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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
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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. Yes /X/ No / /
The number of shares outstanding of Registrant's Common Stock at
October 31, 2000 was 38,260,017 of Class A, par value $0.0001, and 24,550,708 of
Class B, par value $0.0001.
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<PAGE>
NBC INTERNET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.................... 1
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 2000 and 1999..... 2
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 41
Item 6. Exhibits and Reports on Form 8-K............................ 42
Signature................................................... 43
</TABLE>
<PAGE>
NBC INTERNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 104,906 $ 28,095
Short-term investments.................................... 188,819 176,669
Accounts receivable, net.................................. 15,879 17,223
Note receivable from NBC, current portion................. 81,502 78,288
Other current assets...................................... 12,035 8,916
---------- ----------
Total current assets........................................ 403,141 309,191
Fixed assets, net........................................... 66,047 18,096
Goodwill and other intangible assets, net................... 1,828,277 1,759,473
Note receivable from NBC, net of current portion............ 200,177 261,712
Long-term investments....................................... 173,308 132,101
Other assets, including restricted cash of $3,494 and $8,990
as of September 30, 2000 and December 31, 1999,
respectively.............................................. 5,803 13,523
---------- ----------
Total assets................................................ $2,676,753 $2,494,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,727 $ 15,687
Accrued compensation and related expenses................. 13,600 15,293
Other current liabilities................................. 17,091 19,627
Amount due to related party............................... 23,878 41,792
Deferred revenue.......................................... 27,144 18,943
---------- ----------
Total current liabilities................................... 96,440 111,342
---------- ----------
Long-term liabilities:
Convertible notes payable, less unamortized discount due
to NBC
and its affliates....................................... 382,333 371,233
Other long-term liabilities............................... 15,713 11,737
---------- ----------
Total long-term liabilities................................. 398,046 382,970
---------- ----------
Stockholders' equity:
Class A common stock...................................... 1,590,169 941,775
Class B common stock...................................... 1,158,336 1,158,336
Accumulated other comprehensive income (loss)............. (33,380) 4,994
Deferred compensation..................................... (14,809) (4,121)
Accumulated deficit....................................... (518,049) (101,200)
---------- ----------
Total stockholders' equity.................................. 2,182,267 1,999,784
---------- ----------
Total liabilities and stockholders' equity.................. $2,676,753 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenue:
Advertising revenue.............................. $ 26,160 $ 4,552 $ 75,882 $ 9,527
E-commerce revenue............................... 5,142 4,404 16,004 10,376
--------- -------- --------- --------
Total net revenue.................................. 31,302 8,956 91,886 19,903
--------- -------- --------- --------
Cost of net revenue:
Cost of advertising revenue...................... 8,206 1,262 25,326 3,112
Cost of e-commerce revenue....................... 2,093 2,813 7,292 7,462
--------- -------- --------- --------
Total cost of net revenue.......................... 10,299 4,075 32,618 10,574
Gross profit....................................... 21,003 4,881 59,268 9,329
--------- -------- --------- --------
Operating expenses:
Operations and development....................... 18,035 2,206 46,094 3,980
Sales and marketing.............................. 21,675 5,617 63,419 12,306
General and administrative....................... 14,876 3,180 43,063 6,846
Promotion and advertising provided by NBC........ 26,659 -- 64,732 --
Amortization of deferred compensation............ 3,958 90 8,826 495
Purchased in-process research and development.... -- -- 3,768 2,603
Amortization of goodwill and other intangible
assets......................................... 94,688 5,532 259,239 7,836
Loss on impairment of intangible assets.......... 1,873 -- 1,873 --
--------- -------- --------- --------
Total operating expenses........................... 181,764 16,625 491,014 34,066
Loss from operations............................... (160,761) (11,744) (431,746) (24,737)
Other income (expense):
Interest income.................................. 9,442 3,205 29,265 6,213
Interest expense................................. (4,028) (25) (11,875) (90)
Loss on investments.............................. (2,493) -- (2,493) --
--------- -------- --------- --------
Net loss........................................... $(157,840) $ (8,564) $(416,849) $(18,614)
========= ======== ========= ========
Net loss per share--basic and diluted.............. $ (2.52) $ (0.44) $ (6.95) $ (1.11)
========= ======== ========= ========
Number of shares used in per share
calcuation--basic and diluted.................... 62,579 19,655 60,009 16,780
========= ======== ========= ========
</TABLE>
See accompanying notes.
2
<PAGE>
NBC INTERNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Cash used in operating activities:
Net loss.................................................. $(416,849) $(18,614)
Adjustments to reconcile net loss to net cash used in
operating activities:
Receipt of stock and services in exchange for services
provided.............................................. (27,406) --
Purchased in-process research and development........... 3,768 2,603
Depreciation and amortization........................... 278,756 9,611
Issuance of common stock and stock options to directors
and consultants....................................... 414 638
Loss on investments..................................... 2,493 --
Loss on impairment of intangible assets................. 1,873 --
Changes in operating assets and liabilities, net of
business combinations:
Accounts receivable................................... 1,550 (2,517)
Other current assets.................................. (5,254) (3,629)
Other assets.......................................... (5,109) (7,577)
Accounts payable...................................... (2,500) 3,886
Accrued compensation and related expenses............. (1,809) 530
Other accrued liabilities............................. (14,897) (729)
Deferred revenue...................................... 13,744 858
--------- --------
Net cash used in operating activities..................... (171,226) (14,940)
Cash used in investing activities:
Purchases of fixed assets................................. (53,268) (6,169)
Purchases of short-term and long-term investments......... (210,449) (198,450)
Maturities of short-term and long-term investments........ 142,246 18,500
Business combinations, net of cash acquired............... (3,094) (901)
--------- --------
Net cash used in investing activities..................... (124,565) (187,020)
Cash provided by financing activities:
Proceeds from issuance of common stock.................... 284,733 221,597
Proceeds from exercise of stock options................... 17,021 1,836
Proceeds from note receivable............................. 71,310 --
Payments of notes payable and capital lease obligations... (447) (639)
--------- --------
Net cash provided by financing activities................... 372,617 222,794
Effect of foreign currency translation on cash and cash
equivalents............................................... (15) --
--------- --------
Net increase in cash and cash equivalents................... 76,811 20,834
Cash and cash equivalents at beginning of period............ 28,095 54,575
--------- --------
Cash and cash equivalents at end of period.................. $ 104,906 $ 75,409
========= ========
</TABLE>
See accompanying notes.
