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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 000-27899
------------------------
NBC INTERNET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3333463
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
225 BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 375-5000
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0001 PAR VALUE
------------------------
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.
/X/ Yes / / No
The number of shares outstanding of Registrant's Common Stock at July 31,
2000 was 37,982,078 of Class A, par value $0.0001, and 24,550,708 of Class B,
par value $0.0001.
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NBC INTERNET, INC.
TABLE OF CONTENTS
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<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999....................... 1
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2000 and 1999......... 2
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999................... 3
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 3. Quantitative And Qualitative Disclosures About Market
Risk...................................................... 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 42
Item 2. Changes in Securities and Use of Proceeds................... 43
Item 4. Submission of matters to a vote of security holders......... 44
Item 6. Exhibits and Reports on Form 8-K............................ 44
Signature................................................... 45
</TABLE>
<PAGE>
NBC INTERNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 137,572 $ 28,095
Short-term investments.................................... 185,264 176,669
Accounts receivable, net.................................. 23,335 17,223
Related party note receivable from NBC, current portion... 80,416 78,288
Other current assets...................................... 10,490 8,916
---------- ----------
Total current assets........................................ 437,077 309,191
Fixed assets, net........................................... 45,026 18,096
Goodwill and other intangibles, net......................... 1,925,361 1,759,473
Related party note receivable from NBC, net of current
portion................................................... 220,965 261,712
Long-term investments....................................... 198,844 132,101
Other assets, including restricted cash of $8,942 and $8,990
as of
June 30, 2000 and December 31, 1999, respectively......... 11,783 13,523
---------- ----------
Total assets................................................ $2,839,056 $2,494,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,759 $ 15,687
Accrued compensation and related expenses................. 12,805 15,293
Other current liabilities................................. 18,109 19,627
Amount due to related party............................... 12,643 41,792
Deferred revenue.......................................... 37,311 18,943
---------- ----------
Total current liabilities................................... 95,627 111,342
---------- ----------
Long-term liabilities:
Convertible notes payable, less unamortized discount due
to NBC and its affliates................................ 378,633 371,233
Other long-term liabilities............................... 14,984 11,737
---------- ----------
Total long-term liabilities................................. 393,617 382,970
---------- ----------
Stockholders' equity:
Class A common stock...................................... 1,589,257 941,775
Class B common stock...................................... 1,158,336 1,158,336
Accumulated other comprehensive income (loss)............. (19,011) 4,994
Deferred compensation..................................... (18,561) (4,121)
Accumulated deficit....................................... (360,209) (101,200)
---------- ----------
Total stockholders' equity.................................. 2,349,812 1,999,784
---------- ----------
Total liabilities and stockholders' equity.................. $2,839,056 $2,494,096
========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
NBC INTERNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenue:
Advertising revenue.................................... $ 25,272 $ 3,210 $ 49,723 $ 4,975
E-commerce revenue..................................... 5,190 3,315 10,862 5,972
--------- ------- --------- --------
Total net revenue........................................ 30,462 6,525 60,585 10,947
--------- ------- --------- --------
Cost of net revenue:
Cost of advertising revenue............................ 10,457 1,113 17,055 1,850
Cost of e-commerce revenue............................. 2,466 2,607 5,264 4,649
--------- ------- --------- --------
Total cost of net revenue................................ 12,923 3,720 22,319 6,499
Gross profit............................................. 17,539 2,805 38,266 4,448
--------- ------- --------- --------
Operating expenses:
Operating and development.............................. 16,145 1,010 28,059 1,774
Sales and marketing.................................... 23,060 4,607 41,744 6,689
General and administrative............................. 16,603 2,043 28,188 3,666
Promotion and advertising provided by NBC.............. 18,011 -- 38,073 --
Amortization of deferred compensation.................. 3,782 175 4,868 405
Purchased in-process research and development.......... 3,768 2,603 3,768 2,603
Amortization of intangible assets...................... 94,843 1,442 164,551 2,304
--------- ------- --------- --------
Total operating expenses................................. 176,212 11,880 309,251 17,441
Loss from operations..................................... (158,673) (9,075) (270,985) (12,993)
Other income (expense):
Interest income........................................ 10,683 2,368 19,801 3,008
Interest expense....................................... (3,913) (35) (7,825) (65)
--------- ------- --------- --------
Net loss................................................. $(151,903) $(6,742) $(259,009) $(10,050)
========= ======= ========= ========
Net loss per share--basic and diluted.................... $ (2.47) $ (0.40) $ (4.41) $ (0.66)
========= ======= ========= ========
Number of shares used in per share
calcuation--basic and diluted.......................... 61,444 16,777 58,723 15,288
========= ======= ========= ========
</TABLE>
See accompanying notes.
2
<PAGE>
NBC INTERNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Cash provided by (used in) operating activities:
Net loss................................................ $(259,009) $(10,050)
Adjustments to reconcile net loss to net cash used in
operating activities:
Receipt of equity in exchange for services provided... (16,143) --
Purchased in-process research and development......... 3,768 2,603
Depreciation and amortization......................... 174,968 3,417
Issuance of common stock and stock options to
directors and consultants........................... -- 458
Changes in operating assets and liabilities, net of
business combinations:
Accounts receivable................................. (10,768) (1,510)
Inventories......................................... -- (471)
Other current assets................................ (438) (2,136)
Other assets........................................ 4,374 (653)
Accounts payable.................................... (2,468) 2,287
Accrued compensation and related expenses........... (2,604) 604
Other accrued liabilities........................... (28,645) 35
Deferred revenue.................................... 14,928 (342)
--------- --------
Net cash used in operating activities................... (122,037) (5,758)
--------- --------
Cash provided by (used in) investing activities:
Purchases of fixed assets............................... (28,029) (2,907)
Purchases of short-term and long-term investments....... (181,505) (162,528)
Maturities of short-term and long-term investments...... 107,657 7,500
Business combinations, net of cash acquired............. (6,161) (975)
--------- --------
Net cash used in investing activities................... (108,038) (158,910)
--------- --------
Cash provided by (used in) by financing activities:
Proceeds from issuance of common stock.................. 284,756 166,597
Proceeds from exercise of stock options................. 16,487 1,182
Proceeds from note receivable........................... 38,619 --
Payments of notes payable and capital lease
obligations........................................... (310) (268)
--------- --------
Net cash provided by financing activities............... 339,552 167,511
Net increase in cash and cash equivalents............... 109,477 2,843
Cash and cash equivalents at beginning of period........ 28,095 54,575
--------- --------
Cash and cash equivalents at end of period.............. $ 137,572 $ 57,418
========= ========
</TABLE>
See accompanying notes.
3
<PAGE>
NBC INTERNET, INC.
SUPPLEMENTAL CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Supplemental disclosures:
Non-cash transactions:
Investments in corporate securities received in
connection with media contracts..................... $ 26,369 $ 5,000
======== =======
Value of shares received upon cashless exercise of
warrant............................................. $ 1,988 $ --
======== =======
Deferred compensation resulting from grant
of stock options to Company employees............... $ 12,460 $ --
======== =======
Deferred compensation resulting from grant or
restricted
stock to employees of acquired companies............ $ 6,847 $ --
======== =======
Issuance of common stock in conjuction with business
and
technology acquisitions............................. $334,165 $60,410
======== =======
Cash flow information:
Cash paid for interest................................ $ 20 $ 32
======== =======
</TABLE>
See accompanying notes.
4
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
NBC Internet, Inc. ("NBCi" or the "Company") is a next-generation,
integrated media company, connecting buyers and sellers through premier portal,
entertainment, utility and e-commerce services. The Company generates revenues
primarily from online, television and radio advertising and e-commerce services
designed to deliver a comprehensive online experience to a global audience.
NBCi was formed as the result of several transactions that occurred on
November 29 and 30 of 1999, pursuant to which Xoom.com, Inc. ("Xoom.com") and
SNAP! LLC ("Snap") became wholly-owned subsidiaries of NBCi, and NBCi became the
owner of the businesses related to NBC.com, NBC-IN.com and VideoSeeker.com ("NBC
Multimedia Division") and a 10% ownership interest in CNBC.com LLC. Xoom.com was
treated as the accounting acquiror and the financial information in the
accompanying unaudited financial statements includes Xoom.com's results for the
three and six months ended June 30, 1999 and the consolidated results of
operations of Xoom.com, Snap and NBC Multimedia Division for the three- and
six-month periods ended June 30, 2000.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's consolidated financial
position as of June 30, 2000 and December 31, 1999, the consolidated results of
its operations for the three- and six-month periods ended June 30, 2000 and 1999
and its cash flows for the six months ended June 30, 2000 and 1999. All
significant inter-company transactions and balances have been eliminated in
consolidation. These consolidated financial statements should be read in
conjunction with the Company's audited 1999 financial statements, including the
notes thereto, and the other information set forth therein included in the
Company's 1999 Annual Report filed on Form 10-K. Consolidated operating results
for the three- and six-month periods ended June 30, 2000 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2000 or other future periods.
USE OF ESTIMATES
The preparation of consolidated 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 liabilities at the date of the
consolidated financial statements and the reported consolidated results of
operations during the reporting period. Actual results could differ from those
estimates.
CALCULATION OF NET LOSS PER SHARE
The Company computes net loss per share based on Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128"). In
accordance with SFAS 128, basic net income (loss) per share excludes dilutive
common stock equivalents and is calculated as net income (loss) divided by the
weighted average number of Class A and Class B common shares outstanding. Since
each share of Class B common stock is convertible into one share of Class A
common stock, the total of the weighted average number of common shares for both
classes of common stock is considered in the computation of net loss per share.
Diluted net income (loss) per share is computed using the weighted average
number of common
5
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares outstanding and dilutive common stock equivalents outstanding during the
period. Common equivalent shares from stock options and warrants were excluded
from the net loss per share calculations as their effect would be antidilutive.
REVENUE RECOGNITION
ADVERTISING REVENUE. A significant portion of the Company's advertising
revenue is derived from the sale of promotional space on the Company's online
Internet properties. Services offered range from short-term banner
advertisements and sponsorships to long-term arrangements, which may include the
development of co-branded, integrated Web sites. Revenue derived from such
arrangements is recognized during the period in which the service is delivered,
provided that no significant obligations remain at the end of the period.
Company obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by users of
the Company's online properties. To the extent that the minimum guaranteed
impressions are not delivered, the Company defers recognition of the
corresponding revenue until the remaining guaranteed impression levels are
achieved. Advertising revenue is also generated from integrated media sales, in
which the Company sells integrated promotional space on television advertising
purchased from NBC and radio advertising purchased from third parties. Aggregate
revenue derived from these arrangements during the three- and six-month periods
ended June 30, 2000 was $1.9 million and $3.9 million, respectively. Revenue
from integrated media sales is recognized in the period in which the
advertisements are aired and is included in advertising revenue. There was no
revenue from television and radio advertising during the three and six months
ended June 30, 1999.
E-COMMERCE REVENUE. The Company recognizes revenue from e-commerce sales
when the products are shipped to customers or when contractual obligations
related to e-mail marketing campaigns are met. The Company provides for
potential product returns and estimated warranty costs in the period of the
sale. Such costs have been minimal to date.
BARTER TRANSACTIONS. The Company trades advertisements on its online
properties and from its on-air inventory in exchange for either equity ownership
in certain of its customers or advertising in other media. The Company also
trades advertisements on its online properties and from its on-air inventory in
exchange for advertisements on the online properties of other companies. In
accordance with Emerging Issues Task Force Issue 99-17, "Accounting for
Advertising Barter Transactions," revenue derived from these arrangements is
recorded at the fair value of services provided or the fair value of the
services or equity ownership received, whichever is more reliably determinable
at the time of the transaction. Revenue from barter transactions is recognized
when advertisements are delivered on the Company's online properties, displayed
on television or aired on radio. Total revenue derived from the exchange of
media and advertising services for equity was $7.5 million and $14.4 million for
the three and six months ended June 30, 2000, respectively. Total revenue
derived from the exchange of media and advertising services for advertising in
other media totaled $1.2 million and $1.7 million for the three and six months
ended June 30, 2000, respectively. The Company did not record any revenue from
barter transactions during the three or six months ended June 30, 1999.
6
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, LIFE
2000 1999 (MONTHS)
-------- ------------ --------
<S> <C> <C> <C>
Purchased technology......................... $ 74,147 $ 46,489 24 - 60
License to use brand names................... 34,200 34,200 60 - 84
Affiliate and other contracts................ 32,261 31,400 24 - 48
Acquired workforce........................... 4,486 3,802 24 - 48
Membership................................... 3,443 -- 24
-------- --------
Intangible assets............................ 148,537 115,891
Less: Accumulated amortization............... (14,121) (2,472)
-------- --------
Intangible assets, net....................... $134,416 $113,419
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, LIFE
2000 1999 (MONTHS)
---------- ------------ --------
<S> <C> <C> <C>
Goodwill.................................... $1,979,098 $1,681,922 24--84
Less: Accumulated amortization.............. (188,153) (35,868)
---------- ----------
Goodwill, net............................... $1,790,945 $1,646,054
========== ==========
</TABLE>
Intangible assets result from acquisitions accounted for under the purchase
method (See note 2). Amortization of intangibles is provided on the
straight-line basis over the respective estimated useful lives of the assets.
The Company periodically evaluates whether changes have occurred that would
require revision of the remaining estimated useful life of the assigned
intangible assets or render the intangibles not recoverable. If such
circumstances arise, the Company would use an estimate of the undiscounted value
of expected future operating cash flows to determine whether the intangibles are
impaired. To date, no impairment losses have been recorded.
RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior year balance
sheet, statement of operations and statement of cash flows information to
conform to the current year presentation. These reclassifications had no effect
on the Company's previously reported financial positions or results of
operations.
2. BUSINESS COMBINATIONS
The financial information presented in the accompanying financial statements
gives effect to each completed acquisition from the date the acquisition was
consummated. The Company completed the following business acquisitions during
the six months ended June 30, 2000:
CATALYST ADVISORS, INC. On February 14, 2000, the Company acquired 100%
of the outstanding shares of Catalyst Advisors, Inc., a company that
provides real-time financial newswires for active online investors. The
purchase consideration consisted of 123,737 shares of the Company's Class A
common stock at a fair value of $68.69 per share and acquisition costs of
approximately $60,000.
ALLBUSINESS.COM, INC. On March 7, 2000, the Company acquired 100% of
the outstanding shares of AllBusiness.com, Inc., a Web service designed to
be a virtual partner for small and growing businesses. The purchase
consideration consisted of 4,083,021 shares of the Company's Class A
7
<PAGE>
2. BUSINESS COMBINATIONS (CONTINUED)
common stock at a fair value of $52.54 per share, the assumption of 997,896
options at an average price of $49.76 per share and acquisition costs of
approximately $3.4 million.
HUSDAWG COMMUNICATIONS, INC. On March 22, 2000, the Company acquired
100% of the outstanding shares of Husdawg Communications, Inc., an online
electronic software registration company. The purchase consideration
consisted of 141,963 shares of the Company's Class A common stock and the
assumption of 9,015 options, both at an average fair value of $47.92 per
share and acquisition costs of approximately $120,000.
FLYSWAT, INC. On May 31, 2000, the Company acquired 100% of the
outstanding shares, options and warrants of flyswat, Inc., a company that
has developed technology that creates links to relevant Internet content and
commerce services on any Web site or personal document. The purchase
consideration consisted of 942,868 shares of the Company's Class A common
stock at a fair value of $40.65 per share, the assumption of options to
purchase 198,173 shares of the Company's Class A common stock with a fair
value of $39.61 per share, the assumption of warrants to purchase 13,449
shares of the Company's Class A common stock with a fair value of $40.16 per
share, cash of $4.5 million and acquisition costs of approximately $537,000.
