<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1997
REGISTRATION NO. 333-27323
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AT HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7370 77-0408542
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
----------------
425 BROADWAY STREET
REDWOOD CITY, CALIFORNIA 94063
(415) 569-5000
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KENNETH A. GOLDMAN
CHIEF FINANCIAL OFFICER
AT HOME CORPORATION
425 BROADWAY STREET
REDWOOD CITY, CALIFORNIA 94063
(415) 569-5000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
GORDON K. DAVIDSON, ESQ. LARRY W. SONSINI, ESQ.
LAIRD H. SIMONS III, ESQ. JAMES N. STRAWBRIDGE, ESQ.
JEFFERY L. DONOVAN, ESQ. DAVID C. DRUMMOND, ESQ.
DOROTHY L. HINES, ESQ. TREVOR J. CHAPLICK, ESQ.
FENWICK & WEST LLP PAUL R. TOBIAS, ESQ.
TWO PALO ALTO SQUARE WILSON SONSINI GOODRICH & ROSATI,
PALO ALTO, CALIFORNIA 94306 PROFESSIONAL CORPORATION
(415) 494-0600 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_] ________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Common Stock,
$.01 par value per 10,350,000
share................. shs. $10.50 $108,675,000 $3,660
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,350,000 shares that the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating
the amount of the registration fee.
(3) Represents the incremental registration fee for 1,150,000 additional
shares of Series A Common Stock at $10.50 per share. The Registrant paid
the registration fee for the remaining 9,200,000 shares with its filing on
May 16, 1997.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
9,000,000 Shares
[LOGO OF @HOME NETWORK]
At Home Corporation
SERIES A COMMON STOCK
--------------
ALL OF THE SHARES OF SERIES A COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SERIES
A COMMON STOCK OF THE COMPANY. THE COMPANY HAS THREE SERIES OF COMMON STOCK:
SERIES A COMMON STOCK, SERIES B COMMON STOCK AND SERIES K COMMON STOCK
(COLLECTIVELY, THE "COMMON STOCK"). THE SHARES OF COMMON STOCK ARE
SUBSTANTIALLY IDENTICAL, EXCEPT THAT (I) HOLDERS OF SERIES A AND SERIES K
COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE, AND HOLDERS OF SERIES B
COMMON STOCK ARE ENTITLED TO TEN VOTES PER SHARE, ON ALL MATTERS SUBMITTED
TO A VOTE OF STOCKHOLDERS, (II) THE HOLDERS OF SERIES A COMMON STOCK VOTE
SEPARATELY AS A SERIES TO ELECT TWO DIRECTORS WHO ARE NOT OFFICERS OR
EMPLOYEES OF THE COMPANY AND ARE NOT AFFILIATES OR ASSOCIATES OF TELE-
COMMUNICATIONS, INC. ("TCI"), COMCAST CORPORATION ("COMCAST") OR COX
ENTERPRISES, INC. ("COX"), (III) THE HOLDERS OF SERIES B COMMON STOCK VOTE
SEPARATELY AS A SERIES TO ELECT FIVE DIRECTORS, OF WHICH, PURSUANT TO A
STOCKHOLDERS' AGREEMENT, THREE ARE TO BE DESIGNATED BY TCI, ONE IS TO BE
DESIGNATED BY COMCAST AND ONE IS TO BE DESIGNATED BY COX, AND (IV) THE
HOLDERS OF SERIES K COMMON STOCK VOTE SEPARATELY AS A SERIES TO ELECT
ONE DIRECTOR. EACH SHARE OF SERIES B AND SERIES K COMMON STOCK IS
CONVERTIBLE AT THE OPTION OF THE HOLDER INTO ONE SHARE OF SERIES A
COMMON STOCK. IMMEDIATELY FOLLOWING THE COMPLETION OF THIS OFFERING,
TCI WILL OWN ALL OF THE SERIES B COMMON STOCK AND WILL HAVE
APPROXIMATELY 72.3% OF THE COMBINED VOTING POWER OF THE OUTSTANDING
COMMON STOCK (ASSUMING NO EXERCISE OF THE OVER-ALLOTMENT OPTION
GRANTED TO THE UNDERWRITERS). THEREFORE, TCI WILL HAVE THE ABILITY TO
CONTROL MOST SIGNIFICANT MATTERS REQUIRING STOCKHOLDER APPROVAL,
INCLUDING THE ELECTION OF A MAJORITY OF THE COMPANY'S DIRECTORS,
SUBJECT TO CERTAIN SUPERMAJORITY APPROVAL RIGHTS HELD BY COMCAST AND
COX. SEE "PRINCIPAL STOCKHOLDERS" AND "DESCRIPTION OF CAPITAL
STOCK." SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE
SHARES OF SERIES A COMMON STOCK OFFERED HEREBY HAVE BEEN APPROVED
FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"ATHM."
--------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PRICE $10 1/2 A SHARE
--------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................ $10.500 $.735 $9.765
Total(3)................................. $94,500,000 $6,615,000 $87,885,000
</TABLE>
- -------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended. See "Underwriters."
(2) Before deducting expenses estimated at $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 1,350,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions, and proceeds to Company will be
$108,675,000, $7,607,250 and $101,067,750, respectively. See
"Underwriters."
--------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about July 16, 1997 at
the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
--------------
The activities of the Managers are being jointly coordinated.
MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO.
--------------
ALEX. BROWN & SONS HAMBRECHT & QUIST
INCORPORATED
July 11, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
UNTIL AUGUST 5, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 3 Management....................... 52
Risk Factors........................ 5 Certain Transactions............. 63
The Company......................... 22 Principal Stockholders........... 70
Use of Proceeds..................... 23 Description of Capital Stock..... 71
Dividend Policy..................... 23 Shares Eligible for Future Sale.. 73
Capitalization...................... 24 Underwriters..................... 75
Dilution............................ 25 Legal Matters.................... 77
Selected Consolidated Financial Experts.......................... 77
Data............................... 26 Change in Independent Auditors... 77
Management's Discussion and Analysis Additional Information........... 77
of Financial Condition and Results Index to Consolidated Financial
of Operations...................... 27 Statements...................... F-1
Business............................ 33
</TABLE>
----------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited consolidated
financial data for the first three quarters of each year.
----------------
@Home, @Home Network, @Media, @Work and the @ball logo are trademarks of the
Company and are registered in certain jurisdictions. @Work Remote, @Work
Internet, DirectConnect, Replicate, M-Cast and KnowledgeAPI are service marks
of the Company. This Prospectus also includes trademarks of companies other
than the Company.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A COMMON
STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITERS."
2
<PAGE>
@HOME NETWORK
Narrative Description of Inside Cover Gatefold
LANDSCAPE GATEFOLD, INSIDER COVER PAGE:
Title heading, left side--"@Home Network" [@ball logo], right side--
"Leveraging the cable infrastructure to deliver high-speed Internet services
to consumers and businesses."
top left third of page:
heading--"Multimedia Content"
diagram showing two sample browser screens with content and features
highlighted by dotted lines indicating specific captions.
captions [clockwise from top left]--"Standard Web browser features and
access", "Reviews and links to the "best of the Web"', "Collection of
Industry-leading search engines", "Online directory of businesses and
services", "Persistent link to @Home", "Local content: weather, movies,
community events, etc.", "TuneIn: exclusive near CD quality audio service",
"Scrolling news headlines", "Multimedia audio/video advertisements", "Links
to related topics", "Main panel", "Cable Partners:", "Customer support
button", "@Home Guide to channels", "@Home Community: chat groups, bulletin
boards, etc."
artwork consists of Cable Partners Company logos [directly below "Cable
Partners:" caption noted above]--Comcast, Cox, Intermedia, Marcus Cable,
Rogers, Shaw, TCI.Net.
bottom left third of page:
heading--"@Media" [@ball logo]
bullet point list--"Dynamic multimedia content", "Audio/video advertising",
"Premium services"
<PAGE>
top right two-thirds of page:
heading--"@Network Architecture"
diagram modeling physical and electrical structure of network connectivity
with features highlighted by dotted lines indicating specific captions.
external captions [clockwise from top left]--"@Home Service" [large font]
"with Telephone Return Cable Modem", "Analog Telephone Line", "Regional
Data Center (RDC)", "Network Access Point (NAP)", "The Internet", "Network
Operations Center (NOC)", "NAP", "Private National Backbone", "@Work
Remote" [large font caption], "Hybrid-Fiber Coax (HFC)", "Home Office",
"Small Office", "@Work Internet" [large font], "Large Office, Medium Office
or Small Office", "Telecommunications Network", "@Home Service" [large
font] "with Multiple Dwelling Units (MDU)", "Cable Modem", "@Home Service"
[large font] "with Two-Way Cable Modem".
internal captions used repeatedly for specific network elements--
"Telecommunications Network", "Fiber Optic", "RDC", "HFC", "Headend"
artwork consists of graphic representations of physical buildings and
network hardware originating with "Network Operations Center(NOC)" caption
at top center of diagram and branching out through a variety of network
links to end-user stations. The @ball logo is used repeatedly at each node
in the network.
Bottom middle third of page:
heading--"@Home" [@ball logo]
bullet point list--"High speed", "Always on' instant access", "Easy-to-use
navigation"
bottom right third of page:
heading--"@Work" [@ball logo]
bullet point list--"High-performance Internet solutions for business",
"Fully-managed network services", "High-speed telecommuting"
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein,
information in this Prospectus assumes (i) no exercise of the Underwriters'
over-allotment option and (ii) the conversion of all outstanding shares of
Preferred Stock of the Company into shares of Common Stock of the Company,
which will occur upon the closing of this offering.
THE COMPANY
At Home Corporation (the "Company") is a leading provider of Internet
services over the cable television infrastructure to consumers and businesses.
The Company's primary offering, the @Home service, allows residential
subscribers to connect their personal computers via cable modems to a new high-
speed network developed and managed by the Company. This service enables
subscribers to receive the "@Home Experience," which includes Internet service
over hybrid fiber-coaxial ("HFC") cable at a peak data transmission speed over
300 times faster than typical dial-up connections, "always on" availability and
rich multimedia programming through an intuitive graphical user interface. The
technology foundation of the @Home Experience is the Company's scalable,
distributed, intelligent network architecture (the "@Network"), a "parallel
Internet" that optimizes traffic routing, improves security and consistency of
service, and facilitates end-to-end network management, enhancing the Company's
ability to address performance bottlenecks before they affect the user
experience. See "Business--@Network Architecture." The content foundation of
the @Home Experience is provided by the Company's @Media group, which
aggregates content, sells advertising to businesses and will provide premium
services to @Home subscribers. For businesses, the Company's @Work services
provide a platform for Internet, intranet and extranet connectivity solutions
and networked business applications over both cable infrastructure and leased
digital telecommunications lines. By combining the @Network's distributed
architecture with cable, telephone and technology relationships, the @Work
services provide a compelling platform for nationwide delivery of network-based
business applications. The Company has developed this platform at a low
incremental cost by leveraging its existing @Network investment.
The Company has entered into distribution arrangements for the @Home service
with affiliates of Tele-Communications, Inc. ("TCI"), Comcast Corporation
("Comcast"), Cox Enterprises, Inc. ("Cox"), Rogers Cablesystems Limited
("Rogers"), Shaw Cablesystems Ltd. ("Shaw"), Marcus Cable Operating Company,
L.P. ("Marcus") and InterMedia Partners IV L.P. ("Intermedia") (collectively,
together with their affiliates, the "Cable Partners"), whose cable systems
"pass" (i.e., can be connected to) approximately 44 million homes in North
America. The Company believes that approximately two million of these homes are
currently passed by upgraded two-way HFC cable and that the Cable Partners will
complete the upgrade of systems passing a majority of these homes within five
years. The Company has launched its service through TCI, Comcast, Cox
(collectively, the "Principal Cable Stockholders") and Intermedia in portions
of 13 cities and communities (of which 11 have revenue-paying subscribers) in
the United States and had more than 7,000 U.S. subscribers as of June 30, 1997.
To expand distribution, the Company is aggressively seeking to work with
additional United States and international cable system operators. In order to
shorten time to market for cable operators, the Company provides a turnkey
solution, which includes not only a technology platform, but also marketing,
customer service, billing and a national brand. According to Paul Kagan
Associates, Inc., cable is available to approximately 96% of the homes in the
United States, and, according to Baskerville Communications, there will be
approximately 203 million homes passed in Europe and the Asia Pacific region in
the year 2000.
The Company was founded in March 1995 on the premise that the cable
infrastructure could enable the fastest, most cost-effective delivery mechanism
for residential Internet services but that the actual speed of these services
would ultimately be limited by the fundamental architecture of the Internet. As
a result, the Company assembled a team of industry experts to develop an
advanced network architecture and the custom hardware and software products
that would address these limitations. Prior to launching the @Home service in
September 1996, the Company implemented a nationwide backbone, designed and
built its Network Operations Center with 24X7 end-to-end management
capabilities, deployed regional data centers and headend equipment, implemented
an integrated customer management system including billing and support for
those operators that elect to obtain such services from the Company,
implemented a customized browser and aggregated the multimedia content required
to deliver the @Home Experience to its first subscribers.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Total Common Stock outstanding prior to this offering... 108,520,996 shares(1)
Series A Common Stock offered........................... 9,000,000 shares
Common Stock to be outstanding after this offering:
Series A Common Stock outstanding after this offering.. 87,243,336 shares(1)
Series B Common Stock outstanding after this offering.. 15,400,000 shares
Series K Common Stock outstanding after this offering.. 14,877,660 shares
Total................................................ 117,520,996 shares
Use of proceeds......................................... For general corporate
purposes, including
working capital and
capital expenditures.
See "Use of Proceeds."
Nasdaq National Market symbol........................... ATHM
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, SIX MONTHS
1995 ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1995 1996 1996 1997
-------------- ------------ ------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues....................... $ -- $ 676 $ -- $ 1,830
Total costs and expenses....... 2,886 25,703 8,442 24,977
Loss from operations........... (2,886) (25,027) (8,442) (23,147)
Net loss....................... (2,756) (24,513) (8,279) (22,804)
Pro forma net loss per
share(2)...................... $ (.22) $ (.21)
======== ========
Pro forma shares used in per
share calculations(2)......... 111,065 111,065
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term cash
investments........................................... $40,929 $127,814
Working capital........................................ 29,032 115,917
Total assets........................................... 69,145 156,030
Capital lease obligations, less current portion, and
other long-term liabilities........................... 11,953 11,953
Stockholders' equity................................... 42,936 129,821
</TABLE>
- -------
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i)
1,687,000 shares of Series A Common Stock then issuable upon the exercise
of options outstanding under the Company's 1996 Incentive Stock Option Plan
(the "First 1996 Plan") and the Company's 1996 Incentive Stock Option Plan
No. 2 (the "Second 1996 Plan" and with the First 1996 Plan, the "1996
Plans") with a weighted average exercise price of $2.03 per share, (ii)
664,264 shares of Series A Common Stock reserved for issuance under the
Company's 1997 Equity Incentive Plan, (iii) 400,000 shares reserved for
issuance under the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), (iv) 200,000 shares of Series A Common Stock issuable
upon the exercise of an outstanding warrant with an exercise price of
$15.00 per share and (v) 2,000,000 shares of Series A Common Stock issuable
upon the exercise of outstanding warrants with an exercise price of $10.00
per share. See "Management--Employee Benefit Plans," "Description of
Capital Stock" and Notes 5 and 9 of Notes to Consolidated Financial
Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of pro forma shares used in per share
calculations.
(3) Reflects the sale of the 9,000,000 Shares of Series A Common Stock offered
hereby, after deducting underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Shares of Series A Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed below and in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Short Operating History; History of Losses; Unproven Business; No Assurance
of Profitability. The Company was incorporated in March 1995, commenced
operations in August 1995 and has incurred substantial net losses in each
fiscal period since its inception. As of June 30, 1997, the Company had an
accumulated deficit of $50.1 million. In addition, the Company currently
intends to increase its capital expenditures and operating expenses in order
to expand its network to support additional expected subscribers in existing
and future markets and to market and provide the Company's services to a
growing number of potential subscribers. As a result, the Company expects to
incur additional substantial operating and net losses for the foreseeable
future. The profit potential of the Company's business model is unproven, and,
to be successful, the Company must, among other things, develop and market
products and services that are widely accepted by consumers and businesses at
prices that will yield a profit. The Company's @Home service has only recently
been launched in portions of 13 cities and communities (of which 11 have
revenue-paying subscribers) in the United States, and there can be no
assurance that it will achieve broad consumer or commercial acceptance.
Currently, the Company has only approximately 7,000 subscribers to its @Home
service in these areas. Because it is a consumer service, the success of the
Company's @Home service will depend upon the willingness of subscribers to pay
the monthly fees and installation costs of the @Home service, both of which
are set by local cable system operators ("LCOs") and not by the Company. The
@Home service is currently priced at a premium to many other online services,
and there can be no assurance that large numbers of subscribers will be
willing to pay a premium for the @Home service. Accordingly, it is difficult
to predict whether the Company's pricing model will prove to be viable,
whether demand for the Company's services will materialize at the prices it
expects the LCOs to charge or whether current or future pricing levels will be
sustainable. If such pricing levels are not achieved or sustained or if the
Company's services do not achieve or sustain broad market acceptance, the
Company's business, operating results and financial condition will be
materially adversely affected. The Company's ability to increase the number of
subscribers to the @Home service to achieve its business plans and generate
future revenues will be dependent on a number of factors, many of which are
beyond the Company's control, including, among others, the rate at which the
Company's current and future cable partners upgrade their cable
infrastructures, the ability of the Company and its cable partners to
coordinate timely and effective marketing campaigns with the availability of
such upgrades, the success of the LCOs in marketing the @Home service to
subscribers in their local cable areas, the prices that the LCOs set for the
@Home service and its installation, and the rate at which the LCOs can
complete the installations required to initiate service for new subscribers.
Because of the foregoing factors, among others, the Company is unable to
forecast its revenues or the rate at which it will add new subscribers with
any degree of accuracy. There can be no assurance that the Company will be
able to increase its subscriber base in accordance with its internal forecasts
or the forecasts of industry analysts or to a level that meets the
expectations of investors. There can also be no assurance that the Company
will ever achieve favorable operating results or profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Strategy."
Potential Fluctuations in Quarterly Operating Results. The Company's
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly operating results
attributable to its @Home service include the timing of Cable Partners'
upgrades of their cable infrastructures and rollouts of the @Home service, the
rate at which customers subscribe to the Company's Internet services and the
prices subscribers pay for such services, subscriber churn rates, changes in
the revenue splits between the Company and the Cable Partners, the demand for
Internet advertising, the effectiveness of the LCOs' marketing and other
operations, and potential competition with LCOs for advertising revenue.
Quarterly operating results attributable to the Company's
5
<PAGE>
@Work services are dependent on the timing of Cable Partners' upgrades of
their cable infrastructures and rollouts of the @Home service, the demand for,
and level of acceptance of, the Company's corporate Internet, intranet and
extranet connectivity and telecommuting solutions and the introduction of,
demand for, and level of acceptance of, the Company's value-added business
applications. Additional factors that may affect the Company's quarterly
operating results generally include the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
network, the introduction of new Internet and telecommuting services by the
Company or its competitors, price competition or pricing changes in the
Internet, cable and telecommuting industries, technical difficulties or
network downtime, general economic conditions and economic conditions specific
to the Internet, Internet media, corporate intranet and cable industries. The
Company operates with very little backlog, and quarterly sales and operating
results are difficult to forecast even in the short term. There can be delays
in the commencement and recognition of revenue because the installation of
telecommunication lines to implement certain services has lead times that are
controlled by third parties. A significant portion of the Company's expenses
are fixed in advance based in large part on future revenue forecasts. If
revenue is below expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall. Therefore, a
shortfall in actual as compared to estimated revenue would have an immediate
adverse effect on the Company's business, financial condition and operating
results that could be material. In addition, the Company plans to increase
operating expenses to fund additional research and development, sales and
marketing, general and administrative activities and infrastructure. To the
extent that these expenses are not accompanied by an increase in revenues, the
Company's business, operating results and financial condition could be
materially adversely affected. Due to all of the foregoing factors, it is
likely that the subscription rates to the Company's services and the Company's
operating results in one or more future quarters will fail to meet or exceed
the expectations of securities analysts or investors. In such event, the
trading price of the Series A Common Stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Control by TCI; Veto Power of Other Principal Stockholders. The purchasers
of Series A Common Stock in this offering will not have sufficient voting
power to elect any members of the Company's Board of Directors (the "Board").
Following this offering, TCI will control approximately 72.3% of the voting
power of the Company and will have the power to elect a majority of the
members of the Board and the power to control all matters requiring the
approval of the holders of the Company's Common Stock voting together as a
single class. TCI owns all of the Series B Common Stock, which carries ten
votes per share and has the right under the Company's Certificate of
Incorporation (the "Certificate") to elect five directors (the "Series B
Common Stock Directors"), of which, pursuant to a Stockholders' Agreement,
three are to be designated by TCI, one is to be designated by Comcast and one
is to be designated by Cox. Currently, four of the Company's 11 directors are
directors, officers or employees of TCI or its affiliates. The Company's
Certificate provides that so long as TCI owns at least 7,700,000 shares of
Series B Common Stock and securities representing a majority of the
outstanding voting power of the Company, (i) any action by the Company's Board
must be approved by both a majority of directors present at a meeting at which
a quorum is present and by a majority of the Series B Common Stock Directors
(of which TCI is currently entitled to elect three out of five) and (ii) a
committee composed of those Series B Common Stock Directors who are officers,
directors or employees of TCI will have the sole power (acting as a committee
of the Board and without the necessity of stockholder approval) to increase
the size of the Board (up to a maximum of 17 members) and to fill the
vacancies created by any such increase. The effect of these provisions is to
enable TCI to block actions of the Board, even through the TCI directors may
not then constitute a majority of the Board, and to expand the Board at any
time and fill the vacancies with TCI designees such that the TCI designees
would constitute a majority of the Board. As a result, TCI, acting both
through its designees on the Board and through its ownership of voting
securities, will have the power to control the Company, subject, however, to
any fiduciary duties that TCI, as the controlling stockholder, may owe to the
other stockholders of the Company under Delaware law, the fiduciary duties
that all directors of the Company, including those directors who are officers
or directors of TCI, owe to stockholders of the Company to act in the best
interests of the stockholders and the supermajority and unanimous approval
provisions set forth in the Certificate which provide that the Company may not
take certain corporate actions without the approval of
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TCI's Series B Common Stock Directors as well as two out of three, or in
certain cases all three, of the directors designated by Comcast, Cox and
Kleiner Perkins Caufield & Byers ("KPCB"), which effectively gives Cox,
Comcast and KPCB veto powers over certain corporate actions. See "Management--
Board Composition and Procedures," "Certain Transactions" and "Description of
Capital Stock."
Dependence on Cable Partners for Distribution; Potential Conflicts of
Interest with Principal Cable Stockholders. The Cable Partners are expected to
provide through certain of their cable systems the principal distribution
network for the Company's services to residential subscribers to the @Home
service (the majority of whom are expected to be subscribers to such Cable
Partners' cable television services) and will share the revenue from the @Home
services that are derived from such subscribers. Given the contractual and
business relationships between the Cable Partners and the Company, the
interests of the Cable Partners may not always coincide with the interests of
the Company, and conflicts of interest concerning the split of revenues and
other matters exist between the Company and the Principal Cable Stockholders,
who control the Company. Because TCI, Comcast and Cox all operate cable
systems that will be the primary distributors of the @Home service, situations
may arise where the interests of the Principal Cable Stockholders may diverge
or appear to diverge from the interests of the other stockholders of the
Company. TCI and the other Principal Cable Stockholders, acting through their
designees on the Board, will have the ability to cause the Company to take
certain actions or prohibit it from taking certain actions, which may be
favored by the other stockholders of the Company or by the other directors of
the Company who are not affiliated with the Principal Cable Stockholders. The
Board, which is controlled by TCI, has the power, subject to directors'
fiduciary duties, to approve transactions in which the Principal Cable
Stockholders have an interest, including a change in revenue splits in favor
of the Principal Cable Stockholders. Under the current master distribution
agreement pursuant to which the Principal Cable Stockholders distribute the
Company's services (the "Master Distribution Agreement"), the Company receives
35% of monthly fees and fees for premium services. As a result of certain
contractual "most favored nation" provisions (the "MFN"), which provide that
the cable affiliates of the Principal Cable Stockholders are entitled to
distribution arrangements and related services on terms at least as favorable
as those obtained by any other cable system operator, the Principal Cable
Stockholders could determine to cause the Company to approve more favorable
distribution arrangements, including more favorable revenue splits, for one or
more unaffiliated cable operators in order to receive more favorable
distribution arrangements for their respective cable affiliates through the
operation of the MFN. See "Management--Board Composition and Procedures."
Control by Principal Cable Stockholders of Terms of Distribution. Prior to
this offering, the Company and the Principal Cable Stockholders have entered
into the Master Distribution Agreement providing for the distribution of the
@Home service by the Principal Cable Stockholders and their affiliates. The
economic and other terms of the Master Distribution Agreement may be less
favorable to the Company than those that could have been negotiated had the
Company been independent of the Principal Cable Stockholders. Because the
Company does not yet have a significant number of subscribers, it is not yet
possible to determine whether the revenue splits and the other economic
aspects of the distribution of the Company's services will be sufficiently
attractive to encourage a sufficient number of cable system operators to enter
into distribution agreements with the Company, or to encourage cable system
operators, including the Principal Cable Stockholders, to incur the
substantial capital expenditures required to upgrade their cable systems to a
two-way HFC cable infrastructure and to roll out and vigorously promote the
@Home service. Because of their control of the Company, the Principal Cable
Stockholders will have the power, subject to their fiduciary duties, to change
any of the terms of distribution, including the revenue splits with the
Company. In addition, the Master Distribution Agreement and the other
agreements between the Company and the Principal Cable Stockholders contain
provisions that permit a Principal Cable Stockholder to change certain aspects
of the distribution of the @Home service without the approval of the Company.
For example, a Principal Cable Stockholder has the option to provide certain
customer service functions which are currently provided by the Company and
upon which the Company's 35% revenue split was based. If such Principal Cable
Stockholder elects to provide such services, it is also entitled to an
adjustment in the revenue split with the Company. Similarly, the Principal
Cable Stockholders have certain rights pursuant to the Master Distribution
Agreement to remove cable systems from the approved rollout schedule or
substitute cable systems in place of removed systems. These rights are
contractual in nature and may be exercised
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by the Principal Cable Stockholders in their sole discretion. The exercise by
the Principal Cable Stockholders of these contractual rights may have an
adverse effect upon the Company's business, operating results and financial
condition. Moreover, because of their control of the Board, the Principal
Cable Stockholders will have the ability to amend, modify or terminate the
Master Distribution Agreement, agreements between LCOs affiliated with the
Principal Cable Stockholders ("Affiliated LCOs") and the Company ("LCO
Agreements"), a stockholders' agreement to which the Company and the Principal
Cable Stockholders, among others, are parties (the "Stockholders' Agreement")
and the other agreements to which the Company is a party, or to cause the
Company to grant waivers of certain provisions thereof. In considering any
such amendments, modifications or waivers, the members of the Board, including
those members who are designees of the Principal Cable Stockholders, will be
subject to the fiduciary duties owed to the stockholders of the Company under
Delaware law. There can be no assurance that following the consummation of
this offering the Principal Cable Stockholders will not cause the terms of the
Master Distribution Agreement to be amended, modified or terminated or cause
the Company to waive any provision of the Master Distribution Agreement. The
Principal Cable Stockholders control the Company and effectively determine the
rollout schedule of the @Home service. Moreover, the Master Distribution
Agreement and certain other agreements provide the Principal Cable
Stockholders and Rogers and Shaw with certain priority rights with respect to
the rollout schedule of the @Home service. This priority could adversely
affect the Company because the Company may be required to roll out its
services to the Principal Cable Stockholders and Rogers and Shaw, and their
respective LCOs, before rolling out the services to other cable system
operators, even though such other cable system operators may be ready to roll
out the @Home service sooner or on terms more favorable for the Company than
the terms of distribution for the Principal Cable Stockholders and Rogers and
Shaw, and their respective LCOs. See "Business--Strategic Distribution
Relationships--Strategic Relationships with Cable Partners" and "Certain
Transactions."