3
<PAGE>
NBC INTERNET, INC.
SUPPLEMENTAL CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
NON-CASH TRANSACTIONS:
Investments in corporate securities received in
connection with media contracts....................... $ 30,031 $ 5,429
======== ========
Value of shares received upon cashless exercise of
warrant............................................... $ 1,988 $ --
======== ========
Deferred compensation resulting from grant of stock
options to Company employees.......................... $ 12,447 $ --
======== ========
Issuance of common stock in exchange for notes
receivable from stockholders, net..................... $ (645) $ 995
======== ========
Fixed assets acquired under capital lease............... $ 987 $ 125
======== ========
Deferred compensation resulting from grant of restricted
stock to employees of acquired companies.............. $ 6,847 $ --
======== ========
Issuance of common stock in conjuction with business and
technology acquisitions............................... $334,165 $101,055
======== ========
Value of warrant received............................... $ -- $ 6,343
======== ========
Value of warrant issued................................. $ -- $ 6,937
======== ========
CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 113 $ 59
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
NBC Internet, Inc. ("NBCi" or the "Company") is an Internet media company
that helps consumers access Interest resources, leveraging user data to broker
information, commercial and entertainment transactions between consumers and the
Company's marketing partners. The Company generates revenue primarily from
online, television and radio advertising and e-commerce services designed to
deliver a comprehensive online experience to a U.S. consumer 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. 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 nine months ended September 30, 1999 and the consolidated results of
operations of Xoom.com, Snap and NBC Multimedia Division for the three and nine
months ended September 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 September 30, 2000 and December 31, 1999, the consolidated
results of its operations for the three and nine months ended September 30, 2000
and 1999 and its cash flows for the nine months ended September 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 nine months ended September 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.
5
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 loss per share excludes dilutive common
stock equivalents and is calculated as net 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 loss
per share is computed using the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period.
To date, common equivalent shares including stock options, warrants and
convertible securities have been 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 websites. 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
("IMS"), in which the Company sells integrated promotional space on television
advertising purchased from NBC and radio advertising purchased from third
parties. IMS revenue is recognized in the period in which the advertisements are
aired and is included in advertising revenue. Total IMS revenue was
$3.7 million and $7.6 million for the three and nine months ended September 30,
2000, respectively. The Company did not recognize any IMS revenue in the nine
months ended September 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. In accordance with
Emerging Issues Task Force Issue ("EITF") 99-17, "Accounting for Advertising
Barter Transactions" and EITF 00-8, "Accounting by a Grantee for an Equity
Instrument to Be Received in Conjunction with Providing Goods or Services,"
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. Revenue from barter transactions was $11.3 million and
$27.4 million for the three and
6
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
nine months ended September 30, 2000, respectively. The Company did not record
any revenue from barter transactions during the nine months ended September 30,
1999.
WEBSITE DEVELOPMENT COSTS
As of July 1, 2000, the Company adopted Emerging Issues Task Force Issue
00-2, "Accounting for Website Development Costs." As such, the Company expenses
all costs incurred that relate to the planning and post- implementation phases
of development. These charges are included in operations and development in the
accompanying statements of operations. Costs incurred in the development phase
are capitalized and recognized over the product's estimated useful life if the
product is expected to have a useful life beyond one year. Amounts capitalized
are included in fixed assets in the accompanying balance sheets and the related
amortization is included in operations and development in the accompanying
statements of operations. These capitalized costs are being amortized over an
18-month period. As of September 30, 2000, the Company had capitalized
approximately $2.6 million of website development costs and recorded
amortization expense of approximately $4,000.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, LIFE
2000 1999 (MONTHS)
------------- ------------ --------
<S> <C> <C> <C>
Goodwill................................... $1,976,757 $1,681,922 24 - 84
Purchased technology....................... 74,147 46,489 24 - 60
License to use brand names................. 34,200 34,200 60 - 84
Affiliate and other contracts.............. 32,228 31,400 24 - 48
Acquired workforce......................... 4,486 3,802 24 - 48
Membership................................. 3,443 -- 24
---------- ----------
Intangible assets.......................... 2,125,261 1,797,813
Less: accumulated amortization............. (296,984) (38,340)
---------- ----------
Intangible assets, net..................... $1,828,277 $1,759,473
========== ==========
</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
uses an estimate of the undiscounted value of expected future operating cash
flows to determine whether the intangibles are impaired. To date, the Company
has recorded impairment losses of approximately $1.9 million related to the
pending disposition of certain assets and liabilities of AllBusiness.com.
7
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior balance
sheet, statement of operations and statement of cash flows information to
conform to the current 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 unaudited condensed
consolidated financial statements includes the results of operations of each
business acquisition from the date the acquisition was consummated. Results of
operations of businesses acquired prior to acquisition were not material in
relation to those of the Company, individually or in aggregate. The Company
completed the following business acquisitions during the nine months ended
September 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 common
stock at a fair value of $52.54 per share, the assumption of 997,896 options
at a fair value of $49.76 per share and acquisition costs of approximately
$3.4 million. See Note 9.
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 launched technology that creates links to relevant Internet content and
commerce services on any website 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 and acquisition costs of approximately $537,000. The Company also
recorded a write-off of in-process research and development of
$3.8 million. Additionally, subject to certain performance measurements, the
Company may issue up to 577,207 incremental shares of its Class A common
stock and additional options to purchase shares of Class A common stock.
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 for groups of people and
individuals. Prior to the acquisition date, the Company held 10% of
Globalbrain.net's outstanding
8
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. BUSINESS COMBINATIONS (CONTINUED)
shares. The purchase consideration 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. These shares were placed into an escrow account upon
the closing of the acquisition.
