Exhibit 99
FINANCIAL STATEMENTS
Blue Mountain Arts (a division of At Home Corporation)
Year ended December 31, 2000 and
six months ended June 30, 2000 and 2001 (Unaudited)
A-2
Blue Mountain Arts
(a division of At Home Corporation)
Financial Statements
Year ended December 31, 2000 and
six months ended June 30, 2000 and 2001 (Unaudited)
CONTENTS
Report of Independent Auditors.............................................A-4
Financial Statements
Balance Sheets.............................................................A-5
Statements of Operations...................................................A-6
Statements of Equity in Division..........................................A-7
Statements of Cash Flows...................................................A-8
Notes to Financial Statements..............................................A-9
A-3
Report of Independent Auditors
The Board of Directors and Stockholders of
At Home Corporation
We have audited the accompanying balance sheet of Blue Mountain Arts, a division
of At Home Corporation, as of December 31, 2000, and the related statements of
operations, equity in division, and cash flows for the year then ended. These
financial statements are the responsibility of At Home Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blue Mountain Arts, a division
of At Home Corporation, at December 31, 2000 and the results of its operations
and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
September 13, 2001
A-4
Blue Mountain Arts
(a division of At Home Corporation)
Balance Sheets
(In thousands)
DECEMBER 31, JUNE 30,
2000 2001
----------------------------------------
(Unaudited)
ASSETS
Current assets:
Accounts receivable, net of allowance of $13 in 2000 and $204 in 2001 $ 1,785 $ 355
----------------------------------------
Total current assets 1,785 355
Property, equipment, and improvements, net 2,365 1,757
Goodwill and other intangible assets, net 31,585 12,332
Other assets 21 18
----------------------------------------
Total assets $ 35,756 $ 14,462
========================================
LIABILITIES AND EQUITY IN DIVISION
Current liabilities:
Accounts payable $ 166 $ 74
Accrued compensation and related expenses 549 250
Deferred revenue 1,080 199
Accrued colocation services 228 276
Other accrued liabilities 424 393
----------------------------------------
Total current liabilities 2,447 1,192
Commitments and contingencies
Equity in division:
Advances from Excite@Home 1,007,079 1,011,656
Deferred compensation (22,394) (18,195)
Accumulated deficit (951,376) (980,191)
----------------------------------------
Total equity in division 33,309 13,270
----------------------------------------
Total liabilities and equity in division $ 35,756 $ 14,462
========================================
See accompanying notes.
A-5
Blue Mountain Arts
(a division of At Home Corporation)
Statements of Operations
(In thousands)
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------------------
2000 2000 2001
-----------------------------------------------------------
(Unaudited) (Unaudited)
Net revenues $ 13,867 $ 5,232 $ 4,345
Operating costs:
Cost of services 4,203 2,391 2,136
Product development and engineering 4,870 2,266 1,760
Sales and marketing 10,111 3,111 4,795
General and administrative 1,937 886 785
Amortization of deferred compensation 8,184 3,985 4,199
Amortization of goodwill and intangible assets 240,002 118,933 3,982
Write-down of goodwill and other intangible assets 684,205 - 15,503
-----------------------------------------------------------
Total operating costs 953,512 131,572 33,160
-----------------------------------------------------------
Net loss $ (939,645) $ (126,340) $ (28,815)
===========================================================
See accompanying notes.
A-6
Blue Mountain Arts
(a division of At Home Corporation)
Statements of Equity in Division
(In thousands)
ADVANCES DEFERRED ACCUMULATED TOTAL EQUITY
FROM Excite@Home COMPENSATION DEFICIT IN DIVISION
--------------------------------------------------------------------
Balances at December 31, 1999 $ 1,001,635 $ (30,578) $ (11,731) $ 959,326
Cash investment by Excite@Home to fund
operations 5,444 - - 5,444
Amortization of deferred compensation - 8,184 - 8,184
Net loss - - (939,645) (939,645)
--------------------------------------------------------------------
Balances at December 31, 2000 1,007,079 (22,394) (951,376) 33,309
Cash investment by Excite@Home to fund
operations (unaudited) 4,577 - - 4,577
Amortization of deferred compensation
(unaudited) - 4,199 - 4,199
Net loss (unaudited) - - (28,815) (28,815)
--------------------------------------------------------------------
Balances at June 30, 2001 (unaudited) $ 1,011,656 $ (18,195) $ (980,191) $ 13,270
====================================================================
See accompanying notes.
