.8 million for the year ended December 31,
1998. The increase in net cash used in investing activities during 1999 as
compared to 1998 was partially attributable to purchases of short-term
investments net of sales and maturities of $161.7 million in 1999 as compared
to $42.4 million in 1998 and net purchases of other investments of $104.7
million in 1999 compared to $4.3 million in 1998. The increase was also due to
net cash received in acquisitions of $(316.4) million in 1999 compared to $0.1
million in 1998, net purchases of property, equipment and improvements of $60.8
million in 1999 as compared to $16.8 million in 1998, payments under our
backbone agreement of $57 million in 1999 and none in 1998 and investments in
joint ventures of $7.6 million in 1999 and none in 1998. We anticipate future
capital expenditures to be primarily for facilities and equipment to support
expansion of our business and network operations and, consequently, we expect
that our capital expenditures will increase significantly as our business and
employee base grows.
Financing Activities
Net cash from financing activities for the year ended December 31, 1999 was
$519.6 million compared to $341.5 million for the year ended December 31, 1998.
The increase in cash provided by financing activities during 1999 as compared
to 1999 was attributable to: net proceeds from issuance of convertible debt in
1999 of $485.7 million as compared to $222.5 million in 1998; payments on
capital lease obligations of $34.5 million in 1999 as compared to $12.1 million
in 1998; and a decrease in proceeds from issuance of common stock and from
stock option exercises of $68.4 in 1999 compared to $130.8 million in 1998,
primarily due to proceeds of $125.7 million from our secondary public offering
in August 1998. The $350 million cash portion of the purchase price of
Bluemountain.com was financed from the net proceeds of the issuance of
convertible debt in December 1999.
Commitments
In December 1998, we entered into an agreement with AT&T to create a
nationwide network utilizing AT&T's 15,000-mile fiber optic data communications
line, or backbone. Under the terms of this agreement, we paid approximately $57
million in 1999 and we are required to make additional payments totaling $45
million in 2000. We expect to make additional disbursements of approximately $5
million per year during the 20-year term of this agreement for connection
space, equipment and support and maintenance fees.
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. Rental payments for our headquarters facilities, including
recently constructed facilities, are approximately $1.1 million per month.
Total rental payments on facilities in other locations are approximately $0.4
million per month.
In September 1997, we entered into a term loan agreement with Silicon Valley
Bank. The term loan, as amended in October 1998, allows us to borrow up to $15
million to finance the acquisition of property, equipment and improvements and
to collateralize letters of credit. At our option, borrowings under this term
loan bear interest either at the Bank's prime rate or at LIBOR plus 2.5%. As of
December 31, 1999, there were no borrowings under this term loan, although
there were outstanding letters of credit in the amount of $2.4 million related
to real property transactions. Under the term loan agreement, we are required
to meet financial covenants. At December 31, 1999, we were in compliance with
these covenants. The term loan expires on October 19, 2002.
56
<PAGE>
We believe that we have the financial resources needed to meet our presently
anticipated business requirements, including capital expenditure and strategic
operating programs, for at least the next 12 months. Thereafter, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we may need to seek alternative financing, such as selling additional equity or
debt securities or obtaining additional credit facilities. However, depending
on market conditions, we may consider alternative financing even if our
financial resources are adequate to meet presently anticipated business
requirements. The sale of additional equity or convertible debt securities may
result in additional dilution to our stockholders. Financing may not be
available on terms acceptable to us or at all.
Impact of Adoption of New Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Although we have not fully
assessed the impact of adopting SAB 101 on our financial position and results
of operations in 2000 and thereafter, we do not expect the effect, if any, to
be material.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that entities
recognize all derivatives in the balance sheet at fair value and record gains
and losses resulting from changes in fair value according to the purpose of the
derivative and whether it qualifies as a hedge. The effective date of this
Statement was delayed by the issuance of SFAS No. 137 to fiscal years beginning
after June 15, 2000, with earlier application encouraged. We expect to adopt
this Statement effective January 1, 2001 and do not anticipate that its
adoption will have a significant effect on our financial position or results of
operations.
Year 2000 Implications
As of December 31, 1999, we completed our plan to ready our computer systems
for possible year 2000 effects. Although we are not aware of the occurrence of
any significant year 2000 related problems being reported to date, disruptions
to our operations could still occur. Based on currently available information,
management continues to believe that year 2000-related disruptions or other
problems, if any, will not have a significant adverse impact on our operational
results or financial condition. The costs incurred through December 31, 1999 to
support our year 2000 compliance initiative were approximately $450,000. While
there is risk that additional costs may be incurred beyond December 31, 1999,
we do not believe that these costs would be significant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
Interest Rate Sensitivity
Short-Term Investments
We had short-term investments of $300.7 million as of December 31, 1999.
These short-term investments consist predominantly of highly liquid debt
instruments that are of high-quality investment grade and mature in one year or
less. These investments are subject to interest rate risk in that their value
will fall if market interest rates increase. A hypothetical increase in market
interest rates by 10 percent from levels at December 31, 1999 would cause the
fair value of these short-term investments to decline by an immaterial amount.
Because we are not required to sell these investments before maturity, we have
the ability to avoid realizing losses on these investments due to a sudden
change in market interest rates. However, we could choose to sell these
investments before maturity at a loss. Declines in interest rates over time
will, however, reduce our interest income.
57
<PAGE>
Outstanding Convertible Debt
As of December 31, 1999, we had two issuances of long-term convertible debt
outstanding. The balance of our convertible debentures issued in December 1998,
net of unamortized original issue discount, was approximately $236.3 million as
of December 31, 1999 and bears an effective interest rate of approximately 4%.
Our convertible notes issued in December 1999 had an outstanding balance of
$500 million on December 31, 1999 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. We do not hedge against interest rate increases.
Equity Price Risk
We own shares of certain public companies. We value these investments using
the closing fair market value stated in the Wall Street Journal for the last
day of each month. As a result, we reflect these investments in our
consolidated balance sheet at December 31, 1999 at their fair market value of
$273 million, with the unrealized gains and losses reported in stockholders'
equity as "Accumulated Other Comprehensive Income". We do not hedge against
equity price changes.
Foreign Currency Exchange Rate Risk
Substantially all of our revenues are realized in U.S. dollars and most of
our revenues are from customers in the United States. Therefore, we do not
believe we face significant direct foreign currency exchange rate risk. We do
not hedge against foreign currency exchange rate changes.
58
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors....................... 60
Consolidated Financial Statements as of December 31, 1999 and 1998 and
for the Three Years Ended December 31, 1999, 1998, and 1997:
Consolidated Balance Sheets............................................ 61
Consolidated Statements of Operations.................................. 62
Consolidated Statements of Stockholders' Equity........................ 63
Consolidated Statements of Cash Flows.................................. 64
Notes to Consolidated Financial Statements............................. 65
Quarterly Financial Information for the Two Years Ended December 31, 1999
(Unaudited)............................................................. 92
</TABLE>
59
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
At Home Corporation
We have audited the accompanying consolidated balance sheets of At Home
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedules presented at Item 14(b). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of At Home Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 20, 2000
60
<PAGE>
AT HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
----------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 224,548 $ 300,702
Short-term investments................................ 300,675 118,587
----------- ---------
Total cash, cash equivalents and short-term
investments........................................ 525,223 419,289
Accounts receivable, net of allowance of $3,454 in
1999 and $252 in 1998 ............................... 52,253 6,358
Accounts receivable -- related parties................ 18,279 4,300
Other current assets.................................. 35,151 3,381
----------- ---------
Total current assets................................ 630,906 433,328
Property, equipment and improvements, net.............. 176,077 49,240
Investments in affiliated companies.................... 19,015 --
Other investments...................................... 273,005 8,527
Distribution agreements, net........................... 313,772 186,247
Goodwill and other intangible assets, net.............. 7,614,847 93,989
Other assets........................................... 76,657 9,300
----------- ---------
Total assets........................................ $ 9,104,279 $ 780,631
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 44,781 $ 7,100
Accounts payable -- related parties................... 22,916 3,684
Accrued compensation and related expenses............. 15,632 2,504
Deferred revenue...................................... 56,844 5,164
Other accrued liabilities............................. 63,044 12,507
Current portion of capital lease and other
obligations.......................................... 38,666 12,045
----------- ---------
Total current liabilities........................... 241,883 43,004
Convertible notes and debentures....................... 736,294 229,344
Capital lease and other obligations, less current
portion............................................... 52,552 14,356
Other liabilities...................................... 6,533 61
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, no par value:
Authorized shares -- 9,650,000
Issued and outstanding shares -- 10,134 in 1999 and
none in 1998......................................... 397,019 --
Common stock, $0.01 par value:
Authorized shares -- 719,719,414
Issued and outstanding shares -- 384,754,355 in 1999
and 246,545,734 in 1998.............................. 9,312,700 719,676
Deferred compensation................................. (50,493) (2,880)
Accumulated other comprehensive income................ 92,594 4,235
Accumulated deficit................................... (1,684,803) (227,165)
----------- ---------
Total stockholders' equity.......................... 8,067,017 493,866
----------- ---------
Total liabilities and stockholders' equity.......... $ 9,104,279 $ 780,631
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
61
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Revenues(/1/)................................ $ 336,955 $ 48,045 $ 7,437
Costs and expenses(/2/):
Operating costs............................. 143,056 46,965 22,459
Product development and engineering......... 54,805 17,009 11,984
Sales and marketing......................... 130,725 18,091 11,863
General and administrative.................. 30,276 12,429 10,635
Cost and amortization of distribution
agreements................................. 291,967 101,385 9,246
Amortization of goodwill, intangible assets
and deferred compensation and other
acquisition-related costs.................. 1,157,009 2,758 --
----------- --------- --------
Total costs and expenses..................... 1,807,838 198,637 66,187
----------- --------- --------
Loss from operations......................... (1,470,883) (150,592) (58,750)
Interest and other income, net............... 10,253 6,413 3,033
Investment gain from business combination.... 12,566 -- --
Equity share of losses of affiliated
companies................................... (9,574) -- --
----------- --------- --------
Net loss..................................... $(1,457,638) $(144,179) $(55,717)
=========== ========= ========
Net loss per share -- basic and diluted...... $ (4.61) $ (0.63) $ (0.27)
=========== ========= ========
Shares used in per share computation -- basic
and diluted................................. 316,441 228,479 207,086
=========== ========= ========
- --------
(/1/)Revenues from related parties........... $ 28,821 $ 10,458 $ 2,948
=========== ========= ========
(/2/)Depreciation and amortization included
in costs and expenses, excluding
amortization of distribution agreements and
acquisition-related amounts................. $ 49,467 $ 15,029 $ 8,913
=========== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
62
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Notes Accum.
Convertible Receivable Other
Preferred Stock Common Stock From Deferred Compre-
---------------- ------------------- Stock- Compen- hensive Accumulated Total Stock-
Shares Amount Shares Amount holders sation Income Deficit holders'Equity
------ -------- ------- ---------- ---------- -------- ------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996................... 4,522 $ 44,993 23,710 $ 1,035 $ (170) $ (272) $ -- $ (27,269) $ 18,317
Net issuance of Series C
preferred stock........ 240 46,339 -- -- -- -- -- -- 46,339
Preferred stock
converted to common
stock.................. (4,762) (91,332) 190,504 91,332 -- -- -- -- --
Net issuance of Series A
common stock in initial
public offering........ -- -- 20,700 99,768 -- -- -- -- 99,768
Series A common stock
issued under stock
option and restricted
stock plans............ -- -- 4,382 527 (234) -- -- -- 293
Repurchases of Series A
common stock........... -- -- (2,090) (91) 15 -- -- -- (76)
Repayment of notes
receivable............. -- -- -- -- 70 -- -- -- 70
Warrants to purchase
Series A common stock
under distribution
agreements............. -- -- -- 172,283 -- -- -- -- 172,283
Deferred compensation
related to grant of
stock options.......... -- -- -- 5,257 -- (5,257) -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- 1,130 -- -- 1,130
Net loss................ -- -- -- -- -- -- -- (55,717) (55,717)
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Comprehensive loss...... -- -- -- -- -- -- -- -- (55,717)
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Balances at December 31,
1997................... -- -- 237,206 370,111 (319) (4,399) -- (82,986) 282,407
Net issuance of Series A
common stock in
secondary offering..... -- -- 5,750 125,725 -- -- -- -- 125,725
Series A common stock
issued and stock
options assumed in
acquisitions........... -- -- 2,488 94,953 -- -- -- -- 94,953
Series A common stock
issued upon exercise of
warrants............... -- -- 192 -- -- -- -- -- --
Series A common stock
issued under stock
option and employee
stock purchase plans... -- -- 1,300 5,139 -- -- -- -- 5,139
Repurchases of Series A
common stock........... -- -- (390) (40) 16 -- -- -- (24)
Repayment of notes
receivable............. -- -- -- -- 303 -- -- -- 303
Warrants to purchase
Series A common stock
under distribution
agreements............. -- -- -- 124,287 -- -- -- -- 124,287
Amortization of deferred
compensation, net of
cancelled stock
options................ -- -- -- (499) -- 1,519 -- -- 1,020
Net loss................ -- -- -- -- -- -- -- (144,179) (144,179)
Net unrealized gain on
available-for-sale
investments............ -- -- -- -- -- -- 4,235 -- 4,235
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Comprehensive loss...... -- -- -- -- -- -- -- -- (139,944)
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Balances at December 31,
1998................... -- -- 246,546 719,676 -- (2,880) 4,235 (227,165) 493,866
Series A common stock
issued and stock
options and warrants
assumed in
acquisitions........... -- -- 126,808 8,083,468 -- -- -- -- 8,083,468
Series A preferred stock
issued in acquisition.. 11 418,175 -- -- -- -- -- -- 418,175
Series A common stock
issued upon exercise of
warrants............... -- -- 5,417 10,507 -- -- -- -- 10,507
Series A common stock
issued under stock
option and employee
stock purchase plans... -- -- 5,767 58,024 -- -- -- -- 58,024
Repurchases of Series A
common stock........... -- -- (324) (90) -- -- -- -- (90)
Warrants to purchase
Series A common stock
under distribution
agreements............. -- -- -- 417,847 -- -- -- -- 417,847
Conversion of Series A
preferred stock to
Series A common stock.. (1) (21,156) 540 21,156 -- -- -- -- --
Warrants to purchase
Series A common stock
contributed to joint
venture................ -- -- -- 2,112 -- -- -- -- 2,112
Deferred compensation
from stock options and
restricted stock
assumed in
acquisitions........... -- -- -- -- -- (51,061) -- -- (51,061)
Amortization of deferred
compensation........... -- -- -- -- -- 3,448 -- -- 3,448
Net Loss................ -- -- -- -- -- -- -- (1,457,638) (1,457,638)
Net unrealized gain on
available-for-sale
investments............ -- -- -- -- -- -- 88,456 -- 88,456
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (97) -- (97)
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Comprehensive loss...... -- -- -- -- -- -- -- -- (1,369,279)
------ -------- ------- ---------- ------ -------- ------- ----------- -----------
Balances at December 31,
1999................... 10 $397,019 384,754 $9,312,700 -- $(50,493) $92,594 $(1,684,803) $ 8,067,017
====== ======== ======= ========== ====== ======== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
63
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
Net loss.................................... $(1,457,638) $(144,179) $ (55,717)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization.............. 49,467 14,009 7,783
Amortization of distribution agreements.... 78,843 51,591 9,246
Cost of distribution agreements............ 213,124 49,794 --
Amortization of deferred and other stock-
based compensation........................ 10,159 1,020 1,130
Amortization of goodwill and other
intangible assets......................... 1,103,005 -- --
Accretion of discount on convertible
debentures................................ 6,950 -- --
Recognition of non-cash gain on
investment................................ (12,556) -- --
Charge for purchased in-process research
and development........................... 36,715 2,758 --
Equity share of losses of affiliated
companies................................. 9,574 -- --
Changes in assets and liabilities:
Accounts receivable....................... (8,972) (8,099) (1,338)
Other assets.............................. (6,691) (9,143) (2,251)
Accounts payable.......................... 39,198 5,822 1,089
Accrued compensation and related
expenses................................. (2,165) 322 550
Deferred revenues......................... 43,157 3,126 1,853
Other accrued liabilities................. 10,148 4,503 6,026
Other long-term liabilities............... 85 (1,736) 61
----------- --------- ---------
Cash provided by (used in) operating
activities................................. 112,403 (30,212) (31,568)
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchases of short-term investments......... (340,050) (135,342) (103,030)
Sales and maturities of short-term
investments................................ 178,386 92,922 33,925
Net purchases of other investments.......... (104,732) 4,291 --
Net purchases of property, equipment and
improvements............................... (60,809) (16,793) (9,989)
Payments under backbone agreement........... (57,052) -- --
Investment in joint ventures................ (7,561) -- --
Business combinations, net of cash
received................................... (316,383) 144 --
----------- --------- ---------
Cash used in investing activities........... (708,201) (54,778) (79,094)
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from issuance of convertible
debentures................................. 485,750 222,466 --
Proceeds from issuance of convertible
preferred stock............................ -- -- 46,339
Proceeds from issuance of common stock, net
of repurchases............................. 68,441 130,828 99,985
Proceeds from capital lease financing....... -- -- 5,630
Payments on capital lease obligations....... (34,547) (12,118) (6,858)
Repayment of notes receivable from
stockholders............................... -- 303 70
----------- --------- ---------
Cash provided by financing activities....... 519,644 341,479 145,166
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (76,154) 256,489 34,504
Cash and cash equivalents, beginning of
period..................................... 300,702 44,213 9,709
----------- --------- ---------
Cash and cash equivalents, end of period.... $ 224,548 $ 300,702 $ 44,213
=========== ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid.............................. $ 7,236 $ 2,148 $ 1,039
=========== ========= =========
Acquisition of equipment under capital
leases.................................... $ 54,322 $ 12,872 $ 16,527
=========== ========= =========
Warrants to purchase Series A common stock
earned by cable partners under
distribution agreements and capitalized as
intangibles............................... $ 204,723 $ 74,493 $ 172,283
=========== ========= =========
Conversion of preferred stock to common
stock..................................... $ 21,156 $ -- $ 91,332
=========== ========= =========
Mergers and acquisitions:
Common stock issued and options and
warrants exercisable for common stock
assumed.................................. $ 8,083,468 $ 94,953 $ --
=========== ========= =========
Liabilities assumed....................... $ 133,349 $ 2,589 $ --
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
64
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
The Company
At Home Corporation, or Excite@Home, which was incorporated in the state of
Delaware on March 28, 1995, is a global media company that provides consumers
with high speed, high bandwidth Internet connectivity and content and
interactive services available on multiple bandwidth platforms. Our @Home
service provides broadband Internet access from consumers' homes over the cable
television infrastructure and offers end-to-end managed connectivity services
for businesses over both cable and digital telecommunications lines. Our @Work
division further utilizes our network by providing a range of Internet services
for businesses, including high-speed connectivity, web hosting and development
and hosting of e-commerce solutions. Our media and marketing services include
the Excite Network, MatchLogic and Bluemountain.com, as well as other media
properties that deliver entertainment, shopping and information services to our
customers. The Excite Network offers search, content, community, communications
services and commerce functionality to Internet users. Excite's media services
focus on comprehensive navigation, global reach and personalization technology
to attract and retain users and achieve market share. MatchLogic, a subsidiary
of Excite, is a proprietary advertising distribution platform that provides
advertisers with targeted ad campaign management designed to improve the
effectiveness of their advertising campaigns. Bluemountain.com provides online
greeting cards at no cost to visitors of its web site.
Dependence on Cable System Operators
We have strategic partnerships with 22 cable system operators that provide,
through their cable systems, the principal distribution network for our
services to subscribers. Our cable partners have granted us the exclusive right
to offer high-speed residential consumer Internet services over their cable
systems, subject to certain exceptions. However, these cable partners are under
no obligation to carry our services. In addition, the cable partners'
exclusivity obligations in our favor begin expiring in June 2002, and may be
terminated prior to that date under certain circumstances.