The following table summarizes the acquisitions made by the Company during
the nine months ended September 30, 1999 (in thousands):
<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
LiquidMarket, Inc................ $38,747 Stock and options assumed August 3, 1999
Private One, Inc................. $ 2,201 Stock August 3, 1999
</TABLE>
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 nine months
ended September 30, 2000 and 1999, $5.6 and $1.5 million, respectively, of the
aggregate purchase price was allocated to net tangible assets consisting
primarily of cash and cash equivalents, 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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
INTANGIBLE ASSET 2000 1999
---------------- -------- --------
<S> <C> <C>
Goodwill................................................. $297,821 $72,902
Membership............................................... 3,443 --
Assembled workforce...................................... 684 578
Affiliate and other contracts............................ 861 --
Purchased technology..................................... 27,658 25,007
-------- -------
Total.................................................. $330,467 $98,487
======== =======
</TABLE>
For each of the acquisitions completed during the nine months ended
September 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. All shares will be released to all selling
shareholders based on their relative equity interests at the time of
consummation of the individual acquisitions.
9
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. BUSINESS COMBINATIONS (CONTINUED)
For acquisitions completed during the nine months ended September 30, 1999,
the Company placed a total of 298,914 of its Class A common stock into escrow
accounts. As of September 30, 2000, 139,583 shares have been released from these
escrow accounts.
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.
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:
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 November 30, 2000. Both notes
yield 4% per annum. The notes were recorded at their present value at issuance
of $370.0 million. As of September 30, 2000, the total principal and interest
due related to these notes was $370.0 million and $12.3 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% that
compounds quarterly. Principal and interest payments are received by the Company
in quarterly installments of $23.8 million. As of September 30, 2000, the total
principal and interest due to the Company related to this note was
$281.7 million and $1.3 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 the Company, a
10
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
bankruptcy event with respect to NBCi or a material breach by NBCi that is not
cured within 30 days. The Company sells a portion of the advertising it
purchases from NBC to customers as part of an integrated media package as
described in Note 1. From the inception of this agreement through September 30,
2000, the Company has incurred $81.6 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 on available-for-sale securities is included in interest income.
Short-term and long-term investments included the following securities as of
September 30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 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......... $ 138,917 $ 4 $ (14) $ 138,907
Corporate bonds and notes........................... 73,138 22 (74) 73,086
United States government agency bonds............... 38,773 16 (94) 38,695
Foreign debt securities............................. 12,143 3 (29) 12,117
Publicly traded equity securities................... 64,164 956 (34,200) 30,920
--------- ------ -------- ---------
Total available-for-sale securities............... 327,135 1,001 (34,411) 293,725
Less amounts classified as cash and cash
equivalents....................................... (104,916) (2) 12 (104,906)
--------- ------ -------- ---------
Total short-term available-for-sale securities.... $ 222,219 $ 999 $(34,399) $ 188,819
========= ====== ======== =========
Long-term:
Corporate bonds and notes........................... $ 25,881 $ 101 $ (6) $ 25,976
United States government agency bonds............... 21,736 110 -- 21,846
--------- ------ -------- ---------
Total long-term available-for-sale securities..... $ 47,617 $ 211 $ (6) $ 47,822
========= ====== ======== =========
</TABLE>
11
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. FINANCIAL INSTRUMENTS (CONTINUED)
<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 holds long-term investments in both privately-held and
publicly-held companies in the form of unregistered securities which are subject
to Rule 144 holding period restrictions. As of September 30, 2000 and
December 31, 1999, these investments totaled approximately $57.0 million and
$46.4 million, respectively. Additionally, as of September 30, 2000 and
December 31, 1999, the Company held a long-term investment in CNBC.com totaling
$68.5 million. These investments are included in other long-term investments in
the accompanying balance sheets and are accounted for using the cost method.
Impairment losses on equity 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 recorded impairment losses
related to privately-held securities totaling $2.5 million in the accompanying
statements of operations.
5. STOCKHOLDERS' EQUITY
FOLLOW-ON OFFERING
In February 2000, the Company completed a follow-on offering of 4,600,000
shares of Class A common stock at a price of $81.38 per share. Of the 4,600,000
shares of Class A common stock sold in the offering, 3,650,000 were sold by the
Company and 950,000 were sold by existing stockholders. The Company received net
proceeds from the offering of approximately $280.1 million.
DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation charges of
$19.3 million during the nine months ended September 30, 2000. These charges
were recorded to recognize the difference between the
12
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. STOCKHOLDERS' EQUITY (CONTINUED)
exercise price and the deemed fair value of equity instruments 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 nine
months ended September 30, 1999.
6. COMPREHENSIVE LOSS
Comprehensive 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 balance sheets. Comprehensive loss for
the three and nine months ended September 30, 2000 and 1999 was as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss............................................ $(157,840) $(8,564) $(416,849) $(18,614)
Net unrealized gain (loss) on investments........... (14,290) 421 (38,199) 3
Other............................................... (79) -- (175) --
--------- ------- --------- --------
Comprehensive loss.................................. $(172,209) $(8,143) $(455,223) $(18,611)
========= ======= ========= ========
</TABLE>
7. LEGAL PROCEEDINGS
On November 1, 2000, NeoPlanet, Inc. filed a lawsuit against flyswat, Inc.,
a wholly-owned subsidiary of the Company, alleging breach of a distribution
agreement as well as various other related claims. NeoPlanet is claiming damages
of approximately $5.0 million. The Company believes that this lawsuit is without
merit and intends to defend this suit vigorously.
On July 25, 2000, WebNext S.p.A. sent a demand letter to the Company
claiming to have exercised a "put right" with respect to an internet site in
which the Company has a major interest. The demand letter alleged that the value
associated with such put to be in the range of $10.0 to $15.0 million. In
addition, WebNext has threatened to proceed to arbitration if this amount is not
paid. The Company responded to the demand letter by denying the allegations for
a number of reasons, including the Company's view that the put right and the
potential value associated with such right are indeterminable. The Company
intends to defend this matter vigorously.
On June 22, 2000, Sentius Corporation filed a suit against flyswat, Inc.
("flyswat"), a wholly owned subsidiary of the Company, for patent infringement.