Right of Principal Cable Stockholders to Block Access to Certain Content and
Services. The Master Distribution Agreement provides each Principal Cable
Stockholder with the right to exclude the promotion of specified national
content providers from the @Home service offered through such Principal Cable
Stockholder's cable systems, subject to an adjustment in the split of premium
service revenues between the Principal Cable Stockholder and the Company to
the extent the number of such exclusions exceeds a specified number. In
addition, a Principal Cable Stockholder has the right to block access to
certain content, including streaming video segments of more than ten minutes
in duration, and the Company is obligated to use its reasonable best efforts
to block such access. The Company is obligated to use its reasonable best
efforts to consult with and involve each of the Principal Cable Stockholders
in the development of requirements for and design of enhancements, new
features and new applications of the @Home service and coordinate with respect
to the introduction of such enhancements, features and applications that could
have a significant effect on the operations of a Principal Cable Stockholder.
If Principal Cable Stockholders representing a majority of the residential
subscribers who subscribe to the @Home service via Affiliated LCOs of the
Principal Cable Stockholders object to such enhancement, feature or
application, the Company has agreed not to implement such enhancement, feature
or application in the territories of objecting Principal Cable Stockholders.
If any of the Principal Cable Stockholders exercise these rights to block
access to certain content or services in certain territories, the Company may
be required to devote substantial expenses and resources to provide different
content and services in different territories and to assist the Principal
Cable Stockholders in blocking such access, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Certain Transactions--Certain Business Relationships."
No Obligation of Principal Cable Stockholders to Carry the Company's
Services; Limitations on Their Exclusivity. Although the Principal Cable
Stockholders and their Affiliated LCOs are subject to certain exclusivity
obligations under the Master Distribution Agreement that prohibit them from
obtaining high-speed (greater than 128 kilobits per second ("Kbps"))
residential consumer Internet services from any source other than the Company,
the Principal Cable Stockholders and their Affiliated LCOs are under no
affirmative obligation to carry any of the Company's services. Accordingly,
the termination of these exclusivity obligations could adversely affect the
willingness of the Principal Cable Stockholders to roll out or continue to
carry the Company's @Home and other services, which could have a material
adverse effect on the Company's business,
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operating results and financial condition. The Principal Cable Stockholders'
and their Affiliated LCOs' exclusivity obligations in favor of the Company
expire on June 4, 2002, and may be terminated sooner under the following
circumstances: (i) any Affiliated LCO may terminate its exclusivity
obligations if the Company fails to roll out the @Home service in such
operator's territory by the deadlines set forth in the rollout schedules;
(ii) the Principal Cable Stockholders may terminate all exclusivity
obligations upon a change in law that materially impairs certain of the
Principal Cable Stockholders' rights; (iii) Comcast or Cox may terminate all
Principal Cable Stockholders' exclusivity obligations at any time if there is
a change of control of TCI or on June 4, 1999 or each anniversary thereafter
if certain subscriber penetration levels for the @Home service are not met by
TCI and its affiliates; and (iv) Comcast may terminate its own exclusivity
obligations upon its election after June 4, 1999 if it permits a portion of
its equity in the Company to be repurchased by the Company at Comcast's
original cost. Comcast has informed the Company that Comcast has entered into
an agreement with Microsoft Corporation ("Microsoft") pursuant to which
Microsoft can require Comcast to terminate its exclusivity obligations after
June 4, 1999. Although Microsoft has stated in the agreement that it has no
present intention to do so, there can be no assurance that Microsoft will not
be more likely than Comcast to terminate Comcast's exclusivity obligations.
The exclusivity obligations of the Principal Cable Stockholders in the Master
Distribution Agreement also are subject to exceptions that would permit the
Principal Cable Stockholders and their affiliates to engage in certain
activities which could compete, directly or indirectly, with the activities of
the Company; for example, each Principal Cable Stockholder and its affiliates
are permitted to (i) engage in any business other than the provision of high-
speed residential consumer Internet services, including competing with the
Company's @Work operations, (ii) maintain voting equity interests of 10% or
less in public companies that directly compete with the Company's @Home
service and related Internet backbone connectivity services, (iii) acquire an
interest in any business that competes with the Company's high-speed
residential consumer Internet services (so long as the competitive business is
not such entity's primary business and subject to a limited obligation to
divest the competing business on reasonable terms, such divestiture subject to
a right of first refusal by the Company), (iv) acquire equity securities of
public companies that compete with the Company, provided that the Principal
Cable Stockholder does not control (or is not under common control with) such
companies and (v) operate a competing business in any cable system territory
where the exclusivity obligations to the Company have been terminated. See
"Business--Strategic Distribution Relationships--Strategic Relationships with
Cable Partners" and "Certain Transactions."
Rights of Principal Cable Stockholders and Limitations on the Company's
Ability to Provide Certain Excluded Services. The Master Distribution
Agreement provides that the Principal Cable Stockholders' exclusivity
obligations are limited to high-speed residential consumer Internet services,
and therefore the Company will not necessarily have access to their cable
systems for other services that the Company may wish to offer. The Principal
Cable Stockholders' exclusivity obligations do not apply to the creation or
aggregation of content or, among other things, any of the following services
(the "Excluded Services"): (i) the provision of telephony services, (ii) the
provision of services that are primarily work-related, such as @Work services,
(iii) the provision of Internet services that do not use their cable
television infrastructures, (iv) the provision of any local Internet service
that does not require use of an Internet backbone outside a single
metropolitan area, (v) the provision of services that are utilized primarily
to connect students to schools, colleges or universities, (vi) the provision
of Internet telephony, Internet video telephony or Internet video
conferencing, (vii) the provision of certain limited Internet services
primarily intended for display on a television, (viii) the provision of
certain Internet services that are primarily downstream services where the
user cannot send upstream commands in real-time as defined in the Master
Distribution Agreement, (ix) the provision of streaming video services that
include video segments longer than ten minutes in duration or (x) limited
testing, trials and similar activities of less than six months. Until the
later of such time as the applicable Principal Cable Stockholder ceases to be
obligated under the exclusivity provisions set forth above or, if the
exclusivity provisions are terminated by reason of TCI's failure to meet
specified subscriber penetration levels, June 4, 2002, the Company has agreed
(i) not to offer or provide Internet services at data transmission speeds
greater than 128 Kbps to residences in any geographic area served by the cable
systems of a Principal Cable Stockholder that remains in compliance with the
exclusivity provisions without regard to whether the "Restricted Period," as
defined in the Master Distribution Agreement, has ended as to such Principal
Cable Stockholder (the "Exclusive Territory") and (ii) not to directly or
indirectly
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offer, provide, distribute, advertise, promote or market (or carry or
otherwise distribute advertising or promotions with respect to) any streaming
video transmissions that include video segments longer than ten minutes in
duration or any other Excluded Service to residences in the Exclusive
Territory of a Principal Cable Stockholder without its prior written consent
even if such Excluded Service has been integrated with the @Home service in
other areas. Moreover, no assurance can be given that the Company will have
access to the cable infrastructures of the Principal Cable Stockholders or
other Cable Partners for such Excluded Services, and the Company must
negotiate a separate agreement with the Principal Cable Stockholders for each
portion of such services that the Company seeks to provide over their cable
infrastructures. Any such denial of access or exclusion, or competition from
Principal Cable Stockholders in providing Excluded Services, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Strategic Distribution Relationships--
Strategic Relationships with Cable Partners" and "Certain Transactions."
Potential Disposition of Cable Systems by Principal Cable Stockholders. The
Company's agreements with its Principal Cable Stockholders do not require that
such Principal Cable Stockholders maintain a specified number of cable
systems, subscribers or homes passed by cable infrastructure in order to
maintain their control over and equity ownership of the Company. However, the
Stockholders' Agreement does provide that if a Principal Cable Stockholder's
number of homes passed which remain subject to certain exclusivity provisions
in favor of the Company decreases by more than 20% of the number of homes
passed as of June 4, 1996 (subject to certain exceptions), then such Principal
Cable Stockholder must offer to sell a proportionate amount of its equity
interest in the Company to the other Principal Cable Stockholders at the fair
market value thereof. However, such provisions would permit the disposition of
a portion of such Principal Cable Stockholders' cable assets without imposing
any penalty and, in the event a Principal Cable Stockholder exceeds the 20%
threshold, selling shares at fair market value may not constitute a
significant penalty to such Principal Cable Stockholder. Therefore, there can
be no assurance that such arrangements will effectively discourage a Principal
Cable Stockholder from disposing of a significant amount of its cable systems
without requiring that such cable systems remain subject to such exclusivity
provisions. TCI has recently announced the proposed sale or transfer of
certain cable systems in New York and New Jersey to Cablevision Systems
Corporation, certain cable systems in Buffalo, N.Y. to Adelphia Communications
Corporation ("Adelphia"), certain cable systems in Washington, Oregon,
Northern California and Idaho to Falcon Holding Group LP, and certain cable
systems in Kentucky and Tennessee to a limited partnership of which Intermedia
is the general partner and TCI and the Blackstone Group are limited partners.
The cable systems proposed to be transferred in these transactions have
approximately 1.1 million, 260,000, 436,000 and 630,000 homes passed,
respectively, representing a total of approximately 2.5 million homes passed.
In addition, TCI has announced that it is considering various plans and
proposals that may result in the disposition of other of its cable systems. To
the extent that the terms of any such transactions require that such systems
remain subject to such exclusivity provisions, such cable systems and their
homes passed would continue to be included in TCI's homes passed for purposes
of determining whether or not TCI is obligated to offer a portion of its
equity interest in the Company to the other Principal Cable Stockholders, even
though such cable systems are no longer owned or controlled by TCI. To the
extent that the Principal Cable Stockholders dispose of cable systems in the
future without causing such cable systems to remain subject to such
exclusivity provisions, the number of homes passed that are exclusive to the
Company will be decreased. Such decreases in the number of exclusive homes
passed may have an adverse effect upon the business, operating results and
financial condition of the Company.
Dependence on Cable Partners to Upgrade to Two-Way Cable Infrastructure
Necessary to Support the @Home Service; Uncertain Availability and Timing of
Upgrades. Transmission of the @Home service over cable is dependent on the
availability of high-speed two-way HFC cable infrastructure. However, only a
small portion of existing cable plant in the United States has been upgraded
to HFC cable and even less is capable of high-speed two-way transmission. The
Cable Partners and other cable system operators have announced and begun to
implement major infrastructure investments in order to deploy two-way HFC
cable. However, cable system operators have limited experience with these
upgrades, and these investments have placed a significant strain on the
financial, managerial, operating and other resources of the Cable Partners and
other cable system operators, most of which are already highly leveraged, and
thus have been, and the Company expects will
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continue to be, subject to change, delay or cancellation. Although the
Company's commercial success depends on the successful and timely completion
of these infrastructure upgrades, the Cable Partners are under no obligation
to the Company to upgrade systems or to roll out, market or promote the
Company's services. In addition, none of the Cable Partners has agreed to any
specific schedule for rolling out two-way HFC infrastructure improvements, and
the Cable Partners are not contractually required to achieve any specific
rollout schedule. Because of the very substantial capital cost of upgrading
cable systems for high-speed two-way data transmission, there has been
uncertainty in recent months as to the rate at which the Cable Partners and
other cable system operators will upgrade their systems. For example, to
increase television programming capacity to compete with other modes of
multichannel entertainment delivery systems such as direct satellite, the
Cable Partners may choose to roll out digital set-top boxes, which do not
support high-speed Internet access services, rather than to upgrade their
cable infrastructures to two-way HFC cable. The failure of the Cable Partners
to complete these upgrades in a timely and satisfactory manner, or at all,
would prevent the Company from delivering high-performance Internet access
services and would have a material adverse effect on the Company's
business, operating results and financial condition. To the extent that the
Company is required (because of the lack of upgraded two-way HFC cable plant),
or together with the Cable Partners otherwise chooses, to distribute the
Company's services through cable systems to the home with a telephone return
path for data from the home, the Company's services may not achieve the high
speed and quality of experience necessary to attract and retain subscribers to
the @Home service. Subscribers using a telephone return path will experience
the upstream data transmission speeds provided by their analog modems
(typically 28.8 Kbps). In addition, the Company will be highly dependent on
the Cable Partners and any future cable partners to continue to maintain their
cable infrastructure in such a manner that the Company will be able to provide
consistently high performance and reliable service. Therefore, in addition to
the Company's business being subject to general economic and market conditions
and factors relating to Internet service providers and online services
specifically, the success and future growth of the Company's business will
also be subject to economic and other factors affecting the cable television
industry generally, particularly its ability to finance substantial capital
expenditures. See "Business--Strategy," "--Products and Services," "--@Network
Architecture" and "--Strategic Distribution Relationships--Strategic
Relationships with Cable Partners."
Dependence on Cable Partners to Roll Out, Market, Install, Maintain
Infrastructure for, Provide Customer Service for and Bill for the @Home
Service. In order to roll out the @Home service in a geographic area, the
Cable Partners must have completed the two-way HFC cable infrastructure
upgrade in that area. Following the rollout of the @Home service in a service
area, the Company's business will be highly dependent on the LCO to maintain
its cable infrastructure in such a manner as to permit the reliable
transmission of the @Home service. Because subscribers to the @Home service
will subscribe through an LCO, the LCO (and not the Company) will
substantially control the customer relationship with the subscriber. Each LCO
has complete discretion regarding the pricing of @Home service to subscribers
in its territory (except for certain premium services for which the Company
contracts directly with the subscriber), and an LCO could use the @Home
service as a loss leader in order to increase demand for other LCO products or
services with more attractive terms for the LCO. Neither the Cable Partners
nor their LCOs have any affirmative obligations (other than the payment of
revenue splits to the Company) with respect to marketing, installing and
maintaining infrastructure for, providing customer service for and billing for
the @Home service, and the Company has no remedies against the Cable Partners
or their LCOs, other than in limited circumstances such as an LCO's failure to
upgrade its cable system or roll out the @Home service after it has committed
to do so, in which event the Company may be entitled to certain cost
reimbursements and to be released from its exclusivity obligations to such
LCO, neither of which may be an effective remedy for the Company. Moreover,
the Master Distribution Agreement does not create affirmative obligations on
the part of any Principal Cable Stockholder to cause its Affiliated LCOs to
perform any of the foregoing activities or to upgrade any of their cable
systems. The Company's business requires that a material number of LCOs of all
its Cable Partners roll out the @Home service, and if a sufficient number of
LCOs does not roll out the @Home service, the Company's business will not be
viable. Moreover, the LCOs of its Cable Partners have in the past experienced,
and may in the future experience, delays in installing the @Home service in
the areas in which it has been rolled out, which could also materially
adversely affect the Company's business, operating results and financial
condition. Each of the Principal Cable Stockholders and its Affiliated
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LCOs is entitled to MFN terms with respect to the distribution of the @Home
service, subject to certain exceptions. These terms could limit the Company's
ability to negotiate agreements with other cable system operators and
otherwise could limit the Company's potential to generate revenue. The
Affiliated LCOs are expected to provide general customer service to the
Company's subscribers and, pursuant to the distribution agreements with the
Company, have the option to provide technical support, rather than utilizing
the Company's service and support capabilities. If an Affiliated LCO elects to
provide technical support, the LCO Agreement provides for an adjustment in the
revenue split between the Company and the Affiliated LCO, and the Company
would have little or no control over the quality of customer service actually
provided to subscribers of the @Home service. If the customer service and
support provided by Affiliated LCOs are unsatisfactory to subscribers,
consumer demand for the Company's @Home service will likely be materially
adversely affected. See "Business--Strategic Distribution Relationships--
Strategic Relationships with Cable Partners."
Potential Competition with Cable Partners for Advertising Revenue. While the
Company retains 100% of all United States national advertising revenue
delivered on the @Home service through the Company's U.S. Cable Partners, LCOs
of the U.S. Cable Partners retain 100% of revenue generated from local service
offerings that do not require access to an Internet backbone or that relate to
programming within the designated local areas of the home page for the @Home
service, such as revenues from advertising. In Canada, the Company will share
national advertising revenue with its Canadian Cable Partners. Moreover, given
the national coverage of the combined operations of the Principal Cable
Stockholders and their Affiliated LCOs, the Principal Cable Stockholders and
their Affiliated LCOs could strike agreements with advertisers that would
effectively result in broad-based advertising campaigns throughout most of the
United States in competition with the Company's national advertising
campaigns, generating revenue only for Affiliated LCOs and not for the
Company. Accordingly, the @Home service may contain a significant amount of
advertising that is national in scope and focus for which it receives no share
of the revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Strategic Distribution
Relationships--Strategic Relationships with Cable Partners."
Dependence on TCG for Local Telecommunications Services for the @Work
Services. The Company depends on Teleport Communications Group Inc. ("TCG"),
which, like the Company, is also controlled by TCI, Comcast and Cox, to
provide local telecommunications services and co-location within TCG's
facilities on favorable economic terms that enable the Company to provide
@Work services to an entire metropolitan area in which TCG has facilities. If
the Company were required to obtain comparable telecommunications services
from local exchange carriers, it would effectively be limited to providing
@Work services to commercial customers within a ten-mile radius of one of the
Company's points of presence. As a result, the Company would be required to
build multiple points of presence to service an entire metropolitan area,
which would substantially increase the Company's capital costs to enter new
markets and which could make such market entry uneconomical for the Company.
If the Company were required to pay standard local exchange carrier rates, the
Company's ongoing operating costs for its @Work services would be
substantially higher. The loss of the Company's strategic relationship with
TCG would have a material adverse effect on the Company's ability to deploy
its @Work services and on its business, operating results and financial
condition. In addition, TCG has acquired a provider of Internet-related
services to businesses and corporate customers and will compete directly with
the @Work Internet service, and to the extent TCG acquires or enters into
strategic relationships with other Internet service providers ("ISPs"), TCG
may reduce its support of the @Work services. Although there are alternative
suppliers for TCG's services, it could take a significant period of time to
establish similar relationships and equivalent terms might not be available.
See "Business--Strategic Distribution Relationships--Strategic Relationship
with TCG."
Unproven Network Scalability and Speed. Due to the limited deployment of the
Company's services, the ability of the @Network to connect and manage a
substantial number of online subscribers at high transmission speeds is as yet
unknown, and the Company faces risks related to the @Network's ability to be
scaled up to its expected subscriber levels while maintaining superior
performance. While peak downstream data transmission speeds across HFC cable
approach 27 megabits per second ("Mbps") in each 6 MHz channel, the actual
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downstream data transmission speeds over the @Network could be significantly
slower and will depend on a variety of factors, including type and location of
content, Internet traffic, the number of active subscribers on a given cable
network node, the number of 6 MHz channels allocated by the LCO (in its
discretion) to carry the Company's services, the capability of cable modems
used and the service quality of the LCOs' two-way HFC cable infrastructures.
As subscriber penetration increases, it may be necessary for the LCO to add
additional nodes in order to maintain adequate downstream data transmission
speeds although there is no obligation for the LCO to do so. The upstream
transmission data carrier is located in a range not used for broadcast by
traditional cable infrastructures and is more susceptible to interference than
the downstream channel, resulting in a slower peak upstream transmission
speed. In addition to the factors affecting downstream data transmission
speeds, actual upstream data transmission speeds over the @Network can be
materially affected by the level of interference in the LCOs' upstream data
broadcast range. The actual data delivery speeds that can be realized by
subscribers will be significantly lower than peak data transmission speeds due
to the subscriber's hardware, operating system and software configurations. To
access the @Home service, subscribers need a personal computer with at least a
66 MHz 486 or equivalent microprocessor and 16 megabytes of main memory. There
can be no assurance that the @Network will be able to achieve or maintain such
a high speed of data transmission, especially as the number of the Company's
subscribers grows, and the Company's failure to achieve or maintain high-speed
data transmission would significantly reduce consumer demand for its services
and have a material adverse effect on its business, operating results and
financial condition. See "Business--@Network Architecture."
Dependence on High-Quality Content Provision and Acceptance; Developing
Market for High-Quality Content. A key component of the Company's strategy is
to provide a more compelling interactive experience to Internet users than the
experience currently available from dial-up ISPs and online service providers
("OSPs"). The Company believes that, in addition to providing high-speed,
high-performance Internet access, it must also promote the development of and
aggregate high-quality multimedia content. The Company's success in providing
and aggregating such content is dependent on its ability to motivate content
providers to create and support high-quality, high-speed multimedia content
and its ability to aggregate content offerings in a manner that subscribers
find useful and compelling and will be dependent, in part, on the Company's
ability to develop a customer base sufficiently large to justify investments
in the development of such content. There can be no assurance that the Company
will be successful in these endeavors. In addition, the market for high-
quality multimedia Internet content has only recently begun to develop and is
rapidly evolving, and there is significant competition among ISPs and OSPs for
aggregating such content. If the market fails to develop or develops more
slowly than expected, or if competition increases, or if the Company's content
offerings do not achieve or sustain market acceptance, the Company's business,
operating results and financial condition will be materially adversely
affected. See "Business--Strategy" and "--Products and Services."
Uncertain Acceptance and Maintenance of the "@Home" Brand. The Company
believes that establishing and maintaining the "@Home" brand are critical to
attracting and expanding its subscriber base. Promotion of the "@Home" brand
will depend, among other things, on the Company's success in providing high-
speed, high-quality consumer and business Internet products, services and
content, the marketing efforts of the LCOs, and the reliability of the LCOs'
networks and services, none of which can be assured. The Company has no
control over the LCOs' marketing efforts or the reliability of their networks
and services. If consumers and businesses do not perceive the Company's
existing products and services to be of high quality, or if the Company
introduces new products or services or enters into new business ventures that
are not favorably received by consumers and businesses, the Company will be
unsuccessful in promoting and maintaining its brand. To the extent the Company
expands the focus of its marketing efforts to geographic areas where the @Home
service is not available, the Company risks frustrating potential subscribers
who are not able to access the Company's products and services. Furthermore,
in order to attract and retain subscribers, and to promote and maintain the
"@Home" brand in response to competitive pressures, the Company may find it
necessary to increase substantially its financial commitment to creating and
maintaining a distinct brand loyalty among customers. If the Company is unable
to establish or maintain the "@Home" brand successfully, or if the Company
incurs excessive expense in an attempt to improve its offerings or promote and
maintain its brand, the Company's business, operating results and financial
condition would be materially adversely affected. See "Business--Strategy" and
"--Distribution, Marketing and Sales."
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Management of Expanded Operations; Dependence on Key Personnel. The Company
may not be equipped to successfully manage any future periods of rapid growth
or expansion, which could be expected to place a significant strain on the
Company's managerial, operating, financial and other resources. The Company is
highly dependent upon the efforts of its senior management team, and the
Company's future performance will depend, in part, upon the ability of senior
management to manage growth effectively, which will require the Company to
implement additional management information systems capabilities, to develop
further its operating, administrative, financial and accounting systems and
controls, to maintain close coordination among engineering, accounting,
finance, marketing, sales and operations, and to hire and train additional
technical and marketing personnel. There is intense competition for senior
management, technical and marketing personnel in the areas of the Company's
activities. The loss of the services of any of the Company's senior management
team or the failure to attract and retain additional key employees could have
a material adverse effect on the Company's business, operating results and
financial condition. The Company maintains no key-person life insurance. See
"Management."
Competition. The markets for consumer and business Internet services and
online content are extremely competitive, and the Company expects that
competition will intensify in the future. The Company's most direct
competitors in these markets are ISPs, national long distance carriers and
local exchange carriers, wireless service providers, OSPs and Internet content
aggregators. Many of these competitors are offering (or may soon offer)
technologies that will attempt to compete with some or all of the Company's
high-speed data service offerings. Such technologies include Integrated
Services Digital Network ("ISDN") and Digital Subscriber Line ("xDSL"). The
Company also competes with other cable-based data services that are seeking to
contract with cable system operators to bring their services into geographic
areas that are not covered by an exclusive relationship between the Company
and its Principal Cable Stockholders. The bases of competition in these
markets include transmission speed, reliability of service, ease of access,
price/performance, ease-of-use, content quality, quality of presentation,
timeliness of content, customer support, brand recognition, operating
experience and revenue sharing.
ISPs, such as BBN Corporation ("BBN"), Earthlink Network, Inc.
("Earthlink"), MindSpring Enterprises, Inc. ("MindSpring"), Netcom On-Line
Communications Services, Inc. ("Netcom") and PSInet Inc. ("PSInet"), provide
basic Internet access to residential consumers and businesses, generally using
existing telephone network infrastructures. This method is widely available
and inexpensive. Barriers to entry are low, resulting in a highly competitive
and fragmented market.
Long distance inter-exchange carriers, such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and
WorldCom, Inc. ("WorldCom"), have deployed large-scale Internet access
networks and sell connectivity to business and residential customers. The
regional Bell operating companies ("RBOCs") and other local exchange carriers
have also entered this field and are providing price competitive services.
Many of such carriers are offering diversified packages of telecommunications
services, including Internet access service, to residential customers and
could bundle such services together, which could place the Company at a
competitive disadvantage.
Wireless service providers, including AT&T and Hughes Network Systems, are
developing wireless Internet connectivity, such as multichannel multipoint
distribution service, local multipoint distribution service and digital
broadcast satellite.
OSPs include companies such as America Online, Inc. ("America Online"),
CompuServe Corporation ("CompuServe"), Microsoft's Microsoft Network ("MSN"),
Prodigy, Inc. ("Prodigy") and WebTV Networks Inc. ("WebTV") (which has agreed
to be acquired by Microsoft) that provide, over the Internet and on
proprietary online services, content and applications ranging from news and
sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which
enables the provision of data services to the large group of consumers who
have personal computers with modems. In addition, they provide basic Internet
connectivity, ease-of-use and consistency of environment. In addition to
developing their own content or supporting proprietary third-party
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content developers, online services often establish relationships with
traditional broadcast and print media outlets to bundle their content into the
service, such as the relationship of Microsoft with NBC to provide multimedia
news and information programming over both cable television and MSN.
Content aggregators seek to provide a "one-stop" shop for Internet and
online users. Their success depends on capturing audience flow, providing
ease-of-use and offering a range of content that appeals to a broad audience.
Their business models are predicated on attracting and retaining an audience
for their set of offerings. Leading companies in this area include America
Online, CompuServe, Excite, Inc. ("Excite"), Microsoft and Yahoo! Inc.
("Yahoo!"). In this market, competition occurs in acquiring both content
providers and subscribers. The principal bases of competition in attracting
content providers include quality of demographics, audience size, cost-
effectiveness of the medium and ability to create differentiated experiences
using aggregator tools. The principal bases of competition in attracting
subscribers include richness and variety of content and ease of access to the
desired content. The proprietary online services such as America Online,
CompuServe and MSN have the advantage of a large customer base, industry
experience, many content partnerships and significant resources.
The Company's competitors in the cable-based services market are those cable
companies that have developed their own cable-based services and market those
services to unaffiliated cable system operators that are planning to deploy
data services and with which the Company would like to work. Several cable
system operators, including Time Warner Inc. ("Time Warner") and the
Continental Cablevision subsidiary of U S WEST, Inc. ("US West"), have
deployed high-speed Internet access services over their existing local HFC
cable networks. Specifically, Time Warner, which is the second largest cable
company in the United States, has established its own cable-based ISP with
proprietary content, called Road Runner, which features a variety of Time
Warner publications and services. Time Warner plans to market the Road Runner
service through Time Warner's own cable systems as well as to other cable
system operators nationwide. Continental Cablevision has developed another
service called Highway One, which offers high-speed Internet services to its
existing customers. Others that have publicly announced limited-area trials
for their own cable-based Internet services include Adelphia, BellSouth
Corporation ("BellSouth") and Jones Intercable, Inc. ("Jones Intercable").
Some of these companies such as Time Warner have their own substantial
libraries of multimedia content and the other competitors could establish
strategic relationships with content providers, which could provide them with
a significant competitive advantage.
Many of the Company's competitors and potential competitors have
substantially greater financial, technical and marketing resources, larger
subscriber bases, longer operating histories, greater name recognition and
more established relationships with advertisers and content and application
providers than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing Internet services or online
content than the Company. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely
affect the Company's business, operating results or financial condition.
Further, as a strategic response to changes in the competitive environment,
the Company may make certain pricing, service or marketing decisions or enter
into acquisitions or new ventures that could have a material adverse effect on
the Company's business, operating results or financial condition. See
"Business--Competition."
Risk of System Failure. The Company's operations are dependent upon its
ability to support its highly complex network infrastructure and avoid damage
from fires, earthquakes, floods, power losses, telecommunications failures and
similar events. The occurrence of a natural disaster or other unanticipated
problem at the Company's Network Operations Center ("NOC") or at a number of
the Company's regional data centers ("RDCs") could cause interruptions in the
services provided by the Company. Additionally, failure of the Cable Partners
or TCG to provide the data communications capacity required by the Company, as
a result of natural disaster, operational disruption or any other reason,
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--@Network Architecture."