Transmission of data over cable is dependent on the availability of high-
speed two-way hybrid fiber coaxial cable infrastructure. Currently, significant
portions of the cable infrastructure in the United States have not been
upgraded from coaxial cable to hybrid fiber-coaxial cable and, in addition, are
not capable of two-way transmission. Cable system operators have announced and
have started to implement major infrastructure investments in order to deploy
data-over-cable services. However, there can be no assurance that such
infrastructure improvements will be completed.
Certain parties, including other Internet service providers, have petitioned
federal, state and local authorities to require cable operators to provide
Internet and online service providers with unbundled access to their cable
systems. The rates that our cable partners charge for this third-party access,
or for the @Home services, could also be subject to rate regulation or
tariffing requirements. Our financial position and results of operations would
likely be materially affected 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. In addition, some
local jurisdictions, including Portland and Multnomah County, Oregon and
Broward County, Florida, have imposed third-party access requirements on AT&T
and other cable companies operating in those communities. The imposition of
these requirements has been challenged in Federal Courts. In June 1999, a U.S.
District Court upheld the third-party access requirement imposed on AT&T by
Portland and Multnomah County. This decision was appealed to the U.S. Court of
Appeals for the Ninth Circuit and arguments were presented to the court in
November 1999. Although appeals decisions have no time limit, most rulings
occur within three to twelve months after the date arguments are presented.
Numerous other local jurisdictions have considered or are considering imposing
similar third-party access requirements and other municipalities may consider
imposing similar requirements in the future.
65
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, AT&T announced that customers of its broadband cable
systems will be able to choose their Internet service provider for high-speed
Internet access upon expiration of our exclusivity agreement with AT&T.
Dependence on Key Technology Suppliers
We currently depend on a limited number of suppliers for certain key
technologies, including cable modems, which are needed to build, manage and
operate our services. Although we believe that there are alternative suppliers
for each of these technologies, we have established favorable relationships
with each of our current suppliers, and it could take a significant period of
time to establish relationships with alternative suppliers and substitute their
technologies. The loss of any of our relationships with our current suppliers
could have a material adverse effect on our financial condition and results of
operations.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of At Home
Corporation and its subsidiaries, all of which are wholly owned. All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in entities owned 20% or more but less than majority
owned and not otherwise controlled by us are accounted for under the equity
method and presented in the consolidated balance sheets as investments in
affiliated companies.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to current year's presentation.
Stock Split
In May 1999, our stockholders approved a two-for-one split of our common
stock, which occurred on June 16, 1999 to stockholders of record on May 29,
1999. All of the common stock share and per share data appearing in the
consolidated financial statements have been adjusted to retroactively reflect
this stock split.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Monthly customer subscription revenue for the @Home and @Work services is
recognized in the period in which subscription services are provided. We also
earn revenue from cable system operators for providing certain support
services, such as customer support, local area content development and pre-
commercial deployment fees. Revenue from cable system operators is recognized
as the services are performed. We have also entered into agreements with U.S.
cable stockholders for the development, deployment and marketing of additional
services. Revenues for these development agreements are recognized on the
percentage of completion basis.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues also include on-line advertising revenues which are derived
principally from short-term advertising contracts in which we guarantee a
minimum number of impressions (a view of an advertisement by a consumer) for a
fixed fee. We also enter into a number of longer-term advertising and e-
commerce sponsorship agreements. Under these agreements, we earn fees for
initial programming, initiation of service and for generating impressions,
which in some instances are guaranteed. These revenues, as well as contract and
other revenues, which include ad serving and targeting revenues, are generally
recognized ratably over the term of the agreements, provided that we do not
have any significant remaining obligations and collection of the resulting
receivable is probable. To the extent that impression deliveries do not meet
the guarantees, we defer recognition of the corresponding revenues until
impressions are delivered.
Revenues from the exchange of media and advertising services related to our
Internet sites for advertising in other media were less than 10% of total
revenues for the year ended December 31, 1999; such revenues were insignificant
in 1998. Revenues from these exchanges are recorded at the lower of the fair
value of the services provided or the services received.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of 90 days or less and are stated at amounts that
approximate fair value, based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and
the U.S. Government. We include in cash and cash equivalents all short-term,
highly liquid investments that mature within 90 days of their acquisition date.
Other Investments
Other investments primarily consist of strategic investments of less than
20% equity interest in certain companies. We do not have the ability to
exercise significant influence over any of these companies and therefore
account for such investments as available-for-sale securities under Statement
of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investments in publicly held
companies are recorded at fair value as measured by quoted market prices and
investments in privately held companies, which are recorded at cost, are
accounted for under the cost method of accounting. Changes in fair value are
included in comprehensive loss and unrealized gains and losses are included in
accumulated other comprehensive income or loss. Realized gains and losses are
recorded in net interest and other income when the related investments are
sold. Our investments in privately held companies are assessed for impairment
periodically through review of operations and indications of continued
viability, such as subsequent rounds of financing.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of
the estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets consist of purchased technology, acquired workforce,
acquired brand name and content, and goodwill related to the acquisitions of
Narrative Communications Corp., Full Force Systems, Inc., Excite, Inc., iMALL,
Inc., Hartford House, Ltd. and its wholly-owned subsidiary Bluemountain.com,
Webshots Corporation, certain assets of Perspecta, Inc. and Excite Espana.
These acquisitions were accounted for as purchases and are further described in
Note 3. Amortization of goodwill and intangible assets is provided on
67
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the straight-line basis over the estimated useful lives of the assets, which
generally range from two to four years. Acquired in-process research and
development without alternative future use is charged to operations at the date
of acquisition.
We record impairment losses on intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated
fair value of the asset is less than its recorded amount. Conditions that would
trigger an impairment assessment include material adverse changes in operations
or our decision to abandon acquired products, services or technologies.
Measurement of fair value would be based on discounted cash flows at our
incremental borrowing rate and would include a factor for the probability that
the impaired product, service or technology would be successful. To date, no
such impairment has occurred.
Stock-Based Compensation
We account for stock-based awards to employees in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", and have adopted the disclosure-only alternative of Statement of
Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation".
Advertising Costs
All advertising costs are expensed as incurred. Advertising costs, which are
included in sales and marketing expenses, were $18.3 million, $1.8 million and
$0.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Software Development Costs
Costs of software developed internally by us for use in our operations are
accounted for under the American Institute of Certified Public Accountants'
Statement of Position (SOP) 98-1, "Internal Use Software", which we adopted on
January 1, 1999. Under SOP 98-1, we expense costs of research, including pre-
development efforts prior to establishing technological feasibility, and costs
incurred for training and maintenance. Software development costs are
capitalized when technological feasibility has been established and it is
probable that the project will be completed and the software will be used as
intended. Costs incurred for upgrades and enhancements to our software are
capitalized when we believe such efforts result in additional functionality to
the software. Capitalized software costs are amortized to expense over the
estimated useful life of the software. Capitalized software costs for the year
ended December 31, 1999 were not significant. Prior to the adoption of SOP 98-
1, substantially all software development costs were recorded in a manner
similar to SOP 98-1.
Interest Expense
Interest expense includes interest on convertible debt and capital lease and
other obligations of $15.8 million, $2 million and $.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
Income Taxes
Income taxes are computed using the asset and liability method, under which
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws. A
valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
Effect of New Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which provides
guidance on the recognition, presentation and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met in order to recognize revenue and
provides guidance for disclosures related to revenue recognition policies.
Although we have not fully assessed the impact of adopting SAB 101 on our
financial position and results of operations in 2000 and thereafter, we do not
expect the effect, if any, to be material.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that entities recognize all derivatives in the balance sheet at fair
value and record gains and losses resulting from changes in fair value
according to the purpose of the derivative and whether it qualifies as a hedge.
The effective date of this Statement was delayed by the issuance of FAS 137 to
fiscal years beginning after June 15, 2000, with earlier application
encouraged. We expect to adopt this Statement effective January 1, 2001 and do
not anticipate that its adoption will have a significant effect on our
financial position or results of operations.
2. Calculation of Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding. The computation for the period ended December 31, 1997 also
gives pro forma effect to the conversion, in connection with our initial public
offering in July 1997, of all outstanding shares of convertible preferred stock
into shares of common stock. Since we have a net loss for all periods
presented, net loss per share on a diluted basis is equivalent to basic net
loss per share because the effect of converting outstanding stock options,
warrants, common stock subject to repurchase, convertible debt, preferred stock
and other common stock equivalents would be anti-dilutive.
The computation of basic and diluted net loss per share is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Net loss................................. $(1,457,638) $(144,179) $(55,717)
=========== ========= ========
Weighted average shares of common stock
outstanding............................. 322,456 240,108 35,030
Less: weighted average shares of common
stock subject to repurchase............. (6,015) (11,629) (18,448)
Pro forma common equivalent shares from
convertible preferred stock............. -- -- 190,504
----------- --------- --------
Shares used in per share calculations.... 316,441 228,479 207,086
=========== ========= ========
Net loss per share -- basic and diluted.. $ (4.61) $ (0.63) $ (0.27)
=========== ========= ========
</TABLE>
3. Business Combinations
Our acquisitions include Full Force in November 1998; Narrative in December
1998; Excite in May 1999; iMALL, Webshots and Perspecta in October 1999; Excite
Spain in November 1999; and Bluemountain.com in December 1999. All of our
acquisitions were accounted for as purchases. Accordingly, the total purchase
consideration for each acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of the
acquisition. Goodwill represents the excess of purchase consideration over the
fair value of assets, including identifiable intangible assets, net of the fair
value of liabilities assumed. Our consolidated financial statements include the
results of operations of acquired companies commencing on the date of
acquisition.
Narrative is a provider of advertising solutions for the Internet. The
purchase consideration was $93.8 million, comprised of the issuance of
2,410,666 shares of our Series A common stock with an aggregate
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair value of $84.2 million, the assumption of stock options to purchase
approximately 282,000 shares of our Series A common stock with an aggregate
fair value of $9.2 million, and $0.4 million of acquisition costs. Goodwill and
intangible assets are being amortized on a straight-line basis over
approximately three years.
Full Force is a developer of set-top applications for interactive
television. The purchase consideration was approximately $1.7 million,
comprised of the issuance of 76,380 shares of our Series A common stock with an
aggregate fair value of approximately $1.6 million and $0.1 million of
acquisition costs. Goodwill and intangible assets are being amortized on a
straight-line basis over approximately three years.
Excite offers consumers and advertisers comprehensive Internet navigation
services with personalization capabilities and specializes in the delivery of
targeted marketing solutions through its subsidiary, MatchLogic. The
acquisition was accomplished through a merger of Excite, previously a publicly
held company, with and into a wholly-owned subsidiary of our company. The total
purchase consideration of approximately $7,231 million was based on: the fair
value of our Series A common stock issued; stock option, stock purchase plan
and warrant obligations assumed; and merger-related costs. At the closing, we
issued 115,438,508 million shares of our Series A common stock with a fair
value of approximately $6,051 million as of the announcement date, based on an
exchange ratio of 2.083804 shares of our Series A common stock for each
outstanding share of Excite common stock, adjusted to reflect the two-for-one
split of our common stock on June 16, 1999. We assumed outstanding options to
purchase Excite common stock, which were converted into options to acquire
approximately 25,714,000 shares of our Series A common stock. The fair value of
the assumed options was approximately $1,105 million based on the merger
exchange ratio. The converted options are subject to the terms and conditions,
including exercisability and vesting schedules, of the original options. We
also assumed outstanding warrants and convertible debt instruments under which
approximately 232,000 shares of our Series A common stock is issuable, with a
fair value of approximately $10 million. In addition, we incurred direct merger
costs of approximately $65.4 million, which were included in the purchase
consideration. These direct merger costs primarily consisted of investment
banking fees, severance and stock compensation to certain employees and other
professional fees. Goodwill and intangible assets are being amortized on a
straight-line basis over approximately four years.
iMALL provides integrated e-commerce solutions which allow businesses to
create fully commerce-enabled web sites or add transaction capabilities to
their existing ones. The purchase consideration of $637.1 million was based
primarily on the aggregate fair value of our Series A common stock issued in
exchange for shares of iMALL and the obligation to issue our Series A common
stock under assumed warrants and stock options: $481.2 million fair value
related to 9,319,760 shares issued; $82.8 million fair value related to
2,300,000 warrants issued; $7.4 million fair value related to approximately
159,000 warrants assumed; and $61.5 million fair value related to approximately
1,497,000 stock options assumed. In addition, the purchase consideration
included $4.2 million of direct acquisition costs, consisting primarily of
investment banking fees. Goodwill and intangible assets are being amortized on
a straight-line basis over approximately three years.
Webshots offers free copyrighted digital photographs over the Internet,
viewable with its proprietary software. The purchase price consideration of
$83.3 million was comprised of the issuance of 2,050,326 shares of our Series A
common stock with an aggregate fair value of $82.5 million and $0.8 million of
direct acquisition costs. The resale of 30% of the Series A common stock issued
in this acquisition is subject to vesting during the employment of their
holders over the 24 months following the acquisition. The $25.0 million
aggregate fair value of such restricted stock was allocated to deferred
compensation in the purchase price allocation. The deferred compensation is
being amortized on a straight-line basis over 24 months. Goodwill and
intangible assets are being amortized on a straight-line basis over
approximately four years.
Bluemountain.com provides free online greeting cards. The preliminary
purchase consideration of $970 million as of December 31, 1999 was based
primarily on a cash payment of $350 million, the issuance of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10,674 shares of our Series A non-voting preferred stock, which may be
converted to 10,673,549 shares of Series A Common Stock, with an aggregate fair
value of $418.2 million, the assumption of stock options with fair value of
$44.7 million under which approximately 3,011,000 shares of our Series A common
stock are issuable and $150 million related to performance-based contingent
purchase consideration earned in December 1999. In addition, the purchase
consideration included $7.2 million of direct acquisition costs, primarily
investment banking and legal fees. Each Series A preferred stock issued in the
acquisition is convertible into 1,000 shares of Series A common stock at a rate
of 500,000 shares of common stock per month during the twelve months following
the acquisition, and the remaining shares will become fully convertible after
two years. Newly issued unvested stock options assumed in the acquisition were
recorded as deferred compensation in the purchase price allocation based on
their intrinsic value of $26.1 million. Deferred compensation is amortized as
the related stock options vest and become exercisable. We recorded the
remainder of stock options assumed in the acquisition at fair value,
representing fully vested options and options held by third parties. The
performance-based contingent purchase consideration consisted of up to $300
million in additional shares of Series A common stock and stock options at fair
value. The number of additional shares issuable was based on the dollar amount
associated with achievement of the performance goals divided by the average
price of our Series A common stock during the month of December 1999, the
period during which the performance was measured. Based on information
available as of December 31, 1999, $150 million of the performance-based
consideration was determinable and was recorded as common stock in the
consolidated balance sheet. In February 2000, we were able to determine the
final amount of performance-based purchase consideration. Based on the average
closing price of our Series A common stock during the month of December 1999,
we will issue approximately 3,485,000 shares of Series A common stock during
the first quarter of 2000 having an aggregate fair value of approximately $150
million. In addition, the purchase agreement requires that we increase the
number of shares issuable upon exercise of assumed stock options by
approximately 542,000 shares. Goodwill and intangible assets are being
amortized on a straight-line basis over approximately four years.
During the year ended December 31, 1999, we also acquired Perspecta and
Excite Espana for a total purchase consideration of $11.1 million consisting of
cash payments of $10.8 million and approximately $0.3 million of acquisition
costs. Goodwill and intangible assets are being amortized on a straight-line
basis over approximately four years.
Allocation of Purchase Consideration
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<CAPTION>
Acquisitions in 1998 Acquisitions in 1999
-------------------- -----------------------------------------------------
Blue
Narrative Full Force Excite iMALL Webshots Mountain Others(/1/)
--------- ---------- ---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................... $ 77 $ 69 $ 34,341 $ 8,974 $ 73 $ 611 $ 432
Accounts receivable and
other assets........... 584 60 233,338 884 -- 1,204 298
Property and equipment.. 520 5 48,376 3,368 68 3,577 78
Purchased technology.... 22,900 215 94,500 13,200 2,200 800 --
Other identified
intangible assets...... 1,050 101 162,700 35,600 22,800 27,000 --
Goodwill................ 68,404 1,318 6,729,164 576,500 33,110 912,730 13,560
Purchased in-process
research and
development............ 2,700 58 34,400 1,890 425 -- --
Deferred compensation... -- -- -- -- 25,000 26,087 --
Liabilities assumed..... (2,435) (154) (105,743) (3,282) (378) (1,986) (3,308)
------- ------ ---------- -------- ------- -------- -------
Total purchase
consideration........ $93,800 $1,672 $7,231,076 $637,134 $83,298 $970,023 $11,060
======= ====== ========== ======== ======= ======== =======
</TABLE>
(/1/)Includes the acquisitions of Perspecta in October 1999 and Excite
Espana in November 1999.
- --------
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisition-related Amortization
As a result of our acquisitions during 1999 and 1998, we recorded $8,335
million of goodwill and $249.3 million of other acquisition-related intangible
assets. Amortization of goodwill and acquisition-related intangibles was $1,103
million for the year ended December 31, 1999 and insignificant for the year
ended December 31, 1998. Accumulated amortization of goodwill and acquisition-
related intangibles was $1,103 million as of December 31, 1999. In addition, we
recorded $51.1 million of stock-based deferred compensation related to our
acquisitions of Bluemountain.com and Webshots. We are amortizing deferred
compensation to expense over the vesting terms of the stock-based awards, which
range from two to four years. Accumulated amortization of acquisition-related
deferred compensation as of December 31, 1999 and the related amortization
expense for 1999 was $2.4 million.
Purchased In-Process Research and Development
The fair value assigned to purchased in-process research and development in
the allocation of purchase consideration includes research and development
projects for which technological feasibility had not been achieved at the date
of acquisition and which had no alternative future use. This allocation of fair
value is charged to operations at the date of acquisition, and included $34.4
million for Excite, $1.9 million for iMALL, and $425,000 for Webshots during
the year ended December 31, 1999. The charge of $2.8 million in 1998 related
primarily to Narrative.
In order to determine the fair value of purchased in-process research and
development, we estimated the date of completion of the research and
development effort, assessed the state of such effort at the acquisition date,
and calculated the estimated net present value of cash flows expected to result
from the successful deployment of the new technology or product resulting from
the in-process research and development effort. The state of completion was
determined by estimating the costs and time incurred to date relative to the
costs and time to be incurred to develop the in-process technology into a
commercially viable technology or product. The estimated net present value of
cash flows was based on incremental future cash flows from revenues expected to
be generated by the technology or products being developed, taking into account
the characteristics and applications of the technology or product, the size and
growth rate of existing and future markets and an evaluation of past and
anticipated technology and product life cycles. Estimated net future cash flows
also included allocations of operating costs, sales and marketing, general and
administrative expenses, fixed charges, the portion of product development
costs related to maintenance and the net impact of income taxes. Estimated net
future cash flows were discounted to arrive at a net present value and were
allocated to in-process research and development based on the percentage of
completion at the date of acquisition. The discount rate included a factor that
took into account the uncertainty surrounding the successful development of in-
process technology projects.
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, were $14.3 million for the year ended December 31, 1999; there were no
such costs in 1998. Such costs included $8.1 million in employee severance and
retention costs, $1.8 million of systems integration costs, $1.4 million of
professional fees and $3.0 million in other related costs.