Sentius claims that flyswat is currently infringing upon its patent for "System
and method for linking streams of multimedia for reference material for
display." flyswat has received a written legal analysis and opinion that its
products and services do not infringe the patent. The Company and flyswat
believe that this lawsuit is without merit and intend to defend this suit
vigorously.
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
13
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. LEGAL PROCEEDINGS (CONTINUED)
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. The Company believes the possible
range of liability related to this matter is from $0 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.
In February 2000, International Microcomputer Software, Inc. ("IMSI")
notified the Company 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 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. Revenue from portal, online, television
and radio advertising are included in advertising revenue.
14
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
8. SEGMENT DISCLOSURES (CONTINUED)
The Company's geographic revenue was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C> <C> <C>
United States................................ $29,410 94.0% $7,879 88.0%
North America, excluding US.................. 639 2.0% 315 3.5%
Europe....................................... 599 1.9% 272 3.0%
Asia/Pacific................................. 102 0.3% 147 1.7%
Rest of world................................ 552 1.8% 343 3.8%
------- ----- ------ -----
Total...................................... $31,302 100.0% $8,956 100.0%
======= ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C> <C> <C>
United States............................... $86,463 94.1% $17,079 85.8%
North America, excluding US................. 2,014 2.2% 690 3.4%
Europe...................................... 2,036 2.2% 932 4.7%
Asia/Pacific................................ 439 0.5% 411 2.1%
Rest of world............................... 934 1.0% 791 4.0%
------- ----- ------- -----
Total..................................... $91,886 100.0% $19,903 100.0%
======= ===== ======= =====
</TABLE>
As of September 30, 2000 and December 31, 1999, there were no customers that
accounted for more than 10% of gross accounts receivable. For the three and nine
months ended September 30, 2000, one customer accounted for approximately 12.4%
and 11.1% of total net revenue, respectively.
9. SUBSEQUENT EVENT
On October 17, 2000, the Company announced its agreement to contribute
certain assets and liabilities of AllBusiness.com, a wholly-owned subsidiary, to
a subsidiary (the "BV Subsidiary") of BigVine, Inc. ("BigVine"), a leading
online barter marketplace for small business, in exchange for approximately 47%
ownership of the BV Subsidiary. The Company will also contribute approximately
$20.0 million in cash directly to BigVine in exchange for 5% ownership of
BigVine.
The Company recorded a loss on impairment of intangible assets of
approximately $1.9 million during the three months ended September 30, 2000 in
the statement of operations. This amount represents the difference between the
carrying value of the net assets to be contributed and the estimated fair value
of the Company's interest in BigVine and the BV Subsidiary of approximately
$247.0 million. The loss recorded is subject to change depending on the actual
estimated fair value of the Company's interest at the closing date of this
transaction, which is expected to be in November 2000.
15
<PAGE>
NBC INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
9. SUBSEQUENT EVENT (CONTINUED)
The following tables present summarized balance sheet and statements of
operations information for AllBusiness.com as of and for the three and nine
months ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
-------------
<S> <C>
Current assets.............................................. $ 2,667
Total assets................................................ $215,712
Current liabilities......................................... $ 3,385
Total stockholders' equity.................................. $212,328
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
------------- -------------
<S> <C> <C>
Net revenue........................................ $ 1,077 $ 1,473
Net loss........................................... $(34,434) $(73,363)
</TABLE>
AllBusiness.com was acquired by the Company on March 7, 2000 and,
accordingly, no summarized information is presented for periods prior to that
date.
16
<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 25, 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 an Internet media company that helps consumers access Interest
resources, leveraging user data to broker information, commercial and
entertainment transactions between consumers and the Company's marketing
partners. We generate our revenue primarily from online, television and radio
advertising and e-commerce services designed to deliver a comprehensive online
experience to a U.S. consumer 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 and our ability to manage
costs accordingly. 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
revenue.
Our operating losses might increase in the future, and we cannot guarantee
that we will ever achieve or sustain profitability.
RECENT EVENT
On October 17, 2000, we announced our agreement to contribute certain assets
and liabilities of AllBusiness.com, our wholly-owned subsidiary, to a
subsidiary, the BV subsidiary, of BigVine, Inc., or BigVine, a leading online
barter marketplace for small business, in exchange for approximately 47%
ownership of the BV Subsidiary. We will also contribute cash directly to BigVine
in exchange for 5% ownership of BigVine.
17
<PAGE>
We recorded a loss on impairment of intangible assets of approximately
$1.9 million during the three months ended September 30, 2000 in the statement
of operations. This amount represents the difference between the carrying value
of the net assets to be contributed and the estimated fair value of our interest
in BigVine and the BV Subsidiary of approximately $247.0 million. The loss
recorded is subject to change depending on the actual estimated fair value of
our interest at the closing date of this transaction, which is expected to be in
November 2000.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Advertising revenue.................................. 83.6% 50.8% 82.6% 47.9%
E-commerce revenue................................... 16.4 49.2 17.4 52.1
------ ------ ------ ------
Total net revenue...................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of net revenue:
Cost of advertising revenue.......................... 26.2 14.1 27.6 15.6
Cost of e-commerce revenue........................... 6.7 31.4 7.9 37.5
------ ------ ------ ------
Total cost of net revenue.............................. 32.9 45.5 35.5 53.1
Gross profit........................................... 67.1 54.5 64.5 46.9
------ ------ ------ ------
Operating expenses:
Operations and development........................... 57.6 24.6 50.2 20.0
Sales and marketing.................................. 69.2 62.7 69.0 61.8
General and administrative........................... 47.5 35.5 46.9 34.4
Promotion and advertising provided by NBC............ 85.2 0.0 70.4 0.0
Amortization of deferred compensation................ 12.6 1.0 9.6 2.5
Purchased in-process research and development........ -- -- 4.1 13.1
Amortization of goodwill and other intangible
assets............................................. 302.5 61.8 282.1 39.4
Loss on impairment of intangible assets.............. 6.0 -- 2.0 --
------ ------ ------ ------
Total operating expenses............................... 580.6 185.6 534.3 171.2
Loss from operations................................... (513.5) (131.1) (469.8) (124.3)
Other income (expense):
Interest income...................................... 30.2 35.8 31.8 31.2
Interest expense..................................... (12.9) (0.3) (12.9) (0.5)
Loss on investments.................................. (8.0) -- (2.7) --
------ ------ ------ ------
Net loss............................................... (504.2)% (95.6)% (453.6)% (93.6)%
====== ====== ====== ======
</TABLE>
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 $26.2 million for
the three months ended September 30, 2000 and $4.6 million for the corresponding
period ended September 30, 1999. Total advertising revenue was $75.9 million for
the nine months ended September 30, 2000 and $9.5 million for the corresponding
period ended September 30, 1999. The increases in both the three- and
nine-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
18
<PAGE>
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
website co-branding agreements we have entered into with our strategic partners.