The Class A common stock was valued at the average closing price three days
before and three days after the acquisition was announced. The Company also
recorded a write-off of in-process research and development expenses of
$3.8 million. Additionally, subject to certain performance measurements, the
Company will issue up to 577,207 incremental shares of its Class A common
stock and additional options to purchase shares of Class A common stock. The
fair value of such incremental shares will be computed upon the resolution
of the contingent performance measurements, over a period of not more that
six months from the acquisition date and will be released from escrow to all
selling shareholders based on their relative equity interests at the date of
acquisition.
GLOBALBRAIN.NET, INC. On May 31, 2000, the Company acquired the
remaining 90% of the outstanding shares and all of the outstanding options
of Globalbrain.net, Inc., a company that develops search technology that
passively learns and customizes search results. Prior to the acquisition
date, the Company held 10% of Globalbrain.net's, Inc.'s outstanding shares.
The purchase consideration, for the shares not previously owned by the
Company, consisted of 293,962 shares of the Company's Class A common stock
at a fair value of $20.48 per share, the assumption of options to purchase
26,868 shares of the Company's Class A common stock with a fair value of
$10.03 per share and acquisition costs of approximately $310,000.
Additionally, subject to certain performance measurements, the Company may
issue up to 137,500 incremental shares of its Class A common stock. Upon the
closing of the acquisition, the Company placed these shares into an escrow
account. The fair value of such incremental shares will be computed upon the
resolution of the contingent performance measurements, over a period of not
more that 18 months from the acquisition date and will be released from
escrow to all selling shareholders based on their relative equity interests
at the date of acquisition.
The following table summarizes the acquisitions completed by the Company
during the six months ended June 30, 1999:
<TABLE>
<CAPTION>
ENTITY NAME FAIR VALUE OF CONSIDERATION DATE
----------- ----------------------------------- -------------
<S> <C> <C> <C>
Focused Presence, Inc..... $ 1,695 Stock April 1, 1999
MightyMail Networks,
Inc..................... $23,114 Stock and options assumed May 3, 1999
Net Floppy, Inc........... $ 1,440 Stock and cash May 5, 1999
Paralogic Software
Corporation............. $35,396 Stock and options assumed June 16, 1999
</TABLE>
8
<PAGE>
2. BUSINESS COMBINATIONS (CONTINUED)
All of the acquisitions described above have been accounted for as purchase
business combinations and, accordingly, purchase prices have been allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition dates. For the six months
ended June 30, 2000 and 1999, $4.8 million and $3.5 million, respectively, of
the aggregate purchase price was allocated to net tangible assets consisting
primarily of cash and cash equivalents, shareholder notes receivable, other
assets, property and equipment, accounts payable and accrued expenses. The
historical carrying amounts of such net assets approximated their fair values.
Approximately $330.5 million of the aggregate purchase price was allocated to
intangible assets as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
INTANGIBLE ASSET 2000 1999
---------------- -------- --------
<S> <C> <C>
Goodwill................................................. $297,821 $49,577
Membership............................................... 3,443 --
Assembled workforce...................................... 684 257
Affiliate and other contracts............................ 861 --
Purchased technology..................................... 27,658 8,307
-------- -------
Total.................................................. $330,467 $58,141
======== =======
</TABLE>
For each of the acquisitions completed during the six months ended June 30,
2000, the Company placed 10% of the shares issued as part of the purchase
consideration into an escrow account. These shares will be released one year
from the date of the acquisition upon the expiration of certain indemnification
obligations and will be released to all selling shareholders based on their
relative equity interests at the time of consummation of the individual
acquisitions.
For acquisitions completed during the six months ended June 30, 1999, the
Company placed a total of 74,712 of its Class A common stock into escrow
accounts. As of June 30, 2000, all shares have been released from these escrow
accounts.
The results of operations of each business acquisition have been included in
the Company's consolidated results of operations from the date of consummation
of each individual acquisition. Results of operations for periods prior to
acquisition were not material in relation to those of the Company, individually
or in aggregate.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The amount allocated to
purchased research and development was determined through established valuation
techniques in the high-technology Internet industry (generally using an income
approach) and was expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. The value
assigned to purchased in-process technology was determined by identifying the
on-going research projects for which technological feasibility had not been
achieved and assessing the state of completion of the research and development
effort. The state of completion was determined by estimating the costs and time
incurred to date relative to those costs and time to be incurred to develop the
purchased in-process technology into a commercially viable product, estimating
the resulting net cash flows only from the percentage of research and
development efforts complete at the date of acquisition, and discounting the net
cash flows back to their present value. The discount rate included a factor that
took into account the uncertainty surrounding the successful development of the
purchased in-process technology projects.
9
<PAGE>
3. RELATED PARTY TRANSACTIONS
In connection with the NBCi transactions that took place on November 29 and
30, 1999 pursuant to which the Company was formed, the Company entered into the
following transactions:
NOTES PAYABLE
Two subordinated zero coupon convertible notes were issued by the Company.
The convertible notes will have an aggregate principal at maturity of
$486.9 million and are convertible by the holders into a total of 5,809,388
shares of Class B common stock at any time after the first anniversary of the
issuance of the note. Both notes yield 4% per annum. The notes were recorded at
their present value at issuance of $370.0 million. As of June 30, 2000, the
total principal and interest due related to these notes was $370.0 million and
$8.6 million, respectively. The convertible notes have a scheduled maturity of
November 30, 2006.
NOTE RECEIVABLE
The Company received a promissory note from NBC with a principal value of
$340.0 million, due on November 30, 2003. The note bears interest at 5.4% and
compounds quarterly. Principal and interest payments are received by the Company
in quarterly installments of $23.8 million. As of June 30, 2000, the total
principal and interest due to the Company related to this note was
$301.4 million and $1.4 million, respectively. Interest due to the Company is
included in other current assets.
ADVERTISING AGREEMENT WITH NBC
The Company entered into an advertising agreement with NBC pursuant to which
NBCi will purchase 15-, 30- and 60-second advertising spots valued at
$405.0 million over a four-year period on the NBC television network, CNBC,
MSNBC and NBC's owned and operated television stations. The advertisements are
subject to standard terms and conditions generally applicable to such
advertising. The advertising agreement may be terminated by NBC in the event of
a change in control of NBCi, a bankruptcy event with respect to NBCi or a
material breach by NBCi that is not cured within 30 days. NBCi sells a portion
of the advertising it purchases from NBC to customers as part of an integrated
media package as described in Note 1. Proceeds from these sales are included in
advertising revenue. From the inception of this agreement through June 30, 2000,
the Company had incurred $54.9 million of promotional expense related to the
above agreement.
4. FINANCIAL INSTRUMENTS
The Company has classified all short-term and long-term marketable
securities as available-for-sale. Available-for-sale securities are carried at
amounts that approximate fair market value based on quoted market prices.
Interest earned, realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in interest
income.
10
<PAGE>
4. FINANCIAL INSTRUMENTS (CONTINUED)
Short-term and long-term investments include the following securities as of
June 30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term:
Demand and money market instrument accounts..... $ 93,952 $ 5 $ -- $ 93,957
Corporate bonds and notes....................... 134,840 1 (241) 134,600
United states government agency bonds........... 44,748 -- (183) 44,565
Foreign debt securities......................... 12,479 1 (23) 12,457
Publicly traded equity securities............... 55,657 1,749 (20,149) 37,257
--------- ------ -------- ---------
Total available-for-sale securities........... 341,676 1,756 (20,596) 322,836
Less amounts classified as cash and cash
equivalents................................... (137,576) (5) 9 (137,572)
--------- ------ -------- ---------
Total short-term available-for-sale
securities.................................. $ 204,100 $1,751 $(20,587) $ 185,264
========= ====== ======== =========
Long-term:
Corporate bonds and notes....................... $ 30,471 $ 9 $ (101) $ 30,379
United states government agency bonds........... 28,685 50 (20) 28,715
Foreign debt securities......................... 3,047 -- (13) 3,034
--------- ------ -------- ---------
Total long-term available-for-sale
securities.................................. $ 62,203 $ 59 $ (134) $ 62,128
========= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term:
Market auction preferred stock.................... $ 2,000 $ -- $ -- $ 2,000
Demand and money market instrument accounts....... 35,370 -- (91) 35,279
Corporate bonds and notes......................... 70,009 1 (89) 69,921
United states government agency bonds............. 51,473 3 (241) 51,235
Foreign debt securities........................... 8,439 11 (13) 8,437
Publicly traded equity securities................. 32,327 7,453 (1,888) 37,892
-------- ------ ------- --------
Total available-for-sale securities............. $199,618 $7,468 $(2,322) $204,764
Less amounts classified as cash and cash
equivalents..................................... (28,092) (3) -- (28,095)
-------- ------ ------- --------
Total short-term available-for-sale
securities.................................... $171,526 $7,465 $(2,322) $176,669
======== ====== ======= ========
Long-term:
Corporate bonds and notes......................... $ 14,337 $ -- $ (118) $ 14,219
United states government agency bonds............. 2,996 -- (31) 2,965
-------- ------ ------- --------
Total long-term available-for-sale securities... $ 17,333 $ -- $ (149) $ 17,184
======== ====== ======= ========
</TABLE>
The Company also invests in privately-held companies and classifies these
investments as long-term investments. Also included in long-term investments are
portions of certain publicly-held equity securities that are subject to
Rule 144 holding period restrictions. At June 30, 2000 and December 31, 1999,
these investments totaled approximately $68.2 million and $46.4 million,
respectively. Additionally, as of June 30, 2000 and December 31, 1999, the
Company held a long-term investment in CNBC.com LLC totaling
11
<PAGE>
4. FINANCIAL INSTRUMENTS (CONTINUED)
$68.5 million. The Company accounts for these investments using either the cost
or equity methods, depending on the Company's relative ownership interest and
ability to exercise control. These investments are included in other long-term
investments in the accompanying balance sheets. Impairment losses on
privately-held securities are recorded when events and circumstances indicate
that such assets are impaired and the decline in value is other than temporary.
To date, the Company has not recorded any impairment losses related to long-term
investments.
5. STOCKHOLDERS' EQUITY.
2000 STOCK OPTION PLAN
On May 1, 2000, the Company's Board of Directors adopted the NBC
Internet, Inc. 2000 Non-Qualified Stock Option Plan (the "Plan"). The Plan
authorized the grant of options for up to 2,000,000 shares of the Company's
Class A common stock. The Plan is administered by the Company's compensation
committee and provides for nonqualified stock options to be issued to any
employee or consultant to the Company or any of its subsidiaries, other than a
director or officer of the Company at an exercise price of not less than 85% of
the fair value at the grant date. Option vesting schedules are determined by the
Plan administrator at the time of issuance. Options generally vest over 36 to 48
months, and may provide for 25% vesting at the end of the first year and monthly
vesting thereafter. In the event of a change in control, other than by NBC, each
outstanding option under the Plan will automatically have its vesting
accelerated by 12 months on the effective date of the corporate transaction.
1999 STOCK INCENTIVE PLAN
On June 22, 2000, the Company's stockholders approved an amendment to the
1999 Stock Incentive Plan increasing the number of shares of the Company's
Class A common stock reserved for issuance thereunder by 4,500,000 shares from
13,500,000 to 18,000,000 shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation charges of $19.3 million during
the six months ended June 30, 2000. These charges were recorded to recognize the
difference between the exercise price and the deemed fair value of stock options
and restricted stock granted by the Company to certain key employees and
employees of certain acquired companies. These amounts are being amortized by
charges to operations over the vesting periods of the individual equity
instruments, which range from three months to four years. There were no deferred
compensation charges recorded during the six months ended June 30, 1999.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items that
are reported directly as a separate component of consolidated stockholders'
equity on the Company's condensed consolidated
12
<PAGE>
6. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
balance sheets. Comprehensive loss for the three and six months ended June 30,
2000 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss............................ $(151,903) $(6,742) $(259,009) $(10,050)
Net unrealized gain/(loss) on
investments....................... (38,880) (418) (23,909) (418)
Other............................... (55) -- (96) --
--------- ------- --------- --------
Comprehensive loss.................. $(190,838) $(7,160) $(283,014) $(10,468)
========= ======= ========= ========
</TABLE>
7. LEGAL PROCEEDINGS
In September 1998, Zoom Telephonics, Inc. filed a lawsuit against Xoom.com
alleging trademark infringement and related statutory violations. The Company
believes that the claims asserted by Zoom Telephonics are without merit, and
intends to vigorously defend against them. In June 2000, the court by order
denied Zoom Telephonics' motion for a preliminary injunction. An adverse result
of the litigation could seriously harm the Company's business and results of
operations, particularly if the litigation forces the Company to discontinue use
of the Xoom.com mark.
In January 1998, Xoom.com became aware that Imageline, Inc. claimed to own
the copyright in certain images that a third party, Sprint Software Pty Ltd, had
licensed to Xoom.com. Some clip art images that Imageline alleged infringed
Imageline's copyright were included by Xoom.com in versions of its Web Clip
Empire product which was licensed by Xoom.com to third parties, including other
software clip publishers. Xoom.com's contracts with such publishers require it
to indemnify the publisher if copyrighted material licensed from Xoom.com
infringes a copyright. The Company believes the possible range of liability
related to this matter is from $0 up to $10.0 million; however, the Company
believes it is unlikely that the liability would exceed $1.0 million.
Accordingly, the Company reserved $1.0 million for this potential liability, the
expense of which was included in non-recurring charges for the year ended
December 31, 1997. Based on information available to date, management does not
believe that the ultimate outcome of this matter will seriously harm the
Company's financial position, results of operations and cash flows.
Further, International Microcomputer Software, Inc. ("IMSI") has notified
NBCi in a letter dated February 8, 2000 that it intends to make a claim for
indemnification pursuant to a contract with Xoom.com in connection with a
$2.6 million judgment entered in favor of Imageline. The judgment resulted from
an arbitration award pertaining to a contract between Imageline and IMSI. NBCi
has notified IMSI that it denies any duty to indemnify IMSI in connection with
its contractual dispute with Imageline. Additional third parties may ask NBCi to
indemnify them in connection with disputes with Imageline.
Natrificial LLC (d/b/a thebrain.com) filed a lawsuit against NBCi in
April 2000 in the United States District Court, Central District of California
alleging trademark infringement, violation of the Lanham Act, and unfair
competition. thebrain.com alleges that NBCi's use of the Globalbrain.net, Inc.
("Globalbrain") name and logo infringes thebrain.com's "family" of brain-related
trademarks. NBCi has promoted the Globalbrain name and logo on the Snap website
and on television commercials for Snap search functionality. NBCi has licensed
the Globalbrain technology and trademarks from Globalbrain, and has tendered
defense of this claim to Globalbrain. thebrain.com has been granted a
preliminary injunction and is seeking a permanent injunction against both NBCi
and Globalbrain to prevent further use of the
13
<PAGE>
7. LEGAL PROCEEDINGS (CONTINUED)
Globalbrain marks and for damages and fees. The Company believes that this
lawsuit is without merit and intends to defend this suit vigorously.
On June 22, 2000, Sentius Corporation ("Sentius") filed a suit against
flyswat, Inc. ("flyswat"), a wholly owned subsidiary of NBCi, for patent
infringement. flyswat was served with the complaint on July 5, 2000. flyswat has
received a written legal analysis and opinion that its products and services do
not infringe Sentius's patent. NBCi and flyswat believe that this lawsuit is
without merit and intend to defend this suit vigorously.