Pro Forma Results of Operations
The following unaudited pro forma summary represents the consolidated
results of operations as if our acquisitions had occurred at the beginning of
each of the years presented and includes the amortization of goodwill and other
intangible assets and a charge for in-process research and development. Our
1998
72
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisitions are already fully reflected in our 1999 results of operations and
therefore no pro forma adjustments are made for these acquisitions in 1999. Pro
forma shares include a factor for the number of shares of Series A common stock
issued or issuable, excluding employee stock options, as if such shares were
converted and outstanding at the beginning of each of the years presented. The
pro forma summary excludes the results of operations of Perspecta and Excite
Espana because they are not material to the consolidated pro forma disclosures
(in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Pro forma revenues............................... $ 426,009 $ 207,423
=========== ===========
Pro forma net loss............................... $(2,694,301) $(2,532,646)
=========== ===========
Pro forma net loss per share -- basic and
diluted......................................... $ (6.90) $ (6.76)
=========== ===========
Pro forma shares used in per share calculation --
basic and diluted.............................. 390,383 374,624
=========== ===========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred if our business combinations had occurred at
the beginning of each year presented and are not intended to be indicative of
future results of operations.
4. Cash and Cash Equivalents and Short-Term Investments
Our short-term investments as of December 31, 1999 consist primarily of
highly liquid debt instruments with original maturities at the date of purchase
of between three and twelve months as well as other highly liquid investments
which generally mature in one year or less. Highly liquid short-term
investments maturing in 90 days or less at the date of purchase are included in
cash and cash equivalents. We have classified all short-term investments as
available-for-sale. Available-for-sale securities are carried at amounts that
approximate fair market value based on quoted market prices. Realized gains and
losses and declines in fair market value judged to be other-than-temporary are
included in interest income and were not material during the years ended
December 31, 1999, 1998, and 1997. The cost of securities sold is based on the
specific identification method. Interest on securities classified as available-
for-sale is included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Corporate bonds and notes................................. $330,759 $280,429
Market auction preferred stock............................ 1,000 98,609
U.S. government obligations............................... 67,534 8,760
Money market instruments.................................. 100,142 620
Certificates of deposit................................... 19,626 9,388
-------- --------
Total available-for-sale securities...................... 519,061 397,806
Less amounts included in cash and cash equivalents........ 218,386 279,219
-------- --------
Short-term investments.................................... $300,675 $118,587
======== ========
</TABLE>
Unrealized gains and losses on available-for-sale securities at December 31,
1999 and 1998 were not material. Accordingly, we have not made a provision for
such amounts in our consolidated balance sheets.
73
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Investments in Affiliated Companies
Our investments in affiliated companies represent investments of between 20%
and 50% in the equity of certain companies in which we do not have majority
voting control, including joint ventures formed with various entities for the
purpose of expanding the distribution of our @Home broadband and Excite content
services internationally. Investments in affiliated companies are accounted for
under the equity method. Our equity share of losses in affiliated companies was
$9.6 million for the year ended December 31, 1999; we had no equity investments
in operating companies in prior years. Condensed financial information of our
equity-method investments has not been presented as the financial condition and
results of operations of these companies are not material to our consolidated
financial statements.
In general, we have service agreements with affiliated companies under which
we have agreed to provide certain consulting services on a cost-plus basis (see
Note 13).
At Home Solutions
In May 1999, we entered into a joint venture agreement with Motorola, Inc.
to form At Home Network Solutions, Inc. ("Solutions"). In July 1999, Cisco
Systems, Inc. and General Instrument Corporation also invested in Solutions. As
of December 31, 1999, we owned approximately 46% of Solutions and each of
Motorola, Cisco and General Instrument owned approximately 18% of Solutions.
Solutions offers production, packaging, marketing, distribution and support of
our broadband Internet services for delivery by small and medium-sized cable
operations to residential, small office and home office customers in the United
States. We have an option for a three-year period commencing on April 1, 2002
to purchase the interest owned by each of the other joint venture partners at
fair market value. If we do not exercise the purchase option, each joint
venture partner will have the right to sell its interest in Solutions to the
other partners, and the partners collectively will have the right to require
Solutions to register the sale of their interests to the public or collectively
to purchase our interest in Solutions for a nominal price.
At Home Australia
In June 1999, we entered into a joint venture agreement with Optus Vision
Pty Ltd. to form At Home Network Australia Pty Ltd. At Home Australia is owned
50% by us and 50% by Optus and will conduct a business consisting of the
production, packaging, marketing, distribution and support of our broadband
Internet service for delivery to residential, small office and home office
customers in Australia. Optus and we may each be required to contribute up to
approximately $20 million, or 32 million Australian Dollars, to the joint
venture and we have contributed approximately $3.4 million, or 4 million
Australian Dollars, during the year ended December 31, 1999. In March 2000, At
Home Australia acquired Excite Asia Pacific Pty Ltd and the combined entity was
renamed Excite@Home Australia Pty Limited. We have retained our 50% interest in
the combined joint venture and remain subject to the contribution requirements
under the At Home Australia joint venture agreement.
At Home Japan
On August 26, 1999, we and Jupiter Telecommunications Co., Ltd. and Sumitomo
Corporation entered into a joint venture agreement to form At Home Japan
Limited. At Home Japan is indirectly owned 43% by us, 36% by Jupiter and 21% by
Sumitomo and will conduct operations in Japan in a similar manner as our joint
venture in Australia. The joint venture partners have agreed to contribute up
to approximately $74.9 million, or 7.8 billion Yen, based on amounts and timing
determined by At Home Japan's board of directors. Our share of this funding
obligation is $32.6 million, or 3.4 billion Yen. Under certain circumstances,
we may sell up to 50% of our interest in At Home Japan. We issued performance-
based warrants to our joint venture partners under which up to 900,000 shares
of our Series A common stock may be issuable (see Note 10).
74
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Joint Ventures
We have also formed a joint venture in the Netherlands with a local cable
operator and other investors to deliver broadband Internet services. We account
for this joint venture under the equity method but have not recorded our equity
share of losses in this investment because we have not made any cash
contributions and have no obligation to do so in the future.
In May 1999, in connection with the acquisition of Excite, approximately $21
million of the purchase price was allocated to Excite's affiliated companies
based on the fair value of these investments at the date of acquisition,
including Excite Japan, Excite Italia, Excite Asia Pacific Pty Ltd., Excite UK
Limited, Excite Espana and Excite Canada. We have a 50% interest in all of
these joint ventures as of December 31, 1999, except Excite Espana, which
became a wholly-owned subsidiary when we purchased our joint venture partner's
50% interest for approximately $2 million in November 1999. Excite Japan is a
joint venture with Itochu Corporation and Dai Nippon Printing formed in October
1997 in which we have, as of December 31, 1999, a 50% interest and a related
promissory note payable to Itochu for $5 million (see Note 9), which was used
to fund a portion of Excite's required capital contribution. We have a 50%
equity interest in our remaining Excite joint ventures and have no related cash
funding requirements.
6. Other Investments
As of December 31, 1999, our other investments totaled $273 million,
primarily consisting of equity instruments of publicly held companies. We
invested approximately $104.7 million during the year ended December 31, 1999
in these equity instruments. In addition, we acquired approximately $60 million
of other investments at fair value in connection with the acquisition of Excite
in May 1999. During the year ended December 31, 1999, unrealized gains of $88.5
million on other investments in publicly held companies were included in
accumulated other comprehensive income.
In February 1999, we recorded a $12.6 million realized gain on our
investment in a privately held company due to its acquisition in a common stock
exchange with a publicly traded company.
We have made cash investments in several companies with which we also have
strategic relationships under which we have or expect to earn revenues.
Revenues from these companies were $26.1 million and $0.8 million for the years
ended December 31, 1999 and 1998, respectively. There were no such revenues in
1997.
7. Property, Equipment and Improvements
The components of property, equipment and improvements are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, Estimated
---------------- Useful
1999 1998 Lives
-------- ------- ----------
<S> <C> <C> <C>
Computer equipment and
software................ $206,865 $56,004 3-4 years
Furniture and fixtures... 27,086 7,271 5 years
Leasehold improvements... 36,474 9,628 Lease term
Land..................... 5,239 -- n/a
-------- -------
Total property,
equipment and
improvements........... 275,664 72,903
Less accumulated
depreciation and
amortization............ 99,587 23,663
-------- -------
Net property, equipment
and improvements....... $176,077 $49,240
======== =======
</TABLE>
Equipment and improvements include amounts for assets acquired under capital
leases, principally computer equipment and software and furniture and fixtures,
of approximately $133.5 million and $40 million
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as of December 31, 1999 and 1998, respectively. Accumulated amortization of
these assets was approximately $64.4 million and $15.8 million as of December
31, 1999 and 1998, respectively.
8. Commitments and Contingencies
Facility and Equipment Leases
We lease certain office facilities under non-cancelable operating leases
that expire at various dates through 2014, and which require us to pay
operating costs, including property taxes, insurance and maintenance. These
facility leases generally contain renewal options and provisions adjusting the
lease payments based upon changes in the consumer price index and increases in
real estate taxes and operating expenses or in fixed increments. Rent expense
is recorded on a straight-line basis over the terms of the leases. We also have
obligations under a number of capital equipment leases which generally have
terms of 36 months.
Future minimum lease payments under non-cancelable operating and capital
leases having original terms in excess of one year are as follows as of
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
Year ending December 31, --------- -------
<S> <C> <C>
2000..................................................... $ 18,026 $37,108
2001..................................................... 18,311 35,499
2002..................................................... 18,946 17,196
2003..................................................... 19,366 --
2004..................................................... 19,916 --
Thereafter............................................... 144,264 --
-------- -------
Total minimum lease payments............................ $238,829 89,803
========
Less amounts representing interest........................ 7,436
-------
Present value of minimum capital lease obligations........ 82,367
Less current portion...................................... 34,015
-------
Noncurrent portion........................................ $48,352
=======
</TABLE>
We paid expenditures for tenant improvements, primarily related to the
exercise of our build-to-suit options under our headquarters facility
agreement, of approximately $18.5 million in 1999; additional commitments
during 2000 are not significant.
Facility rent expense amounted to approximately $10.2 million, $3.6 million,
and $1.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Other Financing Obligations
As a result of the Excite merger, we assumed obligations related to non-
lease equipment financing arrangements secured by specific computer equipment,
purchased software and office furniture. Amounts due under these obligations
total approximately $4.7 million during 2000 with the significant portion of
the remaining $4.2 million due in 2001.
Backbone Agreement
We have a twenty-year agreement with a major telecommunications company to
develop and utilize a high capacity nationwide 15,000-mile fiber optic data
communications line, or backbone. In connection with this
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement, we made disbursements of $57 million in 1999 to guarantee backbone
capacity and purchase related equipment and are required to make additional
payments totaling $45 million in 2000, which will be capitalized as the
payments are made. The capitalized amount will be amortized by charges to
operations over the term of the agreement or the estimated useful life of the
equipment purchased. In addition, we will be required to make additional
payments of approximately $5 million per year during the 20-year term of this
agreement for connection space, equipment and support and maintenance fees.
Litigation
Sheldon Pittleman and Ralph Zonies each filed derivative lawsuits on behalf
of Excite@Home against AT&T and Messrs. Armstrong, Petrillo, Roberts, Woodrow,
Doerr, Hearst, Bell, Malone, Shaw and Jermoluk, who are our directors, in the
Court of Chancery of the State of Delaware on October 15, 1999. We are named as
a nominal defendant in each complaint. Each complaint alleges breaches of
fiduciary duty to Excite@Home and its public stockholders. We have not yet
filed responsive pleadings in either matter. Each of Messrs. Pittleman and
Zonies seeks an injunction requiring us to alter our corporate governance,
including appointing new, unaffiliated directors, as well as payment of
monetary damages, costs and attorneys' fees. If we do not prevail in this
action, we may be required to alter our corporate governance and pay
substantial damages, which could have a material effect on our financial
position and results of operations.
GTE Internetworking Incorporated and GTE Intelligent Network Services
Incorporated filed a lawsuit against TCI (now a subsidiary of AT&T), Comcast
Corporation and us in the United States District Court for the Western District
of Pennsylvania on October 25, 1999. The complaint alleges violations of the
federal antitrust laws. GTE is seeking an injunction prohibiting continued
performance under our exclusive distribution and sales arrangements with our
cable partners, damages (including treble damages), costs and attorneys' fees.
We filed an answer to the complaint in this matter on December 15, 1999, which
was amended on December 21, 1999, denying the allegations of unlawful conduct
in the complaint. If we do not prevail in this action, our cable partners, when
providing high speed data transport to residential consumers, may be required
to offer the services of other Internet service providers in addition to the
@Home service. We may also be required to pay substantial damages. Either of
these results could materially affect our financial position and results of
operations and could encourage others to initiate litigation on similar legal
theories in the future.
Fred and Roberta Lipschutz, Arthur Simon and John Galley, III, as named
plaintiffs, filed a class action against us, AT&T, ServiceCo L.L.C. and
entities affiliated with eight other cable companies in the United States
District Court for the Central District of California on November 10, 1999. The
complaint alleges violations of the federal antitrust laws. The plaintiffs seek
an injunction prohibiting the alleged acts, damages (including treble damages),
costs and attorneys' fees. We filed an answer to the complaint in this matter
on January 21, 2000, denying the allegations of unlawful conduct in the
complaint. If we do not prevail in this action, we may be required to pay
substantial damages, or we may be forced to alter the way we do business.
Either of these results could materially affect our financial position and
results of operations and could encourage others to initiate litigation on
similar legal theories in the future.
We cannot give assurance that we will prevail in any litigation. Regardless
of the outcome, any litigation may require that we incur significant litigation
expenses and may result in significant diversion of management. An unfavorable
outcome in any of these matters may have a material adverse effect on our
financial position or results of operations.
9. Convertible Debt and Other Liabilities
Convertible Debt
On December 28, 1998, we issued $437 million of Convertible Subordinated
Debentures in a private offering within the United States to qualified
institutional investors. The issue price of each $1,000 debenture
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
was $524.64 (52.464% of principal amount at maturity), or approximately $229.3
million. Issuance costs were approximately $6.9 million, resulting in net
proceeds to us of approximately $222.4 million. The issuance costs were
recorded as other assets and are being amortized by charges to interest expense
ratably over the term of the debentures. Each debenture is convertible at the
option of the holder at any time prior to maturity, unless redeemed or
otherwise purchased, into 13.10 shares of our Series A common stock. The
debentures mature on December 28, 2018, and interest on the debentures at the
rate of 0.5246% per annum on the $437 million principal amount due at maturity
is payable semiannually commencing on June 28, 1999. At our option, we may
redeem the debentures beginning in December 2003 for cash equal to the issue
price plus accrued original issue discount and accrued interest. The effective
annual interest rate on the debentures, including accretion of original
issuance discount and amortization of the issuance costs, is approximately 4%.
No conversions of these debentures have occurred through December 31, 1999.
On December 15, 1999, we issued $500 million principal amount of Convertible
Subordinated Notes due 2006 in a transaction that was exempt under Section 4(2)
of the Securities Act. The proceeds from this issuance were $485.7 million net
of issuance costs of $14.3 million. The issuance costs were recorded as other
assets and are being amortized by charges to interest expense ratably over the
term of the debentures. Each note was issued in denominations of $1,000 or
multiples of $1,000 and is convertible into Series A common stock at a
conversion price of $56.52 per share. We may redeem these notes on or after
December 20, 2002 by giving note holders at least 30 days' notice and paying
cash equal to a redemption price which decreases ratably from 102.7% of the
principal balance in December 2003 to 100% of the principal balance in December
2006, plus accrued interest. The notes bear interest at an annual rate of 4.75%
and mature on December 15, 2006. The net proceeds from the offering were used
to finance the $350 million cash component of the purchase price of
Bluemountain.com and the remainder is intended for working capital and general
corporate purposes. No conversions of these notes have occurred through
December 31, 1999.
Promissory Note
Through our acquisition of Excite, we assumed a convertible promissory note
issued by Excite to Itochu Corporation and certain affiliated entities for the
principal amount of $5 million, which is included in other liabilities in the
consolidated balance sheet as of December 31, 1999. The note matures on October
27, 2002 and bears interest at the London Interbank Offer Rate plus 1%,
resulting in an interest rate of approximately 7.14% as of December 31, 1999.
The unpaid principal amount at the date of maturity is convertible, at the
option of the note holder, into shares of Series A common stock at a conversion
price equal to the average closing price of the stock for the 30 day trading
period preceding the conversion. In addition, we may elect to prepay these
notes at any time by converting them to common stock using the same exchange
ratio.
Term Loan Agreement
We have available a $15 million term loan agreement with a bank to finance
the acquisition of property, equipment and improvements, and to collateralize
letters of credit. At our option, borrowings under this term loan bear interest
either at the Bank's prime rate or at LIBOR plus 2.5%. Under the terms of the
term loan, we are required to meet certain financial covenants. These covenants
were met as of December 31, 1999. The term loan expires in October 19, 2002.
As of December 31, 1999, there were no borrowings under this term loan
although there were outstanding letters of credit in the amount of $2.4 million
issued as security deposits on real property leases.
10. Stockholders' Equity
Unless otherwise indicated, all share and per share data have been adjusted
to reflect our two-for-one stock split effective June 1999.
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock
On July 11, 1997, we completed our initial public stock offering and issued
20,700,000 shares (including 2,700,000 shares issued in connection with the
exercise of the underwriters' over-allotment option) of our Series A common
stock to the public at a price of $5.25 per share. We received net proceeds of
approximately $99,800,000 in cash. Concurrent with the initial public offering,
each share of preferred stock converted to common stock on a 20-for-1 basis.
Shares of Series AT, AX, AM, and C preferred stock converted into 129,949,200
shares of Series A common stock. Shares of Series T preferred stock converted
into 30,800,000 shares of Series B common stock. Shares of Series K preferred
stock converted into 29,755,320 shares of Series K common stock.
Common stock consisted of the following as of the dates indicated:
<TABLE>
<CAPTION>
Shares Issued and
Shares Authorized Outstanding At December
At December 31, 31,
----------------------- -----------------------
Series 1999 1998 1999 1998
------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A............................ 683,700,000 400,000,000 351,954,355 210,526,320
B............................ 30,800,000 30,800,000 30,800,000 30,800,000
K............................ 5,219,414 29,755,320 2,000,000 5,219,414
----------- ----------- ----------- -----------
719,719,414 460,555,320 384,754,355 246,545,734
=========== =========== =========== ===========
</TABLE>
During the year ended December 31, 1999, our Board of Directors authorized
and our stockholders approved an increase in the authorized number of shares of
Series A common stock from 400,000,000 shares to 683,700,000 shares and a
decrease in the number of authorized shares of Series K common stock from
29,755,320 shares to 5,219,414 shares.
The holders of Series A, B and K common stock have one, ten and one vote(s)
per share, respectively. Each share of Series B and K common stock is
convertible into one share of Series A common stock at the option of the
holders. During the years ended December 31, 1999 and 1998, 3,219,414 and
24,535,906 shares, respectively, were converted by holders of Series K common
stock to Series A common stock. There were no such conversions during the year
ended December 31, 1997.
As of December 31, 1999, AT&T controlled approximately 56% of our voting
power as a result of its ownership in Series A and Series B common stock. The
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. So long as AT&T owns at least 15,400,000 shares of our Series B common
stock and holds a majority of our voting power, our board may take action only
if approved by the board and by at least 75%, or four of the five, of our
Series B directors. As a result, corporate actions generally require the
approval of 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.
Preferred Stock
Our Board of Directors is authorized, subject to any limitation prescribed
by Delaware law, to issue, from time to time, in one or more series, up to
9,650,000 shares of preferred stock, with such designation, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a
Board resolution or resolutions providing for the issue of such series without
any further vote or action by the stockholders. The Board may authorize the
issuance of such preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of common
stock. Thus, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company.