A total of $3.7 million related to the sale of radio and television
advertising was included in advertising revenue for the three months ended
September 30, 2000 and an aggregate of $7.6 million was included in the nine
months ended September 30, 2000. Also included in advertising revenue was
revenue derived from the exchange of our media and advertising services for
services from or equity interest in third parties which totaled $11.3 million
for the three months ended September 30, 2000 and $27.4 million for the nine
months ended September 30, 2000. We did not record any revenue from integrated
media sales or barter transactions during the nine months ended September 30,
1999.
The percentage of total net revenue attributable to advertising revenue
increased to 83.6% in the three months ended September 30, 2000 from 50.8% in
the corresponding period ended September 30, 1999 and to 82.6% in the nine
months ended September 30, 2000 from 47.9% in the corresponding period ended
September 30, 1999. These increases were due primarily to an increase in the
number of sites we maintain, 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.
E-COMMERCE REVENUE. E-commerce revenue is generated by services provided by
NBCi Direct, including online product sales, email marketing campaigns and lead
generation. Total e-commerce revenue was $5.1 million for the three months ended
September 30, 2000 and $4.4 million for the corresponding period ended
September 30, 1999. Total e-commerce revenue was $16.0 million for the nine
months ended September 30, 2000 and $10.4 million for the corresponding period
ended September 30, 1999. These increases in e-commerce revenue were related
primarily 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 16.4% in the three months ended September 30, 2000 from 49.2% in
the corresponding period ended September 30, 1999 and to 17.4% in the nine
months ended September 30, 2000 from 52.1% in the corresponding period ended
September 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 is
primarily the result of a substantial increase in our advertising inventory and
a related rise in revenue, as well as advertising revenue generated by the
launch of NBCi.com, our flagship broadband internet portal service.
COST OF ADVERTISING REVENUE. Cost of advertising revenue consists primarily
of bandwidth and hosting charges related to the operation of our websites, the
cost of procuring content for our online properties, employee-related expenses
and depreciation. Total cost of advertising revenue was $8.2 million for the
three months ended September 30, 2000 and $1.3 million for the corresponding
period ended September 30, 1999. Total cost of advertising revenue was
$25.3 million for the nine months ended September 30, 2000 and $3.1 million for
the corresponding period ended September 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 websites.
As a percentage of advertising revenue, cost of advertising revenue
increased to 31.4% in the three months ended September 30, 2000 from 27.7% in
the corresponding period ended September 30, 1999. As a percentage of
advertising revenue, cost of advertising revenue increased to 33.4% in the nine
months ended September 30, 2000 from 32.7% in the corresponding period ended
September 30, 1999. These increases were due primarily to the inclusion of costs
of advertising revenue of our wholly-owned
19
<PAGE>
subsidiaries acquired during 2000, as well as an increase in content costs
resulting from an increase in the volume and breadth of content needed to
support and populate our online properties.
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 $2.1 million for the three months ended
September 30, 2000 from $2.8 million in the corresponding period ended
September 30, 1999. Total cost of e-commerce revenue decreased to $7.3 million
for the nine months ended September 30, 2000 from $7.5 million for the
corresponding period ended September 30, 1999. Cost of e-commerce revenue
remained consistent during the three and nine months ended September 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 nine months of 2000 and 1999 due to consistent levels of product sales.
As a percentage of e-commerce revenue, cost of e-commerce revenue decreased
to 40.7% in the three months ended September 30, 2000 from 63.9% in the
corresponding period ended September 30, 1999 and to 45.6% in the nine months
ended September 30, 2000 from 71.9% in the corresponding period ended
September 30, 1999. These decreases were primarily a 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. 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.
OPERATIONS AND DEVELOPMENT EXPENSES. Operations 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 operations and
development expenses are depreciation, the costs of contract labor and costs
associated with new development operations to improve our online properties.
Operations and development expenses were $18.0 million for the three months
ended September 30, 2000 and $2.2 million for the corresponding period ended
September 30, 1999. Operations and development expenses were $46.1 million for
the nine months ended September 30, 2000 and $4.0 million for the corresponding
period ended September 30, 1999. These increases were due primarily to an
increase in employee-related and contract labor expenses, 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.
Operations and development expenses increased as a percentage of total net
revenue to 57.6% in the three months ended September 30, 2000 from 24.6% in the
corresponding period ended September 30, 1999 and to 50.2% in the nine months
ended September 30, 2000 from 20.0% in the corresponding period ended
September 30, 1999. These increases were due to spending for operations and
development growing at a higher rate than net revenue as a result of a
significant increase in headcount upon the consummation of the NBCi transactions
and an increase in the number of online properties we maintain.
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 websites and
advertising and promotional distribution expenditures. Sales and marketing
expenses were $21.7 million for the three months ended September 30, 2000 and
$5.6 million for the corresponding period ended September 30, 1999. Sales and
marketing expenses were $63.4 million for the nine months ended September 30,
2000 and $12.3 million for the corresponding period ended September 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.
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Sales and marketing expenses increased as a percentage of total net revenue
to 69.2% in the three months ended September 30, 2000 from 62.7% in the
corresponding period ended September 30, 1999 and to 69.0% in the nine months
ended September 30, 2000 from 61.8% in the corresponding period ended
September 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 as well as outside legal and accounting services and
facilities-related expenses. General and administrative expenses were
$14.9 million for the three months ended September 30, 2000 and $3.2 million for
the corresponding period ended September 30, 1999. General and administrative
expenses were $43.1 million for the nine months ended September 30, 2000 and
$6.8 million for the corresponding period ended September 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 to support the growth of our infrastructure and
operations.