In addition to the matters discussed above, the Company is involved in
various legal matters that arise in the normal course of business. The Company
believes that the ultimate resolution of the matters described above and other
matters it is currently aware of will not have a material impact on its
financial condition, results of operations or cash flows.
8. SEGMENT DISCLOSURES
The Company operates in a single industry segment as an integrated media
company that combines portal, community, online, television and radio
advertising and e-commerce services to deliver a comprehensive, next generation
media experience to a global audience. Revenues from portal, online, television
and radio advertising are included in advertising revenues. Net revenues are
composed of advertising and e-commerce revenues, which represent the following
percentage of total net revenues for the following periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Advertising............................ 83.0% 49.2% 82.1% 45.4%
E-commerce............................. 17.0 50.8 17.9 54.6
----- ----- ----- -----
Total................................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
14
<PAGE>
8. SEGMENT DISCLOSURES (CONTINUED)
The Company's geographic sales were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
--------------- --------------
<S> <C> <C> <C> <C>
United States............................... $28,620 93.9% $5,707 87.5%
North America, excluding United States...... 794 2.6 139 2.1
Europe...................................... 597 2.0 342 5.2
Asia/Pacific................................ 170 0.6 127 2.0
Rest of the world........................... 281 0.9 210 3.2
------- ----- ------ -----
Total..................................... $30,462 100.0% $6,525 100.0%
======= ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C> <C> <C>
United States.............................. $57,053 94.2% $ 9,200 84.0%
North America, excluding United States..... 1,375 2.3 376 3.5
Europe..................................... 1,436 2.4 658 6.0
Asia/Pacific............................... 337 0.5 265 2.4
Rest of the world.......................... 384 0.6 448 4.1
------- ----- ------- -----
Total.................................... $60,585 100.0% $10,947 100.0%
======= ===== ======= =====
</TABLE>
Export sales were 6.1% and 12.5% of net revenue for the three months ended
June 30, 2000 and 1999, respectively, and 5.8% and 16.0% of net revenue for the
six months ended June 30, 2000 and 1999, respectively. For the three- and
six-month periods ended June 30, 2000, no single customer accounted for greater
than 10% of total accounts receivable. For the three and six months ended
June 30, 2000, one customer accounted for approximately 12.0% and 10.5% of total
net revenue, respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSES AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ALL
STATEMENTS, TREND ANALYSES AND OTHER INFORMATION CONTAINED HEREIN RELATIVE TO
MARKETS FOR OUR SERVICES AND PRODUCTS AND TRENDS IN REVENUE, AS WELL AS OTHER
STATEMENTS INCLUDING SUCH WORDS AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," "GOAL" AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
BUSINESS AND ECONOMIC RISKS, AND OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS SET
FORTH ELSEWHERE HEREIN, INCLUDING "CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE
OPERATING RESULTS," PAGE 24, AS WELL AS FACTORS SET FORTH IN OUR ANNUAL REPORT
FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
OVERVIEW
We are a next-generation, integrated media company, connecting buyers and
sellers through premier portal, entertainment, utility and e-commerce services.
We generate our revenues primarily from online, television and radio advertising
and e-commerce services designed to deliver a comprehensive online experience to
a global audience. We were organized in May 1999. As a result of transactions
that occurred on November 29 and November 30 of 1999, Xoom.com and Snap became
our wholly-owned subsidiaries, and we became the owners of the businesses
related to NBC.com, NBC-IN.com and VideoSeeker.com and a 10% interest in
CNBC.com.
We have not achieved profitability on a quarterly or annual basis to date,
and anticipate that we will incur net losses for the foreseeable future. The
extent of these losses will depend, in part, on the amount and rates of growth
in our net revenue from advertising and e-commerce. We expect our operating
expenses to increase significantly, especially in the areas of sales and
marketing, goodwill amortization and brand promotion. As a result, we will need
to increase our quarterly net revenue to achieve profitability. We believe that
period-to-period comparisons of our operating results are not meaningful and
that you should not rely upon the results for any period as an indication of
future performance.
Our business, results of operations and financial condition will be
significantly and adversely affected if:
- net revenue does not grow at anticipated rates;
- increases in operating expenses are not offset by commensurate increases
in net revenue; or
- we are unable to adjust operating expense levels as a result of lower net
revenues.
Our operating losses might increase in the future, and we cannot guarantee
that we will ever achieve or sustain profitability.
We have acquired and intend to continue acquiring additional companies to
increase online reach and membership and to seek additional strategic alliances
with content and distribution partners, including alliances that create
co-branded sites through which we market our services. Acquisitions carry
numerous risks and uncertainties, including:
- difficulties in integrating operations, personnel, technologies, products
and the information systems of the acquired companies;
16
<PAGE>
- diversion of management's attention from other business concerns;
- risks of entering geographic and business markets in which we have little
or no prior experience; and
- potential loss of key employees.
We cannot guarantee that we will be able to successfully integrate any
business, product, technology or personnel that we have acquired or that we may
acquire in the future. A failure to integrate acquired entities or assets
successfully could seriously harm our business, results of operations and
financial condition. In addition, we cannot guarantee that we will be successful
in identifying and closing transactions with potential future acquisition
candidates.
RESULTS OF OPERATIONS
The following table presents certain condensed consolidated statements of
operations data for the periods indicated as a percentage of total net revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Advertising........................................ 83.0% 49.2% 82.1% 45.4%
E-commerce......................................... 17.0 50.8 17.9 54.6
------ ------ ------ ------
Total net revenue.................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of net revenue:
Cost of advertising revenue........................ 34.3 17.0 28.2 16.9
Cost of e-commerce revenue......................... 8.1 40.0 8.7 42.5
------ ------ ------ ------
Total cost of net revenue............................ 42.4 57.0 36.9 59.4
Gross profit......................................... 57.6 43.0 63.1 40.6
------ ------ ------ ------
Operating expenses:
Operating and development.......................... 53.0 15.5 46.3 16.2
Sales and marketing................................ 75.7 70.6 68.9 61.1
General and administrative......................... 54.5 31.3 46.5 33.5
Promotion and advertising provided by NBC.......... 59.1 -- 62.9 --
Amortization of deferred compensation.............. 12.4 2.7 8.0 3.7
Purchased in-process research and development...... 12.4 39.9 6.2 23.8
Amortization of intangible assets.................. 311.4 22.1 271.6 21.0
------ ------ ------ ------
Total operating expenses............................. 578.5 182.1 510.4 159.3
Loss from operations................................. (520.9) (139.1) (447.3) (118.7)
Other income (expense):
Interest income.................................... 35.1 36.3 32.7 27.5
Interest expense................................... (12.9) (0.5) (12.9) (0.6)
------ ------ ------ ------
Net loss............................................. (498.7)% (103.3)% (427.5)% (91.8)%
====== ====== ====== ======
</TABLE>
NET REVENUE. Total net revenue for the three months ended June 30, 2000 was
$30.5 million, an increase of approximately $24.0 million over total net revenue
of $6.5 million for the corresponding period ended June 30, 1999. Total net
revenue for the six months ended June 30, 2000 was $60.6 million, an
17
<PAGE>
increase of approximately $49.7 million over total net revenue of $10.9 million
for the corresponding period ended June 30, 1999.
ADVERTISING REVENUE. Advertising revenue includes revenue derived from the
sale of promotional space on our online Internet properties and on-air mediums,
including television and radio. Total advertising revenue was $25.3 million for
the three months ended June 30, 2000 and $3.2 million for the corresponding
period ended June 30, 1999. Total advertising revenue was $49.7 million for the
six months ended June 30, 2000 and $5.0 million for the corresponding period
ended June 30, 1999. The increases in both the three- and six-month periods were
due primarily to an increase in our online and on-air advertising inventory as a
result of acquiring additional Web properties through the NBCi transactions and
entering into our on-air promotion agreement with NBC. The increases can also be
attributed to growth in membership and site traffic, the expansion of our
advertising sales force and an increase in the number of Web site co-branding
agreements we have entered into with our strategic partners.
An aggregate of $1.9 million related to the sale of radio and television
advertising was included in advertising revenue for the three months ended
June 30, 2000 and an aggregate of $3.9 million was included in the six months
ended June 30, 2000. Also included in advertising revenue for the three months
ended June 30, 2000 was $7.5 million related to barter arrangements that
involved the exchange of media and advertising services for equity. Barter
revenue of $14.4 million was included in advertising revenue for the six months
ended June 30, 2000. Barter revenue derived from the exchange of media and
advertising services for advertising in other media totaled $1.2 million for the
three months ended June 30, 2000 and $1.7 million for the six months ended
June 30, 2000. There was no advertising revenue derived from integrated media
sales or barter arrangements during the three or six months ended June 30, 1999.
The percentage of total net revenue attributable to advertising revenue
increased to 83.0% in the three months ended June 30, 2000 from 49.2% in the
corresponding period ended June 30, 1999 and to 82.1% in the six months ended
June 30, 2000 from 45.4% in the corresponding period ended June 30, 1999. These
increases were due primarily to an increase in the number of sites we maintain,
as a result of the NBCI transactions and to a lesser extent, an increase in the
number of co-branded strategic partnerships we have entered into, an increase in
our site traffic and membership base and the expansion of our advertising sales
force, all of which resulted in a higher volume of advertising customers.
Additionally, these increases were due to a decrease in the percentage of
revenue attributable to e-commerce revenue during 2000.
E-COMMERCE REVENUE. E-commerce revenue is generated by services provided by
NBCi Direct, which include online product sales, email marketing campaigns and
lead generation. Total e-commerce revenue was $5.2 million for the three months
ended June 30, 2000 and $3.3 million for the corresponding period ended
June 30, 1999. Total e-commerce revenue was $10.9 million for the six months
ended June 30, 2000 and $6.0 million for the corresponding period ended
June 30, 1999. These increases in e-commerce revenue were primarily related to
an increase in our membership base which facilitated an increase in the volume
of our e-list sales made through NBCi Direct, and to a lesser extent, an
increase in our lead generation arrangements and in the volume and variety of
products sold online.
The percentage of total net revenue attributable to e-commerce revenue
decreased to 17.0% in the three months ended June 30, 2000 from 50.8% in the
corresponding period ended June 30, 1999 and to 17.9% in the six months ended
June 30, 2000 from 54.6% in the corresponding period ended June 30, 1999. These
decreases were due to the fact that e-commerce revenue grew at a less rapid rate
than advertising revenue during 2000, which was primarily the result of our
transition from a lower-margin dealer model, whereby we recognized the full
value of a sale as revenue with the corresponding cost being included in cost of
revenue, to a higher-margin broker model, whereby we recognize only the
transaction fee or commission as revenue as well as a substantial increase in
our advertising inventory and a related rise in revenue and advertising revenue
generated by the launch of NBCi.com, our broadband internet portal service.
18
<PAGE>
COST OF NET REVENUE. Total cost of net revenue for the three months ended
June 30, 2000 was $12.9 million, an increase of approximately $9.2 million over
total cost of net revenue of $3.7 million for the corresponding period ended
June 30, 1999. Total cost of net revenue for the six months ended June 30, 2000
was $22.3 million, an increase of approximately $15.8 million over total cost of
net revenue of $6.5 million for the corresponding period ended June 30, 1999.
COST OF ADVERTISING REVENUE. Cost of advertising revenue consists primarily
of bandwidth and hosting charges related to the operation of our Web sites, the
cost of procuring content for our online properties, employee-related expenses
and depreciation. Total cost of advertising revenue was $10.5 million for the
three months ended June 30, 2000 and $1.1 million for the corresponding period
ended June 30, 1999. Total cost of advertising revenue was $17.1 million for the
six months ended June 30, 2000 and $1.9 million for the corresponding period
ended June 30, 1999. These increases can be attributed primarily to additional
costs that arose concurrently with the significant increase in the number of our
online properties and the resulting increase in bandwidth and hosting charges,
quantity and total cost of content and the number of employees needed to support
our Web sites.
As a percentage of advertising revenue, cost of advertising revenue
increased to 41.4% in the three months ended June 30, 2000 from 34.7% in the
corresponding period ended June 30, 1999. This increase was primarily the result
of the inclusion of costs of advertising revenue generated by AllBusiness.com as
well as an increase in the utilization of content on our online properties
subsequent to the consummation of the NBCi transactions. As a percentage of
advertising revenue, cost of advertising revenue decreased to 34.3% in the six
months ended June 30, 2000 from 37.2% in the corresponding period ended
June 30, 1999. This decrease during the six-month period ended June 30, 2000 was
the result of our advertising revenues growing more rapidly than the cost of
advertising revenue during the first quarter of 2000 that offset the increase in
cost of advertising revenue as a percent of advertising revenue during the
second quarter of 2000.
COST OF E-COMMERCE REVENUE. Cost of e-commerce revenue consists primarily
of product fulfillment fees and outbound shipping and handling costs. Total cost
of e-commerce revenue decreased to $2.5 million for the three months ended
June 30, 2000 from $2.6 million the corresponding period ended June 30, 1999.
Total cost of e-commerce revenue increased to $5.3 million for the six months
ended June 30, 2000 from $4.6 million for the corresponding period ended
June 30, 1999. Cost of e-commerce revenue remained consistent during the three-
and six-month periods ended June 30, 2000 and 1999. This was due to the cost of
product fulfillment, which makes up the majority of our cost of e-commerce
revenue, remaining fairly consistent in the first two quarters of 2000 and 1999
due to consistent product sales.
As a percentage of e-commerce revenue, cost of e-commerce revenue decreased
to 47.5% in the three months ended June 30, 2000 from 78.6% in the corresponding
period ended June 30, 1999 and decreased to 48.5% in the six months ended
June 30, 2000 from 77.8% in the corresponding period ended June 30, 1999. These
decreases were primarily a result of our transition from a lower-margin dealer
model, to a higher-margin broker model. This transition resulted in lower costs
and higher margins associated with our online product sales. Additionally, our
costs of e-commerce revenue during 2000 included a larger percentage of costs
associated with revenue generated through our e-list and direct marketing
services, which have a more favorable margin than online product sales.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
consist primarily of costs related to the enhancement and modification of our
online properties, including payroll and other employee-related expenses for
development and network operations personnel. Also included in operating and
development expenses are depreciation, the costs of contract labor and costs
associated with new development operations to improve our online properties.
Operating and development expenses were $16.1 million for the three months ended
June 30, 2000 and $1.0 million for the corresponding period ended June 30, 1999.
Operating and development expenses were $28.1 million for the six months ended
June 30, 2000 and $1.8 million for the corresponding period ended June 30, 1999.
These increases were
19
<PAGE>
primarily due to higher payroll and related expenses caused by additional
headcount and an increase in the functionality and number of online properties
that we develop, modify and maintain, and to a lesser extent, an increase in
depreciation expense resulting from the expansion of our infrastructure.