79
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We issued 10,674 shares of Series A non-voting preferred stock, which may be
convertible into 10,673,549 shares of Series A common stock, in connection with
the acquisition and merger of Hartford House, Ltd. and Bluemountain.com. Each
share of Series A preferred stock is convertible into 1,000 shares of Series A
common stock at a rate of 500 shares of Series A preferred stock per month
during the first 12 months following the acquisition, with the remainder
convertible 24 months after such date. Preferred stock converted during the
first 12 months may be accelerated under certain circumstances, including the
charitable contribution of such shares. No shares of preferred stock were
issued or outstanding as of December 31, 1998.
Stock Purchase Agreements
During 1996, we entered into stock purchase agreements with certain
employees, officers, directors and consultants under which we issued 15,054,000
shares of Series A common stock at prices ranging from $0.01 to $0.05 per
share, and 100,000 shares of Series K preferred stock at $5.00 per share.
Proceeds from the issuance of the restricted stock were received in the form of
cash or five-year secured promissory notes bearing interest at a rate of
approximately 5.9% per annum. Certain of the agreements provide that the
unvested shares are subject to repurchase by us upon termination of employment
at the original price paid for the shares. The shares generally vest at the
rate of 25% after one year and ratably on a monthly basis for three years
thereafter. During the year ended December 31, 1997, we repurchased 1,038,700
shares pursuant to such agreements; there were no shares repurchased under
these agreements during the years ended December 31, 1999 and 1998. As of
December 31, 1999, 1,250,806 shares were subject to repurchase.
Warrants
Lessor Warrants
In October 1996, we issued a warrant to our facilities lessor that gives the
lessor the right to purchase 400,000 shares of Series A common stock for $7.50
per share. The warrant is exercisable for a five-year period beginning in
October 1997. We deemed the warrant to have insignificant fair value at the
time of issuance. During the years ended December 31, 1999 and 1998, the lessor
acquired 29,328 and 191,812 shares, respectively, through net exercises under
the terms of the warrant. As of December 31, 1999, 48,712 shares remained
available for issuance under this warrant.
Series C Warrants
In April 1997, we issued warrants to purchase 4,000,000 shares of Series C
preferred stock at a price of $5.00 per share to Rogers Cablesystems Limited
and Shaw Cablesystems Ltd., our primary cable partners in Canada that were
Series C preferred stock investors prior to our initial public offering. The
warrants are exercisable beginning June 2004, or earlier subject to certain
performance standards being met by the cable system operators as specified in
the agreement. We deemed the warrants to have insignificant fair value at the
time of issuance. During the year ended December 31, 1999, the holders of these
warrants acquired 1,904,708 shares through net exercises under the terms of
these warrants. As of December 31, 1999, approximately 85,000 warrants were
exercisable.
Intel Warrants
In July 1997, we issued a warrant to Intel Corporation in connection with a
development agreement that gives Intel Corporation the right to purchase
200,000 shares of Series A common stock for $5.00 per share. The shares
exercisable under this warrant vest 25% on the six-month anniversary of the
agreement and the remainder vests monthly for two years thereafter. The warrant
is exercisable through September 2002. In September 1997, we issued, in an
amendment to the development agreement, a second warrant that gives Intel
80
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Corporation the right to purchase an additional 200,000 shares of Series A
common stock for $10.50 per share. The shares exercisable under this second
warrant vest on an accelerated basis from September 2004 or earlier, subject to
certain performance standards being met by Intel, as specified in the amended
development agreement. In September 2004, all unvested shares will
automatically vest. We deemed the warrants to have insignificant fair value at
the time of issuance. No shares have been issued under these warrants through
December 31, 1999. As of December 31, 1999, 266,667 warrants were exercisable.
Warrants Subject to Distribution Agreements
Cablevision
In October 1997, we entered into a contract with Cablevision Systems
Corporation, and its parent, CSC Parent Corporation, Comcast Corporation, Cox
Enterprises, Inc., Kleiner, Perkins, Caufield & Byers and Tele-Communications,
Inc. This agreement provides that Cablevision will enter into a master
distribution agreement for the distribution of our @Home service on
substantially the same terms and conditions as TCI, Comcast and Cox. Although
Cablevision is subject to certain exclusivity obligations that prohibit it from
obtaining high-speed (greater than 128 kilobits per second) residential
consumer Internet services from any source other than us, Cablevision is under
no obligation to upgrade its cable systems to two-way cable infrastructure and
is under no affirmative obligation to roll out, market, promote or carry any of
our services. The exclusivity obligations in our favor expire in June 2002, and
may be terminated sooner under certain circumstances. These exclusivity
obligations also are subject to exceptions that would permit Cablevision to
engage in certain activities which could compete, directly or indirectly, with
our activities in certain markets.
The Agreement provides for the issuance to Cablevision and CSC Parent of a
warrant to purchase 15,751,568 shares of our Series A Common Stock at an
exercise price of $0.25 per share. The warrant was immediately exercisable,
subject to the receipt of all necessary governmental consents or approvals.
During the year ended December 31, 1997, we recorded $172.6 million as
distribution agreements in the consolidated balance sheets representing the
fair value of the warrant, and we are amortizing the amount ratably over
56 months, the remaining term of the exclusivity obligations at the time the
warrant became exercisable.
The agreement with Cablevision provides for the issuance of an additional
warrant to Cablevision and CSC Parent to purchase up to 6,142,304 shares of our
Series A common stock at an exercise price of $0.25 per share under certain
conditions. This contingent warrant was not immediately exercisable and becomes
exercisable as and to the extent certain cable television systems are
transferred from TCI and its controlled affiliates to CSC, CSC Parent or their
controlled affiliates. During the year ended December 31, 1998, the contingent
warrant became exercisable for 4,711,028 shares of Series A common stock or
$74.5 million at fair value. No further shares became exercisable under the
contingent warrant during the year ended December 31, 1999. We capitalized the
fair value of the contingent warrant as distribution agreements in the
consolidated balance sheets and we are amortizing the amount ratably over 51
months, the remaining term of the exclusivity obligations at the time the
contingent warrant became exercisable.
For the years ended December 31, 1999, 1998, and 1997, amortization of
intangible assets under the exclusive provisions of this distribution agreement
was $54.5 million, $51.6 million, and $9.2 million, respectively. As of
December 31, 1999 and 1998, accumulated amortization of the cost of the
distribution agreement totaled $115.3 million and $60.8 million, respectively.
No shares have been issued under exercises of either the warrant or contingent
warrant through December 31, 1999.
Other cable system operators
At various dates during the years ended December 31, 1999 and 1998, we
issued performance-based warrants to certain other cable system operators as
part of the execution of exclusive distribution agreements
81
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
over the cable systems of these operators. Warrants to purchase up to 2,587,700
and 10,544,200 shares of Series A common stock were issued during 1999 and
1998, respectively, at an exercise price of $5.25 per share. We also issued
additional warrants to a cable operator in March 1999 to purchase up to
3,600,000 shares of Series A common stock at an exercise price of $23.13 per
share under a similar arrangement. As a result of changes in ownership during
1999 of certain cable systems covered by warrants with a $5.25 exercise price,
warrants to purchase 537,660 shares of Series A common stock were canceled.
During the year ended December 31, 1999, warrants to purchase 4,381,728 shares
became exercisable as a result of the cable system operators meeting certain
system upgrade and subscriber performance milestones. As the warrants became
exercisable, we recorded $206 million as distribution agreements in our
consolidated balances sheets representing the fair value of exercisable
warrants, and we are amortizing the amount ratably over the remaining terms of
the exclusive distribution agreements, which expire at various times in 2004.
Amortization under these distribution agreements during the year ended December
31, 1999, and the related accumulated amortization as of December 31, 1999, was
$22.9 million. Exercises of warrants resulted in the net issuance of 441,080
shares during the year ended December 31, 1999; there were no issuances in
prior years.
Cable System Operator Performance Warrants
In February 1998, we issued performance-based warrants to Rogers
Cablesystems Limited and Shaw Cablesystems Ltd. to purchase up to 10,000,000
shares of Series A common stock, respectively, at an exercise price of $5.25
per share. Warrants to purchase 5,471,879 and 1,839,536 shares of common stock
became exercisable when Rogers and Shaw met certain subscriber performance
milestones during the years ended December 31, 1999 and 1998, respectively. We
recorded non-cash charges to operations for the fair value of these warrants of
$213.1 million and $49.8 million during the years ended December 31, 1999 and
1998, respectively. Exercises of warrants resulted in the net issuance of
3,044,534 shares during the year ended December 31, 1999; there were no
issuances in prior years.
Warrants Issued to Joint Venture Partners
In April 1999, we issued performance-based warrants to partners in our At
Home Japan joint venture to purchase up to 900,000 shares of Series A common
stock at an exercise price of $32.50. These warrants become exercisable based
on the achievement of certain system upgrade, subscriber and other performance
milestones by the joint venture partners. Warrants to purchase 100,000 shares
of common stock became exercisable during the year ended December 31, 1999 when
one of the joint venture partners met certain of these performance milestones.
We recorded $2.1 million as an additional non-cash investment in the joint
venture based on the fair value of the exercisable warrants. None of these
warrants have been exercised as of December 31, 1999.
Excite Warrants
As a result of our merger with Excite in May 1999, we assumed warrants that
Excite had issued to Netscape to purchase, on a converted basis, 150,886 shares
of Series A common stock at an exercise price of $66.28 per share. These
warrants are exercisable until April 30, 2001 and were fully vested at the date
of the acquisition of Excite. We also assumed other fully-vested warrants to
purchase 8,696 shares, on a converted basis, of Series A common stock at an
exercise price of $2.76. The purchase price allocation of Excite included an
allocation to the fair value of these warrants at the date of acquisition (see
Note 3). None of these warrants have been exercised as of December 31, 1999.
iMALL Warrants
In our acquisition of iMALL in October 1999, we issued warrants to First
Data Corporation to purchase 2,300,000 shares of Series A common stock at an
exercise price of $36.96 per share, with a fair value of
82
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$82.8 million. In addition, we also assumed warrants to purchase 158,728
shares, on a converted basis, of Series A common stock at an exercise price of
$6.96, with a fair value of $7.4 million. All warrants issued and assumed in
the iMALL acquisition were exercisable at the date of acquisition and their
fair values were included in the allocation of purchase price (see Note 3).
None of these warrants have been exercised as of December 31, 1999.
Stock Options
Our stock option plans provide for incentive stock options, nonqualified
stock options and restricted stock awards and bonuses to our employees,
directors and consultants. We adopt stock option plans at the discretion of
management and the Board of Directors and upon approval by stockholders, if
required. We have also assumed the stock option plans of several acquired
entities.
Stock Option Plans We Have Adopted
In January 1996, we adopted the 1996 Incentive Stock Option Plan, and in
July 1996, we adopted the 1996 Incentive Stock Option Plan No. 2. These plans
adopted in 1996 provide for incentive stock options, as defined by the Internal
Revenue Code, to be granted to employees, at an exercise price not less than
100% of the fair value at the grant date as determined by the Board of
Directors. The 1996 plans also provide for nonqualified stock options to be
issued to nonemployee officers, directors and consultants at an exercise price
of not less than 85% of the fair value at the grant date. The options granted
under the 1996 plans were exercisable immediately upon issuance and generally
have a term of ten years. Upon termination of employment, unvested shares may
be repurchased by us at the original purchase price. The repurchase right for
vested shares expired upon the completion of the Initial Public Offering. Stock
options generally vest at the rate of 25% after one year and ratably on a
monthly basis for three years thereafter and are exercisable at the earlier of
90 days after termination or 10 years from the date of grant.
Our 1997 Equity Incentive Plan was adopted by the Board of Directors in May
1997 and approved by the stockholders in July 1997 as the successor to the 1996
plans. The 1997 plan provides for the grant of incentive stock options,
nonqualified stock options, restricted stock awards and stock bonuses to our
employees, directors and consultants. Options under the 1997 plan generally
vest at the rate of 25% after one year and ratably on a monthly basis for three
years thereafter and are exercisable at the earlier of 90 days after
termination or 10 years from the date of grant.
Our stockholders approved an increase in the total number of shares of
Series A common stock reserved for issuance under our equity incentive plans of
17,350,000 in May 1999. As of December 31, 1999, the total number of shares
reserved for issuance under the 1997 plan was 68,900,000 less the total number
of shares issued or issuable to employees, officers, directors and consultants
under restricted stock purchase agreements, the 1996 plans and the 1997
Employee Stock Purchase Plan, discussed below.
83
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans Assumed Through Mergers and Acquisitions
Shares issuable under stock option plans assumed in acquisitions are
converted to stock options to purchase shares of our Series A common stock
based on the respective share exchange ratio in the merger or acquisition. The
following summarizes stock options to purchase shares of Series A common stock
which were assumed in acquisitions (see Note 3):
<TABLE>
<CAPTION>
Options
Assumed
----------
<S> <C>
Assumed during the year ended December 31, 1998:
Narrative Plans(/1/)............................................. 1,177,070
Assumed during the year ended December 31, 1999:
Excite Plans..................................................... 25,713,702
iMALL Plans...................................................... 1,497,165
Hartford House Ltd. Plan (Bluemountain.com)...................... 3,011,348
</TABLE>
(/1/Includes)options to purchase 894,600 shares issued to existing
Narrative employees on December 30, 1998, the date of Narrative's
acquisition.
As a result of meeting certain performance criteria during the month of
December 1999, the number of shares issuable under stock options assumed in the
acquisition of Bluemountain.com were increased from 3,011,348 to 3,552,875
during the first quarter of 2000.
Stock options available for grant under assumed stock option plans are
eliminated at the date of acquisition and outstanding options are subject to
existing vesting and exercise terms, which are generally similar to options
issued under the 1997 plan. However, the vesting schedules of stock options
under several of the assumed plans vary. The most significant variations
include iMALL stock options that vest at a rate of 33% per year and Hartford
House stock options that vest subject to a number of different schedules, the
most common of which is 12.5% vesting after six months with the remainder
vesting ratably over 42 months. Outstanding stock options under plans assumed
in acquisitions are included as options granted in the following table
summarizing activity under our stock option plans.
Stock Option Plan Activity
The following summarizes the activity related to our stock options for the
periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number Of Exercise Number Of Exercise Number Of Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 20,026,590 $16.72 6,116,270 $ 5.13 446,000 $0.03
Options granted......... 50,176,276 $29.24 15,295,304 $20.37 10,316,002 $3.15
Options exercised....... (5,045,756) $10.44 (849,106) $ 3.51 (4,341,172) $0.13
Options cancelled....... (5,546,826) $22.75 (535,878) $ 9.42 (304,560) $1.89
---------- ---------- ----------
Outstanding at end of
year................... 59,610,284 $27.23 20,026,590 $16.72 6,116,270 $5.13
---------- ---------- ----------
Options exercisable at
year-end............... 14,846,032 $16.50 3,232,786 $ 3.35 3,283,770 $1.27
========== ========== ==========
</TABLE>
84
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, there were 4,203,991 shares available for grant
under our stock option plans. The following table summarizes information about
stock options outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted-Average Weighted Weighted
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
---------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01 -- $ 9.22 10,501,448 7.34 $ 3.26 5,762,445 $ 2.54
$ 9.31 -- $16.97 10,081,635 8.34 $14.55 3,209,639 $14.66
$17.06 -- $20.13 5,611,598 9.08 $18.54 1,576,097 $18.53
$20.18 -- $32.39 9,502,646 9.19 $27.64 2,134,992 $26.58
$32.61 -- $32.61 9,529,989 9.44 $34.57 1,193,123 $34.41
$36.66 -- $57.78 8,335,073 9.56 $44.07 247,238 $50.36
$59.47 -- $76.50 6,047,895 9.30 $62.59 722,498 $60.63
---------- ----------
$ 0.01 -- $76.50 59,610,284 8.82 $27.23 14,846,032 $16.50
========== ==========
</TABLE>
As of December 31, 1999, shares issued under stock option plans subject to
repurchase, based on the original exercise price, at our option in the event of
employee terminations consisted of 1,511,035 unvested shares issued pursuant to
exercises of stock options. In addition, shares assumed in the acquisition of
Excite that were subject to repurchase in the event of employee terminations
consisted of 51,205 unvested shares as of December 31, 1999.
We recorded deferred compensation of $51.1 million during the year ended
December 31, 1999 for the deemed fair value of restricted stock issued and
newly issued options assumed in connection with acquisitions and we are
amortizing these amounts over the vesting terms of the awards, which range from
two to four years. The $5.3 million deferred compensation recorded prior to
1999 was related to stock options granted and stock issued under stock purchase
agreements prior to our initial public offering in July 1997. These amounts are
being amortized on a straight-line basis by charges to operations over the
vesting periods of the individual stock options and stock purchase agreements,
which are generally four years.
Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (ESPP) was established in July 1997 to
provide employees with an opportunity to purchase our common stock through
payroll deductions. We initially reserved 800,000 shares of common stock for
issuance to participants and an additional 1,200,000 shares were reserved
during the year ended December 31, 1998. Under the ESPP, our employees may
purchase, subject to certain restrictions, shares of common stock at the lesser
of 85 percent of the fair value at either the beginning of each two-year
offering period or the end of each six-month purchase period within the two-
year offering period. During the years ended December 31, 1999 and 1998,
employees purchased 721,014 and 463,890 shares, respectively. There were no
purchases under this plan during the year ended December 31, 1997. As a result
of our merger with Excite, we assumed an obligation to issue shares related to
outstanding offering periods under Excite's ESPP as of May 28, 1999. Shares
purchased by Excite employees under the remaining offering periods of Excite's
ESPP are not deducted from the reserve for issuance of shares under our ESPP.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
Pro forma information regarding results of operations and loss per share is
required by FAS No. 123, "Accounting for Stock-Based Compensation." Such pro
forma information summarizes our results of operations as if stock-based awards
to employees had been accounted for using a valuation method permitted under
FAS 123.
85
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of our stock-based awards to employees prior to our initial
public offering in July 1997 was estimated using the minimum value method.
Options granted subsequent to the initial public offering have been valued
using the Black-Scholes option pricing model. Among other things, the Black-
Scholes model considers the expected volatility of our stock price, determined
in accordance with FAS 123, in arriving at an option valuation. The minimum
value method does not consider stock price volatility. Further, certain other
assumptions necessary to apply the Black-Scholes model may differ significantly
from assumptions used in calculating the value of options granted in 1996 and
1997, prior to the initial public offering, under the minimum value method.
The fair value of our stock-based awards to employees was estimated assuming
no expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
----------------------- --------------------------
Year ended December 31, Year ended December 31,
----------------------- --------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life of
options................ 4 years 4 years 4 years 6 months 6 months 7 months
Expected volatility..... 0.82 1.00 0.71 0.80 1.00 0.72
Risk free interest
rate................... 6.46% 4.69% 6.00% 6.01% 4.50% 5.09%
</TABLE>
The following summarizes our hypothetical results of operations for the
periods indicated had we accounted for our stock-based awards in accordance
with FAS 123 (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Net loss as reported..................... $(1,457,638) $(144,179) $(55,717)
Pro forma net loss....................... $(1,583,777) $(166,401) $(56,746)
Basic and diluted net loss per share as
reported................................ $ (4.61) $ (0.63) $ (0.27)
Pro forma basic and diluted net loss per
share -- as adjusted.................... $ (5.00) $ (0.73) $ (0.28)
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $28.70, $14.01 and $1.65, respectively.
The weighted-average fair value of ESPP rights granted during the years ended
December 31, 1999, 1998 and 1997 was $18.80, $2.67 and $1.99, respectively.
11. Retirement Plan
We have a retirement plan under Section 401(k) of the Internal Revenue Code.
Under the retirement plan, participating employees may defer a portion of their
pretax earnings up to the Internal Revenue Service annual contribution limit.
We may make contributions to the plan at the discretion of the Board of
Directors. To date, no such contributions have been made by us.