A-7
Blue Mountain Arts
(a division of At Home Corporation)
Statements of Cash Flows
(In thousands)
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -----------------------------------
2000 2000 2001
---------------------------------------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net loss $(939,645) $(126,340) $(28,815)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation 1,464 744 709
Amortization of deferred compensation 8,184 3,985 4,199
Amortization of goodwill and other intangible assets 240,002 118,933 3,982
Impairment write-down of goodwill and acquired intangible
assets 684,205 - 15,503
Changes in assets and liabilities:
Accounts receivable (548) 82 1,430
Other assets 81 47 3
Accounts payable (14) 139 (92)
Accrued compensation and related expenses 269 77 (299)
Accrued colocation services 228 - 48
Other accrued liabilities (157) (14) (31)
Deferred revenues 1,080 174 (881)
---------------------------------------------------
Cash used in operating activities (4,851) (2,173) (4,244)
---------------------------------------------------
INVESTING ACTIVITIES
Sales and maturities of short-term investments 257 257 -
Purchases of property, equipment, and improvements (178) (107) (101)
Capitalized software development costs (794) - (232)
---------------------------------------------------
Cash provided by (used in) investing activities (715) 150 (333)
---------------------------------------------------
FINANCING ACTIVITIES
Proceeds from cash investments by Excite@Home 5,444 1,901 4,577
---------------------------------------------------
Cash provided by financing activities 5,444 1,901 4,577
---------------------------------------------------
Net decrease in cash and cash equivalents (122) (122) -
Cash and cash equivalents, beginning of period 122 122 -
---------------------------------------------------
Cash and cash equivalents, end of period $ - $ - $ -
===================================================
See accompanying notes.
A-8
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements
December 31, 2000
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Blue Mountain Arts (Bluemountain), a division of At Home Corporation or
Excite@Home (Excite@Home), is a provider of free online greeting cards.
Bluemountain also offers users the ability to purchase gifts from national
merchants to send along with electronic greeting cards.
Excite@Home acquired Bluemountain on December 13, 1999 in a transaction
accounted for as a purchase. Bluemountain has since operated within the
Media/Advertising business segment of Excite@Home. Excite@Home's total purchase
consideration for Bluemountain amounted to $1,000.7 million based on a cash
payment of $350 million, the issuance of Series A nonvoting preferred stock
convertible into approximately 0.7 million shares of Excite@Home's Series A
common stock with a fair value of $418.2 million, 3.5 million shares of Series A
common stock with a fair value of $149.4 million, stock options to acquire 3.6
million shares of Excite@Home's Series A common stock with a fair value of $76.1
million, and $7 million of direct acquisition costs consisting primarily of
investment banking and legal fees.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
Cash $ 611
Accounts receivable and other assets 1,204
Property and equipment 3,577
Purchased technology 800
Other identified intangible assets 27,000
Goodwill 938,585
Deferred compensation 30,922
Liabilities assumed (1,986)
----------------
Total purchase consideration $1,000,713
================
On September 12, 2001, American Greetings Corporation acquired Bluemountain from
Excite@Home for $35 million in cash in a transaction accounted for as a
purchase.
A-9
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been derived from Excite@Home's
consolidated historical financial statements and reflect the "carve out"
financial position, results of operations, and cash flows of Bluemountain for
the periods presented. The financial statements for Bluemountain include
allocations from Excite@Home of certain expenses totaling $7.9 million, $2.2
million (unaudited), and $3.3 million (unaudited) for the year ended December
31, 2000 and the six months ended June 30, 2000 and 2001, respectively.
Excite@Home provides various administrative services to Bluemountain including
sales and account management, marketing and business development, and corporate
general and administrative costs. These expense allocations have been determined
on the basis that the expenses were a reasonable reflection of the services
provided to Bluemountain or the benefit received by Bluemountain. It is
Excite@Home's policy to charge these expenses and all other central operating
costs, first on the basis of direct usage when identifiable, with the remainder
allocated to Bluemountain on the basis of their respective annual sales and/or
headcount. In the opinion of management, this method of allocation is
reasonable.