Operating and development expenses increased as a percentage of total net
revenue to 53.0% in the three months ended June 30, 2000 from 15.5% in the
corresponding period ended June 30, 1999 and to 46.3% in the six months ended
June 30, 2000 from 16.2% in the corresponding period ended June 30, 1999. These
increases were due to spending for operating and development growing at a higher
rate than net revenues as a result of a significant increase in headcount and
the number of our online properties subsequent to the consummation of the NBCi
transactions.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of
payroll and related expenses for personnel engaged in sales, costs associated
with directing traffic to our online properties from other Web sites and
advertising and promotional distribution expenditures other than NBC advertising
and promotions. Sales and marketing expenses were $23.1 million for the three
months ended June 30, 2000 and $4.6 million for the corresponding period ended
June 30, 1999. Sales and marketing expenses were $41.7 million for the six
months ended June 30, 2000 and $6.7 million for the corresponding period ended
June 30, 1999. These increases were due primarily to an increase in personnel
and related expenses resulting from the significant increase in our business
development and sales forces required to continue to implement our sales and
marketing strategy, as well as an increase in costs related to directing users
to our online properties and other promotional and advertising expenses.
Sales and marketing expenses increased as a percentage of total net revenue
to 75.7% in the three months ended June 30, 2000 from 70.6% in the corresponding
period ended June 30, 1999 and increased to 68.9% in the six months ended
June 30, 2000 from 61.1% in the corresponding period ended June 30, 1999. These
increases were due to a more rapid increase in sales and marketing expense than
total net revenue, which was the result of significant growth in our sales and
business development forces and increased branding, marketing and promotional
expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of payroll and related expenses for general corporate
functions, including finance, accounting, legal, corporate development, human
resources, investor relations and administration, as well as outside legal and
accounting services and facilities-related expenses. General and administrative
expenses were $16.6 million for the three months ended June 30, 2000 and
$2.0 million for the corresponding period ended June 30, 1999. General and
administrative expenses were $28.2 million for the six months ended June 30,
2000 and $3.7 million for the corresponding period ended June 30, 1999. These
increases were primarily due to increases in the number of general and
administrative personnel, as well as increases in professional services and
facilities-related expenses, including rent, to support the growth of our
operations.
General and administrative expenses increased as a percentage of total net
revenue to 54.5% in the three months ended June 30, 2000 from 31.3% in the
corresponding period ended June 30, 1999 and to 46.5% in the six months ended
June 30, 2000 from 33.5% in the corresponding period ended June 30, 1999. These
increases were due to general and administrative expenses growing at a higher
rate than net revenue, mainly as a result of the significant increase in
headcount subsequent to the consummation of the NBCi transactions in
November 1999.
PROMOTION AND ADVERTISING PROVIDED BY NBC. Promotion and advertising
provided by NBC consists of charges incurred in connection with an advertising
agreement entered into with NBC upon consummation of the NBCi transactions in
November 1999, pursuant to which we agreed to purchase advertising spots with an
aggregate value of $405.0 million over a four-year period. We recorded
$18.0 million in promotion and advertising expense for the three months ended
June 30, 2000, and $38.1 million for the six months ended June 30, 2000. We did
not record any promotion and advertising expense related to NBC promotions in
the six months ended June 30, 1999 as the agreement to purchase advertising from
NBC had not yet been consummated.
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AMORTIZATION OF DEFERRED COMPENSATION. We recorded $3.6 million of deferred
stock compensation charges during the three months ended June 30, 2000 and
$19.3 million of deferred stock compensation charges during the six months ended
June 30, 2000. We did not record any deferred compensation charges during the
three- or six-month periods ended June 30, 1999. These charges were recorded to
recognize the difference between the exercise price and the deemed fair value of
stock options and restricted stock we granted to certain key employees and
employees of certain acquired companies. These amounts are being amortized by
charges to operations over the vesting periods of the individual equity
instruments, which range from three months to four years.
Amortization of deferred compensation reflects the amortization of deferred
compensation charges resulting from employee stock option and restricted stock
grants. Amortization of deferred compensation totaled $3.8 million for the three
months ended June 30, 2000 and $175,000 for the corresponding period ended
June 30, 1999. Amortization of deferred compensation totaled $4.9 million for
the six months ended June 30, 2000 and $405,000 for the corresponding period
ended June 30, 1999. These increases were the result of the additional non-cash
stock compensation charges recorded in the first and second quarters of 2000
related to the hiring of certain key executives.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. We recorded purchased
in-process research and development charges of $3.8 million during the three-
and six-month periods ended June 30, 2000 and $2.6 million during the three- and
six-month periods ended June 30, 1999. Charges incurred during 2000 were
recognized in connection with the acquisition of flyswat. Charges incurred
during the six months ended June 30, 1999 were recognized in connection with the
acquisitions of MightyMail Networks, Inc. and Paralogic Software Corporation.
In each acquisition, the amounts allocated to purchased in-process research
and development were expensed upon acquisition because technological feasibility
had not been established and no future alternative uses existed. The values
assigned to purchased in-process technology were determined by identifying the
on-going research projects for which technological feasibility had not been
achieved and assessing the state of completion of the research and development
effort. Values assigned to purchased in-process research and development were
determined through independent third-party valuations. The state of completion
was determined by estimating the costs and time incurred to date relative to
those costs and time to be incurred to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows only from the percentage of research and development efforts complete at
the date of acquisition, and discounting the net cash flows back to their
present value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the purchased in-process
technology projects.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $94.8 million during the three months ended June 30, 2000 and
$1.4 million during the corresponding period ended June 30, 1999. Amortization
of intangible assets totaled $164.6 million during the six months ended
June 30, 2000 and $2.3 million during the corresponding period ended June 30,
1999. These increases during 2000 were primarily the result of amortization of
goodwill and other intangibles related to the NBCi transactions, amortized over
periods ranging from 36 to 84 months. To a lesser extent, the additional
amortization expense during 2000 is related to acquisitions entered into
subsequent to June 30, 1999, including the acquisitions of LiquidMarket, Private
One, Catalyst Advisors Group, AllBusiness.com, Husdawg Communications,
Globalbrain.net, and flyswat amortized over periods ranging from 24 to
60 months. The amortization of intangibles during the six months ended June 30,
1999 was associated with the acquisitions of Paralogic Corporation, Global
Bridges Technologies, Pagecount, Net Floppy, MightyMail Networks and Focused
Presence as well as the purchase of certain assets of Revolutionary Software,
amortized over periods ranging from 24 to 42 months.
INTEREST INCOME. Interest income primarily represents interest we earned on
our cash balances, marketable securities and additionally, during 2000, the
interest earned on our $340.0 million note receivable from NBC. We earned
$10.7 million of interest income during the three months ended June 30,
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2000 and $2.4 million during the corresponding period ended June 30, 1999. We
earned $19.8 million of interest income during the six months ended June 30,
2000 and $3.0 million during the corresponding period ended June 30, 1999. These
increases are primarily due to the interest earned on our $340.0 million note
receivable from NBC issued as a part of the NBCi transactions, as well as the
interest earned on cash received from our follow-on offering completed in
February 2000, which netted proceeds of $280.1 million.
INTEREST EXPENSE. Interest expense represents interest charges related to
notes payable and capital lease obligations and additionally, during 2000, the
interest charges related to our two convertible notes payable to NBC, which have
a total principle value of $370.0 million. We incurred $3.9 million of interest
expense during the three months ended June 30, 2000 and $35,000 during the
corresponding period ended June 30, 1999. We incurred $7.8 million of interest
expense during the six months ended June 30, 2000 and $65,000 during the
corresponding period ended June 30, 1999. These increases were due primarily to
the interest expense incurred related to the two convertible notes payable to
NBC, which were issued as a component of the NBCi transactions consummated in
November of 1999.
NET LOSS. Our net loss was $151.9 million for the three months ended
June 30, 2000 and $6.7 million in the corresponding period ended June 30, 1999.
Our net loss was $259.0 million for the six months ended June 30, 2000 and
$10.1 million in the corresponding period ended June 30, 1999. These increases
in net loss were due primarily to an increase in the amortization of intangible
assets associated with goodwill and other intangibles related to the NBCi
transactions and the expense associated with promotion and advertising provided
by NBC. To a lesser extent, the increases in net loss were due to increases in
operating expenses including operating and development costs, sales and
marketing costs and general and administrative costs, offset by an increases in
revenues and interest income.
INCOME TAXES. For the three and six months ended June 30, 2000 and 1999, we
did not recognize the tax benefit of our operating losses. We believe the
resulting deferred tax assets are not realizable on a more likely than not
basis.
FUTURE TRENDS. We believe that our operating expenses, including operating
and development, sales and marketing and general and administrative expenses,
will increase in future periods as we continue to expand our operations and
development initiatives, as well as augment our sales and promotional efforts.
Additionally, amortization of intangible assets is expected to increase
significantly in conjunction with potential business acquisitions being made as
a part of our continuing effort to increase our online reach and membership.
LIQUIDITY AND CAPITAL RESOURCES. We have financed our operations primarily
from proceeds received from the Xoom.com initial public offering in
December 1998, a secondary offering in April 1999, the issuance of 960,028
shares of Xoom.com common stock to NBC in July 1999 and our follow-on offering,
which was completed in February 2000.
As of June 30, 2000, we had cash, cash equivalents, short- and long-term
investments and restricted cash totaling $356.5 million. We regularly invest
these excess funds in short-term money market funds, government and foreign
securities and commercial paper. Additionally, we had short-term investments in
public equity securities of $37.3 million and other long-term investments of
$136.7 million.
Net cash used in operating activities was $122.0 million during the six
months ended June 30, 2000 and $5.8 million during the six months ended
June 30, 1999. Cash used in operating activities in the first six months of 2000
was primarily the result of the net loss of $259.0 million, an increase in
accounts receivable of $10.8 million, an increase in other assets of
$4.4 million, decreases in accounts payable and accrued compensation expenses
totaling $5.1 million and a decrease in other accrued liabilities of
$28.6 million related to the payment of NBC advertising and promotional expense,
partially offset by depreciation and amortization of $175.0 million, and an
increase in deferred revenue of $14.9 million due primarily to the receipt of
equity instruments in exchange for services to be performed. Cash used in
operating activities in the six months ended June 30, 1999 was primarily the
result of net losses of $10.1 million, and an increase in accounts receivable of
$1.5 million related to the growth of advertising revenues, partially offset by
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depreciation and amortization $3.4 million and in-process research and
development charges of $2.6 million related to acquisitions and an increase in
accounts payable and accrued compensation expense totaling $2.9 million as a
result of the growth of our business.
Net cash used in investing activities was $108.0 million during the six
months ended June 30, 2000 and $158.9 million during the six months ended
June 30, 1999. Cash used in investing activities during the six months ended
June 30, 2000 was primarily the result of the purchase of investments of
$181.5 million and fixed asset additions of $28.0 million, partially offset by
the maturity of investments of $107.7 million. Cash used in investing activities
during the six months ended June 30, 1999 was used primarily to purchase fixed
assets of $2.9 million and short-term investments of $162.5 million. From time
to time, we expect to evaluate the acquisition of products, businesses and
technologies that complement our business. These acquisitions may involve the
use of cash investments.
Net cash provided by financing activities was $339.6 million during the six
months ended June 30, 2000 and was $167.5 million during the corresponding
period ended June 30, 1999. Cash provided by financing activities in the six
months ended June 30, 2000 was attributable primarily to proceeds from the
issuance of our Class A common stock totaling $284.8 million, net of issuance
costs, proceeds totaling $16.5 million from the exercise of stock options and
proceeds from our note receivable from NBC of $38.6 million, partially offset by
the repayment of notes payable and capital lease obligations of $310,000. Cash
provided by financing activities in the six months ended June 30, 1999 was
primarily related to the proceeds from the Xoom.com secondary public offering,
partially offset by the repayment of notes payable of $268,000.
As set forth in the consolidated statements of operations, we experienced
net losses for the three- and six-month periods ended June 30, 2000 and 1999. 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 sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity or convertible debt securities
may result in additional dilution to our stockholders. We may not be able to
raise any such capital on terms acceptable to us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition," or SAB No. 101, 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. The SEC is expected to
issue additional guidance related to SAB 101, upon which time, we will assess
its impact in conjunction with guidance previously issued.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-2, "Accounting for Web Site Development Costs." This Issue addresses
whether specific types of costs incurred in developing a Web site should be
capitalized. We are currently evaluating this issue and do not believe that the
pronouncement will have a significant impact on our financial position, results
of operations or cash flows in future periods. EITF 00-2 is effective for costs
incurred after June 30, 2000.
In March 2000, the EITF reached a consensus on Issue 00-8, "Accounting by a
Grantee for an Equity Instrument to Be Received in Conjunction with Providing
Goods or Services." This Issue addresses the date on which a grantee should use
to measure the fair value of the equity instruments received and how the grantee
should account for an increase in fair value as a result of reaching designated
performance milestones. We have considered the guidance set forth in this Issue
and do not believe that it will affect our current accounting treatment being
used for transactions in which we receive equity in conjunction with providing
services.
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In July 2000, the EITF reached a consensus on Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs." This Issue addresses how amounts billed
to customers for shipping and handling should be classified in the financial
statements. We have considered the guidance set forth in this Issue and do not
believe that it will have a material affect on our financial position, results
of operations or cash flows in future periods.
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This Issue addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers that can be used in, or that are exercisable
by a customer as a result of, a single exchange transaction. We have considered
the guidance set forth in this Issue and do not believe that it will have a
material affect on our financial position, results of operations or cash flows
in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined principally to the impact of
interest rate changes and changes in the market values of our investments.
Our exposure to interest rate risk relates primarily to our portfolio of
short- and long-term cash investments, our note receivable from NBC and our
convertible notes payable to NBC. We do not use derivative financial instruments
in our portfolio. We invest primarily in instruments issued by high quality
financial institutions and companies including demand and money market
instruments and debt issued by corporations. All of our investments have
maturities of less than two years. Investments in fixed and floating rate
interest earning instruments carry interest rate risk in that the fair value of
fixed rate securities may be adversely impacted if interest rates rise while
floating rate securities may produce less interest income if interest rates
fall. A hypothetical 100 basis point increase in interest rates would result in
an approximate $3.1 million decrease in the fair value of our debt securities
classified as available-for-sale. Because the interest rates on the note
receivable from NBC and convertible note payable to NBC are fixed, an increase
in interest rates causes the fair value of the note receivable and the
convertible note payable to decline and a decrease in interest rates has the
opposite effect. A hypothetical 100 basis point increase in interest rates would
result in a $5.3 million decrease in the fair value of the note receivable from
NBC and a $14.9 million increase in the fair value of the note payable to NBC.
We invest in equity securities of privately-held companies for the promotion
of business and strategic objectives. These investments are generally in
companies in the Internet industry. These investments are included in long-term
investments and are accounted for using either the cost or equity methods,
depending on our relative ownership interest and ability to exercise control.
For investments in which no public market exists, our policy is to regularly
review the operating performance, recent financing transactions and cash flow
forecasts for such companies in assessing the net realizable values of the
securities of these companies. Impairment losses on equity investments are
recorded when events and circumstances indicate that such assets are impaired
and the decline in value is other than temporary. To date, we have not recorded
any impairment losses.
CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward looking statements as a result of certain factors,
including those set forth below.
OUR FAILURE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF XOOM.COM, SNAP OR THE
INTERNET BUSINESSES CONTRIBUTED BY NBC AND OTHER RECENT ACQUISITIONS COULD
SERIOUSLY HARM OUR OPERATIONS
Our success will depend substantially on whether Xoom.com, Snap or the
Internet businesses contributed by NBC and other recent acquisitions can be
integrated by us in an efficient and effective
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manner. We can provide no assurance that this will occur. The combination of our
online properties will require, among other things, the technological
integration of our Web sites, which include NBCi.com, Xoom.com, Snap.com,
NBC.com, NBC-IN.com, VideoSeeker.com and AllBusiness.com and the coordination of
the sales, marketing or research and development efforts of Xoom.com, Snap or
the Internet businesses contributed by NBC and other recent acquisitions.