General and administrative expenses increased as a percentage of total net
revenue to 47.5% in the three months ended September 30, 2000 from 35.5% in the
corresponding period ended September 30, 1999 and to 46.9% in the nine months
ended September 30, 2000 from 34.4% in the corresponding period ended
September 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
$26.7 million in promotion and advertising expense for the three months ended
September 30, 2000, and $64.7 million for the nine months ended September 30,
2000. We did not record any promotion and advertising expense related to NBC
promotions in the nine months ended September 30, 1999 as the agreement to
purchase advertising from NBC had not yet been consummated.
AMORTIZATION OF DEFERRED COMPENSATION. We record deferred compensation
charges to recognize the difference between the exercise price and the deemed
fair value of stock options and restricted stock we grant 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 charges resulting from employee stock option and
restricted stock grants and totaled $4.0 million for the three months ended
September 30, 2000 and $90,000 for the corresponding period ended September 30,
1999. Amortization of deferred compensation totaled $8.8 million for the nine
months ended September 30, 2000 and $495,000 for the corresponding period ended
September 30, 1999. These increases were the result of the additional non-cash
stock compensation charges recorded in the first three quarters of 2000 related
to the hiring of certain key executives.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. We did not record any
purchased in-process research and development charges during the three months
ended September 30, 2000 and 1999. We recorded purchased in-process research and
development charges of $3.8 million during the nine months ended September 30,
2000 and $2.6 million during the nine months ended September 30, 1999. Charges
incurred during 2000 were recognized in connection with the acquisition of
flyswat. Charges incurred during the nine months ended September 30, 1999 were
recognized in connection with the acquisitions of MightyMail Networks, Inc. and
Paralogic Software Corporation.
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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. The state of completion was determined by estimating the costs and time
incurred to date relative to the costs and time to be incurred to develop the
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 GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets totaled $94.7 million during the three
months ended September 30, 2000 and $5.5 million during the corresponding period
ended September 30, 1999. Amortization of goodwill and other intangible assets
totaled $259.2 million during the nine months ended September 30, 2000 and
$7.8 million during the corresponding period ended September 30, 1999. These
increases during 2000 were primarily related to the NBCi transactions, which are
assets 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 September 30, 1999, including the acquisitions of
AllBusiness.com, Catalyst Advisors Group, Husdawg Communications,
Globalbrain.net and flyswat, which are amortized over periods ranging from 24 to
60 months. The amortization of goodwill and other intangible assets during the
nine months ended September 30, 1999 was primarily associated with the
acquisitions of Focused Presence, MightyMail Networks, Net Floppy, LiquidMarket,
Private One and Paralogic Corporation Software, amortized over periods ranging
from 24 to 42 months.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS. During the three months ended
September 30, 2000, we recorded a non-cash loss on the impairment of intangible
assets of $1.9 million related to the pending disposition of certain assets and
liabilities of AllBusiness.com in connection with a transaction with BigVine
pursuant to which we will receive a 47% interest in a subsidiary of BigVine and
a 5% interest in BigVine. The charge represents the difference between the
carrying value of the net assets to be contributed and the estimated fair value
of our interest in BigVine and its subsidiaries, and is subject to adjustment
depending on the actual estimated fair value of our interest at the closing date
of this transaction which is expected to be in November 2000.
INTEREST INCOME. Interest income represents interest we earned on our cash
balances and marketable securities and additionally, during 2000, the interest
earned on our $340.0 million note receivable from NBC. We earned $9.4 million of
interest income during the three months ended September 30, 2000 and
$3.2 million during the corresponding period ended September 30, 1999. We earned
$29.3 million of interest income during the nine months ended September 30, 2000
and $6.2 million during the corresponding period ended September 30, 1999. These
increases are due primarily 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.
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 principal value of $370.0 million. We incurred $4.0 million of interest
expense during the three months ended September 30, 2000 and $25,000 during the
corresponding period ended September 30, 1999. We incurred $11.9 million of
interest expense during the nine months ended September 30, 2000 and $90,000
during the corresponding period ended September 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.
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LOSS ON INVESTMENTS. We recorded non-cash losses totaling $2.5 million
during the three months ended September 30, 2000 related to write-downs of
certain privately-held equity investments. We have not recorded losses related
to equity investments in any prior periods.
INCOME TAXES. From inception through September 30, 2000, we incurred net
losses for federal and state income tax purposes and have not recognized any
income tax provision or benefit. Given our limited operating history, losses
incurred to date and the difficulty in accurately forecasting our future
results, management does not believe that the related deferred income tax asset
meets the recognition criteria required by generally accepted accounting
principles. Accordingly, a full valuation allowance has been recorded.
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 September 30, 2000, we had cash, cash equivalents and short- and
long-term liquid investments of $314.2 million. We regularly invest excess funds
in short-term money market funds, corporate bonds and notes, government and
foreign securities and commercial paper.
Net cash used in operating activities was $171.2 million during the nine
months ended September 30, 2000 and $14.9 million during the corresponding
period ended in 1999. Cash used in operating activities in the first nine months
of 2000 was primarily the result of a net loss of $416.8 million, a decrease in
accrued liablilities of $19.2 million, partially offset by depreciation and
amortization of $278.8 million, and an increase in deferred revenue of
$13.7 million due primarily to the receipt of equity instruments in exchange for
services to be performed. Net cash used in operating activities for the nine
months ended September 30, 1999 was primarily the result of a net loss of
$18.6 million, an increase in accounts receivable related to the growth of
advertising revenue of $2.5 million and an increase in other assets of
$7.6 million related to an increase in long-term deposits, partially offset by
depreciation and amortization of goodwill and other intangible assets of
$9.6 million and in-process research and development charges of $2.6 million and
an increase in accounts payable of $3.9 million.