The financial information included herein does not necessarily reflect the
financial position and results of operations of Bluemountain had the business
unit been a separate, stand-alone entity for the periods presented, and may not
be indicative of future operations or financial position.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements and related disclosures for the
six-month periods ended June 30, 2000 and 2001 are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include normal recurring adjustments and an impairment write-down of
goodwill and other intangible assets of $15.5 million (unaudited) for the six
months ended June 30, 2001, necessary to present fairly the financial statements
for the six-month periods ended June 30, 2000 and 2001. The results for the six
months ended June 30, 2001 are not necessarily indicative of the results to be
expected for the full year ended December 31, 2001.
A-10
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH MANAGEMENT
During the year ended December 31, 2000 and the six months ended June 30, 2001,
Excite@Home provided cash management services to Bluemountain through a
centralized treasury system with the associated transactions recorded via
intercompany accounts. During these periods, Bluemountain did not maintain cash
balances and no interest was charged by Exite@Home. Advances from Excite@Home
has been classified in equity in division in the accompanying balance sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported results of operations during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Bluemountain records revenues in accordance with the Securities and Exchange
Commission's (SEC) Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition" (SAB 101). Bluemountain recognizes revenues when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, fees are fixed and determinable, and collectibility is reasonably
assured. For contracts with multiple elements, Bluemountain allocates the
contract value to each element based on its fair value and recognizes revenue as
each element is delivered.
Bluemountain revenues include online advertising revenue derived from short-term
advertising contracts in which they guarantee a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. Bluemountain also
enters into a number of longer-term advertising and sponsorship agreements.
Under these agreements, which range from one month to two years, Bluemountain
earns fees for generating impressions, which in some instances are guaranteed.
Bluemountain generally recognizes advertising revenue on a straight-line basis
over the term of the agreements, provided that they do not have any significant
remaining obligations such as impression guarantees and collection of the
resulting receivable is probable. To the extent that impression deliveries do
not meet the guarantees, Bluemountain defers recognition of the corresponding
revenue until impressions are delivered.
A-11
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Revenue from barter transactions involving the exchange of advertising for
online advertising was $1.2 million for the year ended December 31, 2000, $0.1
million (unaudited) for the six months ended June 30, 2000, and $1.1 million
(unaudited) for the six months ended June 30, 2001. Revenue from these exchanges
is recorded at the lower of the fair value of the advertising delivered or the
advertising received. In accordance with Emerging Issues Task Force (EITF) Issue
No. 99-17, "Accounting for Advertising Barter Transactions," effective January
20, 2000, the fair value of advertising delivered is based on similar
advertising transactions for which Bluemountain received cash during the six
months prior to the advertising barter transactions. Advertising barter
transactions generally result in the recognition of equivalent amounts of
revenue and expense.
PROPERTY, EQUIPMENT, AND IMPROVEMENTS
Property, equipment, and improvements are stated at cost. Depreciation is
computed using the straight-line method over the shorter of the estimated useful
life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets consist of purchased technology, acquired workforce, acquired
brand name and content, and goodwill related to the acquisition of Bluemountain
by Excite@Home in December 1999. Amortization of goodwill and intangible assets
are provided on the straight-line basis over the estimated useful lives of the
assets, which range from three to four years.
A-12
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
Bluemountain records impairment losses or write-downs on intangible assets when
events and circumstances indicate that an impairment assessment should be
performed and that assessment indicates that there is an impairment. Events and
circumstances that would trigger an impairment assessment include a significant
decrease in the market value of an asset, a significant change in the manner or
extent that an asset is used including a decision to abandon acquired products,
services, or technologies, a significant adverse change in operations or
business climate affecting the asset, and historical operating or cash flow
losses expected to continue for the foreseeable future associated with the
asset. An asset is considered impaired when the undiscounted cash flows
projected to be generated from the asset over its remaining useful life is less
than the recorded amount of that asset. Impairment losses are measured based on
the difference between the asset's fair value and carrying amount and are
recorded as impairment write-downs in the statement of operations in the period
that an indicator of impairment arises. Measurement of fair value is based on
estimated expected future cash flows, including terminal value cash flows
expected to result from the disposition of the asset at the end of its useful
life, discounted at Bluemountain's weighted-average cost of capital.