Some of the factors contributing to the risks attendant to integration are:
- difficulties and expenses of integrating operations, technology and
personnel into our operations while preserving the goodwill of our
businesses;
- the additional financial resources that may be needed to fund our
operations;
- the potential disruption caused to the businesses of Xoom.com, Snap or the
Internet businesses contributed by NBC and other recent acquisitions by
the need to dedicate management and other resources to completing the
transactions;
- our ability to retain employees; and
- the difficulty of creating and maintaining uniform standards, controls,
procedures and policies.
We cannot assure you that we will be able to integrate our businesses
smoothly or successfully. The integration of operations will continue to require
significant management resources, which may distract attention from our
day-to-day operations.
IF OUR INVESTMENT OF RESOURCES IN DEVELOPING AND PROMOTING OUR ONLINE BRAND IS
NOT SUCCESSFUL, THE RESULTS OF OUR OPERATIONS COULD BE SERIOUSLY HARMED
As the number of Internet sites grows, brand recognition will play an
increasingly important role in the success of Internet companies. Establishing
and promoting our online brands in the face of pressures from our competitors
will be critical to further developing our member and user base as well as
various strategic and commercial relationships. We will need to continue to
devote substantial financial and other resources to increase and maintain the
awareness of our online brands among members, advertisers and e-commerce
partners through:
- Web advertising and marketing;
- traditional media advertising campaigns in television, print, radio and
billboards; and
- providing a high quality user experience.
In June 2000, we announced an initiative to phase out our Snap.com,
Videoseeker.com and Xoom.com brands by the end 2000 and consolidate them into a
flagship NBCi.com brand. This initiative could harm our revenues as a result of
the loss of brand identification and equity associated with phased-out brands,
to the extent that e-commerce customers, partners and adverstisers do not fully
transition to the NBCi.com brand. Our efforts to build the new brand may not be
successful. All of these factors could severely harm our future operating
results. In particular, we expect that our new initiative may lead to reduced
revenues and earnings for the remainder of 2000 as the NBCi.com brand rollout is
implemented.
Further, we have agreed to purchase at least $405.0 million of promotional
services from NBC over a four-year period to develop and promote our online
brands as well as our products and services. Our results of operations could be
seriously harmed if this investment of financial and other resources in
developing and promoting our online brands does not generate a corresponding
increase in net revenue, or if the expense of developing and promoting our
online brands becomes excessive.
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WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE OUR BUSINESSES HAVE
LIMITED OPERATING HISTORIES AND A HISTORY OF LOSSES
We and the businesses that were combined to form us have limited operating
histories. We were launched in November 1999, Xoom.com was founded in
April 1996, the Snap.com Web site was launched in September 1997, and NBC.com,
NBC-IN.com and VideoSeeker.com began operations in August 1995, October 1997 and
May 1998, respectively. NBC launched CNBC.com in June 1999. In addition,
Xoom.com, Snap and the Internet businesses contributed by NBC have not achieved
positive annual operating cash flows, and we expect to incur net losses for the
foreseeable future.
Because of the limited operating histories of our businesses and the
uncertain nature of the rapidly changing markets we serve, future results of
operations cannot be predicted. Moreover, we have difficulties forecasting our
revenue potential and operating expenses based on the limited historical
financial data of our businesses.
We currently expect that our operating expenses will continue to increase
significantly as we expand our sales and marketing operations, continue to
build, develop and extend our online brands, fund greater levels of product
development, develop and commercialize additional media properties, and acquire
complementary businesses and technologies. Accordingly, we will need to increase
revenues to be profitable. As a result, we may experience significant losses on
a quarterly and annual basis. If our actual revenue is lower than predicted, we
may be unable to adjust our operating expenses accordingly. If revenues do not
grow as expected or increases in expenses are not in line with forecasts, our
business, results of operations and financial condition could be seriously
harmed. If our operating results in any period fall below the expectations of
securities analysts and investors, the market price of our shares would likely
decline.
OUR BUSINESSES WILL BE SUBJECT TO ALL OF THE RISKS AND DIFFICULTIES FREQUENTLY
ENCOUNTERED BY EARLY STAGE COMPANIES
The prospects of our businesses are subject to all of the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets, particularly those involved in the Internet and in e-commerce.
These risks include the following uncertainties and potential adverse
developments:
- the uncertainty of the level of use of the Internet and online services
and the acceptance of the Internet and other online services and products
such as those we offer;
- the lack of success of our proposed business model on the Internet;
- our failure to continue to build, develop and extend our online brands;
- our inability to obtain needed financing;
- higher than anticipated marketing costs that we will need to incur to
build, maintain and enhance our online brands;
- our inability to generate significant advertising, e-commerce or premium
service revenue;
- our inability to maintain and increase levels of traffic and membership on
our Web sites or to manage rapidly expanding operations effectively;
- the emergence of new services offered by our competitors that affect the
level of traffic on our Web sites and our ability to expand our membership
base;
- our inability to predict demand for products and services we offer and to
optimize advertising inventory levels accordingly;
- our inability to meet minimum guaranteed impressions under advertising
agreements;
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- our failure to adapt to the mix of types of advertising we will sell and
developments relating to advertising on the Web;
- our failure to anticipate and adapt to a developing Internet market and
increased competition;
- our inability to upgrade, develop and deploy our network, systems and
infrastructure and attract new personnel in a timely and effective manner;
and
- the failure of our server and networking systems to handle traffic on our
Web sites efficiently.
THE MAJORITY OF OUR CUSTOMERS ARE INTERNET COMPANIES AND OUR BUSINESS WILL BE
SERIOUSLY HARMED IF THE INTERNET DOES NOT BECOME A VIABLE COMMERCIAL MARKETPLACE
The majority of our customers are Internet companies that are dependent upon
the acceptance of the Internet as a viable commercial marketplace. If the use of
the Internet for e-commerce transactions and as an advertising medium does not
continue to grow, we could lose a substantial portion of our customer base,
which would seriously harm our business and financial condition.
WE ANTICIPATE OUR BUSINESS WILL FLUCTUATE FROM QUARTER TO QUARTER DUE TO OUR
NEAR-TERM RELIANCE ON SHORT-TERM ADVERTISING AGREEMENTS AND SEASONAL
FLUCTUATIONS, WHICH COULD HARM OUR RESULTS OF OPERATIONS
In the near-term, a substantial portion of our net revenue is expected to be
from short-term advertising contracts, usually one to two months in length. As a
result, our quarterly operating results will be a function of the contracts we
enter into within the quarter and our ability to adjust spending in light of any
net revenue shortfalls. Thus, the cancellation of even a small number of
advertising contracts could significantly affect our operating results. Our
operating expenses are likely to increase significantly over the near term. To
the extent that our expenses increase but our revenues do not, our business,
operating results and financial condition may be seriously harmed.
Advertising revenues are also subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters
and user traffic on online media properties has been lower during the summer and
during year-end vacation and holiday periods. As a result, we expect our results
of operations to fluctuate throughout the year, which may significantly harm our
business and financial condition.
OUR ADVERTISING REVENUE MAY BE AFFECTED BY THE LOSS OF TRAFFIC ON OUR WEB SITES
Advertising revenue is linked to the level of traffic on our Web sites, so
if traffic is less than the level expected by our advertising customers, revenue
from this source could be reduced. We have some advertising contracts that
include a guaranteed minimum number of impressions on our Web sites. Reduced
traffic on our Web sites would cause us to fall short in meeting these minimum
requirements and, as a result, we may give credits to our advertisers and reduce
advertising rates, which would lead to a reduction in our revenue from
advertising. For example, our average daily page views decreased from 33,634
during the quarter ended March 31, 2000 to 32,770 during the quarter ended
June 30, 2000.
OUR FAILURE TO ATTRACT ADVERTISING REVENUE IN QUANTITIES AND AT RATES THAT ARE
SATISFACTORY TO US COULD HARM OUR BUSINESS
We expect to derive a significant portion of our revenue from the sale of
on-air and online advertisements, including co-branded commercials, banners,
buttons, windows and text links. We are uncertain whether Web advertising will
continue to grow at a rate that will support expansion in our revenue. The
Internet as a marketing and advertising medium has not been available for a
sufficient period of time to gauge accurately its effectiveness as compared with
traditional media. Many of our suppliers and advertisers have only limited
experience with the Web as a marketing and advertising medium.
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The ability to generate significant advertising revenues will depend upon:
- the development of a large base of users of services possessing
demographic characteristics attractive to advertisers;
- the ability to continue to develop and update effective advertising
delivery and measurement systems; and
- advertising rates, which may fall based on increased competition from
online companies and offline media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising. Advertisers may determine that banner
advertising, which currently comprises a substantial portion of our revenues, is
not an effective advertising medium. If other forms of Web-based advertising
prove more popular than banner advertisements, we may not be able to change our
operations to take advantage of such forms. Advertising filter software programs
are available that limit or remove advertising from an Internet user's desktop.
Such software, if generally adopted by users, may adversely affect the viability
of advertising on the Internet. Our advertising customers may not accept the
internal and third-party measurements of impressions received by advertisements
on our online media properties and such measurements may contain errors. We rely
primarily on our internal advertising sales force for domestic advertising
sales, which involves additional risks and uncertainties, including risks
associated with the recruitment, retention, management, training and motivation
of sales personnel. As a result of these factors, we may not be able to sustain
or increase advertising sales levels. Failure to do so may harm our business,
operating results and financial position.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND SOME OF OUR COMPETITORS MAY BE MORE
SUCCESSFUL IN ATTRACTING AND RETAINING CUSTOMERS
The market for Internet products and services is highly competitive.
Generally, there are no substantial barriers to entry in these markets; however,
the ability to secure financial resources necessary to promote brand awareness
is increasingly becoming a barrier to entry in the market in which we compete.
We expect that competition will continue to intensify. Negative competitive
developments could seriously harm our business and the trading price of our
Class A common stock. In addition, our competitors may have superior or more
attractive product offerings.
We compete with many other providers of online navigation, information and
community services, such as Yahoo! (including GeoCities and Broadcast.com),
America Online (including AOL.com, Netcenter and ICQ), AltaVista, Excite@Home,
Disney (including the GO Network, which is jointly operated with Infoseek),
Lycos (including HotBot and Tripod) and Microsoft Corporation (including
msn.com).
Our businesses compete directly with a great number of other Internet sites
and other media companies across a wide range of different online services with
advantages in technical expertise, brand recognition and other factors,
including:
- metasearch services and software applications that allow a user to search
the databases of several directories and catalogs simultaneously;
- database vendors that offer information search and retrieval capabilities
with their core database products;
- Web-based e-mail and instant messaging services either on a stand alone
basis or integrated into other products and media properties;
- online merchant hosting services and the entry of an increasing number of
companies selling goods and services on the Internet;
- online content Web sites such as ESPN.com and ZDNet.com;
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- online local interactive content Web sites, such as Excite@Home's City
Guides, Lycos City Guides, America Online's Digital City, Ticketmaster
Online-CitySearch and Yahoo! Get Local;
- online video broadcast services, such as CNN VideoSelect, RealNetworks and
FoxNews;
- business portals such as Onvia, Digital Work, Office.com and
Smartonline.com;
- online community Web sites, such as iVillage, Tripod, WhoWhere, GeoCities
and theglobe.com; and
- potential new entrants in any one or all of these areas, or new areas not
considered.
In order to effectively compete, we may need to expend significant internal
engineering resources or acquire other technologies and companies to provide
such capabilities. Any of these acquisitions could be dilutive to our
stockholders.
Our carriage agreement with CNET limited CNET's ability to compete with Snap
in providing a broad based information, navigation and content aggregation
service. These restrictions, however, no longer applied after May 9, 2000. As a
result, CNET could become a competitor of Snap. Competition from CNET could
seriously harm our business.
IF FUTURE ACQUISITIONS ARE NOT SUCCESSFUL, OR IF WE ARE NOT ABLE TO STRUCTURE
FUTURE ACQUISITIONS IN A FINANCIALLY EFFICIENT MANNER, THERE COULD BE AN ADVERSE
EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. We are and will continue to be engaged in
exploring potential acquisitions both of publicly traded and privately held
companies. This acquisition strategy will subject us to integration risks
similar to those we face in integrating our current businesses. In addition, the
success of the acquisitions will be dependent upon the ability of our management
to maximize our financial and strategic position when incorporating the
acquiring company's technology or businesses. Any of these risks could prevent
us from realizing significant benefits from our acquisitions.
In addition, we may invest in business areas in which we do not currently
compete. Such acquisitions represent greater risks as we would be entering
markets, at potentially great expense, where we have little or no direct prior
experience. Accordingly, such acquisitions, if unsuccessful, could have a
significant adverse impact on our financial condition and the price of our
Class A common stock. Even if we believe an acquisition is in our best interest,
investors or securities analysts may disagree and the size of a potential
acquisition could adversely impact the price of our Class A common stock. We may
also engage in other forms of financial transactions, such as spin-offs or
initial public offerings of common stock of our subsidiaries. These transactions
or large acquisitions could effectively change our corporate structure, without
providing our stockholders an opportunity to vote on the transaction. We cannot
assure that such acquisition or investment strategies, if implemented, will
prove successful.
We will face increased competition with other entities for desirable
acquisition targets. Like several of our competitors and other Internet
companies, we expect to issue common stock in future acquisitions. If the market
price of our Class A common stock suffers declines disproportionate relative to
our competitors or fails to keep pace with any increases in the price of the
stock of our competitors, we may not be able to compete with other entities for
desirable acquisition candidates. Our inability to acquire complementary
businesses, products and technologies may seriously harm our business and
results of operations.
In addition, issuing Class A common stock in acquisitions will dilute our
existing stockholders, while the use of cash will deplete cash reserves. We
anticipate that we will be unable to account for future acquisitions under the
"pooling of interests" method of accounting and, therefore, expect to incur
significant, one-time write-offs and amortization charges. These write-offs and
charges would decrease our future earnings or increase our future losses. Due to
all of the foregoing, our inability to structure acquisitions in a financially
efficient manner may seriously harm our business and results of operations.
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THE USE OF A COMMUNITY PLATFORM IS UNPROVEN AND DEPENDS ON MAINTAINING AND
EXPANDING OUR MEMBERSHIP BASE; WE DO NOT KNOW WHETHER OUR COMMUNITY PLATFORM
WILL BE VIABLE AND PROFITABLE
A part of our business model relies on using our community platform and
membership base to generate revenues from different sources. To be profitable,
we will need to provide goods and services that are attractive to our members,
advertisers and vendors. We previously relied on member-generated content and
the "grassroots" voluntary promotional efforts of our members to develop and
maintain our profile as a community site. A decline in voluntary promotional
activities by the members or member-generated content could make our community
services less attractive.
We cannot be sure that Internet users will continue to be interested in
communities on the Web, or that direct e-mail marketing will prove to be a
profitable or effective method of selling goods and services.
WE WILL NOT BE ABLE TO SUSTAIN THE RAPID GROWTH OF OUR INTERNET PROPERTIES
Although Xoom.com and Snap have experienced rapid growth in net revenues,
members, customers and reach in recent periods, these growth rates are likely
not sustainable. These growth rates will likely decrease and are not indicative
of future growth rates we may experience.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD SERIOUSLY HARM OUR RESULTS OF
OPERATIONS
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. Any failure in our networking
hardware and software infrastructure could significantly and adversely impact
the results of our operations.