Net cash used in investing activities was $124.6 million during the nine
months ended September 30, 2000 and $187.0 million during the corresponding
period ended in 1999. Cash used in investing activities during the first nine
months of 2000 was primarily the result of the purchase of investments of
$210.4 million and fixed asset additions of $53.3 million, partially offset by
the maturity of investments of $142.2 million. Cash used in investing activities
during the nine months ended September 30, 1999 was used primarily to purchase
investments of $198.5 million and the purchase of fixed assets of $6.2 million,
offset by the maturity of investments of $18.5 million.
Net cash provided by financing activities was $372.6 million during the nine
months ended September 30, 2000 and $222.8 million during the corresponding
period ended in 1999. Cash provided by financing activities in the nine months
ended September 30, 2000 was attributable to proceeds from the issuance of
common stock of $284.7 million, primarily resulting from our follow-on offering
completed in February 2000, the exercise of stock options totaling
$17.0 million and from our note receivable from NBC of $71.3 million, partially
offset by the repayment of notes payable and capital lease obligations of
$447,000. Cash provided by financing activities in the nine months ended
September 30, 1999 was primarily related to the net proceeds from the Xoom.com
secondary public offering and the issuance of common stock totaling
$221.6 million and the exercise of stock options totaling $1.8 million,
partially offset by the repayment of notes payable and capital lease obligations
of $639,000.
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As set forth in the consolidated statements of operations, we experienced
net losses for the three and nine months ended September 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
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") and subsequently issued SFAS
No. 138, "Accounting for Certain Derivitive Instruments and Certain Hedging
Activities--An Amendment to FASB Statement 133" in June 2000. We are required to
adopt FAS 133 and FAS 138 on January 1, 2001. FAS 133 requires that all
derivative financial instruments be recorded on the consolidated balance sheets
at their fair value. Changes in the fair value of derivatives will be recorded
each period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Gains and losses on derivative instruments reported in
other comprehensive income will be reclassified as earning in the periods in
which earnings are affected by the hedged item. We do not expect the adoption of
this statement to have a significant impact on our financial position, results
of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which was most
recently amended by Staff Accounting Bulletin No. 101B on June 26, 2000 to delay
the implementation date until no later than the fourth fiscal quarter for fiscal
years beginning after December 15, 1999. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC and outlines the basic criteria that must be met in order to
recognize revenue. We are currently evaluating SAB 101 and do not believe that
the bulletin will have a significant impact on our financial position, results
of operations or cash flows.
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 $2.8 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 $4.6 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
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included in long-term investments and are accounted for using the cost method.
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 recorded
$2.8 million of losses related to equity investments.
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 CONTINUE TO SUCCESSFULLY INTEGRATE OUR CURRENT OPERATIONS OR THE
OPERATIONS OF ACQUIRED COMPANIES COULD SERIOUSLY HARM OUR OPERATIONS
Our success will depend substantially on whether we can continue to
integrate our current operations or the operations of acquired companies in an
efficient and effective manner. We can provide no assurance that successful
integration will occur. The combination of our online properties will require,
among other things, the technological integration of our websites into NBCi.com
and the coordination of the sales, marketing or research and development efforts
of acquired companies.
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 operations of businesses acquired
by the need to dedicate management and other resources to consolidating
them as part of NBCi.com;
- 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 into
NBCi.com smoothly or successfully. The integration of operations will continue
to require significant management resources, which may distract management's
attention from our day-to-day operations.
IF OUR INVESTMENT OF RESOURCES IN DEVELOPING AND PROMOTING OUR NBCI.COM 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 NBCi.com 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 NBCi.com brand 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 September 2000, we announced an initiative to phase out our Snap.com,
Videoseeker.com and Xoom.com brands by the end of 2000 and consolidate them into
a flagship NBCi.com brand. This initiative
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could harm our revenue as a result of the loss of brand identification
associated with phased-out brands, or to the extent that e-commerce customers
and 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 revenue and earnings for the remainder of
2000 as the NBCi.com brand consolidation 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 NBCi.com
brand 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 NBCi.com brand does not generate a corresponding
increase in net revenue, or if the expense of developing and promoting our
NBCi.com brand becomes excessive.
WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE OUR BUSINESS AND THE
BUSINESSES COMBINED TO FORM OUR COMPANY HAVE LIMITED OPERATING HISTORIES AND
HISTORIES OF LOSSES
We and the businesses that were combined to form us have limited operating
histories. We originally launched in November 1999 and recently relaunched our
online properties as NBCi.com in September 2000, Xoom.com was founded in
April 1996, the Snap.com website 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 September 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 may continue to increase as
we continue to build, develop and extend our NBCi.com brand, fund greater levels
of product development, develop and commercialize additional media properties,
and acquire complementary businesses and technologies. Accordingly, we will need
to increase revenue 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
revenue 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 BUSINESS FACES RISKS AND DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY STAGE
COMPANIES
Our business faces 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 NBCi.com brand;
- our inability to obtain needed financing;
- higher than anticipated marketing costs that we will need to incur to
build, maintain and enhance our NBCi.com brand;
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- 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 websites or to manage rapidly expanding operations effectively;
- the emergence of new services offered by our competitors that affect the
level of traffic on our websites 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;
- 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
websites 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 revenue do not, our business,
operating results and financial condition may be seriously harmed.
Advertising revenue 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 have experienced and expect to
continue to experience fluctuations of our results of operations 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 WEBSITES
Advertising revenue is linked to the level of traffic on our websites, 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 websites. Reduced
traffic on our websites would cause us to fall short in meeting these minimum
requirements. Furthermore, with the integration of our online properties in
September 2000, it is possible that our traffic may decrease and have an adverse
affect on our revenue.
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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.
The ability to generate significant advertising revenue 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 revenue, 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.
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,
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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 continue to 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.
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 revenue 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.
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 business has developed systems for maintaining its websites, 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 websites are connected to the Internet via
multiple links 24 hours a day, seven days per week by Exodus and GlobalCrossing.
Exodus and GlobalCrossing 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 websites; or
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- communications via our websites 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 websites, could seriously harm our business, results of
operations and financial condition.
Despite precautions taken by our businesses and by the companies that host
our websites, 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.
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 websites. Any system failure that interferes
with access to our websites and use of the free services we provide could
diminish the level of traffic on our websites. 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.
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.