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Risks of Technological Change. The markets for consumer and business
Internet access services and online content are characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging nature of these products and services and
their rapid evolution will require that the Company continually improve the
performance, features and reliability of its network, Internet content and
consumer and business services, particularly in response to competitive
offerings. There can be no assurance that the Company will be successful in
responding quickly, cost effectively and sufficiently to these developments.
There may be a time-limited market opportunity for the Company's cable-based
consumer and business Internet services, and there can be no assurance that
the Company will be successful in achieving widespread acceptance of its
services before competitors offer products and services with speed and
performance similar to the Company's current offerings. In addition, the
widespread adoption of new Internet or telecommuting technologies or
standards, cable-based or otherwise, could require substantial expenditures by
the Company to modify or adapt its network, products and services and could
fundamentally affect the character, viability and frequency of Internet-based
advertising, either of which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
new Internet or telecommuting services or enhancements offered by the Company
may contain design flaws or other defects that could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Products and Services," "--@Network Architecture" and "--
Product Development and Engineering."
Dependence on Two-Way Cable Modems; Minimum Hardware Requirements. Each of
the Company's subscribers currently must obtain a cable modem from an
Affiliated LCO to access the @Home service. The inability of the Affiliated
LCOs to obtain a sufficient quantity of cable modems, or the inability of
subscribers to otherwise obtain cable modems, at acceptable price and
performance levels could delay or impair the expansion of the Company's
business. In addition, the Company's Cable Partners currently depend on a
limited number of suppliers, principally Motorola, Inc. ("Motorola") and Bay
Networks, Inc. ("Bay Networks"), for cable modems. The loss of such suppliers
or their inability to provide cable modems that meet the requirements of the
Company's services, would have a material adverse effect on the Company's
business, operating results and financial condition. In addition to a cable
modem, to access the @Home service, subscribers need a personal computer with
at least a 66 MHz 486 or equivalent microprocessor, 16 megabytes of main
memory and the ability to support an ethernet connection. See "Business--
@Network Architecture."
Dependence on Key Technology Suppliers. The Company currently depends on a
limited number of suppliers for certain key technologies used to build and
manage the @Network. In particular, the Company depends on Sun Microsystems,
Inc. ("Sun") for high availability servers, Silicon Graphics, Inc. ("SGI") for
caching servers, Cisco Systems, Inc. ("Cisco") for network routing and
switching hardware, Sprint for national switched ATM backbone services,
Objective Systems Integrators, Inc. ("OSI") for network management software,
Tivoli Systems Inc. ("Tivoli") for systems management software to operate RDCs
remotely, Oracle Corporation ("Oracle") for advanced database management
software and Netscape Communications Corporation ("Netscape") for server and
browser software. Although the Company believes that there are alternative
suppliers for each of these technologies, it could take a significant period
of time to establish relationships with alternative suppliers and substitute
their technologies into the @Network. The loss of any of the Company's
relationships with these suppliers could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
@Network Architecture."
Dependence on the Internet. Market acceptance of the Company's services is
substantially dependent upon the adoption of the Internet for commerce,
entertainment and communications. As is typical in the case of an emerging
industry characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions, demand for and
market acceptance of recently introduced Internet products and services are
subject to a high level of uncertainty. In addition, critical issues
concerning the commercial use of the Internet remain unresolved and may affect
the growth of Internet use, especially in the business and consumer markets
targeted by the Company. Despite growing interest in the commercial
possibilities for the Internet, many businesses and consumers have been
deterred from purchasing Internet access services for a number of reasons,
including inconsistent quality of service, lack of availability of cost-
effective, high-speed service, a limited number of local access points for
corporate users, inability to integrate business applications
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on the Internet, the need to deal with multiple and frequently incompatible
vendors, inadequate protection of the confidentiality of stored data and
information moving across the Internet and a lack of tools to simplify
Internet access and use. The adoption of the Internet for commerce and
communications, particularly by those individuals and enterprises that have
historically relied upon alternative means of commerce and communication,
generally requires understanding and acceptance of a new way of conducting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of conducting commerce
and exchanging information, or in relationships with other ISPs, may be
reluctant and slow to adopt a new strategy that may make their existing
personnel, infrastructure and ISP relationship obsolete. If the market fails
to develop or develops more slowly than expected, or if market competition
increases, the Company's business, operating results and financial condition
may be materially adversely affected. See "Business--Industry Background."
Security Risks. Despite the implementation of security measures, the
Company's or Affiliated LCOs' networks may be vulnerable to unauthorized
access, computer viruses and other disruptive problems. ISPs and OSPs have in
the past experienced, and may in the future experience, interruptions in
service as a result of the accidental or intentional actions of Internet
users, current and former employees or others. Unauthorized access could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company and its subscribers, which might result in
liability of the Company to its subscribers and also might deter potential
subscribers. Although the Company intends to continue to implement industry-
standard security measures, such measures have been circumvented in the past,
and there can be no assurance that measures implemented by the Company will
not be circumvented in the future. Moreover, the Company has no control over
the security measures that the Affiliated LCOs adopt. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to the Company's subscribers, which could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Network Architecture."
Government Regulation. Although the Company's services are not directly
subject to current regulations of the Federal Communications Commission (the
"FCC") or any other federal or state communications regulatory agency, changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that, directly or indirectly, affect
telecommunications costs, limit usage of subscriber-related information or
increase the likelihood or scope of competition from the RBOCs or other
telecommunications companies, could affect the prices at which the Company may
sell its services. For example, regulations recently adopted by the FCC are
intended to subsidize Internet connectivity rates for schools and libraries,
which could affect demand for the Company's services. The Company cannot
predict the impact, if any, that future regulation or regulatory changes might
have on its business. In addition, regulation of cable television rates may
affect the speed at which the Cable Partners upgrade their cable
infrastructures to two-way HFC. The Company's Cable Partners have advised the
Company that the LCOs typically have elected to classify the provision of all
or some of the Company's services as "additional cable services" under their
respective local franchise agreements, and to pay franchise fees in accordance
therewith. Local franchise authorities may attempt to subject the LCOs to
higher or other franchise fees or taxes or otherwise seek to require them to
obtain additional franchises in connection with their distribution of the
@Home service. There are thousands of franchise authorities in the United
States alone, and thus it will be difficult or impossible for the Company, its
Cable Partners or their LCOs to operate under a unified set of franchise
requirements. It is possible that governmental authorities may attempt to
impose additional fees or regulations on LCOs offering the Company's services.
In the event that the FCC or another governmental agency were to classify the
cable system operators as "common carriers" of Internet services, or cable
system operators were to seek such classification as a means of protecting
themselves against liabilities, the Company's rights as the exclusive ISP over
the systems of certain of the Cable Partners could be lost. In addition, if
the Company, the Cable Partners or their LCOs were classified as common
carriers, they could be subject to government-regulated tariff schedules for
the amounts they could charge for their services. Alternatively, the LCOs
could treat the provision of the Company's services as "information services"
under federal law. While the FCC does not, at present, regulate the provision
of information services, such services could, in the future, be the subject of
federal regulation, state regulation and/or special fees or taxes. Such
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regulation could affect the willingness of LCOs to offer the Company's
services. Rogers and Shaw have informed the Company that, due to certain
Canadian regulations, they are required to provide access to their respective
networks to third-party ISPs, and that therefore the Company's services may
not have exclusive access to such networks. To the extent the Company
increases the number of foreign jurisdictions in which it offers its services,
the Company will be subject to additional governmental regulation. See "--
Risks Associated with International Operations" and "Business--Strategic
Distribution Relationships--Strategic Relationships with Cable Partners."
Potential Liability for Defamatory or Indecent Content. The law relating to
liability of ISPs and OSPs for information carried on or disseminated through
their networks is currently unsettled. A number of lawsuits have sought to
impose such liability for defamatory speech and indecent materials. A recent
federal statute seeks to impose such liability, in some circumstances, for
transmission of obscene or indecent materials. In one case, a court has held
that an OSP could be found liable for defamatory matter provided through its
service, on the ground that the service provider exercised active editorial
control over postings to its service. Other courts have held that ISPs and
OSPs may, under certain circumstances, be subject to damages for copying or
distributing copyrighted materials. The Telecommunications Act of 1996
prohibits, and imposes criminal penalties and civil liability for using, an
interactive computer service for transmitting indecent or obscene
communications. A number of states have adopted or are currently considering
similar legislation. The anti-indecency provisions of the Telecommunications
Act of 1996 have been declared unconstitutional by the United States District
Courts for the Eastern District of Pennsylvania and the Southern District of
New York, which have issued preliminary injunctions against their enforcement.
The United States Supreme Court has upheld those decisions. The imposition
upon ISPs or OSPs of potential liability for materials carried on or
disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain product
or service offerings. In addition, the imposition of liability on the Company
for information carried on the @Network could have a material adverse effect
on the Company's business, operating results and financial condition.
Liability for Information Retrieved and Replicated. Because materials will
be downloaded and redistributed by subscribers and cached or replicated by the
Company in connection with the Company's offering of its services, there is a
possibility that claims may be made against the Company, the Cable Partners or
their Affiliated LCOs under both United States and foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on
the nature and content of such materials. Such types of claims have been
brought, and sometimes successfully pressed, against OSPs in the past. In
particular, copyright and trademark laws are evolving both domestically and
internationally, and there is uncertainty concerning how broadly the rights
afforded under these laws will be applied to online environments. It is
impossible for the Company to determine who all the potential rights holders
may be with respect to all materials available through the Company's services.
In addition, a number of third-party owners of patents have claimed to hold
patents that cover various forms of online transactions or online technology.
As with other OSPs, patent claims could be asserted against the Company based
upon its services or technologies. Although the Company carries general
liability insurance, the Company's insurance may not cover potential claims of
the foregoing types, or may not be adequate to indemnify the Company for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks Associated with International Operations. A key component of the
Company's strategy is expansion into international markets. To date, the
Company has developed relationships only with United States and Canadian cable
system operators. The Company has extremely limited experience in developing
localized versions of its products and services and in developing
relationships with international cable system operators. There can be no
assurance that the Company will be successful in expanding its product and
service offerings into foreign markets. In addition to the uncertainty
regarding the Company's ability to generate revenues from foreign operations
and expand its international presence, there are certain risks inherent in
doing business on an international level, such as regulatory requirements
(including the regulation of Internet access), legal uncertainty
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regarding liability for information retrieved and replicated in foreign
jurisdictions, export and import restrictions, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, seasonal reductions in
business activity during the summer months in Europe and certain other parts
of the world and potentially adverse tax consequences, which could adversely
affect the success of the Company's future international operations. There can
be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Distribution, Marketing and Sales."
Intellectual Property; Litigation. The Company regards its technology as
proprietary and attempts to protect it with copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods. In addition, the
Company has filed two patent applications and is in the process of preparing
additional patent applications with respect to aspects of its high-bandwidth
network technology and online advertising. There can be no assurance that any
patent will issue from these applications or that, if issued, any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any patents that may be issued will
not be challenged, invalidated or circumvented, or that any rights granted
thereunder would provide proprietary protection to the Company. Failure of any
patents to provide protection to the Company's technology may make it easier
for the Company's competitors to offer technology equivalent or superior to
the Company's technology. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products,
services or technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of the Company's content offerings. Policing unauthorized
use of the Company's content offerings is difficult. There can be no assurance
that the steps taken by the Company will prevent misappropriation or
infringement of its technology. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights,
including claims for infringement resulting from the downloading of materials
by the online or Internet services operated or facilitated by the Company. For
example, on July 8, 1997, PCTV, Inc. ("PCTV") filed a complaint against the
Company in the United States District Court for the District of New Hampshire
asserting rights in the @Home trademark. In the complaint, PCTV alleges
trademark infringement and unfair competition based on the Company's use of
the @Home mark and requests damages and injunctive relief. There can be no
assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any assertions or prosecutions will not
materially adversely affect the Company's business, operating results and
financial condition. Irrespective of the validity or the successful assertion
of such claims, the Company would incur significant costs and diversion of
management time and resources with respect to the defense thereof, which could
have a material adverse effect on the Company's business, operating results
and financial condition. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances a license would be available on commercially reasonable
terms, or at all. See "Business--Intellectual Property" and "--Legal
Proceedings."
Ability of TCI to Transfer Control of the Company. The Stockholders'
Agreement provides that no Principal Cable Stockholder may transfer its shares
of the Company's stock until six years after the closing date of this offering
subject to certain exceptions, including, but not limited to, the right of any
Principal Cable
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Stockholder to make indirect transfers of up to 49.9% of its equity ownership
in the Company by transferring equity interests in the subsidiary of the
Principal Cable Stockholder that holds the shares of the Company, transfers in
connection with certain "spin off" transactions involving a Principal Cable
Stockholder and TCI's right to sell its controlling interest in the Company to
a third party. If TCI were to propose such a control sale, the Stockholders'
Agreement grants to Comcast, Cox and KPCB certain "tag along" rights to
participate in such a control sale, and provides TCI with certain "drag along"
rights to cause Comcast, Cox and KPCB to sell their shares in such a control
sale. The purchasers of Series A Common Stock in this offering will not be
subject to these tag along and drag along provisions and therefore would not
be entitled to participate in such a control sale unless it involved a sale of
the entire Company such as through a merger. In addition, the Company has
elected not to be subject to Section 203 of the Delaware General Corporation
Law, which would otherwise provide certain restrictions on "business
combinations" between the Company and any person acquiring a significant (15%
or greater) interest in the Company other than in a transaction approved by
the Board and in certain cases by the stockholders of the Company.
Accordingly, majority control of the Company could be transferred with no
assurance that stockholders other than the Principal Cable Stockholders and
KPCB would be given the opportunity to participate in the transaction or to
receive the same amount and type of consideration for their stock in the
Company. In addition, TCI's control of the voting stock of the Company may
make the Company less attractive as a target for a takeover than it otherwise
might be or render more difficult or discourage a merger proposal, a tender
offer or a proxy contest, even if such actions were favored by the holders of
Series A Common Stock. See "Certain Transactions" and "Description of Capital
Stock."
Certain Anti-Takeover Provisions. Upon completion of this offering, the
Board will have the authority to issue up to 9,650,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Company's Series A Common Stock at a premium over the
market price of the Series A Common Stock and may adversely affect the market
price of, and the voting and other rights of the holders of, the Common Stock.
Such provisions may also have the effect of preventing or deterring changes in
the control or management of the Company. The Company has no current plans to
issue shares of Preferred Stock. The Company's Certificate of Incorporation
and indemnity agreements provide that the Company will indemnify officers and
directors against losses that they may incur in investigations and legal
proceedings resulting from their services to the Company, including services
in connection with takeover defense measures. See "Description of Capital
Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Series A Common Stock in the public market following this offering could
materially adversely affect the prevailing market price of the Company's
Series A Common Stock. Following expiration of or earlier release from the
180-day lockup agreements with Morgan Stanley & Co. Incorporated,
approximately 103,720,996 shares will become eligible for sale, subject in
most cases to compliance with certain volume limitations under Rule 144 and to
certain contractual restrictions under the Stockholders' Agreement. The
remaining 4,800,000 shares held by existing stockholders will become eligible
for sale on April 11, 1998. In addition, the Company intends to register on
Form S-8, immediately following the effective date of this offering, a total
of 1,064,264 shares of Series A Common Stock reserved for issuance under the
Company's Purchase Plan and 1997 Equity Incentive Plan and a total of
1,687,000 shares subject to outstanding options granted under the 1996 Plans.
The holders of approximately 95,252,260 shares of Common Stock, and holders of
warrants to purchase a total of 2,200,000 shares of Series A Common Stock,
will also be entitled to certain rights with respect to registration of such
shares of Common Stock for offer or sale to the public. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. See
"Management--Employee Benefit Plans," "Certain Transactions," "Description of
Capital Stock--Registration Rights" and "Shares Eligible for Future Sale."
20
<PAGE>
Management's Broad Discretion Over Use of Proceeds of the Offering. The
Company expects to use the net proceeds of this offering, over time, for
general corporate purposes, including working capital and capital
expenditures. The Company's management will have the discretion to allocate
the net proceeds to uses that stockholders may not deem desirable. There can
be no assurance that the net proceeds can or will be invested to yield a
significant return. See "Use of Proceeds."
Requirements for Additional Capital. The Company is investing significantly
in the development of its network infrastructure and hiring new personnel
rapidly in anticipation of potential growth in its business, which is still at
a very early stage. The Company believes that the net proceeds from this
offering, together with existing cash, cash equivalents, short-term cash
investments and capital lease financing, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 18
months. However, the Company may need to raise additional funds if its
estimates of working capital and/or capital expenditure and/or lease financing
requirements change or prove inaccurate or in order for the Company to respond
to unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities. Over the longer term, it is likely that the
Company will require substantial additional funds to continue to fund the
Company's infrastructure investment, product development, marketing, sales and
customer support needs. There can be no assurance that any such funds will be
available at the time or times needed, or available on terms acceptable to the
Company. If adequate funds are not available, or are not available on
acceptable terms, the Company may not be able to continue its network
implementation, to develop new products and services or otherwise to respond
to competitive pressures. Such inability could have a material adverse effect
on the Company's business, operating results and financial condition. The
Principal Cable Stockholders have the preemptive right, subject to certain
restrictions, to purchase a pro rata portion of any new securities offered by
the Company other than securities issued pursuant to a public offering,
securities issued pursuant to any incentive plan or agreement for the benefit
of the Company's employees, directors or consultants, securities issued by the
Company in connection with an acquisition, and securities issued in exchange
for interests in a joint venture or other business combination. The existence
of this right could delay or adversely affect the Company's ability to raise
required capital on a timely basis. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
No Prior Trading Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop or,
if one does develop, that it will be maintained. The initial public offering
price, which has been established by negotiations between the Company and the
representatives of the Underwriters based upon a number of factors, may not be
indicative of prices that will prevail in the trading market. See
"Underwriters" for a discussion of the factors considered in determining the
initial public offering price. The stock market has from time to time
experienced significant price and volume fluctuations. In addition, the market
price of the shares of the Company's Series A Common Stock, similar to the
market prices of other Internet companies, is likely to be highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new products by the Company or its
competitors, regulatory actions, and general market conditions may have a
significant effect on the market price of the Company's Series A Common Stock.
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate, substantial dilution in the amount of $9.40. To the
extent that options and warrants to purchase the Company's Series A Common
Stock are exercised, there may be further substantial dilution. See
"Dilution."
21
<PAGE>
THE COMPANY
The Company is a leading provider of Internet services over the cable
television infrastructure to consumers and businesses. The Company's primary
offering, the @Home service, allows residential subscribers to connect their
personal computers via cable modems to a new high-speed network developed and
managed by the Company. This service enables subscribers to receive the "@Home
Experience," which includes Internet service over HFC cable at a peak data
transmission speed over 300 times faster than typical dial-up connections,
"always on" availability and rich multimedia programming through an intuitive
graphical user interface. The technology foundation of the @Home Experience is
the @Network, a "parallel Internet" that optimizes traffic routing, improves
security and consistency of service, and facilitates end-to-end network
management, enhancing the Company's ability to address performance bottlenecks
before they affect the user experience. The content foundation of the @Home
Experience is provided by the Company's @Media group, which aggregates
content, sells advertising to businesses and will provide premium services to
@Home subscribers. See "Business--@Network Architecture."
The Company has entered into distribution arrangements for the @Home service
with its Cable Partners, TCI, Comcast, Cox, Rogers, Shaw, Marcus and
Intermedia, whose cable systems pass approximately 44 million homes in North
America. The Company believes that approximately two million of these homes
are currently passed by upgraded two-way HFC cable and that the Cable Partners
will complete the upgrade of systems passing a majority of these homes within
five years. The Company has launched its service through TCI, Comcast, Cox and
Intermedia in portions of 13 cities and communities (of which 11 have revenue-
paying subscribers) in the United States and had more than 7,000 U.S.
subscribers as of June 30, 1997. To expand distribution, the Company is
aggressively seeking to work with additional United States and international
cable system operators. In order to shorten time to market for cable
operators, the Company provides a turnkey solution, which includes not only a
technology platform, but also marketing, customer service, billing and a
national brand. According to Paul Kagan Associates, Inc., cable is available
to approximately 96% of the homes in the United States, and, according to
Baskerville Communications, there will be approximately 203 million homes
passed in Europe and the Asia Pacific region in the year 2000.
For businesses, @Work services provide a platform for Internet, intranet and
extranet connectivity solutions and networked business applications over both
cable infrastructure and leased digital telecommunications lines. In order to
accelerate deployment of @Work services into major metropolitan areas, the
Company has established a strategic relationship with TCG, the country's
largest competitive local exchange carrier ("CLEC") and an affiliate of TCI,
Comcast and Cox, to provide co-location facilities and local telephone
circuits for infrastructure and subscriber connectivity. By combining the
@Network's distributed architecture with cable, telephone and technology
relationships, the @Work services provide a compelling platform for nationwide
delivery of network-based business applications. The Company has developed
this platform at a low incremental cost by leveraging its existing @Network
investment. Forrester Research Inc. projects that United States business
Internet access revenues will climb from an estimated $595 million in 1996 to
a projected $10.4 billion in 2000.
The Internet has emerged as a global communications medium enabling millions
of people to share information and conduct business electronically. Much of
the potential of the Internet remains unfulfilled due to problems with its
performance and reliability. These limitations stem from its basic
architecture, which is not optimized for distribution of data-intensive
multimedia content. As a network of hundreds of interconnected, separately
administered public and commercial networks, problems with any element in the
Internet can result in performance bottlenecks slowing data transmission speed
to that of the weakest link. A variety of new technologies are being explored
to address the performance and reliability problems encountered by users of
the Internet. However, each of these new approaches focuses on increasing the
speed of transmission along the "last-mile" connection to the user, rather
than the fundamental architectural performance problems of the Internet.
The Company was founded in March 1995 on the premise that the cable
infrastructure could enable the fastest, most cost-effective delivery
mechanism for residential Internet services but that the actual speed of these
services would ultimately be limited by the fundamental architecture of the
Internet. As a result, the Company assembled a team of industry experts to
develop an advanced network architecture and the custom hardware and software
products that would address these limitations. Prior to launching the @Home
service in September 1996, the Company implemented a nationwide backbone,
designed and built its Network Operations Center with 24X7 end-to-end
management capabilities, deployed regional data centers and headend equipment,
implemented an integrated customer management system including billing and
support for those operators that elect to obtain such services from the
Company, implemented a customized browser and aggregated the multimedia
content required to deliver the @Home Experience to its first subscribers.
22
<PAGE>
The Company was incorporated in Delaware in March 1995. The Company's
executive offices are located at 425 Broadway Street, Redwood City, California
94063. Its telephone number at that location is (415) 569-5000 and its Web
site address is http://www.home.net. Information contained in the Company's
Web site is not part of this Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 9,000,000 Shares of
Series A Common Stock offered hereby are estimated to be approximately $86.9
million (approximately $100.1 million if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and estimated offering expenses. The Company intends to use the
net proceeds for general corporate purposes, including working capital and
capital expenditures. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. The Company has no current plans,
agreements or commitments with respect to any such acquisition or investment,
and the Company is not currently engaged in any negotiations with respect to
any such transaction. Pending such uses, the net proceeds of this offering
will be invested in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its capital stock
in the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the actual short-
term debt and capitalization of the Company, (ii) the pro forma short-term
debt and capitalization of the Company giving effect to the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock, which will
occur upon the closing of this offering, and (iii) the pro forma short-term
debt and capitalization of the Company as adjusted to give effect to the sale
of the 9,000,000 Shares of Series A Common Stock offered hereby, after
deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of capital lease
obligations(1)................................ $ 6,653 $ 6,653 $ 6,653
======== ======== ========
Capital lease obligations, less current
portion, and other long-term liabilities(1)... $ 11,953 $ 11,953 $ 11,953
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.01 par value;
14,522,613 shares authorized, 4,762,613
shares issued and outstanding actual;
9,650,000 shares authorized, no shares issued
as adjusted(2)............................... 91,595 -- --
Common stock, $.01 par value; 180,277,660
shares authorized, 13,268,736 shares issued
and outstanding actual; 180,277,660 shares
authorized, 108,520,996 shares issued and
outstanding pro forma; 230,277,660 shares
authorized, 117,520,996 shares issued and
outstanding as adjusted(2)................... 6,785 98,380 185,265
Notes receivable from stockholders............ (320) (320) (320)
Deferred compensation......................... (5,051) (5,051) (5,051)
Accumulated deficit........................... (50,073) (50,073) (50,073)
-------- -------- --------
Total stockholders' equity................. 42,936 42,936 129,821
-------- -------- --------
Total capitalization..................... $ 54,889 $ 54,889 $141,774
======== ======== ========
</TABLE>
- --------
(1) See Notes 3 and 4 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 1,687,000 shares of Series A Common Stock issuable upon the
exercise of stock options outstanding as of June 30, 1997 under the First
1996 Plan and the Second 1996 Plan with a weighted average exercise price
of $2.03 per share, (ii) 664,264 shares of Series A Common Stock reserved
for issuance under the 1997 Equity Incentive Plan, (iii) 400,000 shares of
Series A Common Stock reserved for issuance under the Purchase Plan, (iv)
200,000 shares of Series A Common Stock issuable upon exercise of an
outstanding warrant with an exercise price of $15.00 per share and (v)
2,000,000 shares of Series A Common Stock issuable upon the exercise of
outstanding warrants with an exercise price of $10.00 per share. See
"Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 5 and 9 of Notes to Consolidated Financial Statements.
24
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $42,936,000, or $.40 per share of Common Stock. Net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock then outstanding,
assuming the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock upon the closing of this offering. After giving effect
to the sale of the 9,000,000 Shares of Series A Common Stock offered hereby
(after deducting underwriting discounts and commissions and estimated offering
expenses), the Company's net tangible book value as of June 30, 1997 would
have been $129,821,000, or $1.10 per share of Common Stock. This represents an
immediate increase in net tangible book value of $.70 per share to existing
stockholders and an immediate dilution of $9.40 per share to new public
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $10.50
Net tangible book value per share at June 30, 1997................ $.40
Increase in net tangible book value per share attributable to new
investors........................................................ .70
----
Net tangible book value per share after offering................... 1.10
------
Dilution per share to new public investors......................... $ 9.40
======
</TABLE>
The following table summarizes, as of June 30, 1997, on the pro forma basis
described above, the difference between the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by the existing stockholders and by new public investors
purchasing Shares of Series A Common Stock in this offering (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
----------- ------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(Series A, Series B and
Series K Common
Stock)(1).............. 108,520,996 92.3% $ 94,459,455 50.0% $ .87
New public investors
(Series A Common
Stock)(2).............. 9,000,000 7.7 94,500,000 50.0 10.50
----------- ----- ------------ -----
Total................. 117,520,996 100.0% $188,959,455 100.0%
=========== ===== ============ =====
</TABLE>
- --------
(1) After conversion of Preferred Stock upon the closing of this offering.