Our businesses have developed systems for maintaining their Web sites,
processing transactions and managing orders internally. If, in the future, we
cannot modify these systems to accommodate increased traffic and an increased
volume of transactions and orders, we could suffer from slower response times,
problems with customer service and delays in reporting accurate financial
information.
We use network servers that are housed separately by application at Exodus
Communications, Inc. in Santa Clara, California and GlobalCrossing Global Center
in Sunnyvale, California. Our Web sites are connected to the Internet via
multiple links 24 hours a day, seven days per week by Exodus and GlobalCrossing
Global Center. Exodus and GlobalCrossing Global Center also provide and manage
power and maintain the correct environment for our networking and server
equipment. We manage and monitor our servers and network remotely from our
headquarters in San Francisco, California. We strive to rapidly develop and
deploy high-quality tools and features into our systems without interruption or
degradation in service.
Although agreements with hosting companies will give us remedies for service
interruptions, we cannot guarantee that:
- we will have uninterrupted access to the Internet;
- our members and users will be able to reach our Web sites; or
- communications via our Web sites will be secure.
Any disruption in the Internet access provided by our hosting companies, or
any interruption in the service that our hosting companies receive from other
providers, or any failure of our hosting companies to handle higher volumes of
Internet users to our Web sites, could seriously harm our business, results of
operations and financial condition.
Despite precautions taken by our businesses and by the companies that host
our Web sites, our systems are susceptible to natural and man-made disasters
such as earthquakes, fires, floods, power loss and sabotage. Our systems also
may be vulnerable to disruptions from computer viruses and attempts by hackers
to penetrate our network security.
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We are covered by insurance for loss of income from some of the events
listed above, but this insurance may not be adequate to cover all instances of
system failure. We also have insurance against loss of income due to
earthquakes, but the amount of such insurance may be insufficient, especially
given the frequency and magnitude of earthquakes in Northern California where
our primary facilities and servers are located.
Any of the events listed above could cause interference, delays, service
interruptions or suspensions in our business, and as a result, seriously harm
our business and results of operations.
We must continue to expand and adapt our system infrastructure to keep pace
with the increase in the number of members who use the free services we provide.
Demands on our infrastructure that exceed current forecasts could result in
technical difficulties with our Web sites. Any system failure that interferes
with access to our Web sites and use of the free services we provide could
diminish the level of traffic on our Web sites. Continuing or repeated system
failures could impair our reputation and our brand names and reduce our commerce
and advertising revenue. At present, we do not know if we will be able to scale
the systems to handle a larger amount of traffic at higher transmission speeds.
Expanding the network infrastructure will require substantial financial,
operational and management resources, all of which could harm our financial
results and operations.
If, in the future, we cannot modify these systems to accommodate increased
traffic and an increased volume of transactions and orders, we could suffer
slower response times, problems with customer service and delays in reporting
accurate financial information. Any of these factors could significantly and
adversely impact the results of our operations.
DIFFICULTIES WE MAY ENCOUNTER IN DEALING WITH OUR GROWTH AND EXPANSION COULD
SERIOUSLY HARM OUR RESULTS OF OPERATIONS
Our strategy is to continue growing our membership and user base at a rapid
pace. If this growth continues, we will experience a significant strain on our
resources because of:
- the need to manage relationships with various strategic partners,
technology licensors, members, advertisers and other third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our businesses;
- the need to train and manage a growing employee base; and
- pressures for the continued development of our financial and information
management systems.
Difficulties we may encounter in dealing successfully with the above risks
could seriously harm our operations.
THE SUCCESSFUL OPERATION OF OUR BUSINESS DEPENDS UPON THE SUPPLY OF CRITICAL
ELEMENTS FROM OTHER COMPANIES
We depend substantially upon third parties for several critical elements of
our business, including technology, order fulfillment, content development and
distribution activities.
TECHNOLOGY: We continue to license technology and related databases from
third parties for some elements of our properties, including, among others,
technology underlying the delivery of stock quotes and current financial
information, chat services, street mapping, telephone listings and similar
services. We expect to experience interruptions and delays in service and
availability for such elements, from time to time. Furthermore, we are and
expect to be dependent on hardware suppliers for prompt delivery, installation
and service of servers and other equipment used to deliver our products and
services. Any errors, failures or delays experienced in connection with these
third-party products and information
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services could negatively affect our relationship with users and adversely
affect our brands and business, and could expose us to third party liability.
ORDER FULFILLMENT: We continue to rely on other companies for critical
aspects of our e-commerce business. For example, Banta Global Turnkey
Corporation is primarily responsible for fulfilling orders for products and
services sold via our Web sites and in response to direct e-mail marketing. If
our relationship with Banta were to terminate without sufficient advance notice,
our operations would be negatively affected, even if we were able to quickly
establish a relationship with a comparable vendor to fulfill orders. The success
of our specific e-mail direct e-commerce campaigns depends on the timely supply
of inventory by the manufacturers and suppliers of the products we offer for
sale to our members. The failure of the suppliers on whom we depend would
adversely affect the results of our operations.
CONTENT DEVELOPMENT: A key element of our strategy involves the
implementation of our branded online properties targeted for specific interest
areas, demographic groups and geographic areas. In these efforts, we rely on
content development and localization efforts of third parties. We cannot
guarantee that the third parties will effectively implement these properties, or
that their efforts will result in significant revenue to us. Any failure of
these parties to develop and maintain high-quality and successful media
properties also could hurt our brands.
DISTRIBUTION RELATIONSHIPS: In order to create traffic for our online
properties and make them more attractive to advertisers and consumers, we have
distribution agreements and informal relationships with leading Web browser
providers and portals, operators of online networks and leading Web sites,
manufacturers of Internet devices and computer manufacturers. These distribution
arrangements typically are not exclusive, and may be terminated upon little or
no notice. Third parties that provide distribution typically charge fees or
otherwise impose additional conditions on the listing of our online properties.
Any failure to cost-effectively obtain distribution could seriously harm our
business, results of operations and financial condition.
PLANNED INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS THAT COULD SERIOUSLY HARM
OUR RESULTS OF OPERATIONS
We have been establishing and may continue establishing operations or form
business partnerships in other parts of the world. We have very limited
experience in international markets and may not be able to compete effectively
in international markets. The expansion of operations into international markets
will require substantial management attention and financial resources. We cannot
be certain that our investment in establishing operations in other countries
will produce desired levels of revenue. In addition, international operations
are subject to other inherent risks and problems, including:
- the impact of recessions in economies outside the United States;
- slower adoption of the Internet by users and advertisers in foreign
countries;
- greater difficulty in collecting accounts receivable;
- higher costs to develop new or specialized content;
- widely varied and changing regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights and enforcement of
other legal rights in some countries;
- political and economic instability;
- continued acceptance of the Euro;
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- potential adverse tax effects;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could seriously harm our operations.
TO BE SUCCESSFUL IN THE CONTINUALLY EVOLVING MARKET FOR ONLINE SERVICES, WE MUST
CONTINUE TO ENHANCE OUR PROPERTIES AND DEVELOP NEW ONES
Rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards characterize the
Internet market. These market characteristics could render our existing
services, technology and systems obsolete. We must continually improve the
performance features and reliability of our services to respond to evolving
market demands and competition. Our business, operating results and financial
condition would be seriously harmed if we are unable to respond in a
cost-effective and timely manner to changing market conditions or customer
requirements.
To remain competitive, we must continue to enhance and improve the
functionality, features and content of our Web sites. We may not be able to
successfully maintain competitive user response times or implement new features
and functions, as these changes will likely involve the development of
increasingly complex technologies. Personalized information services, such as
our Web-based e-mail services, message boards, stock portfolios and our
community features, require significantly greater expenses than our general
services. We cannot guarantee that these higher expenses will be offset by
additional revenues.
A key element of our business strategy is the development and introduction
of new branded online properties targeted for specific user groups with
particular demographic characteristics and geographic concentration. We may not
be successful in developing, introducing and marketing such products or media
properties and such properties may not achieve market acceptance, enhance our
brand name recognition or increase user traffic. Furthermore, enhancements of or
improvements to our Web sites or new media properties may contain undetected
errors that require significant design modifications, resulting in a loss of
customer confidence and user support and a decrease in the value of our brand
name. If we fail to effectively develop and introduce new properties, or those
properties fail to achieve market acceptance, our business, results of
operations and financial condition could be seriously harmed.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
FINANCIAL CONDITION MAY BE SERIOUSLY HARMED
We view our technology as proprietary and will seek to protect it under
existing United States and international laws relating to protection of our
intellectual property. We will also develop internal procedures to control
access to and dissemination of our proprietary information. Despite our
precautions, third parties may succeed in misappropriating our intellectual
property or independently developing similar intellectual property. Protecting
our intellectual property against infringement could result in substantial legal
and other costs and could divert our limited management resources and attention,
any of which could adversely impact our business and the results of our
operations.
Some of the technology to be incorporated into our Web sites is based on
technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
license needed technology in a timely manner and on commercially reasonable
terms, we
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could experience delays and reductions in the quality of our services, all of
which could seriously harm our business and results of operations. Our
reputation and the value of our proprietary information could also be adversely
affected by actions of third parties to whom we license our proprietary
information and intellectual property. If someone asserts a claim relating to
proprietary technology or information against us, it may be necessary to seek a
license to such intellectual property. We cannot assure you, however, that we
will be able to obtain such licenses on commercially reasonable terms, if at
all. The failure to obtain any necessary licenses or other rights could
seriously harm our business and results of operations.
Each of our businesses has been subject to claims that they have allegedly
infringed the proprietary rights of third parties, and we cannot assure you that
third parties will not assert claims against us or our businesses in the future.
These claims, whether or not meritorious, sometimes result in litigation and
could become a drain on our management and financial resources. If successful,
claims of this nature could subject us to liability for money damages as well as
injunctive relief restricting our use of intellectual property important to our
operations, and could ultimately cause us to lose rights to some of our
intellectual property. Any of these events could seriously harm our business and
results of operations.
WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY
OUR INSURANCE
The nature and breadth of information disseminated on our Web sites and
through the sites of our members could expose us to liability in various areas,
including claims relating to:
- product information and reviews we offer;
- the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
- copyright or trademark infringement and wrongful action due to the actions
of third parties;
- use of third party content made available through our Web sites or through
content and material posted by members on their home pages or in chat
rooms and bulletin boards; and
- damages arising from the use or misuse of the free e-mail services we
offer.
Claims of these kinds against us could result in us incurring substantial
costs and could also be a drain on our financial and other resources. If the
number or severity of claims of this nature were significant, we would need to
implement measures to reduce our exposure and potential liability. In addition
to being a drain on our resources, this could also require taking measures that
could make our services less attractive to our members and visitors. This in
turn could reduce traffic on our Web sites, negatively impact our member and
user base, and reduce our revenue from e-commerce and advertising. Our general
liability insurance may be insufficient to cover expenses and losses arising in
connection with any claims against us. To the extent our insurance coverage does
not cover liability or expenses we incur, our business and results of operations
would be seriously harmed.
E-COMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES
As part of our business, we enter into agreements with sponsors, content
providers, service providers and merchants under which we are entitled to
receive a share of revenue from the purchase of goods and services by users of
our Web sites. In addition, we provide hosting and other services to online
merchants. These types of arrangements may expose us to additional legal risks
and uncertainties, including potential liabilities relating to the products and
services offered by such third parties.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent these types of claims do not
result in material liability, investigating and defending claims is expensive
and, if the number or severity of claims defended were significant, this could
seriously harm our business and operations.
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WE COULD FACE LIABILITY FROM LEGAL PROCEEDINGS OF OUR SUBSIDIARIES THAT COULD
SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS
Because AllBusiness.com, flyswat, Globalbrain, Snap and Xoom.com and other
entities we have acquired are our wholly-owned subsidiaries, claims made against
these companies will impact our financial condition and results of operations.
An unfavorable outcome in any matters that we are currently litigating could
seriously harm our business and results of operations and the market price of
our Class A common stock.
IF OUR CAPITAL IS INSUFFICIENT TO PROMOTE OUR BUSINESS, AND IF WE CANNOT OBTAIN
NEEDED FINANCING, WE WILL BE UNABLE TO PROMOTE OUR BRAND NAMES, EXPLOIT
ACQUISITION OPPORTUNITIES AND OTHERWISE MAINTAIN OUR POSITION RELATIVE TO OUR
COMPETITORS
We believe we have sufficient capital resources to support our operations at
least for the next 12 months. Nevertheless, we anticipate that we will need to
raise funds to maintain and develop our position in the marketplace. It may be
difficult or impossible for us to obtain financing on favorable terms, if at
all. Neither GE nor its affiliates, including NBC, has made any commitment to
provide financing to us. We cannot assure you that there will be a market for
our securities at any time when we may seek to raise needed funds by equity
financing. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our stockholders, subject to
NBC's exercise of its preemptive rights, and we cannot assure you that an
offering of securities would be completed successfully. Also, new securities we
may issue could have rights senior to the rights of our common stock. If we
cannot obtain needed financing, we could jeopardize our ability to complete the
integration of our Web properties and otherwise meet our business plan and we
will likely be unable to promote our brand names, take advantage of acquisition
opportunities and otherwise maintain our position relative to that of our
competitors, which could seriously harm our business and results of operations.
IF IMPORTANT STRATEGIC RELATIONSHIPS ARE DISCONTINUED FOR ANY REASON, OUR
BUSINESS AND FINANCIAL CONDITION WOULD BE SIGNIFICANTLY HARMED
Although strategic relationships are a key factor in our overall business
strategy, our strategic partners may not view their relationships with us as
significant to their own business. There is a risk that parties with whom we
have strategic alliance agreements may not perform their obligations as agreed.
We expect that our arrangements with future strategic partners generally will
not establish minimum performance requirements but instead rely on the voluntary
efforts of our partners. In addition, most of our agreements with strategic
partners are terminable by either party with little notice. If important
strategic relationships are discontinued for any reason, our business and
results of operations may be harmed.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE AND OUR RELATIONSHIP WITH NBC
BECAUSE NBC HAS SIGNIFICANT INFLUENCE OVER OUR MANAGEMENT AND STRATEGY, THE
ABILITY OF THE HOLDERS OF OUR CLASS A COMMON STOCK TO DETERMINE THE OUTCOME OF
MATTERS REQUIRING A STOCKHOLDER VOTE IS REDUCED
As of June 30, 2000, NBC and its affiliates owned approximately 39.3% of our
outstanding common stock. If the convertible notes held by NBC are converted,
this ownership interest could increase up to approximately 44.5%, although such
conversion cannot occur until November 30, 2000. Even before the convertible
notes are converted, however, CNET has agreed to vote its shares of Class A
common stock in the same manner as NBC with respect to change in control
transactions involving us, enabling NBC to determine the outcome of such vote.
In addition, NBC and its affiliates have rights to maintain their percentage
ownership in the event of dilutive issuances of stock by us. As a result, NBC
may be able to exercise significant influence in the future over many matters
requiring approval by our stockholders,
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including amending our certificate of incorporation, the issuance of additional
shares of our Class B common stock or the adoption of a stockholders rights
plan.
In addition, NBC and its affiliates have the right to elect six of the 13
members of our board of directors, and will retain that right so long as they
own 20% of the outstanding shares of our common stock. Following conversion of
the convertible notes, for so long as NBC and its affiliates own 35% or more of
the outstanding shares of our common stock, NBC and its affiliates will have the
right to elect seven of the 13 members of our board of directors. As long as the
NBC directors do not constitute a majority of our board of directors, several
significant corporate actions by us will require the approval of our directors
appointed by NBC, including a change in control of us or our significant
subsidiaries and significant sales of assets or securities. For as long as there
are any Class B directors, those directors will have the exclusive ability to
remove our chief executive officer and to appoint our chief financial officer
and our general counsel. In addition, Robert C. Wright, the president and chief
executive officer of NBC, serves as our chairman of the board. Many of these
rights are embodied in our certificate of incorporation, and as a result any
amendment will require a vote of our stockholders.