Weighted-average cost of capital is based on historical risk premiums required
by investors for companies of Bluemountain's size, industry, and capital
structure and includes risk factors specific to Bluemountain. In some instances,
the measurement of fair value includes a factor, if appropriate, for market
comparables, representing Bluemountain's estimate of the value that a buyer is
willing to pay for similar assets in terms of products and services, customer
base, risks, and earnings capabilities.
STOCK-BASED COMPENSATION
Bluemountain accounts for stock-based awards to employees in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25), and have adopted the disclosure-only alternative of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
Deferred compensation resulting from the assumption of employee stock options of
Bluemountain by Excite@Home in December 1999 is being amortized on a
straight-line basis over the vesting term of the awards.
A-13
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
All advertising costs are expensed as incurred. Advertising costs, which are
included in sales and marketing expenses, were $3.1 million for the year ended
December 31, 2000, $0.4 million for the six months ended June 30, 2000
(unaudited), and $0.6 million for the six months ended June 30, 2001
(unaudited).
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). Under SFAS 109, the liability method
is used in accounting for income taxes, whereby deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
SEGMENT INFORMATION
Bluemountain operates in one business segment comprised of Media and
Advertising, based on how management organizes, manages, and internally reports
revenues. Bluemountain's revenues were derived predominantly from customers
located in the United States during the year ended December 31, 2000 and the
six-month periods ended June 30, 2000 and 2001 (unaudited). All significant
assets are located in the United States.
A-14
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Costs of software developed internally for use in Bluemountain's operations are
accounted for under the American Institute of Certified Public Accountants'
Statement of Position (SOP) No. 98-1, "Internal Use Software" (SOP 98-1). In May
2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-2,
"Accounting for the Web Site Development Costs" and Bluemountain adopted this
consensus on July 1, 2000. This consensus requires that entities treat most Web
site development as internal use software under SOP 98-1. Under these accounting
pronouncements, costs of research, including predevelopment efforts related to
determining technological or product alternatives, and costs incurred for
training and maintenance are expensed. Software and Web site development costs,
which include direct costs such as labor and contractors, are capitalized when
it is probable that the project will be completed and the software will be used
as intended. Costs incurred for upgrades and enhancements to software or Web
sites are capitalized when such efforts result in additional functionality.
Capitalized software costs and Web site costs are amortized to expense over the
estimated useful life of the software, which range from one to three years.
Costs capitalized under SOP 98-1 were $794,000 during the year ended December
31, 2000 and $232,000 during the six months ended June 30, 2001 (unaudited).
Amortization of capitalized costs was $134,000 during the six months ended June
30, 2001 (unaudited) and was not significant during the year ended December 31,
2000.
COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and other comprehensive income.
Other comprehensive income includes certain changes in equity that are excluded
from net income. To date, Bluemountain has not had any significant transactions
that are required to be reported in comprehensive loss other than the Company's
net loss.
EFFECT OF NEW ACCOUNTING STANDARDS
In December 1999, the SEC issued SAB 101, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
SAB 101 outlines the basic criteria that must be met in order to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. In October 2000, the SEC issued additional written guidance to further
supplement SAB 101. The adoption of SAB 101 in 2000 did not have a material
impact on Bluemountain's financial position and results of operations.
A-15
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS (CONTINUED)
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44). FIN 44 clarifies the application of APB 25 for certain
issues relating to stock compensation such as criteria for determining when a
plan is noncompensatory, the accounting consequences of modifications to the
terms of a fixed award, and the accounting for stock compensation related to
business combinations, among others, and is effective July 1, 2000. The adoption
of FIN 44 did not have a material impact on Bluemountain's financial position or
results of operations.