(2) The foregoing computations assume no exercise of stock options or warrants
outstanding as of June 30, 1997. As of June 30, 1997, there were options
outstanding to purchase a total of 1,687,000 shares of Series A Common
Stock with a weighted average exercise price of $2.03 per share, warrants
to purchase 200,000 shares of Series A Common Stock with an exercise price
of $15.00 per share, and warrants to purchase, commencing December 31,
1997, 2,000,000 shares of Series A Common Stock with an exercise price of
$10.00 per share. To the extent that any of these options or warrants are
exercised, there could be further dilution to new public investors. See
"Capitalization," "Management--Employee Benefit Plans," "Description of
Capital Stock" and Notes 5 and 9 of Notes to Consolidated Financial
Statements.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus. The selected consolidated statement of operations data
presented below for the period from March 28, 1995 (inception) to December 31,
1995 and the year ended December 31, 1996, respectively, and the selected
consolidated balance sheet data as of December 31, 1995 and 1996, are derived
from consolidated financial statements of the Company that have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
Prospectus. The selected consolidated statement of operations data for the six
months ended June 30, 1996 and 1997 and the selected consolidated balance
sheet data as of June 30, 1997 are derived from unaudited consolidated
financial statements included elsewhere in this Prospectus that have been
prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's consolidated operating results for such periods and its financial
condition as of such date. The operating results for the six months ended June
30, 1997 are not necessarily indicative of the results to be expected for any
other interim period or any future fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1995 1996 1996 1997
-------------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues....................... $ -- $ 676 $ -- $ 1,830
Costs and expenses:
Operating costs............... -- 6,969 1,781 9,165
Product development and
engineering.................. 1,447 6,312 2,806 5,274
Sales and marketing........... 496 6,368 2,120 5,878
General and administrative.... 943 6,054 1,735 4,660
------- -------- ------- --------
Total costs and expenses....... 2,886 25,703 8,442 24,977
------- -------- ------- --------
Loss from operations........... (2,886) (25,027) (8,442) (23,147)
Interest income, net........... 130 514 163 343
------- -------- ------- --------
Net loss....................... $(2,756) $(24,513) $(8,279) $(22,804)
======= ======== ======= ========
Pro forma net loss per
share(1)...................... $ .22 $ (.21)
======== ========
Pro forma shares used in per
share calculations(1)......... 110,065 110,065
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term cash investments...... $ 6,907 $16,770 $ 40,929
Working capital............................................. 6,244 10,573 29,032
Total assets................................................ 8,124 33,388 69,145
Capital lease obligations, less current portion, and other
long-term liabilities...................................... -- 7,329 11,953
Stockholders' equity........................................ 7,212 18,317 42,936
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of pro forma shares used in
per share calculations.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The following discussion contains forward-looking statements. The Company's
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future actual results to differ
materially from the Company's recent results or those projected in the
forward-looking statements include, but are not limited to, those discussed in
"Risk Factors," "Business" and below. The Company assumes no obligation to
update the forward-looking statements or such factors.
OVERVIEW
The Company is a leading provider of Internet services to consumers and
businesses over the cable television infrastructure. The Company was founded
in March 1995 on the premise that the cable infrastructure would enable the
fastest, most cost-effective delivery mechanism for Internet services. To
overcome fundamental architectural limitations of the Internet, the Company
has been developing and deploying the @Network, a scalable, distributed
network that links its private high-speed nationwide backbone to HFC cable
systems. As of June 30, 1997, the Company had expended more than $77.5 million
on capital expenditures and operating costs and expenses (including deferred
compensation) to design and build the @Network and the corporate
infrastructure necessary to support the rollout of the @Home and @Work
services. As of June 30, 1997, the Company had developed a nationwide
backbone, designed and implemented a Network Operations Center with end-to-end
management capabilities, deployed regional data centers in 14 geographic
areas, implemented an integrated customer management system including billing
and support, implemented a customized browser and aggregated the initial
multimedia content required to deliver the @Home service to subscribers.
The Company's primary offering, the @Home service, allows subscribers to
connect their personal computers via cable modems to the Company's new high-
speed "parallel Internet." The Company has agreements with seven leading North
American cable companies for the distribution of the Company's high-bandwidth
residential consumer Internet services over their cable systems. None of these
agreements, however, places an affirmative obligation on the Company's Cable
Partners to carry any of the Company's services. The @Home service is
presently offered by TCI, Comcast, Cox and Intermedia to consumers in portions
of 13 cities and communities (of which 11 have revenue-paying subscribers) in
the United States for a flat monthly fee generally ranging from $35 to $55,
which currently includes use of a cable modem, although the Company's Cable
Partners have the right to alter such fees. Under the current arrangements
with its Cable Partners in the United States, the Company receives 35% of such
monthly fees, although this percentage is subject to change by the Principal
Cable Stockholders, and receives fees for premium services. See "Risk
Factors--Dependence on Cable Partners for Distribution; Potential Conflicts of
Interest with Principal Cable Stockholders." In Canada, the Company will
receive a smaller percentage of the monthly subscription fees billed by
Rogers, Shaw and their subdistributors because Rogers and Shaw will bear the
costs of providing additional customer support, data transport, marketing and
programming for the Canadian market which are not borne by the Company's Cable
Partners in the United States. The Company anticipates that the subscriber
pricing and revenue or royalty splits with cable system operators in
international markets will differ from those prevailing in the United States
based on differences in services and content provided by the Company and the
cable system operators. As of June 30, 1997, the Company had more than 7,000
subscribers in the United States, and was in the process of converting to its
@Home service approximately 5,000 subscribers currently receiving the Wave
interactive service provided by Rogers and Shaw in Canada.
For businesses, @Work services provide a platform for Internet, intranet and
extranet connectivity solutions and networked business applications over both
cable infrastructure and leased digital telecommunications lines. In order to
accelerate deployment of @Work services into major metropolitan areas, the
Company has established a strategic relationship with TCG, the country's
largest competitive local exchange carrier (CLEC),
27
<PAGE>
to provide co-location facilities and local telephone circuits for
infrastructure and subscriber connectivity. The @Work Internet service is
currently available in five metropolitan markets: Chicago, Hartford, San
Diego, the San Francisco Bay Area and Seattle. The @Work Internet service
offers dedicated high-speed Internet access options, which are priced
competitively to existing alternatives. The Company currently receives 100% of
installation and monthly access fees for these services. Businesses that are
passed by two-way HFC cable capable of delivering the @Home service also can
connect to the @Work Internet service. Under the revenue and cost arrangements
currently contemplated with its U.S. Cable Partners for such HFC connectivity,
the Company's revenue generally will depend on the services provided by the
respective parties. As of June 30, 1997, the Company was receiving revenues
from 27 business customers and had agreements with more than 160 additional
business customers to begin to install service. Substantially all of these
agreements are for services over telecommunications lines.
The Company expects to generate substantially all of its revenues through
1998 from monthly fees from subscribers to the @Home service and the @Work
Internet service and from customer services provided to the Cable Partners.
The Company believes that a growing subscriber base will generate @Media
division advertising revenues, as well as revenues from premium services and
transaction processing.
The Company has incurred substantial net losses in each fiscal period since
its inception and, as of June 30, 1997, had an accumulated deficit of $50.1
million (including deferred compensation). The Company currently intends to
increase its capital expenditures and marketing and sales expenditures in
order to expand its network to support additional expected subscribers in
existing and future markets and to provide the Company's services to a growing
number of potential subscribers. As a result, the Company expects to incur
additional substantial net losses for the foreseeable future. The Company is
in the early stages of executing its business, and the profit potential of the
Company's subscription-based business is unproven in the Internet industry.
Because its success is dependent on the growth of the Internet into a mass
market, the Company must, among other things, develop and market products and
services that are widely accepted by consumers and businesses at prices that
will yield a profit. There can be no assurance that the Company's services
will achieve broad consumer or commercial acceptance. See "Risk Factors--Short
Operating History; History of Losses; Unproven Business Model; No Assurance of
Profitability."
The Company's ability to generate future revenues will be dependent on a
number of factors, many of which are beyond the Company's control, including,
among others, the rate at which its Cable Partners upgrade their cable
infrastructures, the success of the Affiliated LCOs in marketing the @Home
service to subscribers in their local cable areas and the prices that the
Affiliated LCOs set for the @Home service. Because of the foregoing factors,
among others, the Company is unable to forecast its revenues with any degree
of accuracy. The Company currently expects to incur capital expenditures of
approximately $22.0 million during the period from July 1, 1997 to
December 31, 1997 in order to expand its network and operating infrastructure.
In addition, the Company intends to incur significant expenses in the areas of
operation and customer services to support additional expected subscribers in
current and future markets and to market and provide the Company's services to
a growing number of potential subscribers. To the extent that such expenses
are not accompanied or followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely
affected. Accordingly, there can also be no assurance that the Company will
ever achieve profitability. See "Risk Factors" and "--Liquidity and Capital
Resources."
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data for the Company's six most recent quarters. This information has been
derived from the Company's unaudited consolidated financial statements. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. This
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ 141 $ 535 $ 806 $ 1,024
Costs and expenses:
Operating costs........ 679 1,102 1,968 3,220 4,325 4,840
Product development and
engineering........... 1,286 1,520 1,918 1,588 2,330 2,944
Sales and marketing.... 831 1,289 1,855 2,393 2,934 2,944
General and
administrative........ 998 737 1,858 2,461 2,158 2,502
------- ------- ------- ------- -------- -------
Total costs and
expenses............... 3,794 4,648 7,599 9,662 11,747 13,230
------- ------- ------- ------- -------- -------
Loss from operations.... (3,794) (4,648) (7,458) (9,127) (10,941) (12,206)
Interest income, net.... 84 79 212 139 40 303
------- ------- ------- ------- -------- -------
Net loss................ $(3,710) $(4,569) $(7,246) $(8,988) $(10,901) (11,903)
======= ======= ======= ======= ======== =======
</TABLE>
REVENUES
Revenues consist of monthly subscription fees and fees for customer support
activities for cable system operators, both of which are recognized during the
period in which services are provided. The Company began recognizing revenues
in September 1996. Total revenues were $676,000, $806,000 and $1.0 million for
the year ended December 31, 1996 and the quarters ended March 31, 1997 and
June 30, 1997, respectively. Total revenues were $0 and $1.8 million for the
six months ended June 30, 1996 and 1997, respectively. Substantially all of
the revenues to date have been derived from customer services provided to TCI
and Comcast. Revenues from related parties (the Principal Cable Stockholders)
represented 94% of revenues for the year ended December 31, 1996 and 74% of
revenues for the six months ended June 30, 1997.
COSTS AND EXPENSES
Quarterly expenses for the Company increased sequentially during 1995, 1996
and the first two quarters of 1997 as a result of increased business
activities, initially related to development activities and the build-out and
testing of the @Network and more recently attributable to subscriber growth
for the @Home service commencing in the third quarter of 1996. As the @Home
service has been initiated in additional geographic areas, increases in
marketing and customer service activities, increased personnel and the
additional support of the @Network have contributed to increases in expenses.
The Company believes continued expansion of operations as well as its network
infrastructure is critical to the achievement of its goals and anticipates
that costs and expenses will continue to increase in each quarter for the
foreseeable future.
Operating Costs. Operating costs are primarily related to providing services
to customers and maintaining the @Network infrastructure. These costs include
salaries and related expenses for operating and customer service personnel,
telecommunications transport costs, content programming and the depreciation,
amortization and maintenance of capital equipment. As a development stage
company with no revenues, there were no operating costs during 1995. For the
year ended December 31, 1996, operating costs were $7.0 million, primarily as
a result of activities associated with network and customer service start-up.
Operating costs for the four
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quarters of 1996 and the first and second quarters of 1997 were $679,000, $1.1
million, $2.0 million, $3.2 million, $4.3 million and $4.8 million,
respectively. Increases in the second and third quarters of 1996 were
primarily attributable to increased expenditures to establish the Company's
customer operations department as well as the development of additional
content programming resources. Increases in the fourth quarter of 1996 and the
first and second quarters of 1997 were principally attributable to additional
transport costs to support the rollout of the @Network to additional sites,
maintenance and depreciation of capital equipment, increased customer
operations expenditures to support the subscriber base and additional expenses
for content programming. Operating costs for the six months ended June 30,
1996 and 1997 were $1.8 million and $9.2 million, respectively. The increase
in the six months ended June 30, 1997 compared to the corresponding period of
1996 was principally attributable to activities associated with transport
costs to support the rollout of the @Network, maintenance and depreciation of
capital equipment and customer service operations and content programming
expenditures.
Product Development and Engineering. Product development and engineering
expenses consist primarily of salaries and related expenses for personnel,
fees to outside contractors and consultants, the allocated cost of facilities,
and the depreciation and amortization of capital equipment. Product
development and engineering expenses increased from $1.4 million for the
period from March 28, 1995 (inception) to December 31, 1995 (the "Inception
Period") to $6.3 million for the year ended December 31, 1996 as a result of
additional personnel costs to support the expansion, development and testing
of the @Network. Product development and engineering expenses for the four
quarters of 1996 and the first and second quarters of 1997 were $1.3 million,
$1.5 million, $1.9 million, $1.6 million, $2.3 million and $2.9 million,
respectively. The sequential increase in expenses for the first three quarters
of 1996 was due primarily to additional personnel costs to support the
expansion, development and testing of the @Network. The decrease in expenses
in the fourth quarter of 1996 from the previous quarter was due to a reduction
in certain royalty payments. The increases in expenses in the first and second
quarters of 1997 over the fourth quarter of 1996 are principally attributable
to the increase in personnel and related expenses. Product development and
engineering expenses for the six months ended June 30, 1996 and 1997 were $2.8
million and $5.3 million, respectively. The increase in the six months ended
June 30, 1997 compared to the corresponding period of 1996 was principally
attributable to the increase in personnel and related expenses. Product
development and engineering expenses are primarily incurred in three areas:
the design, testing and deployment of the @Network, the development of
software tools and enabling platforms for the creation and distribution of
enhanced content, and applications specifically designed to take advantage of
the @Network and the development of @Work services. Product development and
engineering costs have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
increased from $496,000 for the Inception Period to $6.4 million for the year
ended December 31, 1996 as a result of increased sales and marketing
activities to support the expansion of regional deployments of the @Home and
@Work services. Sales and marketing expenses for the four quarters of 1996 and
the first and second quarters of 1997 were $831,000, $1.3 million, $1.9
million, $2.4 million, $2.9 million and $2.9 million, respectively. The
sequential increase in expenses was the result of continued increases in sales
and marketing activities to support the expansion of regional deployments of
the @Home and @Work services. Sales and marketing expenses have increased
primarily due to the expansion of the Company's sales force, related travel
and entertainment expenses, expenditures for trade shows and increased
marketing activities to attract additional cable partners, subscribers and
corporate accounts. Sales and marketing expenses for the six months ended June
30, 1996 and 1997 were $2.1 million and $5.9 million, respectively. The
increase in the six months ended June 30, 1997 compared to the corresponding
period of 1996 was the result of increased sales and marketing activities to
support the expansion of regional deployments of the @Home and @Work services.
The Company and the Cable Partners both market the Company's services to
prospective customers and determine the specific costs and expenses to be
borne by each party. The Company bears the cost of national sales and
marketing programs (such as public relations, distribution, database marketing
and acquisition programs); retail distribution; joint Company/Cable Partner
market research; and retention and loyalty programs. Expenditures typically
borne by the Cable Partners include local sales and marketing programs such as
public relations, events and acquisition programs; demonstration sites; market
specific research; and cross-cable services database marketing and bundling
with core cable programs.
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General and Administrative. General and administrative expenses consist
primarily of administrative and executive personnel costs, fees for
professional services and the costs of in-house systems and infrastructure to
support the operations of the Company. General and administrative expenses
increased from $943,000 for the Inception Period to $6.1 million for the year
ended December 31, 1996 as a result of additions of personnel to support the
operations of the Company and their related costs. General and administrative
expenses for the four quarters of 1996 and the first and second quarters of
1997 were $998,000, $737,000, $1.9 million, $2.5 million, $2.2 million and
$2.5 million, respectively. The quarterly increases beginning with the second
quarter of 1996 were primarily related to additions of personnel to support
the operations of the Company and their related costs. The increase in general
and administrative expenses in the third and fourth quarters of 1996 relates
primarily to stock compensation charges resulting from stock options and
restricted stock purchase agreements. General and administrative expenses for
the six months ended June 30, 1996 and 1997 were $1.7 million and $4.7
million, respectively. The increase in the six months ended June 30, 1997
compared to the corresponding period of 1996 was the result of additions of
personnel to support the operations of the Company and their related costs and
stock compensation charges resulting from stock options and restricted stock
purchase agreements.
INTEREST INCOME, NET
Interest income, net was $84,000, $79,000, $212,000, $139,000, $40,000 and
$303,000 for the four quarters of 1996 and the first and second quarters of
1997, respectively. Interest income, net was $130,000, $514,000, $163,000 and
$343,000 for the Inception Period, the year ended December 31, 1996 and the
six months ended June 30, 1996 and 1997, respectively. Interest income, net
represents interest earned by the Company on its cash and short-term cash
investments, less interest expense on capital lease obligations.
INCOME TAXES
At December 31, 1996, the Company had net operating loss and research and
development tax credit carryforwards for federal and state tax purposes of
$16.0 million and $120,000, respectively, which will expire at various times
through the year 2011 if not utilized. Certain changes in the ownership of the
Company, as defined in the Tax Reform Act of 1986 and similar state
provisions, may restrict the utilization of such carryforwards. The proposed
issuance of Series A Common Stock in this offering would not result in such a
change in ownership. At December 31, 1996, the Company had net deferred tax
assets of $11.0 million relating principally to the net operating loss and
research and development credit carryforwards. Realization of deferred tax
assets is dependent on future earnings, if any, the timing and amount of which
are uncertain. A valuation allowance has been recorded for the entire net
deferred tax asset as a result of uncertainties regarding the realization of
the asset due to the lack of earnings history of the Company. Accordingly, the
Company has not recorded any income tax benefit for net losses incurred for
any period from inception through June 30, 1997. See Note 6 of Notes to
Consolidated Financial Statements.
NET LOSS
The net loss for 1996 was $24.5 million, an increase from $2.8 million for
the Inception Period. The Company's net loss was $3.7 million, $4.6 million,
$7.2 million, $9.0 million, $10.9 million and $11.9 million for the four
quarters of 1996 and the first and second quarters of 1997, respectively. The
net loss for the six months ended June 30, 1996 and 1997 was $8.3 million and
$22.8 million, respectively. The increase in loss was due primarily to
increases in expenses as a result of increased business activities.
FACTORS AFFECTING OPERATING RESULTS
The Company's revenue is difficult to forecast in part because the market
for high-bandwidth Internet service is rapidly evolving. The Company's
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly operating results
attributable to its @Home service include the timing of Cable Partners'
upgrades of their cable infrastructures and rollouts of the @Home service, the
rate at which customers subscribe to the Company's Internet services and the
prices subscribers pay for such services, subscriber churn rates, changes in
the revenue splits between the Company and the Cable Partners, the demand for
Internet advertising, the effectiveness of Affiliated LCOs' marketing and
other operations, and potential competition with Affiliated LCOs for
advertising revenue. Quarterly operating results attributable to the Company's
@Work services are dependent on the demand for, and level of acceptance of,
the Company's corporate Internet, intranet and extranet connectivity and
telecommuting solutions, the introduction of, demand for, and level of
acceptance of, the
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Company's value-added business applications and the timing of Cable Partners'
upgrades of their cable infrastructures and rollouts of the @Home service.
Additional factors that may affect the Company's quarterly operating results
generally include the amount and timing of capital expenditures and other
costs relating to the expansion of the Company's network, the introduction of
new Internet and telecommuting services by the Company or its competitors,
price competition or pricing changes in the Internet, cable and
telecommunications industries, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the Internet,
corporate intranet and cable industries. The Company operates with very little
backlog, and quarterly sales and operating results are difficult to forecast
even in the short term. There can be delays in the commencement and
recognition of revenue because the installation of telecommunication lines to
implement certain services have lead times that are controlled by third
parties. A significant portion of the Company's expenses are fixed in advance
based in large part on future revenue forecasts. If revenue is below
expectations in any given quarter, the adverse impact of the shortfall on the
Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall. Therefore, a shortfall in
actual as compared to estimated revenue would have an immediate adverse effect
on the Company's business, financial condition and operating results that
could be material. In addition, the Company plans to increase operating
expenses to fund additional research and development, sales and marketing,
general and administrative activities and infrastructure. To the extent that
these expenses are not accompanied by an increase in revenues, the Company's
business, operating results and financial condition could be materially
adversely affected. Due to all of the foregoing factors, it is likely that the
Company's operating results in one or more future quarters will fail to meet
or exceed the expectations of securities analysts or investors. In such event,
the trading price of the Series A Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of private sales of equity securities and capital equipment
leases. At June 30, 1997, the principal source of liquidity for the Company
was $40.9 million of cash, cash equivalents and short-term cash investments.
The Company finances and expects to continue financing its substantial capital
equipment expenditures from a variety of sources, including direct vendor
leasing programs and third party commercial leasing arrangements.
The Company has had significant negative cash flows from operating
activities in each quarterly period to date. Cash used in operating activities
for the Inception period, the year ended December 31, 1996 and the six months
ended June 30, 1997 was $2.1 million, $19.3 million and $18.0 million,
respectively. Cash used in operating activities in each of these periods was
primarily the result of net losses.
Cash used in investing activities for the Inception period and for the year
ended December 31, 1996 was $1.0 million and $14.3 million, respectively. Cash
used for investing activities in these periods was primarily the result of
capital expenditures for equipment, software, furniture and fixtures as well
as purchases of net short-term cash investments. For the six months ended June
30, 1997, cash provided by investing activities was $3.4 million, resulting
primarily from sales and maturities of short-term cash investments, partially
offset by capital expenditures. Gross capital expenditures for equipment,
software, furniture and fixtures in the Inception period, the year ended
December 31, 1996 and the six months ended June 30, 1997 were $963,000, $15.2
million and $12.8 million, respectively, of which $0, $7.9 million and $10.2
million, respectively, were financed through capital leases. The Company
expects to expend approximately $22.0 million in leasehold improvements,
equipment, software and fixtures from July 1, 1997 to December 31, 1997, much
of which will be financed through capital leases.
Cash provided by financing activities for the Inception period, the year
ended December 31, 1996 and the six months ended June 30, 1997 was $10.0
million, $36.5 million and $44.8 million, respectively, resulting primarily
from net proceeds from the sale of Preferred Stock.
The Company believes that the net proceeds from this offering, together with
existing cash, cash equivalents, short-term cash investments and capital lease
financing, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 18 months. Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company 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 the
Company's stockholders. There can be no assurance that the Company will be
able to raise any such capital on terms acceptable to the Company or at all.
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BUSINESS
The Company is a leading provider of Internet services over the cable
television infrastructure to consumers and businesses. The Company's primary
offering, the @Home service, allows residential subscribers to connect their
personal computers via cable modems to a new high-speed network developed and
managed by the Company. This service enables subscribers to receive the "@Home
Experience," which includes Internet service over HFC cable at a peak data
transmission speed over 300 times faster than typical dial-up connections,
"always on" availability and rich multimedia programming through an intuitive
graphical user interface. The technology foundation of the @Home Experience is
the "@Network," a "parallel Internet" that optimizes traffic routing, improves
security and consistency of service, and facilitates end-to-end network
management, enhancing the Company's ability to address performance bottlenecks
before they affect the user experience. The content foundation of the @Home
Experience is provided by the Company's @Media group, which aggregates
content, sells advertising to businesses and will provide premium services to
@Home subscribers.
The Company has entered into distribution arrangements for the @Home service
with its Cable Partners, TCI, Comcast, Cox, Rogers, Shaw, Marcus and
Intermedia, whose cable systems pass approximately 44 million homes in North
America. The Company believes that approximately two million of these homes
are currently passed by upgraded two-way HFC cable and that the Cable Partners
will complete the upgrade of systems passing a majority of these homes within
five years. The Company has launched its service through TCI, Comcast, Cox and
Intermedia in portions of 13 cities and communities (of which 11 have revenue-
paying subscribers) in the United States and had more than 7,000 U.S.
subscribers as of June 30, 1997. To expand distribution, the Company is
aggressively seeking to work with additional United States and international
cable system operators. In order to shorten time to market for cable
operators, the Company provides a turnkey solution, which includes not only a
technology platform, but also marketing, customer service, billing and a
national brand. According to Paul Kagan Associates, Inc., cable is available
to approximately 96% of the homes in the United States, and, according to
Baskerville Communications, there will be approximately 203 million homes
passed in Europe and the Asia Pacific region in the year 2000. Forrester
Research Inc. estimates that United States consumers spent more than $620
million for Internet access in 1996 and projects that such expenditures will
grow to more than $15 billion in 2001.
For businesses, @Work services provide a platform for Internet, intranet and
extranet connectivity solutions and networked business applications over both
cable infrastructure and leased digital telecommunications lines. In order to
accelerate deployment of the @Work services into major metropolitan areas, the
Company has established a strategic relationship with TCG, the country's
largest competitive local exchange carrier, to provide co-location facilities
and local telephone circuits for infrastructure and subscriber connectivity.
By combining the @Network's distributed architecture with cable, telephone and
technology relationships, the @Work services provide a compelling platform for
nationwide delivery of network-based business applications. The Company has
developed this platform at a low incremental cost by leveraging its existing
@Network investment. Forrester Research Inc. projects that United States
commercial Internet access revenues will climb from an estimated $595 million
in 1996 to a projected $10.4 billion in 2000.
The Company was founded in March 1995 on the premise that the cable
infrastructure could enable the fastest, most cost-effective delivery
mechanism for residential Internet services but that the actual speed of these
services would ultimately be limited by the fundamental architecture of the
Internet. As a result, the Company assembled a team of industry experts to
develop an advanced network architecture and the custom hardware and software
products that would address these limitations. Prior to launching the @Home
service in September 1996, the Company implemented a nationwide backbone,
designed and built its Network Operations Center with 24X7 end-to-end
management capabilities, deployed regional data centers and headend equipment,
implemented an integrated customer management system including billing and
support for those operators that elect to obtain such services from the
Company, implemented a customized browser and aggregated the multimedia
content required to deliver the @Home Experience to its first subscribers.
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INDUSTRY BACKGROUND
GROWTH OF INTERNET USAGE AND CONTENT
The Internet, a network of hundreds of interconnected, separately-
administered public and commercial networks, has emerged as a global
communications medium enabling millions of people to share information and
conduct business electronically. During the past few years, the number of
Internet users, advertisers and content developers and businesses online has
grown dramatically. With readily-available, low-cost Internet access,
consumers and businesses are making increased use of Web browsers, electronic
mail, corporate intranets, telecommuting, online advertising and electronic
commerce. According to Jupiter Communications, the number of Internet
households worldwide will grow from an estimated 23.4 million in 1996 to 66.6
million by 2000. The Company believes that this growth in the number of users
will drive more substantial increases in both Internet advertising, which
International Data Corporation ("IDC") estimates will grow from $181 million
in 1996 to $2.9 billion in 2000, and Internet commerce, which IDC estimates
will grow from $318 million in 1995 to $95 billion in 2000.
Internet usage continues to be stimulated by a number of factors, including
the emergence of the World Wide Web, the increasing sophistication of Internet
browsers and Web-enabled software, the availability of low-cost, flat-rate
pricing for Internet access and online services, and the wealth of
increasingly useful information published on the Internet. Increased Internet
usage and the availability of powerful new tools for the development and
distribution of Internet content have led to a proliferation of Internet-based
services, such as advertising, online magazines, specialized news feeds,
interactive games and educational and entertainment applications, that are
increasingly incorporating multimedia information such as video and near-CD-
quality audio clips. The Internet has the potential to become a platform
through which consumers and businesses easily access rich multimedia
information and entertainment, creating new sources of revenue for
advertisers, content providers and businesses. The growth of Internet
advertising and commerce depends, in part, on the ability of advertisers and
online merchants to deliver a compelling multimedia message to attract viewers
and potential customers. However, multimedia content and other data-intensive
applications require high bandwidth.
LIMITATIONS OF INTERNET ARCHITECTURE AND BANDWIDTH
The potential of the Internet as a medium for communication, education,
entertainment and commerce remains unfulfilled due to problems with its
performance and reliability. The Internet's performance limitations stem from
its basic architecture, which is not optimized for distribution of data-
intensive multimedia content. A limitation associated with any element in the
system, whether it is the "last-mile" connection to the user (the "local
loop"), the infrastructure of the ISP or OSP, the Internet backbone or the
content provider's Web server, can result in performance bottlenecks that slow
data transmission speed to that of the weakest link. For example, the Internet
frequently becomes overloaded when transmitting the same data streams from
popular Web site servers to millions of individual users. In addition, dial-up
users frequently encounter busy signals upon attempting to connect to their
ISP/OSPs and are unable to access quality multimedia content readily due to
the slow speed of their analog modems. Because the Internet is an
interconnection of independently operated networks, there is no single point
of accountability or management to respond to performance problems or to
ensure optimized Internet traffic routing, security or consistency of service.
Therefore, no single ISP/OSP offers an end-to-end solution to Internet
bottlenecks. Performance limitations of the Internet frustrate and discourage
users from fully utilizing it as a convenient and effective information tool,
a compelling educational and entertainment resource, or a way to purchase
goods and services.
TECHNOLOGIES TO INCREASE INTERNET BANDWIDTH
Several new technologies attempt to address the performance problems of the
Internet. While these technologies increase the transmission speed of data
across the local loop, they do not provide an end-to-end solution to the
fundamental performance constraints inherent in the Internet architecture.
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Improved Modem Offerings. In early 1997, dial-up modems offering a peak data
transmission speed of 56 Kbps were introduced for use with ISP/OSPs over
existing telephone lines, although many ISP/OSPs do not yet support this
transmission speed. The lack of a universal standard has slowed the rate of
adoption of faster modems.