Because of these rights, NBC has the ability to exert significant influence
over our management and strategy. While our directors appointed by NBC are
obligated by Delaware law to act in the best interests of NBCi and its
stockholders, NBC's views concerning our management and strategy may be
different from the views held by directors appointed by the holders of shares of
our Class A common stock.
NBC MAY FREELY ENGAGE IN MANY ACTIVITIES THAT MAY BE COMPETITIVE WITH OUR
BUSINESS
Under our brand integration and license agreement with NBC, NBC is obligated
not to co-brand the portal, community and e-commerce services of our competitors
with specified NBC marks, and NBC may not operate a general portal service, a
broad-based community service or a broad-based e-commerce service other than
through us. However, apart from the restrictions in the brand integration and
license agreement, our certificate of incorporation provides that NBC has the
right to engage in, and has no duty to refrain from engaging in, the same or
similar activities or lines of business as we do, to do business with our
potential or actual customers and suppliers and to employ any of our employees.
In the event that NBC learns of a potential corporate opportunity to both NBC
and us, NBC has no duty to communicate or present the opportunity to our
management. NBC will have no liability to us or our stockholders for breach of
any fiduciary duty that may be applicable to NBC as one of our major
stockholders for acquiring or pursuing any corporate opportunity for itself,
directing the opportunity to another person or company, or failing to
communicate information about the opportunity to us.
Moreover, our certificate of incorporation provides that persons who are
directors or officers of us and also of NBC are deemed to have fully satisfied
their fiduciary duties to us with respect to corporate opportunities of NBC and
NBCi if they act consistently with the policy regarding corporate opportunities
set forth in our certificate of incorporation. In particular, a corporate
opportunity offered to any person who is a director, but not an officer, of us
and who is also a director or officer of NBC belongs to us only if offered in
writing to such person solely in his or her capacity as our director, and
otherwise such corporate opportunity belongs to NBC.
These provisions are effective for so long as NBC owns at least 20% of our
common stock and at least one person who is one of our directors or officers is
also a director or officer of NBC. In addition, amendment of these provisions of
our certificate of incorporation in a manner adverse to NBC's interests requires
the approval of holders of at least 80% of our outstanding common stock.
Although as our principal stockholder NBC has a significant financial
interest in our success, NBC also has the objective of maximizing value for its
parent company, General Electric, and the stockholders of GE. There may be
circumstances under which NBC's corporate objectives conflict with our
operations or strategy, and, except as may otherwise be required by law, NBC has
no obligation to act in a manner beneficial to us in the event of such a
conflict. For example, NBC has entered into a distribution and
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marketing agreement with ValueVision International, Inc. with respect to its
home shopping and transactional television service, and an affiliate of NBC is a
principal shareholder of ValueVision. NBC is also the parent company of the CNBC
cable channel and owns 90% of CNBC.com LLC. Moreover, NBC distributes its owned
and licensed television programming and other content over a wide array of media
in varied formats, including videostreaming and other methods of distribution of
video content via the Internet, and there is no limitation on its ability to
continue to do so or to develop new methods of distribution or delivery or forms
of content independently from us. In addition, the value of NBC-IN.com will be
dependent on our ability to negotiate content and distribution relationships
with NBC's affiliated television stations, including the 13 stations owned and
operated by NBC. Although NBC is obligated to comply with the terms of the brand
integration and license agreement, we cannot assure you that NBC will not engage
in activities that are competitive with or otherwise negatively affect our
business. Any such action by NBC may seriously harm our business, operating
results and financial condition.
NBC'S RELATIONSHIPS WITH OUR STRATEGIC PARTNERS LIMIT OUR ABILITY TO ENTER INTO
STRATEGIC RELATIONSHIPS AND TO PROVIDE NEWS, INCLUDING SPORTS AND BUSINESS NEWS,
ON OUR WEB SITES
NBC's relationships with our existing strategic partners and our future
relationships with partners may limit our ability to enter into other strategic
relationships or provide services that we might otherwise offer on our Web
sites. For example, NBC has a relationship with Microsoft that limits in
significant respects the ability of NBC and its affiliates to provide news,
including sports and business news, on any Web site other than MSNBC.com.
Consequently, our ability to develop and present news content on our sites is
limited, and our efforts must be consistent with these restrictions. In
addition, the ability of NBC and its affiliates to deliver business news video
on an interactive basis via the Internet is restricted by the terms of NBC's
joint ventures with Microsoft and Dow Jones. We may enter into similar or other
non-competition arrangements with strategic partners that may limit our ability
to engage in or provide some activities or services.
WE ARE SIGNIFICANTLY DEPENDENT UPON THE QUALITY OF THE NBC BRAND
A deterioration in the quality or value of the NBC brand or the termination
of the brand integration and license agreement may seriously harm our business,
operating results and financial condition. Our licensed use of the NBC brand is
a critical aspect of our efforts to retain, attract and expand our user and
advertiser base, both through the advertising and promotion we will purchase on
the NBC television network as well as the inclusion of the NBC brand on our Web
sites. The television industry is characterized by a small number of
participants with significant financial resources and substantial experience in
a wide variety of media, and consequently is extremely competitive. The success
of each television network is often dependent upon its ability to deliver
programming that appeals to viewers. Television programming often requires
substantial lead time to develop and produce, and seasonal network schedules are
typically designed months before actually being aired. This limits a network's
flexibility to alter programming to respond to changes in viewers' tastes. The
relative ranking of television networks fluctuates continuously. Each network
conducts its own research and obtains research from third parties in order to
evaluate its appeal to a complex variety of demographic groups, and each network
uses this information to promote its television programming and negotiate
pricing with advertisers. While NBC has enjoyed significant success in broadcast
and cable television and we expect it to continue to devote efforts to
continuing this success, we cannot be assured that NBC television programming
will continue to appeal to viewers generally, or to the particular demographic
groups valued by advertisers. Consequently, we cannot predict the extent to
which use of the NBC brand will have a positive effect on our ability to attract
users and advertisers. In addition, NBC may terminate the brand integration and
license agreement if, among other reasons, its percentage ownership in us
declines to 5% or less, or if there is a change in control of us.
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THE SIGNIFICANT INFLUENCE OF NBC AND ANTI-TAKEOVER PROVISIONS IN OUR CHARTER
DOCUMENTS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS
NBC has significant influence with respect to our management and strategy.
As a result of NBC's influence, NBC is able to exercise effective control over
significant corporate transactions, which may delay or prevent a change in
control. NBC and its affiliates have enhanced voting rights with respect to the
approval of significant corporate acquisition transactions. In the event that a
third party initiates a tender offer for our common stock or we agree to enter
into any transaction that would result in a change of control, the limitations
on NBC's ability to acquire additional shares in us, to solicit proxies in
connection with an amendment to our certificate of incorporation or for the
election of Class A directors, or to propose to the holders of the Class A
common stock a merger, business combination or similar transaction terminate.
Moreover, NBC can terminate our use of the NBC trademarks and logos in the event
of a change of control of us. Other provisions of our charter documents could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. Any of these factors could impede or prevent
transactions that would cause a change in control in us. These anti-takeover
provisions might discourage bids for our common stock at a premium over the
common stock market price and adversely affect the trading price of our common
stock.
MARKET AND INDUSTRY RISKS
THE E-COMMERCE MARKET IS EXTREMELY COMPETITIVE AND ANY INCREASE IN COMPETITION
COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR IMPROVE OUR POSITION IN THE
MARKET RELATIVE TO THAT OF OUR COMPETITORS
The e-commerce market is extremely competitive, and we expect intense
competition from an ever increasing number of companies selling goods and
services over the Internet. These competitors include: traditional retailers,
various mail-order retailers, Internet-focused retailers, manufacturers that
sell directly over the Internet and many software companies. We expect new
competitors to emerge.
Increased competition from these and other sources could require us to
respond by establishing pricing, marketing and other programs or seeking out
additional strategic alliances or acquisitions that may be less favorable to us
than we otherwise establish or obtain. Such outcomes could seriously harm our
business, prospects, financial condition and results of operations.
MARKET CONSOLIDATION HAS CREATED AND CONTINUES TO CREATE COMPANIES THAT ARE
LARGER AND HAVE GREATER RESOURCES THAN US
In the recent past, there have been a number of significant acquisitions and
strategic plans announced among and between our competitors, including:
- CNET's acquisition of ZDNet;
- America Online's acquisition of Netscape and its proposed merger with Time
Warner, Inc.;
- CMGI's acquisition of 83% of AltaVista;
- Disney's acquisition of the remaining interest in Infoseek not already
owned by Disney;
- @Home Network's acquisition of Excite; and
- Yahoo!'s acquisitions of GeoCities and Broadcast.com.
The effects these completed and pending acquisitions and strategic plans
have on us cannot be predicted with accuracy, but some of these competitors are
aligned with companies that are larger or more well established than us. In
addition, these competitors include television broadcasters with access to
unique content and substantial marketing resources. As a result, these
competitors may have access to greater financial, marketing and technical
resources than us.
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RECENT ALLIANCES HAVE RESULTED IN COMPETITORS OFFERING A BROADER VARIETY OF
INTERNET RELATED SERVICES THROUGH MORE INTEGRATED WEB SITES AND THE USE OF
PROMINENT SEARCH BUTTONS TO DIRECT TRAFFIC, WHICH MAY MAKE IT MORE DIFFICULT FOR
INTERNET USERS TO FIND AND USE OUR PRODUCTS AND ONLINE PROPERTIES
Recent acquisitions and alliances have resulted and will result in greater
competition as more users of the Internet consolidate to fewer services that
incorporate search and retrieval features. In addition, providers of software
and other Internet products and services are incorporating search and retrieval
features into their offerings. For example, Web browsers offered by Microsoft
and by America Online's Netscape increasingly incorporate prominent search
buttons that direct search traffic to competing services. These features could
make it more difficult for Internet users to find and use our products and
services.
In the future, Netscape, Microsoft and other browser suppliers may also more
tightly integrate products and services similar to ours into their browsers or
their browsers' pre-set home pages. Microsoft recently announced that it will
feature and promote Internet search services provided by Alta Vista and signed a
long term partnership with LookSmart to provide directory services in the
Microsoft Network and other Microsoft online properties. Such search services
may be tightly integrated into future versions of the Microsoft operating
system, the Internet Explorer browser and other software applications, and
Microsoft may promote such services within the Microsoft Network or through
other Microsoft affiliated end-user services such as WebTV Networks. Each of
these situations creates a potential competitive advantage over us because
Internet navigational offerings of competitors may be more conveniently accessed
by users.
OUR SUCCESS WILL DEPEND UPON THE GROWTH IN THE USE OF THE INTERNET FOR
E-COMMERCE TRANSACTIONS
Our future success depends on the continued growth in the use of the
Internet and the Web for e-commerce transactions. Use of the Internet for retail
transactions is a recent development, and the continued demand and growth of a
market for services and products via the Internet is uncertain. The Internet may
ultimately prove not to be a viable commercial marketplace for a number of
reasons, including:
- unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
- lack of acceptable security for data and concern for privacy of personal
information;
- limitations on access and ease of use;
- congestion leading to delayed or extended response times;
- inadequate development of Web infrastructure to keep pace with increased
levels of use; and
- increased or excessive government regulation.
Because of these factors, we do not know whether our business model will
ultimately be viable and profitable. Also, in the future, some Internet access
providers may act to block or limit the use of e-mail for direct e-commerce
solicitations, whether at their own initiative or at the request of users. Our
members may also choose not to receive our e-mail offerings or may fail to
respond to such offerings. If these blocking or limiting programs become
popular, there could be a negative effect upon the viability of e-commerce on
the Web and on our business, results of operations and financial condition.
COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, AND THE LOSS OF KEY PERSONNEL
AND OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD
HARM OUR RESULTS OF OPERATIONS
Our success depends to a significant degree upon the contributions of our
executive management team, as well as our technical, marketing and sales
personnel. Due to the integration of the operations of our businesses, our
employees may have different job responsibilities and may be required to work
with new people. Accordingly, we may experience loss of key management and other
personnel due to the
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change in job responsibilities and work environment. Our employees may
voluntarily terminate their employment with us at any time. Our success also
depends upon our ability to attract and retain additional highly qualified
management, technical, sales and marketing and customer support personnel.
Locating personnel with the combination of skills and attributes required to
carry out our strategy is often a lengthy process. In addition, competition for
qualified employees is intense, specifically in the areas of Web site
development, design and integration. The loss of key personnel, or the inability
to attract and retain additional, qualified personnel, could significantly harm
our results of operations.
THE YEAR 2000 PROBLEM COULD CAUSE OUR SOFTWARE PRODUCTS AND THOSE OF OUR
SUPPLIERS TO MALFUNCTION, WHICH COULD PREVENT OR LIMIT ACCESS TO OUR ONLINE
PROPERTIES AND COULD BE COSTLY TO REMEDY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. Residual Year 2000 problems may
result in miscalculations, data corruption, system failures or disruption of
operations. To date we have not experienced any significant Year 2000 problems
in our internal technology systems or with the vendors of systems we believe to
be critical to our business. In addition, we believe that it is unlikely we will
experience any significant Year 2000 problems in the future.
However, our applications operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. We cannot predict whether Year 2000 unknown errors or defects that
affect the operation of software and systems that we use in operating our
businesses will arise in the future. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to operate our
business, we could lose customers, suffer significant disruptions in our
business, lose revenues and incur substantial liabilities and expenses. We could
also become involved in costly litigation resulting from Year 2000 problems.
This could seriously harm our business, financial condition and results of
operations.
REGULATORY AND LEGISLATIVE RISKS
IMPOSITION OF NEW TAXES OR FEES BY FEDERAL, STATE OR FOREIGN GOVERNMENTS ON
INTERNET TRANSACTIONS OR ON THE USE OF THE INTERNET AS A MEANS OF COMMUNICATION
COULD ADVERSELY AFFECT US
Imposition of sales or other similar taxes on our sales of merchandise in
states or countries where we ship goods could harm our results of operations.
Imposition of new taxes or fees by federal, state or foreign governments on
Internet transactions or on the use of the Internet as a means of communication
could also adversely affect us.
PRIVACY CONCERNS, GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding privacy and the protection
of children, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations and
other countries may do so in the future. In addition, new laws may be adopted in
the United States and in other countries covering issues such as music
licensing, broadcast licensing fees and the characteristics and quality of
Internet services. Laws regulating the Internet, however, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws that govern intellectual
property, privacy, libel and taxation apply to the Internet. The development of
laws governing these areas, or the application to the Internet of existing laws
not designed for the Internet, may decrease the growth in the use of the
Internet. In addition, the growth and development of the e-commerce market may
prompt calls for more stringent consumer protection laws, both in the United
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States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet could harm our business.
The Federal Communications Commission is currently reviewing its regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.
TRADING RISKS
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE BASED ON A NUMBER OF
FACTORS, SOME OF WHICH ARE NOT IN OUR CONTROL
The trading price of our Class A common stock has been and may continue to
be highly volatile. For example, during the six months ended June 30, 2000, the
closing price of our Class A common stock ranged from $100.16 to $11.25, and
subsequently closed at $10.86 on August 4, 2000. Our stock price could be
subject to wide fluctuations in response to a variety of factors, many of which
are out of our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry and the portal and community
services segment in particular;
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of securities by us or our stockholders, which could occur at any
time after the closing of the transaction.