On June 29, 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 and SFAS 142 significantly change the accounting for goodwill acquired in a
purchase business combination. Under the new rules, goodwill acquired prior to
June 30, 2001 will no longer be amortized after December 31, 2001, and will be
reviewed for impairment, using a complex methodology different from the original
proposal, when an event occurs indicating the potential for impairment. The
nonamortization approach applies to previously recorded goodwill as well as
goodwill arising from acquisitions completed after the application of SFAS 141
and SFAS 142. Bluemountain has not yet determined what impact, if any, the
adoption of SFAS 142 will have on the carrying value or classification of its
remaining acquired intangible assets.
2. IMPAIRMENT WRITE-DOWN OF GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
In December 2000, Bluemountain identified indicators of possible impairment of
its long-lived assets (principally, goodwill and other acquired intangible
assets). The impairment indicators included continued deterioration in the
business climate of, and reduced levels of venture capital funding activity for,
Internet advertising and other Internet-based companies, continued significant
declines in the market values of its competitors in the Internet advertising
industry, and recent changes made to its operating and cash flow forecasts.
A-16
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
2. IMPAIRMENT WRITE-DOWN OF GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
(CONTINUED)
With the assistance of independent valuation experts, Bluemountain performed
asset impairment tests as of December 31, 2000, by comparing the expected
undiscounted cash flows for a five-year period, plus a terminal value for future
cash flows, to the carrying amount of the goodwill and other intangible assets.
Bluemountain determined that the carrying amount of property and equipment and
other tangible assets was not significant to be tested for impairment. Based on
the results of these tests, Bluemountain determined that goodwill and other
intangible assets initially recorded in connection with the acquisition of
Bluemountain by Excite@Home were impaired. Fair value of the impaired long-lived
assets was determined using the discounted cash flow method and the market
comparison method. A write-down of goodwill totaling $684.2 million was recorded
during the fourth quarter of 2000, reflecting the amount by which the carrying
amount of the assets exceeded their respective fair values. In March 2001,
Bluemountain identified further indicators of impairment of its goodwill and
other acquired intangible assets and recorded an additional write-down of $15.5
million (unaudited), consisting of $9.6 million for goodwill and $5.9 million
for other acquired intangible assets.
Goodwill and other intangible assets consists of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
--------------------------------
(Unaudited)
Goodwill $ 938,585 $ 254,380
Write-down of goodwill (684,205) (9,596)
--------------------------------
Adjusted basis 254,380 244,784
Less accumulated amortization (243,912) (244,784)
--------------------------------
Goodwill, net 10,468 -
--------------------------------
Acquired identifiable intangible assets 27,800 27,800
Capitalized software development costs 794 1,026
Write-down of intangible assets - (5,907)
--------------------------------
Adjusted basis 28,594 22,919
Less accumulated amortization (7,477) (10,587)
--------------------------------
Other intangible assets, net 21,117 12,332
--------------------------------
Goodwill and other intangible assets, net $ 31,585 $ 12,332
================================
A-17
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
3. PROPERTY, EQUIPMENT, AND IMPROVEMENTS
The components of property, equipment, and improvements were as follows (in
thousands):
DECEMBER 31, JUNE 30, ESTIMATED
2000 2001 USEFUL LIVES
------------------------------------------------------------
(Unaudited)
Computer equipment and software $4,484 $4,605 3 to 4 years
Furniture and fixtures 213 213 5 years
Shorter of 7 years
Leasehold improvements 20 - or the lease term
----------------------------------------
Total property, equipment, and improvements 4,717 4,818
Less accumulated depreciation and amortization (2,352) (3,061)
----------------------------------------
Net property, equipment, and improvements $2,365 $1,757
========================================
4. CONCENTRATION OF CREDIT RISK
Bluemountain's concentration of credit risk consists primarily of trade accounts
receivable. Ongoing credit evaluations of corporate customers and other
counterparties are performed to limit credit risk. While trade accounts
receivable generally do not require collateral, reserves are maintained for
potential credit losses. Credit losses to date have been within management's
expectations.
The carrying amounts reported in the balance sheets for accounts receivable,
which are presented net of reserves, approximate their fair value as of December
31, 2000. Three customers comprised 21%, 14%, and 11% of accounts receivable as
of December 31, 2000. Three customers comprised 31%, 28%, and 17% of accounts
receivable as of June 30, 2001 (unaudited). No other customer comprised over 10%
of accounts receivable at December 31, 2000 or June 30, 2001 (unaudited).