Telecommunications-Based Offerings. Integrated Services Digital Network
("ISDN") technology enables a peak data transmission speed of 128 Kbps between
the user and the ISP/OSP over specially conditioned telephone lines. Although
ISDN technology has been available for several years, it has not been widely
deployed due primarily to its high costs. Asymmetric Digital Subscriber Line
("ADSL") is currently the most prominent implementation of Digital Subscriber
Line ("xDSL") technology, an emerging telecommunications protocol originally
developed to deliver video on demand. ADSL enables peak data transmission
speeds of 8.4 Mbps downstream from the ISP/OSP to the user and 640 Kbps
upstream from the user to the ISP/OSP; however, typical implementations
realize substantially lower data transmission speeds. ADSL access is priced
significantly above other access services and is not expected to be widely
available in the near term.
Wireless Offerings. Satellite-delivered approaches such as direct broadcast
satellite ("DBS") currently provide a peak data transmission speed of
approximately 400 Kbps downstream and rely on dial-up modems and the telephony
network for upstream transmission ("telephone return"). These approaches have
scaling limitations due to the necessity of dividing a finite amount of
satellite bandwidth among subscribers in a broad geographic area. Other
wireless offerings rely on ground-based radios instead of satellites. Such
offerings include multichannel multipoint distribution service ("MMDS") and
local multipoint distribution service ("LMDS"), which are one-way and two-way
high-bandwidth wireless digital broadcasting systems, respectively. MMDS and
LMDS are not yet widely available, require unobstructed "line-of-sight"
transmission paths and may require additional radio frequency spectrum
allocations, an entirely new distribution infrastructure and new equipment
(including specialized radio modems).
Cable Offerings. In recent years, the Company believes most large cable
system operators have begun upgrading to HFC cable infrastructure both to
compete more effectively with DBS television providers, which offer a large
number of television channels with digital audio and video, and to increase
revenue by offering digital television, telephony and data transmission using
cable modems through the upgraded infrastructure. Like corporate LANs, the
cable infrastructure is "always on" and does not consume network resources
when idle, making it well-suited for Internet data transmission. This
architecture contrasts with a switched telephone system, which requires a
separate completed circuit for each data transmission session. Peak data
transmission speeds across HFC cable approach 27 Mbps downstream and 10 Mbps
upstream. Modern HFC networks are highly scalable because HFC cable can
transmit multiple independent data streams over the fiber optic distribution
system that links a single headend (a cable distribution center) to several
neighborhoods in a metropolitan area.
THE COMPANY'S OPPORTUNITY
The Company believes that the rich, multimedia promise of the Internet can
be delivered to businesses and consumers through the global deployment of a
new network architecture that exploits the performance advantages and "always
on" characteristic of the two-way HFC cable infrastructure. Such an
architecture would significantly enhance the user's experience by enabling and
encouraging the creation and aggregation of compelling, multimedia content
that is optimized for a high-bandwidth environment. The Company also believes
that this network architecture could be leveraged to extend high-speed
Internet access to businesses, deliver value-added applications and provide
remote access to corporate LANs. For cable system operators, the Company
believes a turnkey data transmission solution that provides the data network
design capability and other engineering resources required to address the
complex problems associated with delivering high-speed Internet services over
cable would have strong appeal.
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THE COMPANY'S SOLUTION
The Company is a leading provider of Internet services to consumers and
businesses over cable infrastructure. The Company has entered into
distribution arrangements for the @Home service with TCI, Comcast, Cox,
Rogers, Shaw, Marcus and Intermedia, whose cable systems pass approximately 44
million homes in North America. The Company believes that approximately two
million of these homes are currently passed by upgraded two-way HFC cable and
that the Cable Partners will complete the upgrade of systems passing a
majority of these homes within five years. The Company's two Internet
services, @Home for consumers and @Work for businesses, provide an end-to-end
solution over the Company's new network architecture (the "@Network"), which
is a high-performance "parallel Internet" for high-bandwidth data transmission
and content. The @Network leverages the cable infrastructure and other high-
speed local-loop technologies, alleviates the bottlenecks inherent in the
architecture of the Internet and serves as a platform for a variety of high-
bandwidth interactive services. The @Home service combines the technological
and programming capabilities of the Company to provide the comprehensive
"@Home Experience." The @Home Experience includes the fastest residential
Internet access currently available (over 300 times faster when using HFC
cable than a 28.8 Kbps modem) and is "always on" (eliminating the tedious and
unreliable dial-up process). The Company's @Media programming services
aggregate high-quality and compelling multimedia content, stimulate the
development of new high-bandwidth content and deliver this content through an
intuitive graphical user interface. The @Work services offer secure and
reliable Internet access through connections between corporate LANs and the
@Network, and the ability to create virtual private networks. In addition to
providing programming services for the @Home Experience, the Company's @Media
group sells advertising and will package premium services. The Company's
comprehensive customer and technical service organization supports all of its
services on a 24X7 basis. The Company expects that many of its services will
be highly transferable to international markets, recognizing that some degree
of localization of content will be essential to achieving success.
The @Network is a scalable, distributed, intelligent network architecture
that combines a private high-speed nationwide backbone with distributed
caching. Caching moves frequently accessed information close to the user to
avoid multiple transmissions of the same data over the backbone. The @Network
is an end-to-end network solution, enabling the Company to manage the network
24 hours a day from a central Network Operations Center ("NOC") and enhancing
its ability to address performance bottlenecks before they affect the user
experience. All elements of the @Network are readily scalable, enabling it to
provide sustainable high performance as usage increases. In order to shorten
time to market for cable operators, the Company provides a turnkey solution,
which includes not only a technology platform, but also a national brand,
marketing, customer service and billing. This solution enables cable operators
to leverage their infrastructures to deliver high-bandwidth, interactive data
services that represent significant new revenue opportunities.
STRATEGY
The Company's objective is to leverage the cable infrastructure and other
high-speed, local loop transmission technologies to become the leading global
provider of branded, high-speed Internet services. The Company's strategy to
achieve this objective has the following key elements:
Expand Distribution. The Company has strategic relationships with seven
leading cable companies whose cable systems pass approximately 44 million
homes. To expand distribution, the Company aggressively seeks to form
strategic relationships with additional United States and international cable
companies to obtain exclusive rights to their coverage areas. In addition, the
Company has developed a comprehensive set of step-by-step plans and
certification processes to verify that cable companies have upgraded their
cable systems to a two-way HFC cable infrastructure that is capable of
delivering the Company's services. With these plans and processes, TCI,
Comcast, Cox and Intermedia have launched the @Home service in portions of 13
cities and communities (of which 11 have revenue-paying subscribers) in the
United States. The Company plans to continue to roll out the @Home service as
cable system operators complete two-way HFC upgrades. In addition, to access
residences that are not upgraded to two-way HFC cable, the Company is
exploring alternative delivery mechanisms, such
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as the use of one-way HFC cable with telephone return and the use of high-
speed telecommunications services for multiple dwelling units ("MDUs").
Drive Penetration by Providing the Most Compelling Internet Experience. The
Company strives to provide the most compelling interactive Internet experience
available to drive subscriber penetration. The @Home service enables the @Home
Experience, which includes the fastest residential Internet access currently
available, is "always on" and aggregates high-quality and compelling
multimedia Internet content, including video clips and near-CD-quality sound,
with an intuitive graphical user interface. The Company is working with
leading advertisers and over 100 content providers to develop multimedia
content that takes advantage of the high bandwidth and caching and
multicasting capabilities of the @Network to provide an enriched interactive
experience for the user. For international markets, the Company intends to
rely on local cable system operators and content providers to develop high-
quality localized content that delivers the @Home Experience abroad. The
Company manages the @Network from end to end, 24 hours a day, enhancing its
ability to address performance bottlenecks before they affect the user
experience. The Company and the Cable Partners have developed a comprehensive
approach for managing all subscriber interactions, including installation,
billing and transaction management, technical support and customer service,
intended to ensure that every customer interaction with the @Home service is a
positive experience.
Build Brand Awareness. The Company's marketing strategy is to accelerate
penetration within its geographic markets by creating awareness for the
"@Home" brand to make it synonymous with a compelling online interactive
multimedia experience. The Company supports this strategy through cooperative
promotional programs with the Cable Partners, which are licensed by the
Company to use the "@Home" brand in conjunction with their own brands in the
distribution of the Company's services, and through certification of third-
party hardware and software products as "@Home Ready."
Maintain Technological Leadership. The Company's technology strategy is to
continue to develop advanced technological solutions that maximize the
inherent advantages of "always on" connectivity, speed, security and
reliability afforded by the cable infrastructure and the @Network. The Company
continually works to develop: new caching and replicating techniques to
improve the performance and efficiency of the @Network; advanced multicasting
technologies to provide efficient transport of "one-to-many" content;
adaptations of the Company's services for use over non-HFC access
technologies; advertisement targeting and content personalization systems to
fit desired subscriber profiles; virtual private network technology solutions
to enable secure and scalable end-to-end telecommuting and commercial services
over the @Network; and other services and technologies designed to enhance the
@Home Experience and improve market penetration.
Offer Unique Value Proposition to Business Subscribers. The Company's
strategy for its @Work services is to provide secure, reliable corporate
Internet, intranet and extranet connectivity solutions complemented by a
series of network-based business applications. By combining @Network's
distributed architecture with cable, telephone and technology relationships,
the @Work services provide a compelling platform for nationwide delivery of
network-based business applications. The Company has developed this platform
at a low incremental cost by leveraging its existing @Network investment. For
example, by connecting distant workers to the corporate LAN in areas where the
@Home service is available, the Company believes the @Work services can offer
a fast, secure and cost-effective solution for telecommuters. The @Work
services will also facilitate corporate broadcasting to the desktop, and
distributed applications and Web hosting. The Company intends to expand its
network reach by leveraging its relationships with TCG (the nation's largest
CLEC), cable system operators, other high-speed facility providers and
technology suppliers to reach commercial subscribers across the nation. The
Company intends to create awareness of the "@Work" brand, making it synonomous
with network-based distributed applications.
Drive Incremental Revenues from Advertising and Premium Services. The
strategy of the Company's @Media group is to leverage the high bandwidth and
comprehensive usage-compilation capabilities of the @Network to offer
advertisers and content providers a technological platform for the delivery of
rich, multimedia advertising and premium content to @Home subscribers. The
Company sells advertising that uses the @Home
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audio/video advertising window to businesses for advertising on national areas
of the @Home Guide for the @Home service. The Company also works with content
and application providers to deliver specialized content such as high-speed
online interactive games, new applications such as near-CD-quality online
music, and online transactions where subscribers can automatically purchase
and download software or music. The multimedia and technology platforms
developed with @Media technologies significantly enhance the @Home Experience.
The Company negotiates revenue sharing agreements for such advertising,
content and online transactions.
While the Company retains 100% of all United States national advertising
revenue delivered on the @Home service through the Company's U.S. Cable
Partners, LCOs of the U.S. Cable Partners retain 100% of revenue generated
from local service offerings that do not require access to an Internet
backbone or that relate to programming within the designated local areas of
the home page for the @Home service, such as revenues from advertising. In
Canada, the Company will share national advertising revenue with its Canadian
Cable Partners. Moreover, given the national coverage of the combined
operations of the Principal Cable Stockholders and their Affiliated LCOs, the
Principal Cable Stockholders and their Affiliated LCOs could strike agreements
with advertisers that would effectively result in broad-based advertising
campaigns throughout most of the United States in competition with the
Company's national advertising campaigns, generating revenue only for
Affiliated LCOs and not for the Company. Accordingly, the @Home Service may
contain a significant amount of advertising that is national in scope and
focus for which it receives no share of the revenues.
PRODUCTS AND SERVICES
The Company currently offers two Internet services, @Home for consumers and
@Work for businesses. The Company's @Media group complements the @Home service
by providing programming, selling advertising and packaging premium services.
@HOME SERVICE
The Company's primary offering is the @Home service, a comprehensive
Internet solution that leverages the two-way HFC cable television
infrastructure and the Company's technological and programming capabilities to
provide the @Home Experience, which the Company believes is the most
compelling consumer Internet experience currently available. By connecting via
a cable modem to the @Network through the local cable infrastructure, @Home
subscribers' personal computers can achieve a peak data transmission speed
over two-way HFC cable of 10 Mbps (10,000 Kbps), over 300 times faster than
the peak data transmission speed of a 28.8 Kbps modem. This high bandwidth is
critical for sophisticated multimedia applications, advertising, online
commerce and online interactive games. In addition, the two-way cable
infrastructure is "always on," providing instantaneous access to the Internet
and eliminating the need for a tedious dial-up procedure using the telephone
network.
The Company's programming services, provided by the @Media group, enhance
the @Home Experience by aggregating high-quality and compelling multimedia
content available on the Internet and delivering this content through an
intuitive graphical user interface. The cornerstone of this programming is the
@Home Guide, the user's guide to the high-quality multimedia content on the
Web. The Company believes the @Home Guide broadens the appeal of online
services beyond technology enthusiasts to the mass market by simplifying
navigation, increasing the subscriber's knowledge of Internet resources,
presenting compelling high-bandwidth content with animated graphics, near-CD-
quality audio and video clips, and stimulating persistent usage by promoting
current events and interesting new services. The @Home Guide is organized
around a series of "channels," which are defined by both topical subjects
(such as news, technology, sports or popular culture) and audiences (such as
children, game players or shoppers), and which present engaging "best of the
Web" editorial content every day. With the @Home Guide, the Company generates
and directs regular audience traffic to @Media and content providers'
offerings. The @Home Guide includes @Home QuickHits, which takes advantage of
the "always on" feature of the @Home service to provide one-click access to
personal stock portfolios, local weather and traffic, dining and other useful
daily information. The @Home Experience also
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permits @Home subscribers to access online services, purchase software and
engage in multiplayer gaming and interactive shopping.
The @Home service is currently offered to consumers in the United States for
flat monthly fees generally ranging from $35 to $55, including a cable modem
provided by the Cable Partner. Installation of the @Home service is provided
by the Cable Partner at a price generally ranging from $75 to $175. Upon
installation, each new subscriber's personal computer is configured for the
@Home Experience with @Home client software, which provides access to the
@Home Guide and an extensive set of online services. The @Home client software
includes a customized Netscape browser and other high-performance and
multimedia software optimized for the @Home Experience. In addition to making
the Internet considerably easier to access for consumers, this software offers
advertisers and content and application providers a rich and consistent client
environment for delivering multimedia advertising, content and applications.
The @Home service is currently offered by TCI, Comcast, Cox and Intermedia
in portions of 13 cities and communities in the United States, 11 of which
have revenue-paying subscribers: Arlington Heights (IL), Baltimore (MD),
Detroit (MI), Fremont (CA), Hartford (CT), Orange County (CA), Phoenix (AZ),
San Diego (CA), Sarasota (FL), Seattle (WA) and Union County (NJ); and two of
which are in test: Nashville (TN) and Philadelphia (PA). Under the current
United States Cable Partner arrangements, the Company receives 35% of monthly
fees and fees for premium services, and the Cable Partner retains the entire
installation payment. In Canada, the Company will receive a smaller percentage
of the monthly subscription fees billed by Rogers, Shaw and their sub-
distributors because Rogers and Shaw will bear the costs of providing
additional customer support, data transport, marketing and programming for the
Canadian market, which are not borne by the Company's Cable Partners in the
United States. In international markets, the Company anticipates that the
subscriber pricing and revenue or royalty splits with cable system operators
will be different from those that prevail in the United States based on
differences in services and content provided by the international cable system
operators, data transport costs and regulatory environments. To the extent
that the Company offers terms of distribution and other services that are more
favorable than those offered to the Principal Cable Stockholders, they have
the right to obtain such more favorable terms under a "most favored nation"
provision in the Master Distribution Agreement. For areas where two-way HFC
cable is not yet available, the Company has developed a telephone return
version of the @Home service, which uses one-way HFC cable for high-speed
downstream transmission and an analog telephone line for upstream
transmission, and an MDU @Home service offering delivered via a digital
telecom-based connection for high-density apartment and condominium complexes.
To access the @Home service, subscribers need a personal computer with at
least a 66 MHz 486 or equivalent microprocessor, 16 megabytes of main memory
and the ability to support an ethernet connection. The Company is developing
software and a specialized @Home service to enable set-top boxes connected to
televisions and cable modems to deliver the @Home Experience to the broad
market that does not use computers. See "Risk Factors--Dependence on Cable
Partners for Distribution; Potential Conflicts of Interest with Principal
Cable Stockholders" and "--Control by Principal Cable Stockholders of Terms of
Distribution."
@WORK SERVICES
@Work services provide a platform for corporate Internet, intranet and
extranet connectivity solutions and have the ability to provide a series of
networked business applications over both HFC cable and leased digital
telecommunications lines that leverage the @Network. In order to accelerate
deployment of @Work services into metropolitan areas, the Company has
established a strategic partnership with TCG, the country's largest CLEC, to
provide targeted co-location and local telephone circuits for infrastructure
and subscriber connectivity. The Company offers @Work Internet and plans to
offer @Work Remote services.
@Work Internet. The @Work Internet service delivers dedicated, high-speed,
end-to-end managed Internet connectivity to commercial enterprises over both
local telephone circuits and HFC cable. The @Work Internet service offers
telecommunications access options at peak data transmission speeds ranging
from 56 Kbps to 45 Mbps, which are priced competitively to existing
alternatives. Businesses that are passed by two-way HFC cable in areas where
the @Home service has been launched can connect to the @Work Internet service
without paying for local telephone circuits. The @Work Internet HFC service
offers peak data transmission speeds of 10 Mbps downstream and 384 Kbps
upstream using the @Network. The @Work Internet service is currently
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available in five major metropolitan markets: Chicago, Hartford, San Diego,
the San Francisco Bay Area and Seattle.
@Work Remote. The Company has developed the @Work Remote service to offer
secure, high-speed telecommuting solutions via HFC cable and virtual private
networks among remote users, branch offices and a corporate LAN. The @Work
Remote service includes the network equipment and software needed to connect
the corporate LAN securely to the @Network via high-bandwidth local telephone
circuits. Users will be able to gain secure access to all of their corporate
LAN resources 24 hours a day, seven days a week. The Company offers virtual
private network capability between branch offices and corporate headquarters.
The Company is currently negotiating arrangements with the Cable Partners to
offer the @Work Remote service over the cable infrastructure for
telecommuters.
The Company's future @Work services offerings are expected to include
internal corporate multicasting, "push-based" multimedia content delivery and
geographically distributed Web site hosting services. In addition, by
designing each RDC to include high-availability, high-performance servers and
mass storage, the Company will have the ability to deliver and facilitate
next-generation client-server and distributed-object networked business
applications.
@MEDIA SERVICES AND TECHNOLOGIES
The @Media group sells advertising and, in partnership with content
providers, packages advertising-supported transaction and premium services
that it will offer to @Home subscribers. Advertisers and content providers can
utilize @Media technologies that enable them to exploit the high-bandwidth,
multimedia capabilities of the @Network. In addition, the @Media group
provides the programming services that aggregate the high-quality and
compelling multimedia content delivered through the @Home Guide, the
cornerstone of the @Home Experience. See "Risk Factors--Dependence on High-
Quality Content Provision and Acceptance; Developing Market for High-Quality
Content."
The @Media group sells advertising through the "B*box," a broadband
audio/video advertising space located in the @Home Guide. With the B*box,
advertisers are not constrained by the Web banner paradigm and can broaden
their creative presentation using video clips, near-CD-quality audio and
animation. Advertisers have the ability to enhance their message by using
multimedia tools and technologies such as Shockwave, Quicktime Video and Real
Audio. The Company has a broad range of revenue-generating advertisers,
including General Motors, Toyota and Unilever. Advertisers have reported
response rates (click-throughs) substantially greater than they currently
experience with traditional Web banner advertisements. The Company believes
that advertisers' ability to present more compelling messages to online users
will lead to advertising rates greater than those charged for banner
advertising on the Web.
The Company believes that growth in its subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing
efforts, the Company has developed a variety of compelling programming
services delivered through the @Home Guide in order to drive incremental
subscriber penetration. In addition to receiving advertising fees, the @Media
programming services provide a variety of revenue sources. Examples of @Media
programming services include:
Real-Time News and Entertainment Services. Continuously-updated,
scrolling headlines delivered via the News Carousel in the News, Sports and
Business @Home Guide channels, and video clips presenting top stories,
sports highlights and movie previews. Current @Media partners include
Bloomberg, CNET, CNN, MSNBC, SportsLine, The New York Times and USA Today.
Enhanced Search and Directory Services. Leading search and directory
services integrated into the @Home Guide. The Company shares in the
advertising revenue generated from these services. Current @Media partners
include BigBook, Excite, Infoseek, Switchboard, WhoWhere, Yahoo! and Zip2.
Online Services. Offer content of major OSPs via the @Home Guide in order
to take advantage of the @Network's high data transmission speed. The
Company will offer MSN as a premium service through current @Media partner
Microsoft.
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Digital Audio Services. Near-CD-quality audio on various music, talk and
event channels (e.g. jazz, rock and 24-hour sports talk) via the Company's
TuneIn service. Users can simultaneously listen to TuneIn and browse the
Internet without a material degradation in download speeds. Current @Media
partners include CNET Radio, Net Radio, SportsLine and TheDJ.
Software Purchase with Real-Time Downloading. Purchase and download
software titles at speeds substantially faster and with greater reliability
than a typical dial-up modem. A current @Media partner, CNET, provides its
BuyDirect.com service.
High-Speed Multiplayer Gaming. Download and play popular Internet games
against other online players, delivered via @Home Games, an @Home Guide
channel. A current @Media partner, CNET, provides its gamecenter.com
service.
Interactive Shopping. Evaluate and purchase goods via an interactive
multimedia shopping experience. Current @Media partners include iQVC and
Music Boulevard.
The @Media group offers a series of technologies to assist advertisers and
content providers in delivering compelling multimedia advertising and premium
services, including Replicate, DirectConnect, M-Cast and KnowledgeAPI.
Replicate enables the Company's content partners to place copies of their
content and applications locally on the @Network. DirectConnect allows content
providers to connect directly to the @Network without traversing the congested
Internet, further accelerating transmission speeds between popular sites and
services. M-Cast enables the efficient multicasting of advertising, content
and services such as continually updated news and sports information, video
clips and audio from one source to many subscribers simultaneously.
KnowledgeAPI is software that enables the personalization and targeting of
both content and advertising to specific interest groups based on subscriber-
provided profile information. For example, for an @Home Games multiplayer
online game, the Company could utilize Replicate to enable fast downloading of
the game software, DirectConnect to minimize the latency between users and the
game server (enabling an interactive "fast-twitch" experience), M-Cast to
distribute realtime game-play positional data efficiently to all simultaneous
players, and KnowledgeAPI to match gamers with similar interests.
@NETWORK ARCHITECTURE
The Company designed the @Network on the premise that sustainable, high-
performance Internet access requires a new, scalable architecture to alleviate
Internet bottlenecks and to enable true end-to-end network management
capabilities. The Company has developed and implemented its scalable,
distributed intelligent network architecture that links a private high-speed
nationwide backbone with Cable Partners' HFC systems and the TCG
infrastructure. To ensure compatibility and seamless access to the Internet,
this high-performance "parallel Internet" uses the same underlying
communications protocols and is effectively one of the world's largest
intranets. Residential subscribers access the network primarily through high-
speed cable modems, which attach to their personal computers via a standard
Ethernet connection, while businesses can also connect through CLEC
telecommunications networks. The two key principles of the Company's network
strategy are moving data closer to the user and end-to-end network management.
Moving Data Closer to the User. The @Network utilizes caching and
replication technologies to move the information that a subscriber requests
close to the subscriber. While communications costs have dropped over time,
the cost of processing and storing data has diminished more rapidly. In
addition to this fundamental shift in the economics of processing and storage
versus communications, local caching dramatically reduces backbone network
traffic enabling the @Network to overcome a fundamental weakness of the
Internet--duplicative data transfers. For example, when a subscriber downloads
a video clip from a Web site, the user must "pull" data across the Internet
from that Web site to the user's ISP and finally to the user's computer. If
the user's neighbor requests the same video clip from that Web site, the
neighbor must pull the same data across a similar path. In contrast, the
Company's approach would move the video clip over its high-speed backbone only
once in a given geographic area and retain it in a local cache near the user's
home where it could be accessed by every subscriber within that area without
retransmission over the backbone. This more cost-effective approach
simultaneously improves the end user's performance and reduces traffic volume
across the backbone.
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End-to-End Network Management. End-to-end network management is achieved
through the Company's proactive network quality, service and performance
management systems. The @Network provides visibility from the Company's
servers (or content partners' servers) across the backbone and all the way to
the subscriber's home. Because the @Network is centrally managed, the Company
can dynamically identify and enhance network quality, service and performance
or address issues before they affect the user experience.
The primary components of the @Network are the Company's high-speed private
national backbone, RDCs, regional networks, headends (including caching
servers), network connections and cable modems and the Network Operations
Center.
Private National Backbone. The Company operates its own private national
backbone, which consists of a network of high-speed asynchronous transfer mode
("ATM") communications services that the Company leases to connect its RDCs
and regional networks with content providers and the Internet. These services
currently operate at a speed of 45 Mbps and can be upgraded to 155 Mbps. This
backbone can be viewed as a high-speed "parallel Internet" that connects via
the Company's routers to the Internet at multiple network access points
("NAPs") with "Tier-One" peering status, which permits the Company to exchange
Internet traffic with other nationwide ISPs. The Company's backbone approach
provides a high performance, cost-effective, scalable transport facility that
can extend service to new areas without requiring frequent network topology
reconfigurations.
Regional Data Centers. The RDCs act as service hubs for defined geographic
areas, such as major metropolitan areas, providing key services, including e-
mail, news groups and chat facilities, to subscribers, managing network
performance proactively, replicating content and applications, and providing
an economical infrastructure to cache and multicast data throughout a region
and to house local content and subscribers' Web pages. The Company uses state-
of-the-art "high-availability" servers in its RDCs for these mission-critical
activities in order to provide the maximum service availability that consumers
and commercial subscribers expect. To date, the Company has deployed RDCs in
14 geographic areas. The Company estimates that to provide the @Home service
throughout North America will eventually require it to deploy between 30 and
50 RDCs.
Regional Networks. The regional networks consist of network routers and
switches that interconnect the Company's RDCs and its national backbone to
multiple cable headend facilities at speeds of 45 Mbps to 155 Mbps. These
networks generally take advantage of cable operators' fiber optic
infrastructures that are normally used to transport cable television signals
from a consolidated master headend facility to other headends within a region.
This approach often allows the Company to avoid the high cost of leasing
conventional high-speed communication services from local telephone companies
when deploying high-speed connectivity in a region.
Headends. The cable system headends are connected to each RDC through the
regional network. In order to move data as close to the subscriber as possible
and to avoid repetitive transmission of the same data, the headends employ
high-performance caching servers that store frequently accessed content
locally, thereby greatly reducing the amount of data transmission (and
corresponding transport costs) in higher layers of the network. In addition,
local caching servers can compile far more comprehensive usage data than is
normally attainable on the Internet, which data can be used for network
troubleshooting, tuning performance and tailoring the service. Additional
caching servers and/or storage capacity can be added economically as
penetration in a particular community grows, increasing the ability to support
additional service demand without significant capital outlay.
Network Connections and Cable Modems. The last leg of the network connection
is from the headend to the consumer over a cable operator's HFC cable system.
Multiple fiber optic lines carry the signal from the headend out to cable
"nodes" in each neighborhood, which in turn connect through traditional
coaxial cable to the home. These fiber optic nodes typically service from 300
to 2,000 homes in a relatively modern cable system. In such a system, each
television channel requires 6 MHz of the 450-750 MHz of total system capacity.
Downstream transmission of the @Home service utilizes a similar channel. As
subscriber penetration increases,
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THE @NETWORK ARCHITECTURE
[DIAGRAM OF THE @NETWORK ARCHITECTURE]
Graphic depicts the network architecture of the @Network. The graphic
illustrates the connections among the various components of the @Network,
including network access points (NAPs) to the Internet, private national
backbone, regional networks, RDCs, headends and buildings. A caption at the
lower left of the graphic illustrates the connections, at the home, among two-
way HFC cable, a cable modem, an ethernet card and a personal computer. A
legend at the lower right of the graphic identifies the following services
depicted as images on the graphic along with the following peak data
transmission speeds: (i) @Home (Downstream--up to 27Mbps; Upstream--up to
10Mbps); (ii) @Work Remote (Downstream--up to 27 Mbps; Upstream--up to 10
Mbps); and (iii) @Work Internet (up to 45 Mbps). The legend also identifies the
Regional Network and its peak data transmission speed of 45-155 Mbps, as well
as a line that illustrates the @Work Virtual Private Network capability.