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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 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 websites 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 websites,
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.
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 websites 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 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
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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 FACE LIABILITY FROM LEGAL PROCEEDINGS THAT COULD SERIOUSLY HARM OUR BUSINESS
AND RESULTS OF OPERATIONS
We face liability from legal proceedings, as described on page 41. 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 the NBCi.com brand name, 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.
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 September 30, 2000, NBC and its affiliates owned approximately 39.2%
of our outstanding common stock. If the convertible notes held by NBC are
converted, this ownership interest could increase up to approximately 44.3%,
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, 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.
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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 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
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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 WEBSITES
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 websites.
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 website 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
websites. 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
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 websites. 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 revenue.
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 websites 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.
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
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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 AltaVista, America Online (including AOL.com,
Netcenter and ICQ), Disney (including the GO Network, which is jointly operated
with Infoseek), Excite@Home, Lycos (including HotBot and Tripod), Microsoft
Corporation (including msn.com) and Yahoo! (including GeoCities and
Broadcast.com).
We 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 websites such as ESPN.com and ZDNet.com;
- online local interactive content websites, such as America Online's
Digital City, Excite@Home's City Guides, Lycos City Guides, Ticketmaster
Online-CitySearch and Yahoo! Get Local;
- online video broadcast services, such as CNN VideoSelect, FoxNews and
RealNetworks;
- business portals such as Digital Work, Office.com, Onvia and
Smartonline.com;
- online community websites, such as GeoCities, iVillage, theglobe.com,
Tripod and WhoWhere; 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 ours. Competition from CNET could
seriously harm our business.
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 websites 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 websites or through
content and material posted by members on their home pages or in chat
rooms and bulletin boards; and
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- damages arising from the use or misuse of the free e-mail services we
offer.
Claims of these kind 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 websites, 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 websites. 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.
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 also 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.
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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.
RECENT ALLIANCES HAVE RESULTED IN COMPETITORS OFFERING A BROADER VARIETY OF
INTERNET RELATED SERVICES THROUGH MORE INTEGRATED WEBSITES 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 in and will continue to
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. For example, Microsoft announced that it
will feature and promote Internet search services and 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.
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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. 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 website 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.
As part of our effort to reduce our cost structure, we have decreased our
headcount from a year-high of 853 employees, including AllBusiness.com, to 719
employees, including AllBusiness.com, as of September 30, 2000. Most of these
reductions came as a result of the elimination of staff positions, including the
position of President and COO, of which those responsibilities have been
transitioned to NBCi's CEO, William Lansing. Furthermore, Chris Kitze, NBCi's
former CEO, resigned from his position as Vice Chairman of NBCi's board of
directors. NBCi is currently evaluating a solution to the board vacancy.
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
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.
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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 nine months ended September 30,
2000, the closing price of our Class A common stock ranged from $100.17 to
$6.19, and subsequently closed at $7.25 on November 1, 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.
In addition, the Nasdaq National Market, where most publicly-held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. The stock prices of many Internet companies trade at multiples of
earnings or revenue which have fluctuated greatly due to both market and
individual stock performance. Such broad market and industry fluctuations have
and may continue to 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 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 1, 2000, NeoPlanet, Inc. filed a lawsuit against flyswat, Inc.,
our wholly-owned subsidiary, alleging breach of a distribution agreement as well
as various other related claims. NeoPlanet is claiming damages of approximately
$5.0 million. We believe that this lawsuit is without merit and intend to defend
this suit vigorously.
On July 25, 2000, counsel to WebNext S.p.A. sent a demand letter to us
claiming to have exercised a "put right" with respect to an internet site in
Italy in which we have a major interest. The demand letter alleged that the
value associated with such put to be in the range of $10.0 to $15.0 million. In
addition, WebNext has threatened to proceed to arbitration if this amount is not
paid. By letter dated September 19, 2000, we responded to the demand letter by
denying the allegations for a number of reasons, including our view that the put
right and the potential value associated with such right are indeterminable. We
intend to defend this matter vigorously.
On June 22, 2000, Sentius Corporation filed a suit against flyswat, our
wholly-owned subsidiary, for patent infringement. flyswat was served with the
complaint on July 5, 2000. Sentius claims that flyswat is currently infringing
upon its patent for "System and method for linking streams of multimedia for
reference material for display." flyswat has received a written legal analysis
and opinion that its products and services do not infringe the patent. We
believe that this lawsuit is without merit and intend to defend this suit
vigorously. flyswat filed an answer to this complaint in August 2000.
Natrificial LLC, dba thebrain.com, filed a lawsuit against us 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 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. We have licensed the Globalbrain technology and
trademarks from Globalbrain, and have tendered defense of this claim to
Globalbrain. thebrain.com has been granted a preliminary injunction and is
seeking a permanent injunction against both us and Globalbrain to prevent
further use of the Globalbrain marks and for damages and fees. In
September 2000, we settled the litigation under confidential terms.
The two founders of LiquidMarket, Inc., a company acquired by Xoom.com, each
left NBCi at the time of the Xoom.com/LiquidMarket closing. Certain unvested
shares held by these individuals were not repurchased pursuant to the repurchase
option in the employee stock restriction agreement within the appropriate time
period. As a result, each is claiming damages of approximately $1.0 million. We
intend to defend this matter vigorously.
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. In August 2000, both parties
stipulated to the entry of an order of dismissal of the action without prejudice
subject to certain conditions regarding jurisdiction of future claims.
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 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
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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.
In February 2000, International Microcomputer Software, Inc. ("IMSI")
notified us 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. We have notified IMSI that it denies
any duty to indemnify IMSI in connection with its contractual dispute with
Imageline. Additional third parties may ask us to indemnify them in connection
with disputes with Imageline.
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
September 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,
NBC INTERNET, INC.
Date: November 6, 2000
By: /s/ ANTHONY E. ALTIG
--------------------------------------------------------------------------------
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
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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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
10.14 Preferred Carriage Agreement by and between CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc.
and Snap! LLC., dated September 30, 1998(1)
10.15 Addendum to Preferred Carriage Agreement between CNET, Inc.
and Snap! LLC, dated September 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 September 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.
45