A-18
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
4. CONCENTRATION OF CREDIT RISK (CONTINUED)
Two customers accounted for 19% and 15% of total revenues for the year ended
December 31, 2000. Three customers accounted for 24%, 14%, and 13% of total
revenues for the six months ended June 30, 2001 (unaudited). Two customers
accounted for 41% and 27% of total revenues for the six months ended June 30,
2000 (unaudited). No other single customer accounted for more than 10% of total
revenues for the year ended December 31, 2000 or for the six-month periods ended
June 30, 2001 and 2000 (unaudited).
5. COMMITMENTS AND CONTINGENCIES
Bluemountain leases certain office facilities under noncancelable operating
leases that expire at various dates through 2002, and which require Bluemountain
to pay operating costs, including property taxes, insurance, and maintenance.
These facility leases generally contain renewal options and provisions adjusting
the lease payments based upon changes in the consumer price index and increases
in real estate taxes and operating expenses or in fixed increments. Rent expense
is recorded on a straight-line basis over the terms of the leases. Facility rent
expense amounted to approximately $280,000 for the year ended December 31, 2000.
Future minimum lease payments under noncancelable operating leases having
original terms in excess of one year were as follows as of December 31, 2000:
OPERATING
LEASES
-------------------
Year ending December 31:
2001 $123,000
2002 46,000
Thereafter -
-------------------
Total minimum lease payments $169,000
===================
Excite@Home is subject to legal proceedings and claims that arise in the normal
course of business. Excite@Home believes no proceeding will have a material
adverse effect on the financial position or results of operations of
Bluemountian.
A-19
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS
The Bluemountain stock option plan (the BM Plan) was assumed by Excite@Home in
conjunction with Excite@Home's acquisition of Bluemountain in December 1999.
Stock options available for grant under the BM Plan were eliminated at the date
of acquisition. Shares issuable under the BM Plan were converted to
approximately 3.5 million stock options to purchase shares of Excite@Home's
Series A common stock. Options issued under the BM Plan vest at the rate of
12.5% after six months with the remainder vesting ratably over 42 months.
During the year ended December 31, 2000 and the six months ended June 30, 2001,
Excite@Home stock options were also issued to Bluemountain employees from
various other stock option plans adopted by Excite@Home. These plans authorize
incentive stock options to be granted to employees at an exercise price not less
than 100% of the fair value at the date of grant as determined by the board of
directors. These plans also authorize nonqualified stock options to be issued to
nonemployee officers, directors, and consultants at an exercise price of not
less than 85% of the fair value at the date of grant. Stock options under these
plans generally vest at the rate of 25% after one year and ratably on a monthly
basis for three years thereafter. The exercise period of options granted under
these plans generally expires in 10 years or 90 days subsequent to the
employee's termination, whichever is earlier.
The following summarizes the activity related to Excite@Home stock options
issued to Bluemountain employees for the periods indicated:
DECEMBER 31, JUNE 30,
2000 2001
---------------------------- ----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
---------------------------- ----------------------------------
Outstanding at beginning of period 1,310,668 $18.61 1,800,757 $17.66
Options granted 616,983 $15.71 18,250 $4.38
Options exercised (126,894) $18.59 - -
----------------- ------------------
Outstanding at end of period 1,800,757 $17.66 1,819,007 $17.53
================= ==================
Options exercisable at end of
period 675,406 $18.23 883,251 $18.10
================= ==================
A-20
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about Excite@Home stock options
outstanding held by Bluemountain employees as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------------------------------------------------
(In years)
$3.09-$10.13 174,151 9.57 $9.52 13,785 $6.31
$11.28-$16.56 370,076 9.04 $15.96 99,022 $15.51
$17.63-$18.59 1,185,376 8.76 $18.55 545,222 $18.58
$25.13-$45.06 71,154 8.53 $31.67 17,377 $32.06
------------------ -----------------
$3.09-$45.06 1,800,757 $17.66 675,406 $18.23
================== =================
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations is required by SFAS 123.