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it may be necessary for the LCO to add additional nodes in order to maintain
adequate downstream data transmission speeds although there is no obligation
for the LCO to do so. Upstream transmission, however, utilizes a frequency
range not used for traditional broadcast by cable systems. This range is more
prone to interference than downstream channels, which effectively limits the
peak upstream transmission speed. In such a two-way system, no use of
telephone line facilities in the home is required. In the home, a cable modem
connects to the cable television coaxial wiring and attaches to the user's
personal computer via standard Ethernet connections. Cable modems are
manufactured by a variety of vendors, including Motorola and Bay Networks. The
peak data transmission speed of a cable modem depends on the specific model
and can approach 27 Mbps downstream and 10 Mbps upstream. Even when cable
modems operate at these speeds, however, the performance that subscribers
actually experience is often constrained by their operating systems, software
and hardware. See "Risk Factors--Unproven Network Scalability and Speed."
The @Network is "always on" unlike switched technologies such as dial-up and
ISDN. The coaxial cable connection from the neighborhood node to the home is a
medium shared among those subscribers attached to a given fiber optic node or
a number of combined fiber optic nodes. Proximate users share high-bandwidth
access (much like corporate LANs) and may limit the effective bandwidth that
is available to a given subscriber at a given time. However, this shared
connection is particularly efficient and well suited to the sporadic nature of
Internet traffic, where browsing tends to consume bandwidth in discrete bursts
intermixed with periods of inactivity. As subscriber penetration increases,
the cable operator has multiple cost-effective alternatives to increase
capacity, including allocating additional 6 MHz channels for the @Home service
or reducing the number of subscribers sharing a given bandwidth by adding
nodes housing lasers and transmitters, with each node serving a smaller number
of subscribers over the same fiber-optic infrastructure. These approaches
allow the cable operator to fine-tune both the amount of bandwidth available
and the number of users sharing that bandwidth, and to increase bandwidth
incrementally as subscriber penetration in a market increases.
Network Operations Center. The Company provides end-to-end network
management through its NOC. The NOC uses advanced network management tools and
systems to monitor the network infrastructure on a 24X7 basis, enhancing its
ability to address performance bottlenecks before they affect the user
experience. From the NOC, the Company can manage the @Network from end-to-end,
including the backbone, RDCs, regional networks, headends facilities, servers
and other components of the network infrastructure to the user's home. See
"Risk Factors--Risk of System Failure."
The Company also utilizes certain key technologies from third parties to
build and manage the @Network. In particular, the Company has established
strategic relationships with Sun for high availability servers, SGI for
caching servers, Cisco for network routing and switching hardware, Sprint for
national switched ATM backbone services, OSI for network management software,
Tivoli for systems management software to operate RDCs remotely, Oracle for
advanced database management software and Netscape for server and browser
software. See "Risk Factors--Dependence on Key Technology Suppliers."
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STRATEGIC DISTRIBUTION RELATIONSHIPS
Strategic Relationships with Cable Partners. The Company has strategic
relationships with seven leading cable companies whose systems pass
approximately 44 million homes. Subject to certain exceptions, the Company's
Principal Cable Stockholders, TCI, Comcast and Cox, have granted the Company
the exclusive right to offer high-bandwidth residential consumer Internet
services over their cable systems for an agreed period. Rogers and Shaw have
agreed to market and promote the @Home service under the name "Wave@Home" in
Canada. In addition, Marcus and Intermedia have entered into agreements to
distribute the @Home service through certain of their cable systems. The
following table sets forth the number of homes passed by the cable systems of
each of the Cable Partners and the principal cities and communities served by
their cable systems. See "Risk Factors--No Obligation of Principal Cable
Stockholders to Carry the Company's Services; Limitations on Their
Exclusivity."
<TABLE>
<CAPTION>
MILLIONS OF PRINCIPAL CITIES AND COMMUNITIES
CABLE PARTNER HOMES PASSED SERVED BY CABLE PARTNER'S SYSTEMS
- ------------- ------------ ---------------------------------
<S> <C> <C>
TCI.............. 23.8* Chicago, Dallas, Denver, Hartford, Miami,
Pittsburgh, San Francisco Bay Area, Seattle and
Washington, D.C.
Comcast.......... 7.3 Baltimore, Detroit, Northern New Jersey, Orange
County, Philadelphia and Sarasota
Cox.............. 5.2 Hampton Roads, Hartford, New Orleans, Oklahoma
City, Omaha, Orange County, Phoenix, Providence
and San Diego
Rogers........... 2.7 London, Ottawa, Toronto, Vancouver and Victoria
Shaw............. 2.0 Calgary, Edmonton, Saskatoon, Windsor and
Winnipeg
Marcus........... 1.9** Fort Worth
Intermedia....... 1.4** Asheville, Greenville, Nashville and Spartanburg
----
Total............ 44.3
====
</TABLE>
- --------
* TCI has recently announced the proposed sale or transfer of cable systems
having approximately 2.5 million homes passed to other cable companies or
joint ventures with which the Company does not have distribution
arrangements. See "Risk Factors--Potential Disposition of Cable Systems by
Principal Cable Stockholders."
** Represents total homes passed by all of the Cable Partners' cable systems.
The Company has agreements for distribution of its @Home service only with
respect to the cities and communities listed, which represent a small
portion of the total homes passed.
The Company believes that approximately two million of these homes are
currently passed by upgraded two-way HFC cable and that the Cable Partners
will complete the upgrade of systems passing a majority of these homes within
five years. However, Cable Partners have limited experience with these
upgrades, and these investments have placed a significant strain on the
financial, managerial, operating and other resources of the Cable Partners,
most of which are already highly leveraged, and thus have been, and the
Company expects will continue to be, subject to change, delay or cancellation.
Although the Company's commercial success depends on the successful and timely
completion of these infrastructure upgrades, the Cable Partners are under no
obligation to the Company to upgrade systems or to roll out, market or promote
the Company's services. In addition, none of the Cable Partners has agreed to
any specific schedule for rolling out two-way HFC infrastructure improvements,
and the Cable Partners are not contractually required to achieve any specific
rollout schedule. Because of the very substantial capital cost of upgrading
cable systems for high-speed two-way data transmission, there has been
uncertainty in recent months as to the rate at which the Cable Partners and
other cable system operators will upgrade their systems. See "Dependence on
Cable Partners to Upgrade to Two-Way Cable Infrastructure Necessary to Support
the @Home Service; Uncertain Availability and Timing of Upgrade." As of June
30, 1997, the Company had more than 7,000 subscribers in the United States and
was in the process of converting to its @Home service approximately 5,000
subscribers currently receiving the Wave interactive
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service provided by Rogers and Shaw in Canada. To date, TCI, Comcast, Cox and
Intermedia have launched the @Home service in portions of the 13 cities and
communities (of which 11 have revenue-paying subscribers) set forth in the
following table.
<TABLE>
<CAPTION>
TCI COMCAST COX INTERMEDIA
--- ------- --- ----------
<S> <C> <C> <C>
Arlington Heights, IL Baltimore, MD Orange County, CA Nashville, TN*
Fremont, CA Detroit, MI Phoenix, AZ
Hartford, CT Philadelphia, PA* San Diego, CA
Seattle, WA Sarasota, FL
Union County, NJ
</TABLE>
- --------
*In market trials
In order to shorten time to market for cable operators, the Company provides
a turnkey solution, which includes not only a technology platform, but also a
national brand, marketing, customer service and billing. This solution enables
the Cable Partners to leverage their respective infrastructures to deliver
high-bandwidth interactive data services that represent significant new
revenue opportunities. The Company's Cable Partners have the additional
opportunity to develop and receive all the revenues derived from local content
distributed locally though portions of the @Network to local subscribers. The
Cable Partners bear the cost of upgrading and maintaining their cable systems
to provide high-speed two-way data transmission, installing the @Home service
in subscribers' homes, procuring the cable modems needed to interface with the
@Network and local marketing efforts. See "Risk Factors--Dependence on Cable
Partners to Roll Out, Market, Install, Maintain Infrastructure for, Provide
Customer Service for and Bill for the @Home Service."
The @Home service is currently offered to consumers in the United States for
flat monthly fees generally ranging from $35 to $55, including a cable modem
provided by the Cable Partner. Installation of the @Home service is provided
by the Cable Partner at a price generally ranging from $75 to $175. Under the
current United States Cable Partner arrangements, the Company receives 35% of
monthly fees and fees for premium services, and the Cable Partner retains the
entire installation payment. In Canada, the Company will receive a smaller
percentage of the monthly subscription fees billed by Rogers, Shaw and their
sub-distributors because Rogers and Shaw will bear the costs of providing
additional customer support, data transport, marketing and programming for the
Canadian market which are not borne by the Company's Cable Partners in the
United States. In international markets, the Company anticipates that the
subscriber pricing and revenue or royalty splits with cable system operators
will be different from those that prevail in the United States based on
differences in services and content provided by the Company and the cable
system operators, data transport costs and regulatory environments. To the
extent that the Company offers terms of distribution and other services that
are more favorable than those offered to the Principal Cable Stockholders,
they have the right to obtain such more favorable terms under a "most favored
nation" provision in the Master Distribution Agreement. See "Certain
Transactions--Certain Business Relationships--Master Distribution Agreement
with TCI, Comcast and Cox."
Strategic Relationship with TCG. The Company has established a strategic
relationship with TCG to provide facilities management and telecommunications
network services for the local transport requirements of the Company's @Work
services. TCG, of which TCI, Comcast and Cox control a majority of the voting
stock, is the largest CLEC in the United States, providing high-speed fiber
optic telecommunications services to more than 7,700 commercial customer sites
in 57 major metropolitan centers in the United States. The Company's access to
TCG's fiber optic network and switching infrastructure gives the Company a
nationwide opportunity in the commercial marketplace, which the Company
believes will accelerate the deployment of the Company's @Work services into
major United States markets. As the Company's @Work services grow, the Company
believes that its strategic relationship with TCG will provide TCG the
benefits of driving additional traffic volumes over TCG's existing networks
and generating significant incremental revenues for TCG. See "Risk Factors--
Dependence on TCG for Local Telecommunications Services for the @Work
Services."
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DISTRIBUTION, MARKETING AND SALES
The Company has entered into distribution arrangements for the @Home service
with TCI, Comcast, Cox, Rogers, Shaw, Marcus and Intermedia, whose cable
systems pass approximately 44 million homes in North America. To expand
distribution, the Company is aggressively seeking to work with additional
United States and international cable companies to obtain exclusive rights to
their coverage areas. The Company is also exploring alternative delivery
mechanisms such as the use of telephone return and the use of high-speed
telecommunications services for MDUs. The Company has developed a
comprehensive set of step-by-step plans and certification processes to verify
that cable companies have upgraded their cable systems to a two-way HFC cable
infrastructure that is capable of delivering the Company's services. The
Company's marketing strategy is to accelerate penetration within its
geographic markets by creating awareness of the "@Home" brand, making it
synonymous with a compelling online interactive multimedia experience. The
Company executes this strategy through cooperative promotional programs with
the Company's Cable Partners, which are licensed by the Company to use the
"@Home" brand in conjunction with their own brands in the distribution of the
Company's services. Ultimately, the Company plans to leverage its growing
subscriber base by marketing services that provide incremental revenue
opportunities such as advertising, premium subscriber services and @Work
value-added services. See "Risk Factors--Dependence on Cable Partners for
Distribution; Potential Conflicts of Interest with Principal Cable
Stockholders."
@Home Service. The @Home service is sold to consumer households by the Cable
Partners in the markets they serve. While the Cable Partners have the primary
responsibility for locally marketing the service, the Company assists them in
local market planning and product promotions by providing templates and
materials for print, direct mail and broadcast advertising. The Company also
believes that retailers and original equipment manufacturers ("OEMs") may
provide a major opportunity for the Company to gain exposure to a much wider
audience of consumers, provide hands-on demonstrations and increase subscriber
penetration by certifying products such as personal computers and cable modems
as "@Home Ready" and developing "@Home-branded" products.
@Work Services. The Company's sales and marketing strategy for its @Work
services utilizes both a direct sales force and indirect sales channels. The
Company engages in direct sales through a National Account Team and a Valued
Account Team. The National Account Team proactively calls on senior executives
and chief information officers at Fortune 1,000 companies in regions where the
@Work services are available. These sales are typically complex in nature and
involve businesses with significant integration needs and multiple sites. The
Valued Account Team consists of both inbound and outbound telesales
representatives and focuses on sales to non-Fortune 1,000 companies. This team
responds to call activity and leads generated through @Work marketing
activities, including direct mail, online Web promotion and advertising,
national and regional industry events, @Work seminars, promotional programs
and pursuit of favorable industry analyst and press coverage. The indirect
sales team works with @Work partner companies to leverage their sales forces
to sell @Work services. Indirect sales partners include OEMs, value added
resellers and systems integrators. The Company also plans to establish
distribution arrangements for the @Work services through its Cable Partners.
@Media Services and Technologies. The Company sells advertising to national
consumer businesses through a direct sales force and attracts advertisers by
providing a series of services and technologies through its Interactive
Advertising Group. The Company's Interactive Advertising Group, which consists
of advertising production resources, ad program management personnel and a
traditional commissioned advertising sales team, works with advertisers to
develop compelling advertising for the Internet. The Company's Media
Development Team works with leading content and application providers to
package access to premium subscription offerings. The Company and its Cable
Partners market these offerings to subscribers to the @Home service through
online and traditional media.
International Markets. The Company believes that international markets will
provide a substantial opportunity for its services. Simba Information Inc.
projects that there will be 21 million online and Internet users outside North
America in 2000. The Company expects that many of its services will be highly
transferable to international markets, recognizing that some degree of
localization of content will be essential to achieving
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success. Accordingly, the Company plans to address targeted international
markets though local partners that will market, sell and distribute the
Company's services in their countries. The international markets that the
Company plans to target first are Canada, the United Kingdom, Germany, Japan
and France. In March 1997, the Company entered into exclusive arrangements for
the distribution of its @Home service under the name "Wave@Home" in Canada
through Rogers and Shaw, the two leading cable system operators in Canada,
whose systems reach approximately five million homes or 50% of the homes
passed by cable in Canada. Through Rogers and Shaw, which have the right to
redistribute the Wave@Home service to other cable system operators in Canada,
the Company expects to expand the distribution of its service into Canada.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that inadequate customer service and technical support
represent a major shortcoming of Internet access services. The Company and its
Cable Partners have developed a comprehensive approach for managing all
subscriber interactions, including installation, billing and transaction
management, technical support and customer service, intended to ensure that
every interaction a subscriber has with the Company's services is a positive
experience. The @Home service is typically installed in the subscriber's home
by a trained computer technician and a cable technician both provided by the
Cable Partner. The Company assists the Cable Partners in training the service
installers, provides automated installation processes and collateral materials
and, in some cases, coordinates installation schedules. To ensure ongoing
customer satisfaction, the Company and the Cable Partners provide three tiers
of customer service and technical support: general customer service (Tier 1);
technical support (Tier 2); and network management support (Tier 3). Tier 1
support, including billing, is typically the responsibility of the Cable
Partner, although the Company offers the full range of service and support as
a complete outsourced solution, and the Cable Partner has the option of
contracting with the Company for Tier 1 support at the Company's cost.
Alternatively, the Cable Partner may elect to provide Tier 2 support and
reduce the revenue split paid to, or otherwise be compensated by, the Company.
The Company provides an open "ServiceAPI" for cable operators to integrate
their existing billing, service and support systems with the Company's
systems. All of these programs are supported by "@Home University," which
provides a comprehensive set of education services to assist the Cable Partner
in training installers and customer service representatives and training
developers on implementing the ServiceAPI.
The Company's technical support personnel are co-located with the Company's
NOC staff, who are responsible for monitoring the performance of the @Network
from end-to-end on a 24X7 basis. The co-location of these two organizations
facilitates close collaboration between the two groups to resolve subscriber
problems more rapidly and to anticipate potential problems before they can
affect the user experience. The Company utilizes customized network tools that
enable its technical support staff to deliver solutions that would otherwise
require advanced engineering analysis. The Company is also developing a state-
of-the-art knowledge base system to capture and organize the latest
information to meet the needs of the Company's technical support staff, cable
partners and subscribers. By leveraging its integrated subscriber management
systems and technical support database, the Company plans to provide an online
customer support service known as "Help@Home," which will enable comprehensive
access to its service and support knowledge base by both subscribers and cable
operators through the Web, e-mail or interactive voice response.
COMPETITION
The markets for consumer and business Internet services and online content
are extremely competitive, and the Company expects that competition will
intensify in the future. The Company's most direct competitors in this market
are ISPs, national long distance carriers, local exchange carriers, wireless
service providers, OSPs and Internet content aggregators. Many of these
competitors are offering (or may soon offer) technologies that will attempt to
compete with some or all of the Company's high-speed data service offerings.
Such technologies include ISDN and xDSL. The Company also competes with other
cable-based data services that are seeking to contract with cable system
operators to bring their services into geographic areas that are not covered
by an exclusive relationship between the Company and its Principal Cable
Stockholders. The bases of competition in these markets include transmission
speed, reliability of service, ease of access, price/performance, ease-of-use,
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<PAGE>
content quality, quality of presentation, timeliness of content, customer
support, brand recognition, operating experience and revenue sharing. The
Company believes that it compares favorably with its competitors with respect
to each of these factors, except brand recognition, which the Company is
starting to build. However, many of the Company's competitors and potential
competitors have substantially greater resources than the Company, and there
can be no assurance that the Company will be able to compete effectively in
its target markets.
Internet Service Providers. ISPs, such as BBN, Earthlink, MindSpring, Netcom
and PSInet, provide basic Internet access to residential consumers and
businesses, generally using existing telephone network infrastructures. This
method is widely available and inexpensive, but performance is limited.
Barriers to entry are low, resulting in a highly competitive and fragmented
market.
National Long Distance Carriers and Local Exchange Carriers. Long distance
inter-exchange carriers, such as AT&T, MCI, Sprint and WorldCom, have deployed
large-scale Internet access networks and sell connectivity to business and
residential customers. The RBOCs and other local exchange carriers have also
entered this field and are providing price competitive services.
Wireless Service Providers. Wireless service providers, including AT&T and
Hughes Network Systems, are developing wireless Internet connectivity, such as
MMDS, LMDS and DBS. MMDS and LMDS are not yet available and will require radio
frequency spectrum auctions before service is possible. They will also require
an entirely new distribution infrastructure and new equipment including
specialized modems.
Online Service Providers. OSPs include companies such as America Online,
CompuServe, MSN, Prodigy and WebTV that provide, over the Internet and on
proprietary online services, content and applications ranging from news and
sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which
enables the provision of data services to the large group of consumers who
have personal computers with modems. In addition, they provide basic Internet
connectivity, ease-of-use and consistency of environment. In addition to
developing their own content or supporting proprietary third-party content
developers, online services often establish relationships with traditional
broadcast and print media outlets to bundle their content into the service,
such as Microsoft's relationship with NBC to provide multimedia news and
information programming over both cable television and MSNBC.
Internet Content Aggregators. Content aggregators seek to provide a "one-
stop" shop for Internet and online users. Their success depends on capturing
audience flow, providing ease-of-use and offering a range of content that
appeals to a broad audience. Their business models are predicated on
attracting and retaining an audience for their set of offerings. Leading
companies in this area include America Online, CompuServe, Excite, Microsoft
and Yahoo!. In this market, competition occurs in acquiring both content
providers and subscribers. The principal bases of competition in attracting
content providers include quality of demographics, audience size, cost-
effectiveness of the medium and ability to create differentiated experiences
using aggregator tools. The principal bases of competition in attracting
subscribers include richness and variety of content and ease of access to the
desired content. The proprietary online services such as America Online,
CompuServe and MSN have the advantage of a large customer base, industry
experience, many content partnerships and substantial resources.
Cable-Based Data Services. The Company's competitors in the cable-based
services market are those cable companies that have developed their own cable-
based services and market those services to unaffiliated cable system
operators that are planning to deploy data services and with which the Company
would like to work. Several cable system operators, including Time Warner and
US West's Continental Cablevision subsidiary, have deployed high-speed
Internet access services over their existing local HFC cable networks.
Specifically, Time Warner, which is the second largest cable company in the
United States, has established its own cable-based ISP with proprietary
content service, called Road Runner, which features a variety of Time Warner
publications and services. Time Warner plans to market the Road Runner service
through Time Warner's own cable systems as well as to other cable system
operators nationwide. Continental Cablevision has developed another service
called Highway One, which offers high-speed Internet services to its existing
customers. Others that have publicly
49
<PAGE>
announced limited-area trials for their own cable-based Internet services
include Adelphia, BellSouth and Jones Intercable. Some of these companies such
as Time Warner have their own substantial libraries of multimedia content and
the other competitors could establish strategic relationships with content
providers, which could provide them with a significant competitive advantage.
Many of the Company's competitors and potential competitors have
substantially greater financial, technical and marketing resources, larger
subscriber bases, longer operating histories, greater name recognition and
more established relationships with advertisers and content and application
providers than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing Internet services or online
content than the Company. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely
affect the Company's business, operating results or financial condition.
Further, as a strategic response to changes in the competitive environment,
the Company may make certain pricing, service or marketing decisions or enter
into acquisitions or new ventures that could have a material adverse effect on
the Company's business, operating results or financial condition. See "Risk
Factors--Competition."
PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering efforts focus on the
design and development of new technologies and products to increase the speed
and efficiency of the @Network and to facilitate the development and
distribution of high bandwidth over its network. The principal areas of
current product development and engineering include:
. enhancing caching and replication techniques to improve network
performance and efficiency;
. advancing multicasting technologies to provide efficient transport of
"one-to-many" content;
. adapting the Company's network services for use over non-HFC access
technologies, such as xDSL and conventional twisted-pair ethernet wiring
in MDUs;
. developing advertisement targeting and content personalization systems to
fit desired subscriber profiles;
. developing virtual private network technology solutions to enable secure
and scalable end-to-end telecommuting and commercial services over the
@Network;
. enhancing the Company's advanced network management capabilities to
identify and address network performance issues before they affect the
user experience;
. developing advanced directory and certification services to enable the
Company's subscribers to perform electronic commerce and access
information and premium resources securely; and
. defining application programming interfaces for TV-based Internet devices
that can browse and interact with the Web without requiring the use of a
personal computer.
The Company's product development and engineering expenses for the period
from March 28, 1995 (inception) to December 31, 1995, 1996 and the six months
ended June 30, 1997 were $1.4 million, $6.3 million and $5.3 million,
respectively.
INTELLECTUAL PROPERTY
The Company regards its technology as proprietary, attempts to protect it
with copyrights, trademarks, trade secret laws, restrictions on disclosure and
other methods, and has filed two patent applications and is in the process of
preparing additional patent applications with respect to aspects of its high-
bandwidth network technology and online advertising. There can be no assurance
that any patent will issue from these applications or that, if issued, any
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents that may be issued
will not be challenged, invalidated or circumvented, or that any rights
granted thereunder would provide proprietary protection to the Company.
Failure of any patents to provide protection to the Company's technology may
make it easier for the Company's competitors to offer technology equivalent or
superior to the Company's technology. The Company also generally enters into
confidentiality or
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license agreements with its employees and consultants, and generally controls
access to and distribution of its documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's products, services or
technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of the Company's content offerings. Policing unauthorized
use of the Company's content offerings is difficult. There can be no assurance
that the steps taken by the Company will prevent misappropriation or
infringement of its technology. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights,
including claims for infringement resulting from the downloading of materials
by the online or Internet services operated or facilitated by the Company. See
"Legal Proceedings" below. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted or prosecuted against the Company or that any
assertions or prosecutions will not materially adversely affect the Company's
business, operating results and financial condition. Irrespective of the
validity or the successful assertion of such claims, the Company would incur
significant costs and diversion of resources with respect to the defense
thereof, which could have a material adverse effect on the Company's business,
operating results and financial condition. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance,
however, that under such circumstances a license would be available on
commercially reasonable terms, or at all.
LEGAL PROCEEDINGS
On July 8, 1997, PCTV, Inc. ("PCTV") filed a complaint against the Company
in the United States District Court for the District of New Hampshire
asserting rights in the @Home trademark. In the complaint, PCTV alleges
trademark infringement and unfair competition based on the Company's use of
the @Home mark and requests damages and injunctive relief. PCTV is a New
Hampshire corporation that produces computer-related television programs such
as "Business Computing," "Computer Chronicles" and "@Home." PCTV alleges that
it first used the @Home mark in August 1994. The Company intends to defend the
suit vigorously and does not expect the outcome of this litigation to have a
material adverse effect on the Company's business, operating results or
financial condition.
EMPLOYEES
As of June 30, 1997, the Company had 292 employees, excluding temporary
personnel and consultants. Of the total, 75 were employed in networking
engineering, 86 supported the @Home service including customer support and
related activities, 33 supported the @Work services, 61 were employed in the
@Media group and 37 were employed in general and administration. None of the
Company's employees is represented by a labor union, and the Company considers
its relations with its employees to be good. The Company's ability to achieve
its financial and operational objectives depends in large part upon the
continued service of its senior management and key technical personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such qualified personnel in the
Company's industry and geographical location in the San Francisco Bay Area is
intense, particularly in software development, network engineering, cable
engineering and product management personnel. See "Risk Factors--Management of
Growth and Expansion; Dependence on Key Personnel."
FACILITIES
The Company is headquartered in facilities consisting of approximately
70,000 square feet in Redwood City, California, which the Company occupies
under a 12-year lease. In connection with this lease, the Company is obligated
to reimburse the landlord for leasehold improvements totaling approximately
$5.5 million. In addition, the Company has three separate options to require
the landlord to build a total of approximately 400,000 additional square feet
of facilities on adjacent property, subject to certain conditions. The Company
would then occupy these buildings under leases of 12 years with base rent to
be determined based on the cost of construction of the buildings. The Company
anticipates that the Redwood City facilities will be adequate for the
foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages and
positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas A. Jermoluk(1)... 41 Chairman of the Board, President and Chief Executive Officer
David P. Bagshaw........ 44 Senior Vice President, @Media Group
Dean A. Gilbert......... 40 Senior Vice President and General Manager, @Home Group
Kenneth A. Goldman...... 48 Senior Vice President and Chief Financial Officer
Donald P. Hutchison..... 40 Senior Vice President and General Manager, @Work Group
John L. O'Farrell....... 38 Senior Vice President, International
Milo S. Medin........... 34 Vice President, Networks
David G. Pine........... 38 Vice President, General Counsel and Secretary
William R. Hearst 48 Vice Chairman
III(1)(2)..............
James L. Barksdale(1)... 54 Director
Brendan R. Clouston(3).. 44 Director
L. John Doerr(1)(4)..... 46 Director
John C. Malone.......... 56 Director
Bruce W. 47 Director
Ravenel(2)(3)(4).......
Brian L. Roberts........ 38 Director
Edward S. Rogers........ 64 Director
Larry E. Romrell(3)..... 57 Director
David M. Woodrow(2)..... 51 Director
</TABLE>
- --------
(1) Member of .Com Committee
(2) Member of the Audit Committee
(3) Member of the Series B Committee
(4) Member of the Compensation Committee
THOMAS A. JERMOLUK has served as Chairman of the Board, President and Chief
Executive Officer of the Company since he joined the Company in July 1996.
From 1994 to July 1996, he was President, and from 1992 to July 1996 he was
Chief Operating Officer, of Silicon Graphics, Inc. ("SGI"), a visual computing
company. From 1991 to 1994, Mr. Jermoluk was Executive Vice President of SGI,
and, from 1988 to 1991, he was Vice President and General Manager of SGI's
Advanced System Division. From October 1993 to August 1996, he was a member of
the board of directors of SGI. Prior to joining SGI in 1986, Mr. Jermoluk
managed a variety of hardware and software development projects at Hewlett-
Packard Company and Bell Laboratories. He serves on the boards of directors of
Pure Atria Corporation and Forte Software, Inc. Mr. Jermoluk holds B.S. and
M.S. degrees in Computer Science from Virginia Tech.