12. Income Taxes
Our income tax benefit differs from the income tax benefit determined by
applying the U.S. federal statutory rate to the net loss as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1998
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Income tax benefit at
U.S. statutory rate.... $(510,173) $(50,463) $(19,501)
Non-deductible
amortization........... 388,144 -- --
Acquisition-related
costs.................. 18,305 -- --
Valuation allowance for
deferred tax assets.... 103,724 50,463 19,501
--------- -------- --------
Income tax benefit...... $ -- $ -- $ --
========= ======== ========
</TABLE>
86
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of our deferred tax assets and liabilities for federal and state income taxes
as of the dates indicated were (in thousands):
<TABLE>
<CAPTION>
As of December 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards...................... $ 169,798 $ 38,394
Stock options assumed in acquisitions.................. 269,248 --
Cost and amortization of distribution agreements....... 168,877 45,078
Accrued costs and expenses............................. 27,969 6,054
Deferred revenue....................................... 19,058 --
Depreciation and amortization.......................... 12,054 2,462
Research and development credits....................... 2,248 480
Capitalized research and development costs............. 4,922 --
Other.................................................. 88 --
--------- --------
Total gross deferred tax assets......................... 674,262 92,468
Less valuation allowance................................ (528,065) (92,468)
--------- --------
Deferred tax assets................................... 146,197 --
Deferred tax liabilities:
Acquisition-related intangibles........................ 146,197 --
--------- --------
Total gross deferred tax liabilities.................... 146,197 --
--------- --------
Net deferred tax assets............................... $ -- $ --
========= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of December 31,
1999 and 1998 has been established to reflect these uncertainties. The
valuation allowance increased by $435.6 million, $59.3 million and $22.3
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately $135.4 million of the valuation allowance as of December 31, 1999
is attributable to stock option deductions, the benefit of which will be
credited to paid-in capital when realized. Approximately $269.2 million of the
valuation allowance as of December 31, 1999 is attributable to deferred tax
assets that when realized, will first reduce unamortized goodwill, then other
non-current intangible assets of acquired subsidiaries, and then income tax
expense.
As of December 31, 1999, we had net operating loss carryforwards for federal
and state tax purposes of approximately $452.6 million and $197.9 million,
respectively. We also had research and development credit carryforwards for
federal and state tax purposes of approximately $1.1 million and $1.6 million,
respectively. These carryforwards will expire beginning in 2002, if not
utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operation loss and tax credit carryforwards before utilization.
13. Related Party and Other Significant Transactions
We are involved in transactions with certain related parties in the ordinary
course of business. These related parties include stockholders and certain
cable partners with significant investments in our common
87
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock, our joint venture entities and its partners, and our executive officers
and members of our Board of Directors.
Revenues from related parties were $28.8 million, $10.5 million, and $3
million for the years ended December 31, 1999, 1998 and 1997, respectively, and
were primarily related to support services such as customer support, local area
content development, development of set-top devices and pre-commercial
deployment consulting provided to our cable partners with significant
investments in our common stock. During 1999, revenues from related parties
included $10.5 million related predominantly to consulting and other services
rendered to our international joint ventures reimbursed on a cost-plus basis.
Our agreements with cable partners and communications providers for license
and distribution of our services involve significant costs, including payments
under the backbone agreement described in Note 8.
We received financing from several cable partners and other strategic
partners prior to our initial public offering in July 1997. We have also issued
warrants to cable partners and others in connection with license and
distribution agreements as described in Note 10.
14. Segment Reporting
Since our merger with Excite in May 1999, we operate in two significant
business segments, media and advertising services and subscriber network and
other services. Revenues for these two segments are reported separately for
internal purposes, 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 internally. Our key operating segments are
aggregated into the reported business segments based upon how our management
organizes and manages our operations. Key operating segments within media and
advertising services include content development for our Excite narrowband
portal, targeted narrowband and electronic mail advertising services provided
by Matchlogic, media-rich advertising services provided by our Enliven service
and other advertising and media services provided over our narrowband and
broadband portals. Key operating segments within subscriber network and other
services include our @Home network engineering, maintenance and customer
support services, our @Work services and our set-top box and pre-deployment
consulting services. In addition, we have corporate marketing, general and
administrative and business development operations which generate no revenues.
The following represents revenues for our reported business segments (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Media and advertising services...................... $203,714 $ 5,444 $ 752
Subscriber network and other services............... 133,241 42,601 6,685
-------- ------- ------
Total consolidated revenues........................ $336,955 $48,045 $7,437
======== ======= ======
</TABLE>
Revenues from media and advertising services are derived predominantly from
customers located within the United States. Revenues from customers located
outside the United States, derived primarily from our international joint
ventures, were approximately $2.6 million for the year ended December 31, 1999
and were insignificant for the years ended December 31, 1998 and 1997.
Revenues from subscriber network and other services are derived from
customers located outside the United States included approximately $22.6
million, $5.2 million and $0.4 million for the years ended December 31, 1999,
1998 and 1997. Our international customers include our cable partners and their
cable
88
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
customers and joint venture partners located outside of the United States.
Approximately 70% of these revenues from customers located outside the United
States in each of 1999, 1998 and 1997 consisted of cable subscription fees and
other revenues from Canadian customers and the remainder was comprised
primarily of pre-deployment consulting services to our joint ventures in
Europe, Japan and Australia.
No individual customer accounted for more than 10% of total revenues during
the years ended December 31, 1999, 1998 and 1997.
15. Financial Instruments
Financial instruments that subject us to concentrations of credit risk
consist primarily of cash, cash equivalents and short-term investments and
trade accounts receivable. We maintain cash, cash equivalents and short-term
investments with domestic financial institutions and broker-dealers with a
high credit standing. We perform periodic evaluations of the relative credit
standing of these institutions and, if warranted, adjust the investment
portfolio maintained with these institutions. Our business involves
transactions that arise in trade accounts receivable with companies in various
industries throughout the United States as well as international locations.
Ongoing credit evaluations of corporate customers and other counterparties are
performed to limit credit risk. While trade accounts receivable generally do
not require collateral, reserves are maintained for potential credit losses.
Credit losses to date have been within management's expectations.
We use the following methods and assumptions in estimating the fair values
of our financial instruments:
Cash and cash equivalents: The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates its fair value as of
December 31, 1999 and 1998.
Short-term investments: The fair values of short-term investments, all of
which have been classified as available-for-sale, are based on quoted market
prices as reported in the consolidated balance sheets. Thus, the carrying
amounts of short-term investments are equal to their fair values as of
December 31, 1999 and 1998.
Accounts receivable and accounts payable: The carrying amounts reported in
the consolidated balance sheets for accounts receivable and accounts payable,
which are presented net of reserves, approximate their fair value as of
December 31, 1999 and 1998.
Other investments: The fair values of our other investments, which are
accounted for as available-for-sale investments, are based on quoted market
prices for publicly held securities and the lower of cost or estimated fair
value for privately held securities as reported in the consolidated balance
sheets. Thus, the carrying amounts of other investments are equal to their
fair values as of December 31, 1999 and 1998.
Capital lease and other obligations: We estimate the fair values of our
capital lease and other equipment financing obligations based on the implicit
interest rates for capital lease obligations we entered into recently compared
to the weighted average interest rates in our existing financings. Based on
this analysis, the carrying amounts of capital lease and other obligations
approximate their fair values as of December 31, 1999 and 1998.
Convertible debt: The fair values of our convertible debentures and notes
are estimated using market rates for similar securities. The $485.7 million
carrying amount of convertible debt issued in December 1999 approximates its
fair value as of December 31, 1999. The fair value of convertible debt issued
in December 1998 is approximately $274 million and the carrying amount is
$236.3 as of December 31, 1999; the carrying amount of this convertible debt
approximated its fair value as of December 31, 1998.
89
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Subsequent Events (Unaudited)
Acquisition of Kendara, Inc.
On February 20, 2000, we completed our 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, which may be converted into
1,299,296 shares of Series A common stock. We also assumed Kendara's
outstanding options, which were converted into options to purchase shares of
our Series A common stock. The merger consideration is approximately $120
million. Each share of Series B preferred stock is being held in escrow for one
year and will automatically convert into 1,000 shares of our Series A common
stock upon the expiration of the escrow period. Each share of Series C
preferred stock is also convertible into 1,000 shares of our Series A common
stock, subject to a vesting schedule and escrow. Kendara is a provider of
browser-based marketing services. We accounted for this acquisition as a
purchase.
Announcement of Work.com Joint Venture
On February 22, 2000, we entered into a preliminary agreement with Dow Jones
& Co., Inc. to form a joint venture for the purpose of establishing and
operating an Internet site providing news, information and business services to
small and medium-sized businesses. Under the agreement, we will contribute to
the joint venture approximately $16 million in cash, our Work.com web site
including the related technology and certain of our business-related
advertising and content relationships, in exchange for a 50% equity interest.
Under a separate agreement, we will receive a percentage of the advertising
revenues generated by the joint venture over a three-year term up to a total of
$31 million. The joint venture will be accounted for as an investment under the
equity method.
17. Events Subsequent to Date of Report of Independent Auditors (Unaudited)
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.
The letter agreement provides that beginning June 4, 2002, we will provide
AT&T, Comcast and Cox with platform-connectivity services used in delivering
their high-speed residential Internet access services over their United States
cable systems. This agreement will not prevent each cable partner from offering
a choice of Internet access service providers and portals on its high-speed
Internet system.
90
<PAGE>
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 exercise price for these warrants
is $29.54 per underlying share. 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 such date. We will also grant additional warrants for increases in
homes passed, and each warrant granted by us will be subject to forfeiture
based on decreases in homes passed or for failure to bring new systems in
compliance with the distribution provisions of this agreement. Upon the
effectiveness of these transactions, AT&T's warrants will instead become
exercisable for one share of Series A common stock and one share of Series B
common stock for each home passed.
In addition, upon the effectiveness of these transactions, we will issue to
AT&T one share of our Series B common stock, each share of which entitles its
holder to 10 votes, in exchange for each share of our Series A common stock
surrendered by AT&T to us, up to a maximum number of shares equal to the number
of shares subject to the AT&T warrant described above. 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.
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.
Under the agreement, AT&T has granted Comcast and Cox the right to sell
their shares of our Series A common stock to AT&T for a minimum price of $48 a
share at any time between January 1, 2001, and June 4, 2002, up to a maximum of
$1.5 billion for Comcast and $1.4 billion for Cox.
Upon the effectiveness of these transactions, Comcast and Cox will waive
most of their rights under the current stockholders' agreement between those
parties, us, AT&T and other Excite@Home stockholders, including the right to
designate a director to our board. The designees of Comcast and Cox that are
currently on our board will resign their board positions on the effective date
of these transactions. The primary effect of these changes will be that AT&T
will acquire voting control over all board actions, and Comcast and Cox will no
longer have the right to veto a board action by voting together against a board
action.
Completion of these transactions is subject to stockholder approval of an
amendment to our fifth amended and restated certificate of incorporation,
receipt of any required approval by the Nasdaq Stock Market and receipt of any
other consents, approvals and waivers as are necessary to complete these
transactions in a manner that results in the economic effects contemplated by
these transactions.
91
<PAGE>
Quarterly financial information (unaudited)
<TABLE>
<CAPTION>
Three months Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- --------- ------------- ------------
(In thousands, except per share and stock
price data)
<S> <C> <C> <C> <C>
Total revenue.................. $ 25,098 $ 70,542 $ 112,562 $ 128,753
Costs and expenses:
Operating costs............... 18,600 29,084 45,260 50,112
Product development and
engineering.................. 6,467 11,281 16,834 20,223
Sales and marketing........... 7,676 25,274 48,179 49,596
General and administrative.... 4,103 6,423 9,028 10,722
Cost and amortization of
distribution agreements...... 15,020 18,703 43,932 214,312
Amortization of goodwill,
intangible assets and
deferred compensation and
other acquisition-related
costs........................ 6,733 199,451 447,569 503,256
-------- --------- --------- ---------
Total costs and expenses....... 58,599 290,216 610,802 848,221
-------- --------- --------- ---------
Loss from operations........... (33,501) (219,674) (498,240) (719,468)
Interest and other income,
net........................... 2,811 2,472 2,556 2,414
Investment gain from business
combination................... 12,566 -- -- --
Equity share of losses of
affiliates.................... -- (742) (2,876) (5,956)
-------- --------- --------- ---------
Net loss....................... $(18,124) $(217,944) $ (498,560) $(723,010)
======== ========= ========= =========
Basic and diluted net loss per
share(/1/).................... $ (0.08) $ (0.76) $ (1.37) $ (1.93)
======== ========= ========= =========
Price range per share(/1/):
Low........................... $ 37.25 $ 39.00 $ 33.13 $ 36.69
High.......................... $ 81.75 $ 99.00 $ 59.63 $ 59.75
<CAPTION>
Three months Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
(In thousands, except per share and stock
price data)
<S> <C> <C> <C> <C>
Total revenue.................. $ 5,773 $ 9,220 $ 13,815 $ 19,237
Costs and expenses:
Operating costs............... 8,615 10,098 12,256 15,996
Product development and
engineering.................. 3,573 3,891 4,588 4,957
Sales and marketing........... 3,500 4,356 4,978 5,257
General and administrative.... 2,874 2,925 3,112 3,518
Cost and amortization of
distribution agreements...... 19,534 13,628 13,628 54,595
Amortization of goodwill,
intangible assets and
deferred compensation and
other acquisition-related
costs........................ -- -- -- 2,758
-------- --------- --------- ---------
Total costs and expenses....... 38,096 34,898 38,562 87,081
-------- --------- --------- ---------
Loss from operations........... (32,323) (25,678) (24,747) (67,844)
Interest and other income,
net........................... 1,107 906 1,460 2,940
-------- --------- --------- ---------
Net loss....................... $(31,216) $ (24,772) $ (23,287) $ (64,904)
======== ========= ========= =========
Basic and diluted net loss per
share(/1/).................... $ (0.14) $ (0.11) $ (0.10) $ (0.28)
======== ========= ========= =========
Price range per share(/1/):
Low........................... $ 10.25 $ 14.88 $ 11.75 $ 17.25
High.......................... $ 19.06 $ 28.63 $ 27.47 $ 42.38
</TABLE>
- --------
(/1/) Share and per share data have been adjusted to reflect our two-for-
one stock split effective June 1999.
92
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table shows the name, age and position of each of our
executive officers and directors as of March 31, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George Bell............. 43 Chief Executive Officer, President and Director
Benjamin Addoms......... 37 President, Media and Marketing Services
David P. Bagshaw........ 46 Senior Vice President and General Manager, Customer Care
Leilani T. Gayles....... 45 Senior Vice President, Human Resources
Kenneth A. Goldman...... 50 Executive Vice President and Chief Financial Officer
Adam Grosser............ 39 President, Subscriber Networks
Milo S. Medin........... 37 Senior Vice President and Chief Technology Officer
John L. O'Farrell....... 41 Executive Vice President, International
David G. Pine........... 41 Senior Vice President, General Counsel and Secretary
Byron Smith............. 38 Senior Vice President and General Manager, @Home Division
Mark Stevens............ 40 Executive Vice President, Business Development
Thomas A. Jermoluk(1)... 43 Chairman of the Board
William R. Hearst
III(1)(2).............. 50 Vice Chairman of the Board
C. Michael Armstrong.... 61 Director
L. John Doerr(1)(3)..... 48 Director
Raymond Liguori......... 42 Director
John C. Malone.......... 59 Director
John C. Petrillo(2)..... 50 Director
Brian L. Roberts........ 40 Director
Edward S. Rogers........ 66 Director
David M. Woodrow(3)..... 54 Director
</TABLE>
- --------
(1) Member of the .Com committee
(2) Member of the audit committee
(3) Member of the compensation committee
George Bell has served as Chief Executive Officer of Excite@Home since
January 2000, and has served as President since May 1999. From January 1996 to
May 1999, Mr. Bell was Chief Executive Officer of Excite. From 1991 to 1995,
Mr. Bell was Senior Vice President of Times Mirror Magazines, publisher of
special interest magazines, where he held direct operating responsibility for
several sporting publications as well as that company's multimedia initiatives.
Prior to joining Times Mirror Magazines in 1991, Mr. Bell was a producer and
writer of conservation and adventure documentaries for ABC, CBS, National
Geographic and the Discovery Channel and has won four national Emmy Awards. He
was the Chairman of Governor Wilson's California Privacy Committee to establish
privacy standards on the Internet. Mr. Bell holds a B.A. degree in English from
Harvard.
Benjamin Addoms has served as President, Media and Marketing Services of
Excite@Home since September 1999, and he served as Senior Vice President Sales
and Account Management from May 1999 to September 1999. From April 1997 to May
1999, he was Executive Vice President of Strategic Customer Management at
MatchLogic, Inc., now a subsidiary of Excite@Home. From 1994 to April 1997, Mr.
Addoms
93
<PAGE>
was Senior Vice President of Database Development for The Polk Company, where
he was responsible for the acquisition and creation of a consumer database. Mr.
Addoms holds a B.A. degree from Wesleyan University.
David P. Bagshaw has served as Senior Vice President and General Manager of
Customer Care of Excite@Home since April 1999, and he served as Vice President
and General Manager of our @Media Group from September 1996 to April 1999. From
1987 to August 1996, he held various positions with Silicon Graphics, most
recently as Vice President of Marketing, and was responsible for various
marketing organizations and activities, including communications, public
relations, business development, application developer support and product
marketing. Mr. Bagshaw holds B.S. and M.S. degrees in mechanical engineering
and an M.B.A. degree, each from Stanford University.
Leilani T. Gayles is our Senior Vice President, Human Resources and has
served with Excite@Home since October 1997. From October 1995 until October
1997, she was a human resources consultant to a variety of companies. From
February 1985 until June 1995, she held various management positions at Silicon
Graphics, most recently Vice President, Human Resources. Ms. Gayles holds a
B.S. degree in organizational behavior from the University of San Francisco.
Kenneth A. Goldman is our Executive Vice President and Chief Financial
Officer and has served with Excite@Home since July 1996. From July 1992 to July
1996, he was Senior Vice President and Chief Financial Officer of Sybase, Inc.,
a database software and services company. From 1989 to July 1992, Mr. Goldman
was Vice President of Finance and Administration and Chief Financial Officer at
Cypress Semiconductor Corporation, a semiconductor manufacturer. Mr. Goldman
serves on the board of directors of One World Systems. He holds a B.S. degree
in electrical engineering from Cornell University and an M.B.A. degree from
Harvard University.
Adam Grosser has served as President, Media and Marketing Services of
Excite@Home since September 1999, and he served as Vice President, Product
Development from February 1997 to September 1999. Mr. Grosser co-founded
Catapult Entertainment, Inc., a provider of networking services for personal
computers and console video games, in April 1994, and was President and Chief
Executive Officer of Catapult until that company was sold in November 1996.
From August 1993 to April 1994, Mr. Grosser was the Senior Vice President of
New Media at Sony Pictures. Mr. Grosser holds a B.A. in product design, an M.S
in engineering and an M.B.A. degree, each from Stanford University.
Milo S. Medin co-founded Excite@Home in June 1995, has served as Senior Vice
President and Chief Technology Officer since March 1998, and served as Vice
President, Networks from June 1995 until March 1998. From 1985 to June 1995, he
was employed at the NASA Ames Research Center, where he was responsible for a
variety of wide area networking projects, including the use of Internet
technology to interconnect NASA facilities and researchers at over 200 sites in
16 countries.. Mr. Medin studied computer science at the University of
California at Berkeley.
John L. O'Farrell is our Executive Vice President, International and has
served with Excite@Home since April 1997. From August 1995 to April 1997, he
was President of U S WEST Interactive Services, Inc., an Internet content
development company. From March 1992 to August 1995, he held various positions
with US West, Inc., including most recently as Vice President, Corporate
Strategy. Mr. O'Farrell holds a B.E.E. degree from University College Dublin,
Ireland and an M.B.A. degree from Stanford University.