Such pro forma information summarizes our results of operations as if
stock-based awards to employees had been accounted for using a valuation method
permitted under SFAS 123.
The fair value of stock-based awards granted to Bluemountain employees have been
valued using the Black-Scholes option pricing model assuming no expected
dividends and the following weighted-average assumptions:
YEAR ENDED
DECEMBER 31,
2000
------------
Expected life of options 4 years
Expected volatility 0.76
Risk-free interest rate 6.20%
A-21
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
(CONTINUED)
The following summarizes the pro forma results of operations for the periods
indicated had Bluemountain accounted for stock-based awards in accordance with
SFAS 123 (in thousands):
YEAR ENDED
DECEMBER 31,
2000
------------
Net loss as reported $ 939,645
Pro forma net loss $ 940,406
The weighted-average fair value of options granted to Bluemountain employees
during the year ended December 31, 2000 was $9.33.
7. RETIREMENT PLAN
Excite@Home has a retirement plan under Section 401(k) of the Internal Revenue
Code. Under the retirement plan, participating Bluemountain employees may defer
a portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. Excite@Home makes contributions to the plan at the
discretion of the board of directors. To date, no such contributions have been
made.
8. INCOME TAXES
Bluemountain is a business unit within the legal entity At Home Corporation.
Bluemountain is included in the consolidated U.S. federal and state income tax
returns of Excite@Home. The provision for income taxes has been determined as if
Bluemountain had filed separate tax returns as if it was a stand-alone company
for the periods presented. Accordingly, the effective tax rate of Bluemountain
in future years could vary from its historical financial information. Given that
the revenues and expenses of these components of the statements of operations
have been prepared on a carve-out basis from Excite@Home, the resulting deferred
income tax assets and net operating losses were included in Excite@Home's
financial statements.
Provision has been made for income taxes in accordance with SFAS 109.
A-22
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
There was no current tax expense or benefit on federal or state taxes for the
year ended December 31, 2000. The provision (benefit) for income taxes for
December 31, 2000 are as follows (in thousands):
YEAR ENDED
DECEMBER 31,
2000
---------------------
Current tax expenses (benefits):
Federal $(6,084)
State (1,060)
Deferred tax expenses 1,006
---------------------
Subtotal (6,138)
Valuation allowance 6,138
---------------------
Total provision $ -
=====================
The effective tax rate differs from the prevailing statutory federal tax rate
for the year ended December 31, 2000 as follows:
YEAR ENDED
DECEMBER 31,
2000
---------------------
Statutory federal tax rate 35.00%
State tax rate, net of federal benefit 0.07%
Goodwill (34.42%)
Valuation allowance (0.65%)
---------------------
Effective tax rate 0.00%
=====================
A-23
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The components of the income tax assets and liabilities at December 31, 2000 are
as follows (in thousands):
YEAR ENDED
DECEMBER 31,
2000
---------------------
Deferred tax assets:
Net operating losses $ 6,084
Accrued costs and expenses 73
Deferred revenue 125
Deferred compensation 7,837
---------------------
Total deferred tax assets 14,119
Valuation allowance (14,119)
---------------------
Net deferred tax assets $ -
=====================
Realization of deferred tax assets is dependent on future earnings. Bluemountain
has a history of losses, therefore, Bluemountain cannot accurately predict the
timing of profitability and the use of tax assets to offset current tax
payables. Accordingly, a valuation allowance, in an amount equal to the net
deferred tax assets as of December 31, 2000, has been established to reflect
these uncertainties.
As of December 31, 2000 as a separate entity, Bluemountain would have had net
operating loss carryforwards for federal tax purposes of approximately $17.3
million. These carryforwards would expire beginning in the year 2020, if not
utilized.
A-24
Blue Mountain Arts
(a division of At Home Corporation)
Notes to Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS
Bluemountain is involved in transactions with related parties in the ordinary
course of business. These related parties include stockholders and partners with
significant investments in Excite@Home common stock and companies in which
Excite@Home has significant investments.
Total revenue from related parties was $3.0 million for the year ended December
31, 2000, $2.2 million (unaudited) for the six months ended June 30, 2000, and
$0.1 million (unaudited) for the six months ended June 30, 2001.
A-25