DAVID P. BAGSHAW has served as Senior Vice President of the Company's @Media
Group since he joined the Company in September 1996. From August 1991 to
August 1996, he served as Vice President of Marketing of SGI, where he was
responsible for various marketing organizations and activities, including
communications, public relations, business development, application developer
support and product marketing. From 1987 to August 1991, he served as a
product manager and as a director of marketing at SGI. Mr. Bagshaw holds B.S.
and M.S. degrees in Mechanical Engineering from Stanford University and an
M.B.A. degree from the Stanford University Graduate School of Business.
DEAN A. GILBERT has served as Senior Vice President and General Manager of
the Company's @Home Group since November 1996 and served as Senior Vice
President, Marketing and Sales of the Company from February 1996 to November
1996. From September 1994 to February 1996, he served as President and Chief
Executive Officer of Positive Communications, Inc., a provider of paging
products and services. From 1991 to September 1994, Mr. Gilbert was Executive
Vice President, Group Operations and from 1989 to 1991 was Senior
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Vice President, Marketing, Programming and Business Development of KBLCOM,
Incorporated, a cable television provider. He holds B.A. and M.A. degrees in
Telecommunications from Michigan State University.
KENNETH A. GOLDMAN has served as Senior Vice President and Chief Financial
Officer of the Company since he joined the Company in July 1996. From July
1992 to July 1996, he was Senior Vice President and Chief Financial Officer of
Sybase, Inc., a database software and services company. From 1989 to July
1992, Mr. Goldman was Vice President of Finance and Administration and Chief
Financial Officer at Cypress Semiconductor Corporation, a semiconductor
manufacturer. From 1983 to 1989, he was Vice President and Chief Financial
Officer of VLSI Technology Inc. Mr. Goldman serves on the boards of directors
of Global Village Inc. and Unison Software, Inc. He holds a B.S. degree in
Electrical Engineering from Cornell University and an M.B.A. degree from the
Harvard University Graduate School of Business.
DONALD P. HUTCHISON has served as Senior Vice President and General Manager
of the Company's @Work Group since he joined the Company in February 1997.
Prior to that time, he served as Senior Vice President, Strategic Partnerships
from March 1996 to November 1996, Senior Vice President, Sales from August
1995 to March 1996 and Vice President, Sales and Marketing from May 1994 to
August 1995 of Netcom On-Line Communications Services, Inc., an Internet
access service provider. From 1989 to May 1994, Mr. Hutchison was Director of
Sales and Marketing at TAU Corporation, a digital video imaging company. From
1987 to 1989, he was Director of Sales and Business Planning for Pixar, and,
prior to that time, he held various sales and management positions with Prime
Computer and Data General Corporation. Mr. Hutchison holds a B.A. degree in
Business Economics from the University of California at Santa Barbara and an
M.B.A. degree from Loyola Marymount University.
JOHN L. O'FARRELL has served as Senior Vice President, International of the
Company since he joined the Company in April 1997. From August 1995 to April
1997, he was President of U S WEST Interactive Services, Inc., an Internet
content development company. Prior to that time, Mr. O'Farrell served as Vice
President, Corporate Strategy of U S WEST, Inc., a telephone and cable network
operator, from May 1994 to August 1995 and as Executive Director, Corporate
Strategy of U S WEST, Inc. from 1992 to May 1994. Before joining U S WEST,
Inc., he held general management, marketing and consulting positions in the
United States and Europe with Telecom Ireland (Ireland), Booz, Allen &
Hamilton (U.S.), the Commission of European Communities (Luxembourg), Digital
Equipment Corporation and Siemens AG (both Germany). Mr. O'Farrell holds a
B.E.E. degree from University College Dublin, Ireland and an M.B.A. degree
from the Stanford University Graduate School of Business.
MILO S. MEDIN has served as Vice President, Networks of the Company since he
joined the Company as its first employee in June 1995. From 1985 to June 1995,
he was employed at the NASA Ames Research Center ("NASA Ames"), where he was
responsible for a variety of wide area networking projects, including the use
of Internet technology to interconnect NASA facilities and researchers at over
200 sites in 16 countries. In 1989, Mr. Medin developed the architecture for
the first Internet interconnect at NASA Ames, linking the major government
backbones together. He also managed the National Research and Educational
network project at NASA Ames, which, in concert with the United States
Department of Energy, deployed the first non-experimental 155 Mbps Internet
backbone using switched ATM services to interconnect supercomputing and data
archive facilities across the United States. Prior to joining NASA, he was
employed by Science Applications Inc. as a programmer for defense program
activities at the Lawrence Livermore National Laboratory and at the Los Alamos
National Laboratory. In addition, Mr. Medin has been active in the development
of Internet routing protocols and standards, primarily in the Internet
Engineering Task Force, the leading Internet development and standards
organization, for more than 10 years. He studied Computer Science at the
University of California at Berkeley.
DAVID G. PINE has served as Vice President and General Counsel of the
Company since he joined the Company in April 1996 and as Secretary of the
Company since July 1996. From 1990 to March 1996, he served as Vice President,
General Counsel and Secretary of Radius Inc., a manufacturer of computer
peripherals. Before
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that, Mr. Pine was in private law practice with Fenwick & West LLP. Mr. Pine
holds an A.B. degree in Government from Dartmouth College and a J.D. degree
from the University of Michigan Law School.
WILLIAM R. HEARST III has been a director of the Company since August 1995
and has served as Vice Chairman of the Board of Directors since July 1996. He
has been a general partner of KPCB, a venture capital firm, since January
1995. From May 1995 to July 1996, he was the founding Chief Executive Officer
of the Company. Before joining KPCB, Mr. Hearst was editor and publisher of
the San Francisco Examiner for ten years. He is a Fellow of the American
Association for the Advancement of Science and a Trustee of the Carnegie
Institute of Washington and the California Academy of Sciences. Mr. Hearst
holds an A.B. degree in Mathematics from Harvard University.
JAMES L. BARKSDALE has been a director of the Company since August 1995. He
has been President and Chief Executive Officer of Netscape, an Internet
software company, since January 1995. He has served as a director of Netscape
since October 1994. Mr. Barksdale served as President and Chief Operating
Officer of AT&T Wireless Services (formerly, McCaw Cellular Communications,
Inc.) from January 1992 to September 1994 and as its Chief Executive Officer
from September 1994 to January 1995. From 1983 to January 1992, he served as
Executive Vice President and Chief Operating Officer of Federal Express
Corporation. From 1979 to 1983, Mr. Barksdale served as Chief Information
Officer of Federal Express Corporation. Mr. Barksdale serves on the boards of
directors of 3Com Corporation, Harrah's Entertainment, Inc., Navio
Communications Inc. and Robert Mondavi Corp. He holds a B.S. degree in
Business Administration from the University of Mississippi.
BRENDAN R. CLOUSTON has been a director of the Company since August 1996. He
has been Executive Vice President of TCI since January 1994 and was Chief
Financial Officer of TCI from March 1997 to April 1997, President and Chief
Executive Officer of TCI Communications, Inc. ("TCIC") from October 1994 to
March 1997, and Executive Vice President and Chief Operating Officer of TCIC
from March 1992 to October 1994. Prior to joining TCIC, he held various
executive positions with United Artists Entertainment Company and its
predecessor, United Artists Communications, Inc., most recently as Executive
Vice President and Chief Financial Officer. Mr. Clouston serves on the board
of directors of TCG. He holds a B.A. degree from the University of Toronto and
an M.B.A. degree from the University of Western Ontario.
L. JOHN DOERR has been a director of the Company since August 1995. He has
been a general partner of KPCB since September 1980. Prior to joining KPCB,
Mr. Doerr was employed by Intel Corporation for five years. He serves on the
boards of directors of Amazon.com, Inc., Intuit Inc., Macromedia, Inc.,
Netscape, Platinum Software Corporation, Shiva Corporation and Sun
Microsystems, Inc. Mr. Doerr holds B.S.E.E. and M.E.E. degrees from Rice
University and an M.B.A. degree from the Harvard University Graduate School of
Business.
JOHN C. MALONE has been a director of the Company since April 1997. He has
served as Chairman and Chief Executive Officer of TCI since November 1996 and
was President and Chief Executive Officer of TCI from 1973 through November
1996. Dr. Malone also serves on the boards of directors of Tele-Communications
International, Inc., TCI Satellite Entertainment, Inc., BET Holdings, Inc.,
Discovery Communications, Inc. and the Bank of New York Company, Inc. He holds
a B.S. degree in Electrical Engineering and Economics from Yale University and
an M.S. degree in Industrial Management and a Ph.D. in Operations Research
from Johns Hopkins University.
BRUCE W. RAVENEL has been a director of the Company since August 1995. Since
January 1996, he has served as President and Chief Executive Officer of
TCI.NET, Inc. and Senior Vice President of TCIC, both wholly owned
subsidiaries of TCI, where he has been responsible for all Internet-related
business activities of TCI. From March 1994 to January 1996, Mr. Ravenel was
Senior Vice President and Chief Operating Officer of TCI Technology Ventures,
Inc., a division of TCI. From March 1992 to March 1994, he served as Vice
President of TCI Technology, Inc., a subsidiary of TCI. He serves on the board
of directors of Acclaim Entertainment, Inc. Mr. Ravenel holds a B.A. degree in
Economics from the University of Colorado.
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<PAGE>
BRIAN L. ROBERTS has been a director of the Company since August 1996. He
has served as President of Comcast since February 1990 and as a director of
Comcast since 1987. Prior to becoming President, Mr. Roberts spent eight years
in various management positions with Comcast. He serves on the boards of
directors of Comcast UK Cable Partners Limited, Storer Communications, Inc.
and TCG. Mr. Roberts holds a B.S. degree in Economics from the Wharton School
of Finance of the University of Pennsylvania.
EDWARD S. ROGERS has been a director of the Company since April 1997. He has
served as President and Chief Executive Officer and as a director of Rogers, a
telecommunications company, since 1979 and as Acting President and Chief
Executive Officer of Rogers Cablesystems Limited, a cable company and a wholly
owned subsidiary of Rogers Communications, since April 1996. Mr. Rogers
founded Rogers Cable TV (now Rogers Cablesystems Limited) in 1967, Rogers
Radio Broadcasting Limited (now Rogers Broadcasting Limited) in 1969 and
Cantel, Inc. (now Rogers Cantel, Inc.) in 1983 and has served in various
management positions with Rogers- related entities during the last 30 years.
Mr. Rogers serves on the boards of directors of Rogers Cantel Mobile
Communications Inc. and the Toronto-Dominion Bank. He holds a B.A. in
Political Science and Economics from the University of Toronto and an LL.B
from Osgoode Hall Law School.
LARRY E. ROMRELL has been a director of the Company since August 1995. He
has served as Executive Vice President of TCI since January 1994 and President
and Chief Executive Officer of TCI Technology Ventures, Inc. since September
1994. From 1991 to October 1994, Mr. Romrell was Senior Vice President of TCI.
He serves on the boards of directors of General Communication, Inc., TCG and
United Video Satellite Group, Inc.
DAVID M. WOODROW has been a director of the Company since August 1996. He
has served as Senior Vice President of Broadband Services for Cox since April
1994. Mr. Woodrow joined Cox in 1982 as Director, Business Development, and
was promoted to Western Regional Manager in 1984, to Vice President and
General Manager of Cox Cable Santa Barbara, Inc. in 1985 and to Senior Vice
President, Operations in 1989. Prior to joining Cox, he was employed by the
Technology Components Group of Exxon Enterprises from 1976 to 1982 and by
Pitney Bowes, Inc. from 1970 to 1976. Mr. Woodrow serves on the board of
directors of TCG and is a director of the Cellular Telephone Industry
Association. He holds B.S. and M.S. degrees in Mechanical Engineering from
Purdue University and an M.B.A. degree from the University of Connecticut.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The existing directors were
elected pursuant to provisions in the Certificate of Incorporation, a
stockholders' agreement and a voting agreement that will be modified or
replaced effective upon the closing of this offering. See "--Board Composition
and Procedures," "Certain Transactions" and "Description of Capital Stock"
below. Members of the Board do not receive compensation for their services as
directors. Executive officers are elected by, and serve at the discretion of,
the Board.
BOARD COMPOSITION AND PROCEDURES
Immediately following the closing of this offering, the Board will consist
of 11 directors. Under the Company's Certificate of Incorporation, the holders
of the Series B Common Stock, all of which will be owned by a subsidiary of
TCI immediately following this offering, have the right to elect five members
of the Board (the "Series B Common Stock Directors"). TCI has initially
designated Messrs. Clouston, Ravenel and Romrell as Series B Common Stock
Directors. Subject to certain conditions, TCI has also agreed to elect one
representative designated by Comcast and one representative designated by Cox
as Series B Common Stock Directors. Mr. Roberts is the current representative
of Comcast, and Mr. Woodrow is the current representative of Cox. The holders
of the Series K Common Stock, the substantial majority of which is controlled
by KPCB, have the right to elect one director (the "Series K Common Stock
Director"), who is currently Mr. Doerr. So long as the holders of Series B
Common Stock or Series K Common Stock are entitled to elect any Series B
Common Stock Director or any Series K Common Stock Director, the holders of
Series A Common Stock have the right to elect two directors (the "Series A
Common Stock Directors") who are not officers or employees of the Company and
are not affiliates or associates of TCI, Comcast or Cox ("Outside Directors").
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<PAGE>
Messrs. Barksdale and Hearst are the current Series A Common Stock Directors.
Immediately following this offering, TCI, Comcast and Cox will own
approximately 35.6%, 16.7% and 16.7%, respectively, of the outstanding Series
A Common Stock, and TCI together with either Comcast or/and Cox will have the
ability to elect both of the Series A Common Stock Directors subject to the
requirement that they qualify as Outside Directors. The remaining directors
are elected by the holders of the Common Stock voting together as a single
class. Since TCI holds more than 50% of the outstanding voting power of the
Company's capital stock, it has the power to elect all of these directors.
However, TCI, Comcast, Cox and KPCB have agreed to vote for the election of
the Chief Executive Officer of the Company to the Board. Subject to certain
conditions, TCI, Comcast and Cox have also agreed to vote for the election to
the Board of one representative jointly designated by Rogers and Shaw, who is
currently Mr. Rogers. TCI has elected Dr. Malone to the remaining position on
the Board. In addition, the Certificate of Incorporation provides that, so
long as TCI owns at least 7,700,000 shares of Series B Common Stock and
securities representing a majority of the outstanding voting power of the
Company, there will be a committee of the Board consisting of those Series B
Common Stock Directors who are officers, directors or employees of TCI or any
subsidiary of TCI (the "Series B Committee"), which shall have the sole power,
exercisable at any time, to increase the size of the Board to up to 17
directors and to fill any vacancies created by such an increase. Since four of
the eleven current directors are officers of TCI or a subsidiary of TCI and
TCI has the power, without a meeting of the stockholders, to increase the size
of the Board to up to 17 directors and appoint additional members of the
Board, TCI has the power to appoint a majority of the Board at any time. See
"Risk Factors--Control by TCI; Veto Power of Other Principal Stockholders" and
"Description of Capital Stock."
Under the Certificate of Incorporation, all actions of the Board must be
approved by (i) a majority of the members of the Board present at a meeting at
which a quorum is present or unanimous written consent of all members of the
Board and (ii) so long as TCI owns at least 7,700,000 shares of Series B
Common Stock and securities representing a majority of the outstanding voting
power of the Company, a majority of the Series B Common Stock Directors.
Accordingly, because TCI has the right to elect three of the five Series B
Common Stock Directors, TCI has the power to prevent the Board from taking any
action that is not approved by its designated Series B Common Stock Directors.
In addition, to the extent that TCI exercises its power to elect a majority of
the entire Board, TCI will be able to control all Board decisions, subject to
the supermajority and unanimous vote requirements and other limitations
discussed below.
In addition, certain actions of the Board require the approval of at least
75% (currently five of six) of the total number of Series B and Series K
Common Stock Directors, and certain other actions of the Board require the
unanimous approval of all of the Series B and Series K Common Stock Directors.
Accordingly, with the current composition of the Board, actions that require
supermajority approval cannot be taken without the approval of the Series B
Common Stock Directors designated by TCI and at least two of the three
directors designated by Comcast, Cox and KPCB, and actions that require
unanimous approval cannot be taken without the approval of all three of such
directors and the Series B Common Stock Directors designated by TCI.
The Company actions that require supermajority approval by the Series B and
Series K Common Stock Directors are: (i) a merger, consolidation or other
business combination; (ii) the acquisition of assets having a value greater
than 20% of the value of the Company's assets; (iii) the disposition of assets
having an aggregate value greater than 50% of the value of the Company's
assets; (iv) the acquisition by the Company of assets in exchange for capital
stock that would constitute more than 16 2/3% of its fully diluted shares
(other than a sale of stock solely for cash); (v) the appointment or removal
of the Chief Executive Officer; (vi) voluntary dissolution or liquidation or
the initiation of voluntary bankruptcy proceedings; (vii) any amendment of the
Certificate of Incorporation or Bylaws of the Company other than the filing of
a Certificate of Designation establishing a series of Preferred Stock that
does not have certain specified special voting rights; (viii) the creation or
issuance of any additional class or series of capital stock having more than
one vote per share or entitled to vote as a separate class or series on any
matter subject to certain exceptions; (ix) any increase in the number of
shares reserved for issuance to management of the Company in excess of
16,000,000 shares plus an amount equal to the greater of (a) 7.5% of the
number of shares issued by the Company after August 1, 1996 or (b) 4% per year
of the total fully diluted shares outstanding on August 1, 1996; (x) the
declaration of dividends on or certain repurchases of
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<PAGE>
Common Stock, (xi) the adoption of any budget for the Company that does not
provide for a substantially pro rata rollout of the Company's services to TCI,
Comcast and Cox in proportion to the number of qualifying homes passed made
available by them to the Company and (xii) the appointment of any directors to
the .Com Committee other than the current members of the .Com Committee.
The Company actions that require unanimous approval by the Series B and
Series K Common Stock Directors are: (i) the authorization or issuance of any
shares of Series AX, AM, AT, K and T Preferred Stock other than pursuant to
the power granted to the Board in the Certificate of Incorporation; (ii) any
amendments to or modifications of the actions requiring supermajority or
unanimous approval of the Series B and Series K Common Stock Directors; (iii)
any increase in the number of Series B or Series K Common Stock Directors;
(iv) any modifications of the rights of the holders of Series B or Series K
Common Stock to designate and elect directors; (v) the appointment of any
directors to the .Com Committee other than the Chief Executive Officer, the
other directors who are currently members of the .Com Committee and any
additional directors elected to the .Com Committee by supermajority vote; and
(vi) any amendment to the specifications and standards for the @Home service
that would require the operator facilities of any affiliate of a Principal
Cable Stockholder to be capable of distributing or providing streaming video
transmissions that include video segments longer than ten minutes in duration.
The Certificate of Incorporation specifies certain requirements for the
approval of certain transactions between the Company and any holder of more
than 5% of the voting power of the Company or any affiliate of such holder.
First, such a related party transaction must be approved by a majority of the
members of the Board present at a meeting for which the notice sets forth the
related party transaction and a reasonably detailed description of the matter,
or by unanimous written consent of the Board following such a meeting. In
addition, so long as the holders of Series B Common Stock are entitled to
elect a Series B Common Stock Director, the related party transaction must
also be approved either (i) by a majority of the Series B and Series K Common
Stock Directors who are disinterested with respect to the transaction and by a
majority of all Series B Common Stock Directors regardless of whether they are
disinterested with respect to the transaction or (ii) by all of the Series B
Common Stock Directors regardless of whether they are disinterested with
respect to the transaction. These requirements do not apply to (i)
transactions involving an aggregate amount less than $1,000,000 that are
entered into in the ordinary course of business on arms'-length terms, (ii)
the entering into of LCO Agreements and other agreements for the provision of
ancillary or related services that are on terms no more favorable to the
related party than the terms of similar agreements then currently offered by
the Company to affiliates of each other Principal Cable Stockholder without
regard to size, identity or ownership of securities of the Company, (iii) the
entering into or performance under any .Com Agreement or Promotional Agreement
discussed below or (iv) any actions taken by the Series B Committee.
.COM COMMITTEE
The Company's Certificate of Incorporation establishes a committee of the
Board referred to as the ".Com Committee" consisting of the Chief Executive
Officer of the Company and the other members of the Board who are not
affiliated with TCI, Comcast or Cox (currently Messrs. Jermoluk, Barksdale,
Doerr and Hearst) to review and approve certain content and promotional
agreements (".Com Agreements" and "Promotional Agreements") between the
Company and content providers that are affiliates of the Principal Cable
Stockholders. It is the Company's policy to maintain a position of openness
and non-exclusion with regard to entering into such agreements and that such
content providers will not be unfairly advantaged or disadvantaged in their
ability to obtain carriage or promotion on the Company's services by reason of
their relationship with a Principal Cable Stockholder. Accordingly, any .Com
Agreement or Promotional Agreement between the Company and any affiliate of a
Principal Cable Stockholder may be approved by any one of three methods, to be
chosen by the applicable Principal Cable Stockholder: (i) by the authorized
officers of the Company on the Company's standard terms and conditions, (ii)
by a majority of the .Com Committee or (iii) by a majority of the entire Board
including all of the Series B Common Stock Directors.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in July 1996 to review and
approve the compensation and benefits for the Company's key executive
officers, administer the Company's stock purchase and stock option plans and
make recommendations to the Board regarding such matters. The Compensation
Committee is currently composed of Messrs. Ravenel and Doerr. No interlocking
relationship exists between the Board or Compensation Committee and the board
of directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
AUDIT COMMITTEE
The Board has established an Audit Committee to meet with and consider
suggestions from members of management and the Company's internal audit staff,
as well as the Company's independent accountants, concerning the financial
operations of the Company. The Audit Committee also has the responsibility to
review audited financial statements of the Company and consider and recommend
the employment of, and approve the fee arrangements with, independent
accountants for both audit functions and for advisory and other consulting
services. Messrs. Hearst, Ravenel and Woodrow are the members of the Audit
Committee.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during 1996 by the Company's present and former
Chief Executive Officers and the four most highly compensated executive
officers, other than the Chief Executive Officers, who were serving as
executive officers at the end of 1996 and whose compensation for 1996 was in
excess of $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ---------------
OTHER
ANNUAL RESTRICTED OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION STOCK AWARDS(1) COMPENSATION(2)
- --------------------------- -------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Thomas A. Jermoluk,
Chairman of the Board,
President and Chief
Executive Officer...... $209,985 (3) -- -- (4) $272
William R. Hearst III,
Former Chief Executive
Officer................ -- (5) -- -- (6) --
Sean Doherty, Former
President, @Work
Group.................. 217,869 -- -- (7) 372
Dean A. Gilbert, Senior
Vice President and
General Manager, @Home
Group.................. 201,643 $30,000 (8) -- (9) 425
Milo S. Medin, Vice
President, Networks.... 154,744 -- -- (10) 257
Kenneth A. Goldman,
Senior Vice President
and Chief Financial
Officer................ 104,664 50,000 (8) -- (11) 464
</TABLE>
- --------
(1) All shares reflected in this column were purchased at their fair market
value on the date of purchase. With the exception of Mr. Hearst's shares,
which were immediately vested, all shares were restricted shares that
vest over a period of four years so long as the individual remains
continuously employed by the Company. The Company has the right to
repurchase unvested restricted shares at their original purchase price
upon the termination of the executive's employment.
(2) Represents life insurance premiums paid by the Company.
(3) Mr. Jermoluk was employed by the Company in July 1996.
(4) On July 31, 1996, Mr. Jermoluk purchased 3,000,000 shares of the
Company's Series A Common Stock for $150,000 in cash and 50,000 shares of
the Company's Series K Preferred Stock for $500,000 in cash.
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As of December 31, 1996, he held vested and unvested restricted shares
with aggregate values of $187,500 and $562,500, respectively. See "--
Employment Agreement."
(5) Mr. Hearst, a general partner of KPCB, served on an interim basis as
Chief Executive Officer without compensation.
(6) Mr. Hearst purchased 400,000 shares of the Company's Series A Common
Stock on July 31, 1996 for $20,000 in cash. As of December 31, 1996, the
aggregate value of all shares held by Mr. Hearst was $100,000. Does not
include any shares held by KPCB in which Mr. Hearst may have a beneficial
interest as a partner of KPCB.
(7) Mr. Doherty purchased 500,000 shares of the Company's Series A Common
Stock on May 31, 1996 in exchange for a promissory note in the amount of
$25,000. As of December 31, 1996, he held vested and unvested restricted
shares with aggregate values of $44,312 and $80,688, respectively. Mr.
Doherty resigned his employment with the Company in February 1997, and
the Company repurchased the 301,850 shares that were unvested at the time
of his resignation for their original purchase price by reducing the
outstanding principal and interest due under the promissory note.
(8) Represents amounts paid in connection with the Company's employment of
these individuals.
(9) Mr. Gilbert was employed by the Company in February 1996. Mr. Gilbert
purchased 440,000 shares of the Company's Series A Common Stock on May
31, 1996 in exchange for a promissory note in the amount of $22,000. As
of December 31, 1996, Mr. Gilbert held no vested restricted shares and
held unvested restricted shares with an aggregate value of $110,000.
(10) Mr. Medin purchased 600,000 shares of the Company's Series A Common Stock
on May 31, 1996 in exchange for a promissory note in the amount of
$30,000. As of December 31, 1996, Mr. Medin held vested and unvested
restricted shares with aggregate values of $56,310 and $93,690,
respectively.
(11) Mr. Goldman was employed by the Company in July 1996. Mr. Goldman
purchased 550,000 shares of the Company's Series A Common Stock on July
29, 1996 for $27,500 in cash. As of December 31, 1996, Mr. Goldman held
no vested restricted shares and held unvested restricted shares with an
aggregate value of $137,500.
The Company granted no stock options to the Named Executive Officers through
December 31, 1996.
EMPLOYEE BENEFIT PLANS
1996 Incentive Stock Option Plan. In January 1996, the Board adopted the
1996 Incentive Stock Option Plan (the "First 1996 Plan"), which was amended in
May 1996. Under the First 1996 Plan, up to 3,000,000 shares of Series A Common
Stock were reserved for issuance. As of June 30, 1997, options to purchase
2,457,585 shares had been exercised (net of repurchases), options to purchase
an additional 175,000 shares of Series A Common Stock at an exercise price of
$.05 were outstanding and 367,415 shares remained available for future grants.
Following the closing of this offering, no additional options will be granted
under the First 1996 Plan. Options granted under the First 1996 Plan are
subject to terms substantially similar to those described below with respect
to options to be granted under the 1997 Equity Incentive Plan; however, the
First 1996 Plan does not provide for issuance of restricted stock or stock
bonus awards.
1996 Incentive Stock Option Plan No. 2. In July 1996, the Board adopted the
1996 Incentive Stock Option Plan No. 2 (the "Second 1996 Plan"), which was
amended in October 1996. Under the Second 1996 Plan, up to 13,000,000 shares
of Series A Common Stock were reserved for issuance, provided that such number
is reduced by the number of restricted shares sold outside of either the First
1996 Plan or the Second 1996 Plan (6,705,150 such shares were sold through
June 30, 1997 (net of repurchases)). As of June 30, 1997, options to purchase
4,086,001 shares had been exercised (net of repurchases), options to purchase
1,512,000 shares were outstanding at exercise prices ranging from $.05 to
$4.00 per share, and 696,849 shares were available for future grants.
Following the closing of this offering, no additional options will be granted
under the Second 1996 Plan. Options granted under the Second 1996 Plan are
subject to terms substantially similar to those described below with respect
to options to be granted under the 1997 Equity Incentive Plan; however, the
Second 1996 Plan does not provide for issuance of restricted stock or stock
bonus awards.
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1997 Equity Incentive Plan. In May 1997, the Board adopted and in July 1997
the stockholders approved the 1997 Equity Incentive Plan, under which the
total number of shares of Series A Common Stock reserved for issuance is
16,000,000 less: (a) the total number of shares issued by the Company under
(i) restricted stock purchase agreements entered into prior to the effective
date of the 1997 Equity Incentive Plan with employees, officers, directors,
consultants, independent contractors or advisors of the Company and (ii) the
First 1996 Plan or the Second 1996 Plan (the "1996 Plans") pursuant to the
exercise of options granted on or before the effective date of the 1997 Equity
Incentive Plan; (b) shares that are issuable as of the effective date of the
1997 Equity Incentive Plan upon exercise of options granted under the 1996
Plans; and (c) shares issued as of any date under the Company's 1997 Employee
Stock Purchase Plan.