David G. Pine is our Senior Vice President and General Counsel and Secretary
and has served with Excite@Home since April 1996. From 1990 to March 1996, he
was Vice President, General Counsel and Secretary of Radius Inc., a
manufacturer of Macintosh computer peripherals. Mr. Pine holds an A.B. degree
in government from Dartmouth College and a J.D. degree from the University of
Michigan Law School.
94
<PAGE>
Byron Smith has served as Senior Vice President and General Manager, @Home
Division, of Excite@Home since January 2000. From January 1999 to January 2000,
Mr. Smith was Vice President, Long Distance of AT&T's Consumer Services
Division, where he was responsible for AT&T's consumer long distance strategy
and marketing. From 1994 to January 1999, Mr. Smith held various positions with
GTE Wireless, most recently Vice President of Sales, where he was responsible
for all sales, distribution and gross margin. Mr. Smith holds a B.S. degree in
economics and political science from Middle Tennessee State University, and an
M.B.A. degree from the University of Chicago.
Mark C. Stevens has served as Executive Vice President of Corporate and
Business Development of Excite@Home since May 1999, and he served in the same
capacity at Excite from January 1999 until May 1999. From 1983 until January
1999, he was in private practice with the Silicon Valley law firm of Fenwick &
West LLP, where he had been a partner since 1989. Mr. Stevens received his B.S.
degree in mathematics from Santa Clara University, and his J.D. from
Northwestern University.
Thomas A. Jermoluk has been Chairman of the Board of Excite@Home since July
1996, served as Chief Executive Officer from July 1996 to January 2000 and as
President from July 1996 to May 1999. From 1988 to July 1996, he held various
positions with Silicon Graphics, Inc., a visual computing company, most
recently as President. From October 1993 to August 1996, he was a director of
Silicon Graphics. Mr. Jermoluk holds B.S. and M.S. degrees in computer science
from Virginia Tech.
William R. Hearst III has been a director of Excite@Home since August 1995
and has served as Vice Chairman of the board of directors since July 1996. Mr.
Hearst has been a general partner of KPCB, a venture capital firm, since
January 1995. From May 1995 to July 1996, he was Chief Executive Officer of
Excite@Home. He serves on the board of directors of Hearst-Argyle Television,
Inc. and Juniper Networks, Inc. Mr. Hearst holds an A.B. degree in mathematics
from Harvard University.
C. Michael Armstrong has been a director of Excite@Home since May 1999. Mr.
Armstrong has been Chairman of the Board and Chief Executive Officer of AT&T
since November 1997. From 1992 to November 1997, he was Chairman and Chief
Executive Officer of Hughes Electronics. Mr. Armstrong is Chairman of the
President's Export Council and Chairman of the FCC Network Reliability and
Interoperability Council. He is a member of the Council on Foreign Relations,
the National Security Telecommunications Advisory Committees and the Defense
Policy Advisory Committee on Trade. Mr. Armstrong is a director of Citicorp,
Inc. Mr. Armstrong holds a B.S. degree in business and economics from Miami
University in Ohio.
L. John Doerr has been a director of Excite@Home since August 1995. Mr.
Doerr has been a general partner of KPCB, a venture capital firm, since 1980.
Mr. Doerr is also a director of Amazon.com, Inc., Intuit Inc., Healtheon/
WebMD, Homestore.com, Drugstore.com, Martha Stewart Living Omnimedia, Sun
Microsystems, Inc. and Shiva Corp. He holds B.S. and M.S. degrees in electrical
engineering and computer science from Rice University and an M.B.A. degree from
Harvard University.
Raymond Liguori has been a director of Excite@Home since November 1999. Mr.
Liguori has held various positions with AT&T since April 1999, and currently
serves as Financial Vice President of Mergers and Acquisitions and Assistant
Treasurer of International. Mr. Liguori is a member of AT&T's Business
Development Committee, which reviews acquisitions and divestitures greater than
$5 million. From 1994 to April 1999, Mr. Liguori served as the Senior Latin
American Telecom Analyst with Merrill Lynch in New York. Mr. Liguori holds a
B.S. degree in finance/economics and a J.D. degree, both from Boston College,
and an M.B.A degree from Harvard University.
John C. Malone has been a director of Excite@Home since April 1997. Dr.
Malone has been Chairman of Liberty Media Corporation since March 1999. From
November August 1994 to March 1999, he held various positions with TCI, most
recently as Chairman of the Board and Chief Executive Officer, and formerly as
President. He is a director of AT&T, BET Holdings, Inc., USANi LLC, Cendant
Corp. and Bank of New York Company. Dr. Malone holds a B.S. degree in
electrical engineering and economics from Yale University and an M.S. degree in
industrial management and a Ph.D. in operations research from Johns Hopkins
University.
95
<PAGE>
John C. Petrillo has been a director of Excite@Home since May 1999. Mr.
Petrillo has held various positions with AT&T since 1993, most recently
Executive Vice President of Corporate Strategy and Business Development, in
which capacity he is responsible for overall business strategy and the
development of AT&T's online service and electronic messaging businesses, and
formerly as President of AT&T's Business Communications Services unit, which
provides worldwide long distance network services for business customers. He
holds a B.S. in electrical engineering from Worcester Polytechnic Institute and
a J.D. degree from Brooklyn Law School.
Brian L. Roberts has been a director of Excite@Home since August 1996. Mr.
Roberts has been President of Comcast, a cable systems company, since February
1990 and has served as a director of Comcast since 1987. He is Vice President
and a director of Sural Corporation, a privately-held investment company. He is
a director of Comcast Cable Communications, Inc., Comcast Cellular Corporation,
Jones Intercable, Inc. and The Bank of New York Company. Mr. Roberts holds a
B.S. degree in economics from the University of Pennsylvania.
Edward S. Rogers has been a director of Excite@Home since January 2000, and
formerly served as a director from July 1997 to June 1998. Mr. Rogers has
served as President and Chief Executive Officer and as a director of Rogers
Communications Inc., a telecommunications company, since 1979 and as Acting
President and Chief Executive Officer of Rogers Cable Inc., a cable company and
a wholly owned subsidiary of Rogers Communications, since April 1996. He is a
director of Rogers Cantel Mobile Communications Inc. and the Toronto-Dominion
Bank. He holds a B.A. degree in political science and economics from the
University of Toronto and an LL.B from Osgoode Hall Law School.
David M. Woodrow has been a director of Excite@Home since August 1996. Mr.
Woodrow has held various positions with Cox Communications, Inc. since 1982,
most recently as Executive Vice President of Business Development, and formerly
as Senior Vice President of Broadband Services. Mr. Woodrow received B.S. and
M.S. degrees in mechanical engineering from Purdue University, and a M.B.A.
degree from the University of Connecticut.
Compliance Under Section 16(a) of the Securities Exchange Act of
1934. Section 16 of the Exchange Act requires our directors and certain of our
officers, and persons who own more than 10% of our common stock, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission and the Nasdaq National Market. Such persons
are required by Securities and Exchange Commission regulation to furnish us
with copies of all Section 16(a) forms they file. Based solely on our review of
the copies of such forms furnished to us and written representations from these
officers and directors, we believe that all Section 16(a) filing requirements
were met during fiscal 1999, except that one Form 4 for Robert Lerner due March
1999 was filed late.
96
<PAGE>
Item 11. Executive Compensation
The following table provides compensation awarded to, earned by or paid for
services rendered to Excite@Home in all capacities during 1997, 1998 and 1999
by our Chief Executive Officer and our four other most highly compensated
executive officers who earned at least $100,000 in 1999 and who were serving as
executive officers at the end of 1999. We did not grant any other compensation,
restricted stock awards or stock appreciation rights to these individuals in
1997, 1998 and 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Securities
Name and Principal Annual Underlying All Other
Position Year Salary Bonus Options Compensation(1)
- ------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Thomas A. Jermoluk........ 1999 $500,000 $200,000 -- $1,299
Chairman of the Board of
Directors(2) 1998 500,000 250,000 1,000,000 1,938
1997 500,000 200,000 -- 1,377
Kenneth A. Goldman........ 1999 250,000 82,500 140,000 1,924
Executive Vice President
and 1998 250,000 50,000 250,000 1,566
Chief Financial Officer 1997 250,000 50,000 -- 1,479
David P. Bagshaw.......... 1999 250,000 46,875 65,000 1,189
Senior Vice President and
General Manager, 1998 250,000 50,000 160,000 1,566
Customer Care 1997 250,000 40,000 50,000 867
Dean A. Gilbert........... 1999 225,000 48,750 180,000 647
Senior Vice President and
General Manager, 1998 225,000 45,000 150,000 816
@Home Division(3) 1997 202,068 30,000 100,000 425
Donald P. Hutchison....... 1999 270,000 46,875 100,000 752
Senior Vice President and
General Manager, 1998 241,666 50,000 260,000 918
@Work Group(4) 1997 201,203 25,000 900,000 714
</TABLE>
- --------
(1) Represents life insurance premiums paid by Excite@Home.
(2) Mr. Jermoluk served as President until May 1999 and as Chief Executive
Officer until January 2000.
(3) Mr. Gilbert resigned his position in March 2000.
(4) Mr. Hutchison resigned his position in January 2000 and left Excite@Home in
March 2000.
George Bell became President in May 1999 and Chief Executive Officer in
January 2000 and is compensated at an annual rate of $350,000 with bonuses of
up to $175,000 per year.
Stock Option Grants in 1999
The following table provides information regarding each stock option grant
during 1999 to the executive officers named in the Summary Compensation Table
above.
Each option included in the following table was granted at an exercise price
equal to the fair market value of our Series A common stock on the date of
grant. Each option becomes exercisable at the rate of 2.083% of the shares
subject to that option per month over a period of 48 months. Each option has a
term of ten years, subject to earlier termination within 90 days after the
termination of the optionee's employment or consultancy relationship with us.
97
<PAGE>
The potential realizable value is calculated based on the term of the option
at its time of grant, compounded annually. The 5% and 10% assumed annual rates
of compounded stock price appreciation are required by the rules of the
Securities and Exchange Commission, and do not represent our estimates or
projections of our future stock prices. Actual gains, if any, on option
exercises are dependent on future performance of our Series A common stock and
overall market conditions. The potential realizable values shown in this table
may never be achieved.
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
Percentage Value at Assumed
Number of of Total Annual Rates of Stock
Shares Options Exercise Price Appreciation for
Underlying Granted to Price Option Terms
Options Employees in Per Expiration ----------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Jermoluk...... 0 -- -- -- -- --
Kenneth A. Goldman...... 100,000 .5% $59.47 4/19/09 $3,739,961 $ 9,477,795
40,000 .2 34.63 8/10/99 871,019 2,207,333
David P. Bagshaw........ 40,000 .2 59.47 4/19/09 1,495,984 3,791,118
25,000 .1 34.63 8/10/09 544,387 1,379,583
Dean A. Gilbert......... 120,000 .6 59.47 4/19/09 4,487,953 11,373,354
60,000 .3 34.63 8/10/09 1,306,529 3,311,000
Donald P. Hutchison..... 100,000 .5 59.47 4/19/09 3,739,961 9,477,795
</TABLE>
Aggregated Option Exercises in 1999 and Year-End Option Values
The following table provides information concerning stock option exercises
by each of the executive officers named in the Summary Compensation Table above
who exercised options during the fiscal year ended December 31, 1999 and
information concerning unexercised options held by these officers at the end of
1999. The value realized represents the difference between the deemed fair
value of our Series A common stock used by us for accounting purposes and the
exercise price of the option. The value of unexercised in-the-money options is
based on the closing price of our Series A common stock on December 31, 1999 of
$42.88 per share, minus the exercise price, multiplied by the number of shares
issuable upon exercise of the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Year-end at Year-end
Acquired on Value -------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Jermoluk...... -- -- 250,000 250,000 $2,343,750 $2,343,750
Kenneth A. Goldman...... 33,720 $1,736,217 67,527 288,753 1,007,468 3,945,845
David P. Bagshaw........ -- -- 107,705(1) 167,295 2,293,133 2,883,427
Dean A. Gilbert......... 66,101 2,444,809 82,231(2) 261,668 429,808 4,062,434
Donald P. Hutchison..... -- -- 163,330 296,670 4,235,656 5,308,084
</TABLE>
- --------
(1) Of these shares, 18,750 are unvested and subject to a right of repurchase
which lapses at a rate of 1,041 shares per month.
(2) Of these shares, 37,500 are unvested and subject to a right of repurchase
which lapses at a rate of 2,083 shares per month.
98
<PAGE>
Employment and Severance Agreements
Employment Agreement with George Bell. In May 1999, we entered into an
employment agreement with Mr. Bell, to become our President and a director. The
agreement established Mr. Bell's initial annual base salary at $210,000 and
provides for bonuses of up to $150,000 per year, based on the achievement of
performance objectives agreed to between Mr. Bell and our board of directors.
The term of the agreement is four years. The agreement provides that, in the
event Mr. Bell is terminated without formal cause or is constructively
terminated, he shall receive an amount equal to one year of base salary, the
vesting of his options to purchase our Series A common stock shall accelerate
by one year, and he shall be allowed to participate in our general benefit
plans for one year following such termination. The agreement also restricts Mr.
Bell from competing with us for a period of one year following termination of
his employment with us. We will provide Mr. Bell with a standard benefits
package, including pension, profit sharing, executive bonuses, stock purchases,
stock options, health and vacations. Mr. Bell's employment is considered an
"at-will" agreement. We or Mr. Bell may terminate the employment relationship
at any time for any reason.
Amendment to Employment Agreement with Thomas Jermoluk. In November 1999, we
amended our employment agreement with Mr. Jermoluk dated July 19, 1996 to
provide that, in contemplation of a potential restructuring of Excite@Home, the
termination of Mr. Jermoluk's position as Chief Executive Officer of
Excite@Home for any reason, including his resignation, would be treated as
termination "without cause" under the employment agreement. Accordingly, Mr.
Jermoluk received a lump sum payment of six months' salary upon his termination
as Chief Executive Officer in January 2000, and our right to repurchase the
shares of Series A common stock and Series K common stock sold to Mr. Jermoluk
under the agreement lapsed.
Severance Agreement with Donald Hutchison. In January 2000, we entered into
a separation agreement with Mr. Hutchison, formerly the Senior Vice President
and General Manager of our @Work division. This agreement provided that Mr.
Hutchison would resign his position effective December 31, 1999 and his
employment with us would terminate effective February 15, 2000, which we later
extended to March 2000. We agreed that Mr. Hutchison's options to purchase our
Series A common stock had vested with respect to 116,667 shares in accordance
with the terms of a letter agreement dated February 10, 1997 between us and
Mr. Hutchison. In addition, Mr. Hutchison received the same employee benefits,
including salary, medical benefits and vesting of stock options, through the
termination of his employment in March 2000.
99
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents information as to the beneficial ownership of
our common stock as of March 31, 2000 by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each executive officer listed in the Summary Compensation Table above;
and
. all of our executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated above, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Percentage ownership is based on 395,191,598 shares of common
stock outstanding as of March 31, 2000. Shares of common stock subject to
options or warrants exercisable on or before May 30, 2000 (within 60 days of
March 31, 2000) are deemed to be outstanding and to be beneficially owned by
the person holding such options or warrants for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Unless
indicated above, the address for each director and executive officer listed
below is At Home Corporation, 450 Broadway Street, Redwood City, CA 94063.
<TABLE>
<CAPTION>
Percentage Percentage of
Series A Series B Series K Common Stock Voting Rights
Common Common Common Beneficially of Common
Name Stock Stock (1) Stock Owned Stock
- ---- ---------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
5% Stockholders
AT&T Corp.(2)........... 63,720,000 30,800,000 -- 23.9 55.2
Comcast Corporation(3).. 29,114,600 -- -- 7.3 4.3
Cox Communications,
Inc.(4)................ 29,114,600 -- -- 7.3 4.3
Cablevision Systems
Corp.(5)............... 21,893,872 -- -- 5.2 3.1
Directors and Executive
Officers
Thomas A. Jermoluk(6)... 4,225,875 -- 1,083,334 1.3 *
Edward S. Rogers(7)..... 4,336,925 -- -- 1.1 *
William R. Hearst
III(8)................. 1,740,743 -- -- * *
L. John Doerr(9)........ 1,693,029 -- -- * *
George Bell(10)......... 1,310,932 -- -- * *
Kenneth A. Goldman(11).. 659,542 -- -- * *
Dean A. Gilbert(12)..... 526,241 -- -- * *
Donald P.
Hutchinson(13)......... 481,225 -- -- * *
John L. O'Farrell(14)... 469,192 -- -- * *
David P. Bagshaw(15).... 371,654 -- -- * *
John C. Malone(16)...... 14,950 -- -- * *
David M. Woodrow(17).... 9,500 -- -- * *
Brian L. Roberts(18).... 5,000 -- -- * *
All directors and
executive officers as a
group (22
persons)(19)........... 18,308,170 -- 1,083,334 3.7 2.2
</TABLE>
- --------
* Constitutes less than 1% of Excite@Home's outstanding common stock.
(1) Our certificate of incorporation provides that each share of Series B
common stock entitles its holder to 10 votes on all matters subject to a
vote of stockholders to which that holder is entitled to vote. If our
100
<PAGE>
stockholders approve the proposed amendment to our certificate of
incorporation, the holders of shares of Series B common stock (currently
only AT&T) will be entitled to elect a majority of the board of directors.
(2) Represents shares held by TCI Internet Holdings, Inc., a wholly-owned
subsidiary of AT&T. The address of AT&T is 32 Avenue of the Americas, New
York, New York 10013.
(3) Represents shares held by Comcast PC Investments, Inc., a wholly owned
subsidiary of Comcast Corporation. Comcast disclaims beneficial ownership
of the shares held by Mr. Roberts. The address of Comcast is 1500 Market
Street, 35th Floor, Philadelphia, Pennsylvania 19102.
(4) Represents shares held by Cox @Home, Inc., a wholly owned subsidiary of
Cox Communications, Inc. Cox disclaims beneficial ownership of the shares
held by Mr. Woodrow. The address of Cox is 1400 Lake Hearn Drive,
Atlanta, Georgia 30319.
(5) Represents warrants held by CSC Parent Corporation, a wholly-owned
subsidiary of Cablevision Systems Corporation, which are immediately
exercisable with respect to 20,462,596 shares and which will become
exercisable as to 1,431,276 shares when and to the extent certain cable
systems are transferred to Cablevision from AT&T. The shares reported in
the table above are subject to a stockholders' agreement, certain
provisions of which are described under "Certain Relationships and
Related Transactions." The address of Cablevision is 111 Stewart Avenue,
Bethpage, New York 11714.
(6) Includes options that are exercisable with respect to 354,166 shares of
Series A common stock on or before May 30, 2000. Mr. Jermoluk is Chairman
of the Board of Excite@Home, and formerly served as Chief Executive
Officer of Excite@Home until January 2000 and as President until May
1999.
(7) Includes warrants held by Rogers Communications Inc. which are currently
exercisable with respect to 4,014,640 shares, and warrants held by Rogers
Cable Inc. which are currently exercisable with respect to 322,285
shares. Mr. Rogers disclaims beneficial ownership of the shares held by
these entities. Mr. Rogers is a director of Excite@Home.
(8) Mr. Hearst is the Vice Chairman of the board of directors of Excite@Home.
(9) Includes 622,247 shares held by trusts for which Mr. Doerr disclaims
beneficial ownership except to the extent of any indirect pecuniary
interest therein. Mr. Doerr is a director of Excite@Home.
(10) Includes options that are exercisable with respect to 1,251,927 shares on
or before May 30, 2000. Mr. Bell is Chief Executive Officer, President
and a director of Excite@Home.
(11) Includes options that are exercisable with respect to 116,484 shares on
or before May 30, 2000, and 73,334 shares which are subject to a right of
repurchase which lapses at a rate of 18,333 shares per month. Mr. Goldman
is Executive Vice President and Chief Financial Officer of Excite@Home.