In addition, The Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. The trading prices of many Internet companies continue to trade at
multiples of earnings or revenues substantially above historic levels. These
trading prices and multiples may not be sustainable. These broad market and
industry factors have and may in the future cause the market price of our
Class A common stock to decline, regardless of our actual operating performance.
In the past, following periods of volatility in the market price of an
individual company's securities, securities class action litigation often has
been instituted against that company. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
THE TRACES TRANSACTION COULD CAUSE OUR STOCK PRICE TO DECLINE
The market price volatility of our Class A common stock could increase or
the price could become depressed if investors sell their shares of our Class A
common stock in anticipation of the potential distribution into the market of
additional shares of Class A common stock as a result of the delivery of shares
of Class A common stock under the terms of the Trust Automatic Common Exchange
Securities, or TRACES, by the Automatic Common Exchange Securing Trust, by the
possible sale of shares of Class A
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common stock by investors who view the TRACES as a more attractive means of
equity participation in us and by hedging or arbitrage trading activity that may
develop involving the TRACES and the Class A common stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1998, Zoom Telephonics, Inc. filed a lawsuit against Xoom.com
alleging trademark infringement and related statutory violations. We believe
that the claims asserted by Zoom Telephonics are without merit, and intend to
vigorously defend against them. In June 2000, the court by order denied Zoom
Telephonics' motion for a preliminary injunction. An adverse result of the
litigation could seriously harm NBCi's business and results of operations,
particularly if the litigation forces us to discontinue use of the Xoom.com
mark.
In January 1998, Xoom.com became aware that Imageline, Inc. claimed to own
the copyright in certain images that a third party, Sprint Software Pty Ltd, had
licensed to Xoom.com. Some clip art images that Imageline alleged infringed
Imageline's copyright were included by Xoom.com in versions of its Web Clip
Empire product and licensed by Xoom.com to third parties, including other
software clip publishers. Xoom.com's contracts with such publishers require it
to indemnify the publisher if copyrighted material licensed from Xoom.com
infringes a copyright. We believe the possible range of liability related to
this matter is from $0 up to $10.0 million; however, we believe it is unlikely
that the liability would exceed $1.0 million. Accordingly, we reserved
$1.0 million for this potential liability, the expense of which was included in
non-recurring charges for the year ended December 31, 1997. Based on information
available to date, management does not believe that the ultimate outcome of this
matter will seriously harm our financial position, results of operations and
cash flows.
Further, International Microcomputer Software, Inc. ("IMSI") has notified
NBCi in a letter dated February 8, 2000 that it intends to make a claim for
indemnification pursuant to a contract with Xoom.com in connection with a
$2.6 million judgment entered in favor of Imageline. The judgment resulted from
an arbitration award pertaining to a contract between Imageline and IMSI.NBCi
has notified IMSI that it denies any duty to indemnify IMSI in connection with
its contractual dispute with Imageline. Additional third parties may ask NBCi to
indemnify them in connection with disputes with Imageline.
In March 1999, Snap filed a complaint against CityAuction, Inc. and
Ticketmaster Online-CitySearch in connection with an agreement entered into
between Snap and CityAuction to promote CityAuction's online auction site in
exchange for monetary compensation and warrants to purchase shares of
CityAuction. This matter was pending in Superior Court in San Francisco,
California. Snap claimed that CityAuction breached the agreement by refusing to
honor Snap's exercise in February 1999 of its CityAuction warrants, failing to
make a $125,000 payment due to Snap and failing to provide Snap with notice of
CityAuction's pending acquisition by Ticketmaster Online-CitySearch. Snap also
claimed that Ticketmaster Online-City Search induced CityAuction to breach its
contractual obligations to Snap. Snap was seeking damages, injunctive and
equitable relief of not less than $5.0 million from CityAuction, in addition to
damages from Ticketmaster Online-CitySearch Inc. for intentional interference
with the Snap and CityAuction agreements. CityAuction filed a cross-complaint
against Snap seeking rescission of its promotion agreement with Snap,
restitution of not less than $125,000 and unspecified damages for Snap's alleged
failure to perform the promotion agreement. In April 2000, Snap,
CityAuction, Inc. and Ticketmaster Online-CitySearch settled the litigation
under confidential terms.
In March 2000, Snap! LLC ("Snap") filed a complaint against NextCard, Inc.
in connection with an agreement entered into by and between Snap and NextCard to
which Snap agreed to run NextCard's banner advertisements on Snap's website for
a six-month period from April 15, 1999 through October 14, 1999. This matter is
pending in Superior Court in San Francisco, California. Snap claims that
NextCard remains indebted to Snap for services rendered to NextCard in
connection with the banner advertisements
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and is refusing to pay the sum of $250,551. Snap is seeking damages of not less
than: $250,551, plus interest in the sum of 10 percent per annum from and after
June 27, 1999 and costs of suit incurred. NextCard filed a cross-complaint
against Snap seeking: damages and restitution in a sum in excess of $500,000,
statutory interest on such sum, costs incurred and injunctive relief barring
Snap from its unfair business practices.
Natrificial LLC dba thebrain.com filed a lawsuit against NBCi in April 2000
in the United States District Court, Central District of California alleging
trademark infringement, violation of the Lanham Act, and unfair competition.
thebrain.com alleges that NBCi's use of the Globalbrain.net, Inc.
("Globalbrain") name and logo infringes thebrain.com's "family" of brain-related
trademarks. NBCi has promoted the Globalbrain name and logo on the Snap website
and on television commercials for Snap search functionality. NBCi has licensed
the Globalbrain technology and trademarks from Globalbrain, and has tendered
defense of this claim to Globalbrain. thebrain.com has been granted a
preliminary injunction and is seeking a permanent injunction against both NBCi
and Globalbrain to prevent further use of the Globalbrain marks and for damages
and fees. Globalbrain believes that this lawsuit is without merit and intends to
defend this suit vigorously.
On June 22, 2000, Sentius Corporation filed a suit against flyswat, Inc.
("flyswat"), a wholly owned subsidiary of NBCi, for patent infringement. flyswat
was served with the complaint on July 5, 2000. Sentius claims that flyswat is
currently infringing United States Patent No. 5,822,720 for "System and method
for linking streams of multimedia for reference material for display" of which
Sentius is the assignee and owner. flyswat has received a written legal analysis
and opinion that its products and services do not infringe the 5,822,720 patent.
NBCi and flyswat believe that this lawsuit is without merit and intend to defend
this suit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 2000, the Company issued 942,868 shares of its Class A common stock
and 211,622 options to purchase shares of Class A common stock in exchange for
the outstanding capital stock, stock options and warrants of flyswat. Of the
aggregate consideration, 10% of the shares were placed into an escrow account to
be released upon the expiration of certain indemnification obligations.
Additionally, 577,207 shares may be issued upon the achievement of certain
performance objectives. The shares were issued pursuant to an exemption by
reason of Section 3(a)(10) of the Securities Act of 1933, after the Company
obtained a permit for the issuance of the shares pursuant to a fairness hearing
held by the California Commissioner of Corporations.
In May 2000, the Company issued 293,962 shares of its Class A common stock
and options to purchase 26,868 shares of Class A common stock in exchange for
the outstanding capital stock and stock options of Globalbrain.net. Of the
aggregate consideration, 10% of the shares were placed into an escrow account to
be released upon the expiration of certain indemnification obligations.
Additionally, 137,500 shares of our Class A common stock were placed into an
escrow account to be released upon the achievement of certain performance
objectives. The shares were issued pursuant to an exemption by reason of
Section 3(a)(10) of the Securities Act of 1933, after the Company obtained a
permit for the issuance of the shares pursuant to a fairness hearing held by the
California Commissioner of Corporations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 22, 2000, the Company had its Annual Meeting of Stockholders. At
this meeting, the following matters were voted on:
(a) ELECTION OF CLASS A DIRECTORS. The stockholders elected as directors
William J. Lansing (with 29,304,112 affirmative votes and 1,178,361 votes
withheld), Chris Kitze (with 30,002,834 affirmative votes and 479,639 votes
withheld), Jeffrey Ballowe (with 30,365,090 affirmative votes and 117,383 votes
withheld), Robert C. Harris, Jr. (with 30,297,368 affirmative votes and
185,105 votes withheld), James J. Heffernan (with 30,365,533 affirmative votes
and 116,940 votes withheld) and Philip Schlein (with 30,363,611 affirmative
votes and 118,862 votes withheld).
(b) ELECTION OF ONE INDEPENDENT DIRECTOR. The stockholders elected as an
independent director L. Lowry Mays (with 30,361,524 affirmative votes and
120,949 votes withheld).
(c) ELECTION OF CLASS B DIRECTORS. The stockholders elected as directors
Robert C. Wright, Mark W. Begor, Gary M. Reiner, Scott M. Sassa, John F.
Welch, Jr. and Martin J. Yudkovitz. Each of the elected Class B directors
received 24,550,708 affirmative votes and had zero votes withheld.
(d) APPROVAL OF AMENDMENT TO NBC INTERNET, INC. 1999 STOCK INCENTIVE
PLAN. The stockholders approved an amendment to the 1999 Stock Incentive Plan
increasing the number of shares of the Company's Class A common stock reserved
for issuance thereunder by 4,500,000 shares from 13,500,000 to
18,000,000 shares (with 41,529,253 affirmative votes, 3,453,095 negative votes,
29,126 abstaining votes and 10,021,707 votes withheld).
(e) APPOINTMENT OF INDEPENDENT AUDITORS. The stockholders ratified the
appointment of Ernst & Young LLP as the Company's independent auditors (with
54,619,048 affirmative votes, 402,542 negative votes, 11,591 abstaining votes
and zero votes withheld).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Report of Form 10-Q.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
NBC INTERNET, INC.
Date: August 8, 2000
By: /s/ ANTHONY E. ALTIG
-----------------------------------------
SENIOR VICE PRESIDENT
AND ACTING CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
--------------------- -------- ------------
<C> <S> <C>
2.1 Agreement and Plan of Contribution and Merger dated as of
May 9, 1999 by and among the Registrant, Xoom.com, Inc.,
CNET, Inc., Snap! LLC and Xenon 3, Inc.(1)
2.2 First Amendment to Agreement and Plan of Contribution and
Merger dated as of October 20, 1999 by and among the
Registrant, Xoom.com, Inc. CNET, Inc., Snap! LLC and
Xenon 3, Inc.(1)
2.3 Second Amended and Restated Agreement and Plan of
Contribution, Investment and Merger dated July 8, 1999 by
and among the Registrant, National Broadcasting
Company, Inc., GE Investments Subsidiary, Inc., Neon Media
Corporation and Xoom.com, Inc.(1)
2.4 First Amendment to Second Amended and Restated Agreement and
Plan of Contribution, Investment and Merger dated
October 20, 1999 by and among the Registrant, National
Broadcasting Company, Inc., GE Investments
Subsidiary, Inc., Neon Media Corporation and
Xoom.com, Inc.(1)
3.1 Restated Certificate of Incorporation of the Registrant(2)
3.2 Amended and Restated Bylaws of the Registrant(2)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen Stock Certificate of the Registrant(1)
10.1 Form of Indemnification Agreement between the Registrant and
each of its executive officers and directors(1)
10.2 Agreement of Sublease between Xoom.com, Inc. and Cornerstone
Internet Solutions Company d/b/a USWeb Cornerstone dated
August 1, 1998(1)
10.3 Assignment of Lease by Xaos Tools, Inc. and Acceptance of
Assignment and Assumption of Lease by Xoom.com, dated
July 31, 1998(1)
10.4 Office Lease for One Beach Street, San Francisco, California
between No. 1 Beach Street, LLC and CNET, Inc. dated
September 24, 1997(1)
10.5 Governance and Investor Rights Agreement between the
Registrant and National Broadcasting Company, Inc.(3)
10.6 Standstill Agreement between the Registrant and
CNET, Inc.(3)
10.7 Brand Integration and License Agreement between NBC
Multimedia, Inc. and National Broadcasting Company, Inc.,
dated May 8, 1999(1)
10.8 Stock Option Agreement between Xoom.com, Inc. and National
Broadcasting Company, Inc., dated May 9, 1999(1)
10.9 Voting Agreement among Xoom.com, Inc., National Broadcasting
Company, Inc., CNET, Inc., Chris Kitze and Flying Disc
Investments Limited Partnership, dated May 9, 1999(1)
10.10 Voting and Right of First Offer Agreement between National
Broadcasting Company, Inc. and CNET, Inc.(3)
10.11 Loan Agreement between Xoom.com, Inc. and Sand Hill
Capital, LLC, dated as of November 3, 1998(1)
10.12 Amended and Restated Letter Agreement between Bank of
America National Trust and Savings Association and
Snap! LLC, dated September 14, 1999(1)
10.13 Agreement of Lease between Eleven Penn Plaza LLC and
Xoom.com, Inc., dated March 16, 1999(1)
</TABLE>
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
--------------------- -------- ------------
<C> <S> <C>
10.14 Preferred Carriage Agreement by and between CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc.
and Snap! LLC., dated June 30, 1998(1)
10.15 Addendum to Preferred Carriage Agreement between CNET, Inc.
and Snap! LLC, dated June 30, 1998(1)
10.16 Addendum to the Snap Agreements by and among CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc.
and Snap! LLC., dated May 9, 1999(1)
10.17 Form of Severance Agreement by and between Xoom.com, Inc.
and Laurent Massa(1)
10.18 1999 Stock Incentive Plan(1)
10.19 Stock Purchase Agreement by and between Xoom.com, Inc. and
National Broadcasting Company, Inc., dated June 11,
1999(1)
10.24 Employment Agreement by and between Xoom.com, Inc. and John
Harbottle, dated August 4, 1998(1)
10.25 Advertising Agreement between the Registrant and National
Broadcasting Company, Inc.(3)
10.26 Registration Rights Agreement by and among the Registrant,
CNET, Inc., National Broadcasting Company, Inc.,
GE Investments Subsidiary, Inc., Flying Disc Investments
Limited Partnership and Chris Kitze(3)
10.27 $39,477,953 Subordinated Zero Coupon Convertible Debenture
due 2006(3)
10.28 $447,416,805 Subordinated Zero Coupon Convertible Debenture
due 2006(3)
10.29 $340,000,000 Term Note(3)
10.30 Office Lease for 225 Bush Street, San Francisco, California
between OAIC Bush Street, LLC and Xoom.com, Inc. dated
August 13, 1999(1)
10.31 Letter Agreement by and between Xoom.com, Inc. and Edmond
Sanctis, dated October 19, 1999(3)
10.32 Letter Agreement by and between Xoom.com, Inc. and Alan
Braverman, dated November 12, 1999(3)
10.33 Letter Agreement by and between Xoom.com, Inc. and John
McMenamin, dated November 17, 1999(3)
10.34 1999 Employee Stock Purchase Plan(3)
10.35 Employment Agreement by and between NBC Internet, Inc. and
William Lansing, dated March 23, 2000(4)
10.36 2000 Non-Qualified Stock Option Plan and form stock option
agreement(4)
21.1 Subsidiaries of the Registrant(3)
27.1 Financial Data Schedule of NBC Internet, Inc.
</TABLE>
------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-82639) on July 12, 1999
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-91715) on November 29, 1999.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-94655) on January 14, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000.
47