(12) Includes options that are exercisable with respect to 82,021 shares on or
before May 30, 2000 (of which 27,084 shares would be subject to a right
of repurchase if exercised). Mr. Gilbert was formerly Senior Vice
President and General Manager, @Home Division of Excite@Home.
(13) Includes options that are exercisable with respect to 186,869 shares on
or before May 30, 2000. Mr. Hutchison was formerly Senior Vice President
and General Manager, @Work Division of Excite@Home.
(14) Includes options that are exercisable with respect to 106,662 shares on
or before May 30, 2000 (of which 13,542 shares would be subject to a
right of repurchase if exercised), and 137,500 shares which are subject
to a right of repurchase which lapses at a rate of 11,458 shares per
month. Mr. O'Farrell is Executive Vice President, International of
Excite@Home.
(15) Includes options that are exercisable with respect to 153,222 shares on
or before May 30, 2000. If exercised, 13,542 of these shares will be
subject to a right of repurchase by Excite@Home that will lapse as to
1,041 shares per month. Mr. Bagshaw is Senior Vice President and General
Manager Customer Care of Excite@Home.
(16) Dr. Malone is a director of Excite@Home.
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(17) Mr. Woodrow is the Executive Vice President of New Business Development of
Cox, but disclaims beneficial ownership of the shares held by Cox. Mr.
Woodrow is a director of Excite@Home.
(18) Mr. Roberts is the President of Comcast, but disclaims beneficial
ownership of the shares held by Comcast. Mr. Roberts is a director of
Excite@Home.
(19) Includes the shares described in all footnotes above relating to directors
and executive officers, plus (a) an additional 1,472,511 shares of Series
A common stock held by seven other executives officers, of which 107,268
were subject to repurchase at March 31, 2000, and (b) options that are
exercisable with respect to 2,301,783 shares of Series A common stock on
or before May 30, 2000 (of which 16,250 shares would be subject to a right
of repurchase by Excite@Home if exercised).
Voting Agreements Involving 5% Stockholders
Arrangement with Rogers and Shaw. Shares held by AT&T, Comcast and Cox were
formerly subject to a voting agreement with Rogers and Shaw under which AT&T,
Comcast and Cox agreed to use their reasonable best efforts to cause a single
representative designated jointly by Rogers and Shaw to be nominated for
election to the board and an additional jointly designated representative to be
afforded the right to attend all meetings of the board as a nonvoting observer.
This agreement terminated in 1998. However, although Rogers and Shaw no longer
hold contractual rights under this agreement, the parties to this agreement
have decided for now to continue to vote in favor of electing a designee of
Rogers and Shaw to the board, currently Mr. Rogers.
Stockholders' Agreement. Each of the shares reported by AT&T, Comcast, Cox
and Cablevision in the table above are subject to the provisions of a
stockholders' agreement. Among other things, the stockholders' agreement
provides that each principal stockholder will vote all of its shares of our
voting stock in favor of any action required by the stockholders' agreement,
including the election of our Chief Executive Officer to the board of
directors, and that any holder of Series B common stock, all of which is
currently owned by AT&T, will vote all such shares in favor of the election of
certain designees of AT&T, Comcast and Cox to the board as Series B Directors
as follows:
. Comcast will be entitled to designate one director so long as it owns at
least 5 million shares of common stock;
. Cox will be entitled to designate one director so long as it owns at
least 5 million shares of common stock; and
. AT&T will be entitled to designate three directors so long as it owns at
least 7.7 million shares of Series B common stock, two directors so long
as it owns at least 6.4 million shares of Series B common stock and one
director so long as it owns at least 5 million shares of Series B common
stock.
In addition, the stockholders' agreement provides, if Cablevision so
requests, that we and the principal stockholders are required to take such
commercially reasonable actions as are required to cause a designee of
Cablevision to be appointed as a common stock director and that each principal
stockholder will vote all of its shares of our voting stock in favor of the
election of the Cablevision designee as a common stock director so long as
Cablevision beneficially owns at least 5 million shares of common stock.
If the transactions contemplated by the recently announced agreements with
our principal cable partners become effective, Comcast and Cox will waive most
of their rights under this agreement, including the right to each designate one
Series B director.
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Item 13. Certain Relationships and Related Transactions
Other than the transactions described in "Executive Compensation" above,
employment contracts, compensatory plans or arrangements and similar
arrangements not required to be reported and the transactions described below,
there has not been since January 1, 1999, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock or any member of his or her immediate family had or will
have a direct or indirect material interest.
Letter Agreement and Term Sheets with AT&T, Comcast and Cox
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, upon the expiration of our existing master distribution agreement and
local cable operator agreements beginning on June 4, 2002, and a reorganization
of our corporate governance. The letter agreement contemplates that the parties
will enter into definitive agreements covering these transactions; however, if
these definitive agreements are not entered into by June 26, 2000, then the
letter agreement and attached term sheets will constitute the definitive
agreement. The following is a summary of the letter agreement and term sheets.
You can find more information by reviewing the agreement and term sheets in
their entirety, which are filed as an exhibit to our current report on Form 8-K
filed with the Securities and Exchange Commission on April 3, 2000.
Effect on Existing Agreements. 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. The termination would take effect on the June 4
or December 4 next occurring after the expiration of the notice period. The
letter agreement provides that, in the event of such a termination, we and the
terminating party will commence executing a transition plan which involves the
transfer of certain subsystems and network elements to the terminating party.
In the event of such a termination by Comcast, any right of repurchase that
applies to shares of our Series A common stock held by Comcast will lapse.
Additionally, Comcast may terminate the exclusivity obligations of the existing
master distribution agreement at any time if required to do so by Microsoft
under an agreement between these companies, but in this event shares of our
Series A common stock held by Comcast would be subject to a right of repurchase
by us as provided in the existing master distribution agreement.
Distribution Arrangements After June 4, 2002. The letter agreement provides
that beginning June 4, 2002, we will provide AT&T, Comcast and Cox with
platform-connectivity services used in delivering their high-speed residential
Internet access services over their United States cable systems. This agreement
will not prevent each cable partner from offering a choice of Internet access
service providers and portals on its high-speed Internet system. Additionally,
each of these cable partners will make our portal available for selection, and
will display our portal prominently, on its high-speed residential Internet
access start page. These cable partners have agreed not to remarket any
alternative portal to existing Excite@Home subscribers as of June 4, 2002. Each
of these cable partners will pay us a marketing fee, on a "most favored
nations" basis, for each new subscriber that we induce to use such cable
partner's Internet access service, and we will pay a marketing fee to these
cable partners for each of their Internet access subscribers that chooses our
portal. In addition, AT&T and we have agreed to work together to deliver
services to consumers via advanced television, narrowband initiatives and,
subject to negotiation with AT&T Wireless Group, wireless services.
Comcast or Cox may terminate the new master distribution agreement at any
time on or after June 4, 2002, by providing six months' prior written notice.
The termination would take effect on the June 4 or December 4 next occurring
after the expiration of the notice period. Upon termination, the terminating
party would forfeit all or a
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portion of the warrants that it received under this agreement, as described
below, and we and the terminating party would commence executing a transition
plan which involves the transfer of certain subsystems and network elements to
the terminating party. Regardless of whether Comcast or Cox terminates the
existing or new master distribution agreement, Comcast and Cox each have the
right to negotiate commercial arrangements with us, on a most favored nations
basis so long as at least 50% of such party's broadband residential Internet
access subscribers use our platform/connectivity service, or otherwise on terms
reasonably comparable to those offered to other parties.
Issuance of New Warrants and Conversion of Shares. 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 exercise price for these warrants is $29.54 per underlying
share. 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 such date. We
will also grant additional warrants for increases in homes passed, and each
warrant granted by us will be subject to forfeiture based on decreases in homes
passed or for failure to bring new systems in compliance with the distribution
provisions of this agreement. Upon the effectiveness of these transactions,
AT&T's warrants will instead become exercisable for one share of Series A
common stock and one share of Series B common stock for each home passed. We
will incur accounting charges with respect to these warrants, although we have
not yet determined the exact accounting treatment with respect to these
charges.
In addition, upon the effectiveness of these transactions, we will issue to
AT&T one share of our Series B common stock, each share of which entitles its
holder to 10 votes, in exchange for each share of our Series A common stock
surrendered by AT&T to us, up to a maximum number of shares equal to the number
of shares subject to the AT&T warrant described above. 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.
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.
"Put" Rights Granted by AT&T to Comcast and Cox. 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. If the average share price of our Series A common
stock exceeds $48 for 15 days before and 15 days after either Comcast or Cox
exercises its right to sell, the exercising party will receive the higher price
per share, with the number of shares saleable to be reduced in accordance with
the maximum obligations described above. Comcast and Cox have the right to take
payment in cash or in shares of AT&T stock.
Corporate Governance Changes. Upon the effectiveness of these transactions,
Comcast and Cox will waive most of their rights under the current stockholders'
agreement between those parties, us, AT&T and other Excite@Home stockholders,
including the right to designate a director to our board. The designees of
Comcast and Cox that are currently on our board will resign their board
positions on the effective date of these
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transactions. We are seeking stockholder approval of an amendment to our fifth
amended and restated certificate of incorporation, which will:
. increase the number of shares of Series B common stock authorized for
issuance, to provide for shares to be issued to AT&T in exchange for
shares of Series A common stock, and to reserve shares for exercises of
the warrants issued in these transactions;
. provide that holders of shares 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
members of the board of directors, and that any additional directors will
be elected by the holders of all outstanding shares of our common stock,
voting together as a single class; and
. eliminate all supermajority and unanimous board voting requirements, and
instead provide that all board actions must be approved by the vote of a
majority of the board of directors or the vote of a majority of relevant
committee of the board.
In addition, AT&T has agreed that it will vote its shares of Series B common
stock in favor of the election of the current Chief Executive Officer of
Excite@Home as an additional director. The primary effect of these changes
will be that AT&T will acquire voting control over all board actions, and
Comcast and Cox will no longer have the right to veto a board action by voting
together against a board action.
Effectiveness of the Transactions. Completion of these transactions is
subject to stockholder approval of an amendment to our fifth amended and
restated certificate of incorporation, receipt of any required approval by the
Nasdaq Stock Market and receipt of any other consents, approvals and waivers
as are necessary to complete these transactions in a manner that results in
the economic effects contemplated by these transactions. If these transactions
do not become effective on or before September 30, 2000, then any party to the
letter agreement, other than a party whose failure to comply with its
obligations has caused this delay, may terminate this agreement.
Other Agreements with our Cable Partners
Backbone capacity contract with AT&T. In December 1998, we entered into an
agreement with AT&T to create a nationwide Internet protocol network utilizing
AT&T's backbone to cost-effectively support broadband services throughout
North America. Under this agreement, we paid AT&T fees of $57 million in 1999
and we will pay AT&T fixed fees of $45 million in 2000, as well as recurring
maintenance fees, which will total approximately $5 million in 2000, over the
20-year term of the agreement. We amended this agreement to provide that we
would pay AT&T an additional $4 million in fees under this agreement. We
amended this agreement again in September 1999 to provide that, in exchange
for AT&T assuming up to an additional $10.5 million in expenses under an
agreement assumed from us by AT&T, we would pay AT&T an additional $8 million
in fees during 1999.
Issuance of a warrant to InterMedia in 1999 and transfer of shares to
AT&T. In January 1999, we issued a warrant to InterMedia Partners IV L.P. to
purchase up to 2.5 million shares of our Series A common stock at an exercise
price of $5.25 per share. This warrant was issued in connection with a new
distribution agreement entered into in January 1999. This warrant vested and
became exercisable with respect to approximately 2.3 million shares based on
homes passed by InterMedia's cable systems and new subscribers to the @Home
service. In October 1999, AT&T acquired InterMedia's cable system in
Nashville, Tennessee. Pursuant to the agreement, InterMedia transferred
warrants to purchase approximately 1 million shares upon the completion of
this acquisition to AT&T, which warrants are vested with respect to
approximately 560,000 shares and the remainder of which will vest if certain
targets for homes passed and new subscribers are met.
Agreement with Jupiter Communications and Sumitomo Corporation. In April
1999, we announced an agreement with Jupiter Communications and Sumitomo
Corporation to form Excite@Home Japan, a joint
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venture to launch our first service offering in Asia. We own 43% of the joint
venture, Jupiter owns 36%, and Sumitomo owns 21%. In addition, we will receive
up to $7.5 million in start-up fees and 12.5% of the total subscription fees
paid by Excite@Home Japan subscribers. The warrants become exercisable upon the
satisfaction of milestones based upon upgrades to the cable infrastructure and
development of subscriber and partner relationships. The Liberty Media
Corporation, which is controlled by AT&T, owns 40% of Jupiter.
Excite Promotion, Distribution and License Agreement with AT&T. In March
1998, Excite and AT&T entered into an agreement which provides for the
promotion of AT&T on Excite's web sites. This agreement was amended on January
15, 1999 and April 1, 1999 to revise certain performance and payment terms. We
assumed this agreement in connection with our acquisition of Excite in May
1999. Under the amended agreement, we are obligated to develop and make
available a co-branded web site with AT&T and provide ad-serving services on
this web site. We are also obligated to provide AT&T branded text links and
banner advertisements on Excite's web sites and technical assistance to AT&T
related to trials of its voice-based Internet services, including AT&T Chat 'N
Talk. In addition, we are responsible for providing MatchLogic services
including targeted e-mail, user research and promotional campaign services. In
1999, AT&T paid us cash and provided services totaling approximately $5 million
in exchange for our services under this agreement.
@Work Internet Agreement with AT&T. In July 1999, we entered into an
agreement with TCI Cable Management Corporation, a subsidiary of AT&T, covering
the offering of commercial Internet services to businesses using AT&T's cable
infrastructure and our network infrastructure. These services include
connectivity to a subscriber's local area network, multiple workstation
support, use of Excite@Home content and our browser, domain name registration,
and email access and support. Under the agreement, AT&T is obligated to pay us
a monthly fee of 50% of its gross monthly recurring subscription fees for these
services. Although AT&T is responsible for providing certain equipment in
connection with subscribers' use of the services, AT&T may require us to assume
this obligation on a cost-plus basis. AT&T and we have also agreed to cooperate
in marketing and selling the service, and we will receive certain fees in
connection with our sales activities. AT&T is entitled to "most favored nation"
terms with respect to the services covered by the agreement. This agreement
with AT&T will remain in effect until June 30, 2002, subject to earlier
termination in certain circumstances, including on 90 days written notice by
AT&T at any time after the completion of the first nine months of the
agreement. In 1999, revenues recorded by us under this agreement were
insignifcant.
Web Hosting Agreement with AT&T. In September 1999, we entered into an
agreement with a subsidiary of AT&T in connection with the offering of shared
web hosting services to small and medium-sized businesses marketed under the
AT&T brand. Under this agreement, we design and develop the web hosting
services, and receive a wholesale fee from AT&T for each subscriber to this
service. In 1999, we received $100,000 in set-up fees and recorded less than
$100,000 in Web hosting revenues under this agreement.
Sublease with Comcast. In January 2000, we entered into a sublease agreement
with Comcast Online Communications, Inc., a subsidiary of Comcast, covering
approximately 19,000 square feet of office space in Bala Cynwyd, Pennsylvania.
Monthly rent equals $33,250 and the sublease will expire on June 30, 2003.
Mobile Channel Agreement with AT&T Wireless. In March 2000, we entered into
an agreement with AT&T Wireless to provide Excite@Home content to subscribers
of AT&T Wireless' PocketNet Service. Under the agreement, AT&T Wireless will
offer Excite@Home content on the PocketNet Service, and we will promote the
PocketNet Service on our www.excite.com website.
Professional Services Agreement with AT&T. In April 2000, we entered into a
Professional Services Agreement to retain AT&T Solutions Inc., a subsidiary of
AT&T, to assist us with various projects relating to our network infrastructure
including email stabilization support, HVAC/power stabilization support,
operations planning and staff augmentation, the preparation of service level
agreements, and the review of possible outsourcing options. We anticipate AT&T
will complete these projects within 45 days, although we are free to terminate
the agreement any time. Total fees under the agreement are anticipated to total
approximately $2.0 million.
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Other Transactions. Additionally, we received revenues from AT&T, Comcast
and Cox of $475,000, $442,000 and $185,000 for wholesale connectivity and
access services and other miscellaneous services.
Certain Other Related Party Revenues Received During 1999. During 1999, we
received revenues under the following agreements entered into prior to 1999:
1. Master Distribution Agreement with AT&T, Comcast, Cox and Cablevision--We
recorded revenues in 1999 for services performed by us on behalf of each of
these cable partners under this agreement of $338,000 from AT&T and $855,000
from Comcast, and the revenues we recorded from Cox and Cablevision were
insignificant. We recorded expenses of approximately $215,000 in 1999 in
connection with AT&T's provision of support services under this agreement.
2. Agreement with TCG--We recorded expenses of approximately $6.5 million in
1999 in connection with TCG's services under this agreement.
3. Set-top Device Agreement with AT&T--AT&T paid us approximately $8.1
million in 1999 under this agreement.
4. @Work Remote Agreement with AT&T, Comcast and Cox--AT&T, Comcast and Cox
paid us approximately $860,000, $270,000 and $270,000 in 1999 under this
agreement.
5. @Work Internet Agreement with Cox--Cox paid us approximately $371,000 in
1999 under this agreement.
The terms of each of these agreements were described in our proxy statement for
our 1999 annual stockholders' meeting.
Agreements with our Executive Officers and Directors
Loan to Mark Stevens. In March 1999, Excite loaned $1,000,000 to Mark
Stevens, currently our Executive Vice President of Corporate and Business
Development. We assumed the right to repayment under this loan in connection
with our acquisition of Excite in May 1999. The loan bore interest at an
average annual rate of 4.66%. Mr. Stevens repaid the remaining amount due under
this loan in January 2000.
Loan to Byron Smith. As part of our employment offer letter dated January 4,
2000 to Mr. Smith, our Senior Vice President of Marketing, we agreed to extend
two loans of $150,000 each to assist Mr. Smith in the purchase of a home. Each
loan will be made pursuant to a full recourse promissory note, to be secured by
the home and the shares subject to Mr. Smith's stock options. The first loan
will have a term of four years, and one fourth of the principal amount and
accrued interest to date will be forgiven by us each year. The second loan will
have a term of five years, with the principal due on the fifth anniversary of
the loan or ninety days following the termination of Mr. Smith's employment
with us. We will forgive the interest on this second loan each year. If Mr.
Smith sells any of the shares subject to his stock options, all proceeds will
first be applied against all unpaid principal and interest under the second
loan. In addition, if Mr. Smith sells shares subject to his stock options after
voluntary termination of his employment with us or termination by us for cause,
proceeds will be applied against all unpaid principal and interest under both
loans. The loans will bear interest at a rate to be determined, and will be
available to Mr. Smith until January 4, 2001.
Indemnification agreements with directors and executive officers. We have
entered into indemnification agreements with certain of our directors and
executive officers, including some that began serving as directors or executive
officers within the past year. These agreements provide the maximum indemnity
available to them under Section 145 of the Delaware General Corporation Law and
under our bylaws, as well as certain additional procedural protections. These
agreements provide generally that we will advance expenses incurred by
directors and executive officers in any action or proceeding as to which they
may be indemnified, and require us to indemnify such individuals to the fullest
extent permitted by law.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this annual report:
1. Financial Statements. See Index to Financial Statements at Item 8
on page 59 of this annual report.
2. Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
As of December
31,
------------------
1999 1998 1997
------- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period........................ $ 252 $ -- $ --
Acquired allowance................................... 1,705 19 --
Bad debt expense..................................... 3,203 190 --
Write-offs, net of recoveries........................ (1,706) 43 --
------- ---- ----
Balance at end of period.............................. $ 3,454 $252 $ --
======= ==== ====
</TABLE>
Omitted schedules are not applicable or the required information is
shown in the consolidated financial statements and notes thereto.
3. Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this annual report:
<TABLE>
<CAPTION>
Incorporated by Reference
----------------------------------
Exhibit Exhibit
Number Description Form File No. Exhibit Filing Date
------- --------------------------------- ---- --------- ------- -----------
<C> <S> <C> <C> <C> <C>
2.01 Agreement and Plan of Merger, 8-K -- 2.1 01/14/99
dated December 17, 1998, between
the Registrant and Narrative
Communications Corp.
2.02 Agreement and Plan of S-4 333-77151 2.01 04/27/99
Reorganization, dated January 19,
1999, between the Registrant and
Excite, Inc.
2.03 Agreement and Plan of Merger, 13D -- 99.A 08/02/99
dated as of July 12, 1999,
between the Registrant and iMALL,
Inc.
2.04 Agreement and Plan of Merger, 10-K -- 2.04 03/30/00
dated October 27, 1999, between
the Registrant and Webshots
Corporation.
2.05 Agreement and Plan of Merger, 10-Q -- 2.01 11/15/99
dated October 23, 1999, between
the Registrant and Hartford
House, Ltd.
3.01 Fifth Amended and Restated S-8 333-79883 4.01 06/03/99
Certificate of Incorporation of
the Registrant, filed with the
Delaware Secretary of State on
May 28, 1999.
3.02 Second Amended and Restated S-1 333-27323 3.05 06/20/97
Bylaws of the Registrant, as
adopted on July 16, 1997.
3.03 Certificate of Designation of 10-K -- 3.03 03/30/00
Series A non-voting convertible
preferred stock of the
Registrant, filed with the
Delaware Secretary of State on
December 13, 1999.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
----------------------------------
Exhibit Exhibit
Number Description Form File No. Exhibit Filing Date
------- --------------------------------- ---- --------- ------- -----------
<C> <S> <C> <C> <C> <C>
3.04 Certificate of Designation of S-3 333-31530 4.04 03/02/00
Series B non-voting convertible
preferred stock of the
Registrant, filed with the
Delaware Secretary of State on
February 9, 2000.
3.05 Certificate of Designation of S-3 333-31530 4.05 03/02/00
Series C non-voting convertible
preferred stock of the
Registrant, filed with the
Delaware Secretary of State on
February 9, 2000.
4.01 Form of certificate representing S-1 333-27323 4.05 03/31/99
shares of the Registrant's Series
A common stock.
4.02 Indenture, dated December 28, 10-K -- 10.38 03/31/99
1998, between the Registrant and
State Street Bank and Trust
Company of California, N.A., as
trustee (contains form of note).
4.03 Registration Rights Agreement, 10-K -- 10.39 03/31/99
dated December 28, 1998, between
the Registrant and Merrill Lynch
& Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated,
Morgan St Goldman and Sachs & Co.
4.04 Indenture, dated as of December S-3 333-32228 4.03 03/10/00
1, 1999, between the Registrant
and State Street Bank and Trust
Company of California, N.A., as
trustee (contains form of note).
4.05 Registration Rights Agreement, S-3 333-32228 4.04 03/10/00
dated December 1, 1999, between
the Registrant and Morgan Stanley
& Co. Incorporated, Goldman Sachs
& Co., Deutsche Bank Securities
Inc., Donaldson Lufkin & Jenrette
Securities Corporation, Hambrecht
& Quist LLC and BancBoston
Robertson Stephens Inc.
4.06 Third Amended and Restated S-1 333-27323 4.01 05/16/97
Registration Rights Agreement,
dated April 11, 1997, among the
Registrant and the parties
indicated therein.
4.07 Amended and Restated S-1 333-27323 4.04 06/20/97
Stockholders' Agreement, dated
August 1, 1996, among the
Registrant and the parties
indicated therein, as amended on
May 15, 1997.
4.08 Letter Agreement and Term Sheet, 8-K -- 10.01 10/22/97
dated as of October 2, 1997 and
amended as of October 10, 1997,
among the Registrant, Cablevision
Systems Corporation, CSC Parent
Corporation, Comcast Corporation,
Cox Enterprises, Inc., Kleiner
Perkins Caufield & Byers and
Tele-Communications, Inc.
4.09 Letter Agreement, dated April 7, AT&T -- 13 04/13/99
1999, among the Registrant, AT&T 13D
Corp., Tele-Communications, Inc.,
Cox Communications, Inc. and
Cox@Home, Inc.
9.01 Voting Agreement, dated April 11, S-1 333-27323 9.01 05/16/97
1997 among the Registrant, TCI
Internet Holdings, Inc., Comcast
PC Investments, Inc., Cox
Teleport Providence, Inc., Rogers
Cablesystems Limited and Shaw
Cablesystems Ltd.
10.01 Form of Indemnification Agreement S-1 333-27323 10.09 05/16/97
between the Registrant and
certain of its directors and
executive officers.*
10.02 Description of the Registrant's 10-K -- 10.13 02/19/99
1998 Executive Incentive Plan.*
</TABLE>
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<TABLE>
<CAPTION>
Incorporated by Reference
------------------------------------------
Exhibit Exhibit
Number Description Form File No. Exhibit Filing Date
------- ------------------------- ---------- ----------- ------- -----------
<C> <S> <C> <C> <C> <C>
10.03 At Home Corporation 1996 S-1 333-27323 10.10 05/16/97
Incentive Stock Option
Plan.*
10.04 At Home Corporation 1996 S-1 333-27323 10.11 05/16/97
Incentive Stock Option
Plan No. 2.*
10.05 At Home Corporation 1997 S-8 333-81477 4.05 06/24/99
Equity Incentive Plan,
amended as of April 16,
1999.*
10.06 At Home Corporation 1997 S-8 333-60037 4.08 07/28/98
Employee Stock Purchase
Plan, amended as of
May 13, 1998.*
10.07 At Home Corporation 2000 S-8 333-31532 4.06- 03/02/00
Equity Incentive Plan and 4.09
forms of related
agreements.*
10.08 Narrative Communications S-8 333-81477 4.04 06/24/99
Corp. 1998 Equity
Incentive Plan, assumed
by the Registrant as of
December 30, 1998.*
10.09 Narrative Communications 10-K -- 10.12 02/19/99
Corp. 1995 Stock Option
Plan.*
10.10 Excite, Inc. 1995 Equity Excite 333-2328-LA 03/11/96
Incentive Plan.* SB-2
10.11 Excite, Inc. 1996 Equity Excite 333-59329 4.04 07/17/98
Incentive Plan.* S-8
10.12 Excite, Inc. 1996 Excite 333-2328-LA 03/11/96
Directors Stock Option SB-2
Plan.*
10.13 Excite, Inc. 1996 Excite 333-59329 4.05 07/17/98
Employee Stock Purchase S-8
Plan.*
10.14 Classifieds2000, Inc. Excite 333-52001 4.04 05/07/98
1996 Stock Option Plan.* S-8
10.15 MatchLogic, Inc. 1997 Excite 333-46591 4.03 02/19/98
Equity Compensation S-8
Plan.*
10.16 Netbot, Inc. 1996 Stock Excite S-8 333-41523 4.04 12/05/97
Option Plan.*
10.17 Throw, Inc. 1996 Stock Excite 333-52001 4.03 05/07/98
Option Plan.* S-8
10.18 iMALL, Inc. 1997 Stock iMALL 333-52905 4.1 05/15/98
Option Plan.* S-8
10.19 iMALL, Inc. 1999 Stock S-8 333-90327 4.04 11/04/99
Option Plan.*
10.20 Hartford House, Ltd. S-8 333-93339 4.03 12/22/99
Amended and Restated 1999
Stock Option/Stock
Issuance Plan.*
10.21 Kendara, Inc. 1999 Stock S-8 333-31532 4.03- 03/02/00
Plan and forms of related 4.05
agreements.*
10.22 Employment Letter S-1 333-27323 10.19 05/16/97
Agreement, dated July 19,
1996, between the
Registrant and Thomas A.
Jermoluk.*
10.24 Restricted Stock Purchase S-1 333-27323 10.14 05/16/97
Agreement, dated July 31,
1996, between the
Registrant and Thomas A.
Jermoluk for the purchase
of Series A common
stock.*
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
----------------------------------
Exhibit Exhibit
Number Description Form File No. Exhibit Filing Date
------- --------------------------------- ---- --------- ------- -----------
<C> <S> <C> <C> <C> <C>
10.25 Restricted Stock Purchase S-1 333-27323 10.15 05/16/97
Agreement, dated July 31, 1996,
between the Registrant and Thomas
A. Jermoluk for the purchase of
Series K preferred stock.*
10.26 Amendment of Employment 10-K -- 10.26 03/30/00
Agreement, dated November 23,
1999, between the Registrant and
Thomas A. Jermoluk.*
10.27 Employment Agreement, dated as of 10-K -- 10.27 03/30/00
May 28, 1999, between the
Registrant and George Bell.*
10.28 Restricted Stock Purchase S-1 333-27323 10.17 05/16/97
Agreement, dated July 29, 1996,
between the Registrant and Ken
Goldman for the purchase of
Series A common stock.
10.29 Settlement Agreement and General 10-K -- 10.29 03/30/00
Release, dated June 15, 1999,
between the Registrant and Robert
Tomasi, Jr.*
10.30 Option Continuation Agreement, 10-K -- 10.30 03/30/00
dated June 15, 1999, between the
Registrant and Robert Tomasi,
Jr.*
10.31 Form of Restricted Stock Purchase S-1 333-27323 10.18 05/16/97
Agreement and Promissory Note
between the Registrant and other
officers for the purchase of
Series A common stock.
10.32 Term Sheet, dated June 4, 1996, S-1 333-27323 10.06 05/16/97
among the Registrant, TCI
Internet Holdings, Inc., Kleiner
Perkins Caufield & Byers VII,
KPCB Information Sciences
Zaibatsu Fund II, KPCB VII
Founders Fund, Comcast PC
Investments, Inc., and Cox
Teleport Providence, Inc.
10.33 Letter of Agreement, dated May S-1 333-27323 10.20 06/20/97
15, 1997, among Registrant and
the parties indicated therein,
including as exhibits the Master
Distribution Agreement Term Sheet
and the Term Sheet for Form of
LCO Agreement.
10.34 Term Sheet, dated March 18, 1997, S-1 333-27323 10.06 05/16/97
between the Registrant and Shaw
Cablesystems Ltd. and Rogers
Cablesystems Limited.
10.35 Canadian Purchase Letter S-1 333-27323 4.03 05/16/97
Agreement, dated April 11, 1997,
among the Registrant, Rogers
Cablesystems Limited and Shaw
Cablesystems Ltd.
10.36 Binding Warrant Term Sheet, dated 10-Q -- 10.24 05/15/98
February 24, 1998, among the
Registrant, Rogers
Communications, Inc. and Shaw
Communications, Inc.
10.37 Warrant Purchase Agreement, dated 8-K -- 10.02 10/22/97
October 10, 1997, between the
Registrant and Cablevision
Systems Corporation.
10.38 Warrant to purchase shares of 8-K -- 10.03 10/22/97
Series A common stock of
Registrant issued to CSC Parent
Corporation as of October 10,
1997.
10.39 Contingent warrant to purchase 8-K -- 10.04 10/22/97
shares of Series A common stock
of the Registrant issued to CSC
Parent Corporation as of October
10, 1997.
10.40 Lease, dated October 17, 1996, S-1 333-27323 10.08 05/16/97
between the Registrant and
Martin/Campus Associated, L.P.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
----------------------------------
Exhibit Exhibit Filed
Number Description Form File No. Exhibit Filing Date Herewith
------- ------------------------ ---- --------- ------- ----------- --------
<C> <S> <C> <C> <C> <C> <C>
10.41 Build To Suit Lease, 10-K -- 10.35 02/19/99
dated September 29,
1997, between the
Registrant and Martin/
Campus Associates, L.P.,
(440 Broadway, Redwood
City, California).
10.42 Build To Suit Lease, 10-Q -- 10.21 05/15/98
dated September 29,
1997, between the
Registrant and Martin/
Campus Associates, L.P.
(425 Broadway, Redwood
City, California).
10.43 Build to Suit Option 10-Q -- 10.22 05/15/98
Agreement, dated October
25, 1996, between
Registrant and
Martin/Campus
Associates, L.P., and
First Amendment to Build
to Suit Option Agreement
10.44 Build to Suit Lease, 10-K -- 10.36 02/19/99
dated July 14, 1998,
between Registrant and
Martin/Campus
Associates, L.P. (420
Broadway, Redwood City,
California)
10.45 Build to Suit Lease 10-K -- 10.37 02/19/99
between the Registrant
and Martin/Campus
Associates, L.P. (430
Broadway, Redwood City,
California)
10.46 Loan and Security 10-Q -- 10.23 11/14/97
Agreement, dated
September 30, 1997,
between the Registrant
and Silicon Valley Bank.
10.47 Loan Modification 10-K -- 10.34 02/19/99
Agreement between the
Registrant and Silicon
Valley Bank
10.48 Master Communications S-1 333-27323 10.07 05/16/97
Services Agreement,
dated April 2, 1997,
between the Registrant
and Teleport
Communications Group
Inc.
10.49 IRU Capacity Agreement, 10-K -- 10.33 04/27/99
dated December 19, 1998,
between the Registrant
and AT&T Corp.
10.50 Form of Amendment Number 10-Q -- 10.01 11/15/99
Two to IRU Capacity
Agreement, dated
September 30, 1999,
between the Registrant
and AT&T Corp.
21.01 List of Subsidiaries of 10-K -- 21.01 03/30/00
the Registrant.
23.01 Consent of Ernst & Young X
LLP, Independent
Auditors.
24.01 Power of Attorney. 10-K -- 24.01 03/30/00
27.01 Financial data schedule 10-K -- 27.01 03/30/00
for the year ended
December 31, 1999.
</TABLE>
- --------
* Management contracts or compensatory plans required to be filed as an
exhibit to this annual report.
(b) Reports on Form 8-K.
On October 27, 1999, we filed a current report on Form 8-K announcing under
Item 5 that we had entered into an Agreement and Plan of Merger with Hartford
House, Ltd., the operator of the Bluemountain.com web site.
On December 6, 1999, we filed a current report on Form 8-K announcing under
Item 5 that we had issued a press release dated December 3, 1999 with respect
to our intention to raise approximately $400 million through a private offering
of convertible subordinated notes within the United States to qualified
institutional buyers.
112
<PAGE>
On December 22, 1999, we filed a current report on Form 8-K announcing under
Item 2 that we had completed our merger with Hartford House, Ltd., the operator
of the Bluemountain.com web site, and announcing under Item 5 that (1) on
December 13, 1999 we had completed the private placement of $500 million of
4.75% Convertible Subordinated Notes Due 2006, (2) on December 14, 1999, we
issued a press release with respect to the completion of the private placement
of the convertible notes, (3) on December 6, 1999, AT&T announced that it would
not extend its exclusivity agreement with us, and (4) on November 22, 1999, we
announced that our Board of Directors had authorized us to investigate the
issuance of a "tracking stock" for our media business.
113
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 28, 2000 AT HOME CORPORATION
Kenneth A. Goldman*
By: _________________________________
Kenneth A. Goldman
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
Principal Executive Officer:
<S> <C> <C>
George Bell* President, Chief Executive April 28, 2000
____________________________________ Officer and Director
George Bell
Principal Financial Officer:
Kenneth A. Goldman* Executive Vice President and April 28, 2000
____________________________________ Chief Financial Officer
Kenneth A. Goldman
Chief Accounting Officer:
Robert A. Lerner* Vice President, Corporate April 28, 2000
____________________________________ Controller and Treasurer
Robert A. Lerner
Additional Officers:
Thomas A. Jermoluk* Chairman April 28, 2000
____________________________________
Thomas A. Jermoluk
William R. Hearst III* Director April 28, 2000
____________________________________
William R. Hearst III
____________________________________ Director
C. Michael Armstrong
L. John Doerr* Director April 28, 2000
____________________________________
L. John Doerr
____________________________________ Director
Ray Liguori
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
John C. Malone* Director April 28, 2000
____________________________________
John C. Malone
____________________________________ Director
John C. Petrillo
Brian L. Roberts* Director April 28, 2000
____________________________________
Brian L. Roberts
Ted Rogers* Director April 28, 2000
____________________________________
Ted Rogers
David M. Woodrow* Director April 28, 2000
____________________________________
David M. Woodrow
</TABLE>
/s/ David G. Pine
*By: ____________________________
David G. Pine
Attorney-in-fact
115
<PAGE>
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-31115) pertaining to the 1996 Incentive Stock Option Plan,
the 1996 Incentive Stock Option Plan No. 2, the 1997 Employee Stock Purchase
Plan, and the 1997 Equity Incentive Plan of At Home Corporation, the
Registration Statement (Form S-8 No. 333-38833) pertaining to the 1997 Equity
Incentive Plan of At Home Corporation, the Registration Statement (Form S-8
No. 333-60037) pertaining to the 1997 Equity Incentive Plan and the 1997
Employee Stock Purchase Plan of At Home Corporation, the Registration
Statement (Form S-8 No. 333-79883) pertaining to the 1997 Equity Incentive
Plan of At Home Corporation, the 1995 Equity Incentive Plan, the 1996 Equity
Incentive Plan, the 1996 Directors Stock Option Plan, and the 1996 Employee
Stock Purchase Plan of Excite, Inc., the Stock Option Plan of Netbot, Inc.,
the 1997 Equity Compensation Plan of MatchLogic, Inc., the 1996 Option Plan of
Throw, Inc., and the 1996 Stock Option Plan of Classifieds2000, Inc., the
Registration Statement (Form S-8 No. 333-81477) pertaining to the 1995 Stock
Option Plan, the 1998 Equity Incentive Plan of Narrative Communications Corp.,
the Registration Statement (Form S-8 No. 333-90327) pertaining to the 1997
Stock Option Plan and the 1999 Stock Option Plan of iMall, Inc., the
Registration Statement (Form S-8 No. 333-93339) pertaining to the Amended and
Restated 1999 Stock Option/Stock Issuance Plan of The Hartford House, Ltd.,
the Registration Statement (Form S-8 No. 333-31532) pertaining to the 2000
Equity Incentive Plan of At Home Corporation, the 1999 Stock Plan of Kendara,
Inc. and the 1999 Stock Option/Stock Issuance Plan of The Hartford House,
Ltd., the Registration Statement (Form S-3 No. 333-60049) and the related
Prospectus of At Home Corporation for the registration of 2,875,000 shares of
its Series A common stock, the Registration Statement (Amendment No. 3 to Form
S-3 No. 333-72669) and the related Prospectus of At Home Corporation for the
registration of 919,000 shares of its Series A common stock, the Registration
Statement (Amendment No. 1 to Form S-3 No. 333-78419) and the related
Prospectus of At Home Corporation for the registration of $437,000,000
principal amount 5.246% Convertible Subordinated Debentures Due 2018 and
5,724,700 shares of its Series A common stock, the Registration Statement
(Amendment No. 1 to Form S-3 No. 333-91001) and the related Prospectus of At
Home Corporation for the registration of 4,769,696 shares of its Series A
common stock, the Registration Statement (Amendment No. 1 to Form S-3 No. 333-
94045) and the related Prospectus of At Home Corporation for the registration
of 10,673,549 shares of its Series A common stock, the Registration Statement
(Form S-3 No. 333-31530) and the related Prospectus of At Home Corporation for
the registration of 5,285,600 shares of its Series A common stock, and the
Registration Statement (Form S-3 No. 333-32228) and the related Prospectus of
At Home Corporation for the registration of $500,000,000 principal amount
4.75% Convertible Subordinated Notes Due 2006 and 8,846,246 shares of its
Series A common stock, of our report dated January 20, 2000, with respect to
the consolidated financial statements and schedules of At Home Corporation
included in this Amendment No. 1 to the Annual Report on Form 10-K for the
year ended December 31, 1999.
/s/ Ernst & Young LLP
San Jose, California
April 28, 2000