Shares that: (a) are issuable upon exercise of an option granted under the
1996 Plans or under the 1997 Equity Incentive Plan that cease to be subject to
such option for any reason other than exercise of such option; (b) are subject
to an award granted under restricted stock purchase agreements entered into
prior to the effective date of the 1997 Equity Incentive Plan with employees,
officers, directors, consultants, independent contractors or advisors of the
Company, the 1996 Plans, or the 1997 Equity Incentive Plan, that are forfeited
or are repurchased by the Company at the original issue price; or (c) are
subject to any other award granted under the 1996 Plans or under the 1997
Equity Incentive Plan that otherwise terminates without shares being issued,
will again be available for grant and issuance under the 1997 Equity Incentive
Plan. In addition, on August 1, 1997, the number of shares reserved for
issuance under the 1997 Equity Incentive Plan will automatically increase by
4,200,000 shares. The 1997 Equity Incentive Plan will become effective on the
effective date of the Registration Statement for this offering and will serve
as the successor to the 1996 Plans. The 1997 Equity Incentive Plan will
terminate in May 2007, unless sooner terminated by the Board. The 1997 Equity
Incentive Plan authorizes the award of options, restricted stock and stock
bonuses (each an "Award"). No person will be eligible to receive more than
1,000,000 shares in any calendar year pursuant to Awards under the 1997 Equity
Incentive Plan other than a new employee of the Company, who will be eligible
to receive no more than 2,000,000 shares in the calendar year in which such
employee commences employment. The 1997 Equity Incentive Plan is administered
by a committee appointed by the Board, currently the Compensation Committee,
which presently consists of Messrs. Doerr and Ravenel, both of whom are non-
employee directors under applicable federal securities laws and "outside
directors" as defined under applicable federal tax laws. The committee has the
authority to construe and interpret the 1997 Equity Incentive Plan and any
agreement made thereunder, grant Awards and make all other determinations
necessary or advisable for the administration of the 1997 Equity Incentive
Plan.
The 1997 Equity Incentive Plan provides for the grant of both incentive
stock options ("ISOs") that qualify under Section 422 of the Code and
nonqualified stock options ("NQSOs"). ISOs may be granted only to employees of
the Company or of a parent or subsidiary of the Company. NQSOs may be granted
to employees, officers, directors, consultants, independent contractors and
advisors of the Company or any parent or subsidiary of the Company, provided
such consultants, independent contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a capital-
raising transaction ("Eligible Service Providers"). The exercise price of ISOs
must be at least equal to the fair market value of the Company's Series A
Common Stock on the date of grant. (The exercise price of ISOs granted to 10%
stockholders must be at least equal to 110% of that value.) The exercise price
of NQSOs must be at least equal to 85% of the fair market value of the
Company's Series A Common Stock on the date of grant. The maximum term of
options granted under the 1997 Equity Incentive Plan is ten years. Options
granted under the 1997 Equity Incentive Plan may not be transferred in any
manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of the optionee only by the optionee. Options
granted under the 1997 Equity Incentive Plan generally expire three months
after the termination of the optionee's service to the Company or a parent or
subsidiary of the Company, except in the case of death or disability, in which
case the options generally may be exercised up to 12 months following the date
of death or termination of service. Options will generally terminate one month
after termination for cause.
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Opportunities to purchase shares of the Company's Series A Common Stock
("Restricted Stock Awards"), and awards of shares of the Company's Series A
Common Stock ("Stock Bonuses"), either of which may be subject to a right of
repurchase in favor of the Company or other restrictions on ownership or
transfer, may be given to Eligible Service Providers. The administrator of the
1997 Equity Incentive Plan has the authority to determine the restrictions
applied to the stock. The sum of (i) Restricted Stock Awards, (ii) Stock
Bonuses and (iii) options with an exercise or purchase price below fair market
value issued under the 1997 Equity Incentive Plan may not exceed 20% of the
total number of shares reserved for issuance under the 1997 Equity Incentive
Plan as of any date.
If the Company is acquired under certain circumstances, any or all
outstanding Awards may be assumed or replaced by the successor corporation. If
Awards are not assumed or replaced, the vesting of such Awards will accelerate
and all outstanding options will become exercisable in full prior to the
consummation of the transaction. Any options not exercised prior to the
transaction will expire.
1997 Employee Stock Purchase Plan. In May 1997, the Board adopted and in
July 1997 the stockholders approved the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved a total of 400,000 shares of the Company's
Series A Common Stock for issuance thereunder. The Purchase Plan will become
effective upon the effective date of the Registration Statement for this
offering and will permit eligible employees to acquire shares of the Company's
Series A Common Stock through payroll deductions. Eligible employees may
select a rate of payroll deduction between 2% and 10% of their compensation
and are subject to certain maximum purchase limitations described in the
Purchase Plan. Except for the first offering, each offering under the Purchase
Plan will be for a period of 24 months (the "Offering Period") and will
consist of four six-month purchase periods (each a "Purchase Period"). The
first Offering Period is expected to begin on the first business day following
the effective date of this Registration Statement and, depending on the
effective date of this Registration Statement, may be greater or less than 24
months long. Offering Periods thereafter will begin on February 15 and August
15. The purchase price for the Company's Series A Common Stock purchased under
the Purchase Plan is 85% of the lesser of the fair market value of the
Company's Series A Common Stock on the first day of the applicable Offering
Period and the last day of the applicable Purchase Period. The Compensation
Committee has the power to change the duration of Offering Periods and
Purchase Periods without stockholder approval, if such change is announced at
least 15 days prior to the beginning of the Offering or Purchase Period to be
affected. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code.
401(k) Plan. The Board maintains the @Home 401(k) Plan (the "401(k) Plan"),
a defined contribution plan intended to qualify under Section 401 of the Code.
All employees who are at least 21 years old and have been employed by the
Company for one month are eligible to participate in the 401(k) Plan. An
eligible employee of the Company may begin to participate in the 401(k) Plan
on the first day of January, April, July or October of the 401(k) Plan year
coinciding with or following the date on which such employee meets the
eligibility requirements. A participating employee may make pre-tax
contributions of a percentage (not less than 2% and not more than 20%) of his
or her eligible compensation and up to 100% of any cash bonus, subject to
limitations under the federal tax laws. Employee contributions and the
investment earnings thereon are fully vested at all times. The Company does
not make matching or profit-sharing contributions.
EMPLOYMENT AGREEMENT
On July 31, 1996, the Board elected Thomas A. Jermoluk as President, Chief
Executive Officer and Chairman of the Board of the Company pursuant to an
employment agreement dated July 19, 1996. Under the employment agreement, the
Company has agreed to pay Mr. Jermoluk an annual base salary of $500,000 per
year, and Mr. Jermoluk is eligible to receive a bonus of $200,000 per year
based on the performance of the Company with respect to its annual operating
plan. On July 31, 1996, the Company sold to Mr. Jermoluk a total of 3,000,000
shares of the Company's Series A Common Stock at a purchase price of $.05 per
share for a total of $150,000 and a total of 50,000 shares of the Company's
Series K Preferred Stock at a purchase price of $10.00 per share for a total
of $500,000. Of these shares, 25% were immediately vested and an additional
2.08% will
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vest on August 22, 1997 and each subsequent month of Mr. Jermoluk's continuous
employment. The Series K Preferred Stock will be converted upon the closing of
this offering into 1,000,000 shares of Series K Common Stock. Under the terms
of Mr. Jermoluk's employment agreement, so long as Mr. Jermoluk is employed by
the Company, and for 90 days thereafter if his employment is terminated
without cause, to the extent that Mr. Jermoluk sells any of his vested shares
during the five-year period beginning on July 22, 2000 at an average price
less than $5.00 per share, the Company is obligated to pay Mr. Jermoluk the
difference between $5.00 per share and such average price for each share sold.
The Company must repurchase any unvested shares at Mr. Jermoluk's cost upon
the termination of his employment. If the Company terminates Mr. Jermoluk's
employment without cause, the Company will be obligated to pay Mr. Jermoluk's
base salary and bonus for six months after the date of such termination, and
the Company's right to repurchase any unvested shares will lapse at the date
of such termination.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) under Section 174
of the Delaware General Corporation Law or (iv) for any transaction from which
the director derived an improper personal benefit. As permitted by Section 145
of the Delaware General Corporation Law, the Company's Certificate of
Incorporation further provides (i) for mandatory indemnification, to the
fullest extent permitted by applicable law, for any person who is or was a
director or officer of the Company, or a person who is a legal representative
of such director or officer, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
person, (ii) that the Company's obligation to indemnify any person who was or
is serving at the Company's request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, enterprise or
nonprofit entity must be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit entity, (iii) that the Company must advance to
all indemnified parties the expenses (including attorneys' fees) incurred in
defending any proceeding provided that indemnified parties (if they are
directors or officers) must provide the Company an undertaking to repay such
advances if indemnification is determined to be unavailable, (iv) that the
rights conferred in the Certificate of Incorporation are not exclusive and (v)
that the Company may not retroactively amend the Certification of
Incorporation provisions relating to indemnity.
The Company has entered into Indemnification Agreements with each of its
current directors and intends to enter into such Indemnification Agreements
with each of its executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Certificate of Incorporation and to provide
additional procedural protections. At present, there is no pending litigation
or proceeding involving a director, officer or employee of the Company for
which indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
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CERTAIN TRANSACTIONS
Since March 28, 1995, the Company's inception date, there has not been nor
is there currently proposed, any transaction or series of similar transactions
to which the Company or any of its subsidiaries was or is to be a party in
which the amount involved exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of the Common Stock of the Company or any
member of the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest other than (i) compensation
agreements, which are described where required in "Management," and (ii) the
transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% SECURITY HOLDERS
The Company has financed its operations to date through a series of private
Preferred Stock financings. Upon the closing of this offering, all shares of
Preferred Stock will be converted into shares of Common Stock at a conversion
rate of 20 shares of Common Stock for each share of Preferred Stock. Shares of
Series T Preferred Stock will be converted into shares of Series B Common
Stock. Shares of Series K Preferred Stock will be converted into shares of
Series K Common Stock. Shares of all other series of Preferred Stock will be
converted into shares of Series A Common Stock. See "Description of Capital
Stock."
Initial Financings from TCI and KPCB. On August 29, 1995 and May 9, 1996,
the Company sold shares of its Series T Preferred Stock to a wholly owned
subsidiary of TCI and shares of its Series K Preferred Stock to venture
capital funds affiliated with KPCB, in each case at a cash purchase price of
$10.00 per share, as follows:
<TABLE>
<CAPTION>
PURCHASER DATE TYPE OF STOCK SHARES TOTAL PURCHASE PRICE
--------- ------- ------------------------- ------- --------------------
<S> <C> <C> <C> <C>
TCI............. 8/29/95 Series T Preferred Stock 770,000 $ 7,700,000
KPCB............ 8/29/95 Series K Preferred Stock 230,000 2,300,000
TCI............. 5/9/96 Series T Preferred Stock 770,000 7,700,000
KPCB............ 5/9/96 Series K Preferred Stock 230,000 2,300,000
1996 Financing from TCI, Comcast, Cox and KPCB. On August 1, 1996, the
Company issued 770,000 shares of its Series AT Preferred Stock to a wholly
owned subsidiary of TCI in exchange for the cancellation of 770,000 shares of
the Company's Series T Preferred Stock and sold additional shares of its
Preferred Stock to wholly owned subsidiaries of TCI, Comcast and Cox and
purchasers affiliated with KPCB (the "KPCB Purchasers"), in each case at a
cash purchase price of $10.00 per share, as follows:
<CAPTION>
PURCHASER TYPE OF STOCK SHARES TOTAL PURCHASE PRICE
--------- ------------------------- ------- --------------------
<S> <C> <C> <C> <C>
TCI..................... Series AT Preferred Stock 783,000 $ 7,830,000
Comcast................. Series AM Preferred Stock 727,865 7,278,650
Cox..................... Series AX Preferred Stock 727,865 7,278,650
KPCB Purchasers......... Series K Preferred Stock 233,883 2,338,830
1997 Financing from Rogers, Shaw and Other Strategic Partners. On April 11,
1997, the Company sold an aggregate of 240,000 shares of its Series C
Preferred Stock at a cash purchase price of $200 per share to certain
companies with which the Company has established strategic commercial
relationships and to James L. Barksdale, who is a director of the Company and
the Chief Executive Officer of Netscape. Among the purchasers were the
following:
<CAPTION>
PURCHASER TYPE OF STOCK SHARES TOTAL PURCHASE PRICE
--------- ------------------------- ------- --------------------
<S> <C> <C> <C> <C>
Rogers.................. Series C Preferred Stock 75,000 $15,000,000
Shaw.................... Series C Preferred Stock 75,000 15,000,000
Netscape................ Series C Preferred Stock 20,000 4,000,000
James L. Barksdale...... Series C Preferred Stock 5,000 1,000,000
</TABLE>
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In connection with the Series C Preferred Stock financing, the Company
entered into agreements with Rogers and Shaw granting them exclusive rights to
distribute the @Home service in Canada under the "Wave@Home" brand and the
right to license other cable companies to distribute the service in Canada. In
addition, on April 11, 1997, the Company granted to Rogers and Shaw
transferable warrants to purchase up to an aggregate of 100,000 shares of
Series C Preferred Stock each at a purchase price of $200 per share (which
warrants will be converted into the right to purchase up to an aggregate of
2,000,000 shares of Series A Common Stock at $10.00 per share following this
offering). These warrants become fully exercisable on the earlier of April 11,
2004 or the achievement of certain performance milestones with respect to the
distribution of the Wave@Home service in Canada.
Pursuant to a Voting Agreement entered into with Rogers and Shaw on April
11, 1997, TCI, Comcast and Cox have agreed (i) to use their reasonable best
efforts to cause a single representative designated jointly by Rogers and Shaw
to be nominated for election to the Board and an additional representative
designated jointly by Rogers and Shaw to be afforded the right to attend all
meetings of the Board as a nonvoting observer and (ii) to vote all voting
securities of the Company controlled by them in favor of election of the
designee of Rogers and Shaw to the Board. The Voting Agreement will terminate
on the earlier to occur of the date that (i) neither Rogers nor Shaw continues
to offer the Wave@Home service on an exclusive basis or (ii) Rogers and Shaw
together with their controlled affiliates cease to own at least 2,000,000
shares of Series A Common Stock plus either an additional 500,000 shares of
Series A Common Stock or warrants to purchase an additional 500,000 shares of
Series A Common Stock.
Stockholders' Agreement. On August 1, 1996, TCI, Comcast, Cox and the KPCB
Purchasers (collectively, the "Principal Stockholders") and the Company
entered into a Stockholders' Agreement, which they have agreed to amend upon
the closing of this offering (as amended, the "Stockholders' Agreement"),
which provides for certain voting agreements, restrictions on transfer of
Company securities, rights of first offer, tag-along and drag-along rights and
preemptive rights. The following summary description of the Stockholders'
Agreement does not purport to be complete and is qualified in its entirety by
reference to the text of the Stockholders' Agreement as it will be amended
immediately before the closing of this offering, which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
Furthermore, there can be no assurance that following the consummation of this
offering the parties will not cause the Stockholders' Agreement to be amended,
modified or terminated or cause the Company to waive any provision of the
Stockholders' Agreement.
The Stockholders' Agreement provides that each Principal Stockholder will
vote all of its shares of Company voting stock in favor of any action required
by the Stockholders' Agreement, including the election of the Chief Executive
Officer of the Company to its Board, and that any holder of Series B Common
Stock (all of which is currently owned by TCI) will vote all such shares in
favor of the election of certain designees of TCI, Comcast and Cox to the
Board as Series B Common Stock Directors as follows: Comcast will be entitled
to designate one director so long as it owns at least 5,000,000 shares of
Common Stock; Cox will be entitled to designate one director so long as it
owns at least 5,000,000 shares of Common Stock; and TCI will be entitled to
designate three directors so long as it owns at least 7,700,000 shares of
Series B Common Stock, two directors so long as it owns at least 6,350,000
shares of Series B Common Stock and one director so long as it owns at least
5,000,000 shares of Series B Common Stock. See "Risk Factors--Control by TCI;
Veto Power of Other Principal Stockholders."
The Stockholders' Agreement, with certain exceptions, restricts transfers of
Company securities by the Principal Stockholders until the earliest to occur
of (i) June 4, 2006, (ii) the fifth anniversary of the termination of the
exclusive period applicable to any Principal Cable Stockholder and (iii) the
sixth anniversary of this offering. To the extent transfers of Series B and K
Common Stock are permitted, the holders of such shares generally must convert
them to Series A Common Stock prior to consummating such transfers. Following
the first anniversary of this offering, each Principal Stockholder will be
permitted to sell its Series A Common Stock in the public market if it first
offers to each other Principal Stockholder the right of first offer to
purchase such securities. Following the closing of this offering, the
restrictions on transfer contained in the Stockholders' Agreement will not
apply to any constituent partner of KPCB. The restrictions on transfer do not
apply to a
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transfer of Company securities that would result in an unaffiliated third
party acquiring a majority of the voting stock of the Company (a "Control
Block Sale"). In the event of a Control Block Sale, all Principal Stockholders
that continue to own at least 25% of the Company securities they originally
purchased on or before August 1, 1996 (the "Eligible Principal Stockholders")
will be permitted to participate in the Control Block Sale by selling a pro
rata portion of their Company securities to the third party (the "Tag-Along
Right"). If any group of Principal Stockholders consisting of TCI and any two
other Eligible Principal Stockholders proposes to make a Control Block Sale,
that group will have the right to require the other Principal Stockholders to
sell a pro rata portion of their Company securities to the third party in the
Control Block Sale (the "Drag-Along Right").
The Stockholders' Agreement provides that, if the number of homes passed by
a Principal Cable Stockholder's cable systems that remain subject to the
exclusivity provisions of the Master Distribution Agreement (together with any
systems that have been released from such provisions due to the Company's
failure to meet the rollout schedule) falls below 80% of the Principal Cable
Stockholder's base homes passed as of June 4, 1996, then such Principal Cable
Stockholder must offer to sell a proportionate amount of its Company
securities to the other Principal Stockholders at a price equal to the average
closing price of the Company's Series A Common Stock over the most recent 20
trading days preceding the event.
The Stockholders' Agreement gives each Eligible Principal Stockholder the
preemptive right to purchase a pro rata portion of any new securities offered
by the Company other than securities issued pursuant to a public offering,
securities issued pursuant to any incentive plan or agreement for the benefit
of the Company's employees, directors or consultants, securities issued by the
Company in connection with an acquisition, and securities issued in exchange
for interests in a joint venture or other business combination.
The Stockholders' Agreement will terminate on the earliest of (i) June 4,
2021, (ii) when there are no Eligible Principal Stockholders and no Principal
Cable Stockholders subject to exclusivity obligations under the Master
Distribution Agreement, (iii) a merger in which the Company is not the
surviving entity or (iv) when there are no shares of Common Stock or Preferred
Stock of the Company outstanding.
Registration Rights Agreement. All of the current holders of Preferred Stock
have certain registration rights with respect to their shares of Series A
Common Stock following this offering. See "Description of Capital Stock--
Registration Rights."
Officer Loans. In connection with the exercise of stock options granted
under the Second 1996 Plan, the Company permitted two executive officers,
Donald P. Hutchison and John L. O'Farrell, to purchase shares of Series A
Common Stock in exchange for promissory notes in the amounts of $96,000 and
$66,000, respectively. Each note is secured by the shares purchased with that
note. The notes bear interest at the rates of 6.31% and 6.42%, respectively,
and are due and payable on March 15, 2002 and April 28, 2002, respectively.
The Company has approved loans to Messrs. Hutchison and O'Farrell of $100,000
and $200,000, respectively, to assist each of them in the purchase of a home.
The loans will be secured by the homes purchased by Messrs. Hutchison and
O'Farrell, respectively. The loans, which have not yet been issued, will have
a five-year term and bear interest at the minimum rate sufficient to avoid
imputation of taxable income.
CERTAIN BUSINESS RELATIONSHIPS
Master Distribution Agreement with TCI, Comcast and Cox. The Company and its
Principal Cable Stockholders (TCI, Comcast and Cox) are parties to the Master
Distribution Agreement. The following summary description of the Master
Distribution Agreement does not purport to be complete and is qualified in its
entirety by reference to the text of the Master Distribution Agreement, which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Furthermore, there can be no assurance that following the
consummation of this offering the parties will not cause the Master
Distribution Agreement to be amended, modified or terminated or cause the
Company to waive any provision of the Master Distribution Agreement.
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Under the terms of the Master Distribution Agreement, in connection with the
Company's periodic budgets and business plans, the parties have agreed to
cooperate in good faith to establish a master rollout schedule for the
deployment of the @Home service within the cable system territories of the
respective Principal Cable Stockholders, and the Company is obligated to use
commercially reasonable efforts to cause the @Home service to be made
available to the qualifying upgraded homes passed of the Principal Cable
Stockholders on a substantially pro rata basis in accordance with the master
roll-out schedule. While the Master Distribution Agreement provides that the
Principal Cable Stockholders will be subject to certain exclusivity
obligations described below, there is no affirmative obligation on the part of
the Principal Cable Stockholders to upgrade their cable plants to two-way HFC
cable or to offer the @Home service over their cable systems. The Master
Distribution Agreement contemplates that the Company will enter into
agreements ("LCO Agreements") with the Affiliated LCOs of the Principal Cable
Stockholders for the distribution of the @Home service, although no LCO
Agreements have been executed to date. The Company and the Principal Cable
Stockholders have established the principal terms of the LCO Agreements,
including the payment to the Company of 35% of the basic and premium service
revenue received by Affiliated LCOs from subscribers to the @Home service.
There can be no assurance that following the consummation of this offering the
parties will not cause the LCO Agreements to be amended, modified or
terminated or cause the Company to waive any provision of the LCO Agreements.
Until June 4, 2002 or such earlier time as the exclusivity provisions
described below terminate as to a Principal Cable Stockholder (the "Restricted
Period"), each Principal Cable Stockholder on behalf of itself and its
controlled affiliates has agreed not to conduct, participate in or have a
material beneficial ownership interest in any business within the United
States (a "Restricted Business") that involves (i) the provision of a
residential Internet service over the cable television plant of the Principal
Cable Stockholder at data transmission speeds greater than 128 Kbps and whose
primary purpose is the provision to consumers of entertainment, information
content, transactional services or electronic mail, chat and news groups (a
"Consumer Purpose"), (ii) the connection by the Principal Cable Stockholder of
its cable television plant directly or indirectly to any Internet backbone for
a Consumer Purpose at data transmission speeds greater than 128 Kbps or (iii)
the provision of an Internet backbone service. These exclusivity provisions do
not apply to the creation or aggregation of content or, among other things,
the following Excluded Services: (i) the provision of telephony services, (ii)
the provision of services that are primarily work-related such as the @Work
services, (iii) the provision of Internet services that do not use the cable
television infrastructures of the Principal Cable Stockholders, (iv) the
provision of any local Internet service that does not require use of an
Internet backbone outside a single metropolitan area, (v) the provision of
services that are utilized primarily to connect students to schools, colleges
or universities, (vi) the provision of Internet telephony, Internet video
telephony or Internet video conferencing, (vii) the provision of certain
limited Internet services for display on a television, (viii) the provision of
certain Internet services that are primarily downstream services where the
user cannot send upstream commands in "real-time," as referenced in the Master
Distribution Agreement, (ix) the provision of streaming video transmissions
that include video segments longer than ten minutes in duration or (x) limited
testing, trials and similar activities of less than six months.
The exclusivity provisions described in the preceding paragraph may be
terminated under the following circumstances: (i) any Affiliated LCO may
terminate its exclusivity obligations if the Company fails to roll out the
@Home service in such operator's territory by mutually agreed dates in a
schedule set forth in an LCO Agreement; (ii) the Principal Cable Stockholders
may terminate all exclusivity obligations upon a change in law that materially
impairs certain of the Principal Cable Stockholders' rights under the Master
Distribution Agreement; (iii) Comcast or Cox may terminate all Principal Cable
Stockholders' exclusivity obligations if there is a change of control of TCI
at any time or if certain subscriber penetration levels for the @Home services
are not achieved by TCI and its affiliates on June 4, 1999 or any anniversary
thereof; and (iv) Comcast may terminate its exclusivity obligations at its
election after June 4, 1999 if it permits a portion of its equity in the
Company to be repurchased by the Company at Comcast's original cost. Comcast
has informed the Company that Comcast has entered into an agreement with
Microsoft pursuant to which Microsoft can require Comcast to terminate its
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exclusivity obligations after June 4, 1999. Although Microsoft has stated in
the agreement that it has no present intention to do so, there can be no
assurance that Microsoft will not be more likely than Comcast to terminate
Comcast's exclusivity obligations.
Until the later of (i) such time as the applicable Principal Cable
Stockholder ceases to be obligated under the exclusivity provisions set forth
above or (ii) if the exclusivity provisions are terminated by reason of TCI's
failure to meet specified subscriber penetration requirements, June 4, 2002,
the Company has agreed (a) not to offer or provide Internet services at data
transmission speeds greater than 128 Kbps to residences in the geographic area
served by the cable systems of a Principal Cable Stockholder that remains in
compliance with the exclusivity provisions without regard to whether the
Restricted Period has ended as to such Principal Cable Stockholder (the
"Exclusive Territory") and (b) not to offer, provide, distribute, advertise,
promote or market (or carry or otherwise distribute advertising or promotions
with respect to) any streaming video transmissions that include video segments
longer than ten minutes in duration or any other Internet service that is not
a Restricted Business to residences in the Exclusive Territory of a Principal
Cable Stockholder without its prior written consent.
In addition, the Company has agreed that it will not offer, provide,
distribute, advertise, promote or market any streaming video transmissions
that include video segments longer than ten minutes in duration in any "area
of dominant influence" as defined by the FCC ("ADI") that includes an
Exclusive Territory of a Principal Cable Stockholder without the prior consent
of the affected Principal Cable Stockholders having two-thirds of the cable
television subscribers of all Principal Cable Stockholders having an Exclusive
Territory in the ADI.
The Company's agreements with its Principal Cable Stockholders do not
require that such Principal Cable Stockholders maintain a specified number of
cable systems, subscribers or homes passed by cable infrastructure in order to
maintain their control over and equity ownership of the Company. However, the
Stockholders' Agreement does provide that if a Principal Cable Stockholder's
number of homes passed that remain subject to certain exclusivity provisions
decreases by more than 20% of the number of homes passed as of June 4, 1996
(subject to certain exceptions), then such Principal Cable Stockholder must
offer to sell a proportionate amount of its equity interest in the Company to
the other Principal Cable Stockholders at the fair market value thereof.
However, such provisions would permit the disposition of a portion of such
Principal Cable Stockholders' cable assets without imposing any penalty and,
in the event a Principal Cable Stockholder exceeds the 20% threshold, selling
shares at fair market value may not constitute a significant penalty to such
Principal Cable Stockholder. Therefore, there can be no assurance that such
arrangements will effectively discourage a Principal Cable Stockholder from
disposing of a significant amount of its cable systems without requiring that
such cable systems remain subject to such exclusivity provisions. TCI has
recently announced the proposed sale or transfer of certain cable systems in
New York and New Jersey to Cablevision Systems Corporation, certain cable
systems in Buffalo, N.Y. to Adelphia Communications Corporation ("Adelphia"),
certain cable systems in Washington, Oregon, Northern California and Idaho to
Falcon Holding Group LP, and certain cable systems in Kentucky and Tennessee
to a limited partnership of which Intermedia is the general partner and TCI
and the Blackstone Group are limited partners. The cable systems proposed to
be transferred in these transactions have approximately 1.1 million, 260,000,
436,000 and 630,000 homes passed, respectively, representing a total of
approximately 2.5 million homes passed. In addition, TCI has announced that it
is considering various plans and proposals that may result in the disposition
of other of its cable systems. To the extent that the terms of any such
transactions require that such systems remain subject to such exclusivity
provisions, such cable systems and their homes passed would continue to be
included in TCI's homes passed for purposes of determining whether or not TCI
is obligated to offer a portion of its equity interest in the Company to the
other Principal Cable Stockholders, even though such cable systems are no
longer owned or controlled by TCI. To the extent that the Principal Cable
Stockholders dispose of cable systems in the future without causing such cable
systems to remain subject to such exclusivity provisions, the number of homes
passed that are exclusive to the Company will be decreased. Such decreases in
the number of exclusive homes passed may have an adverse effect upon the
business, operating results and financial condition of the Company.
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Each Principal Cable Stockholder and its controlled affiliates are entitled
to "most favored nation" ("MFN") terms and conditions of carriage with respect
to the distribution of the Company's services and with respect to the terms
and conditions of any related trademark license agreement or ancillary
services arrangements, including all direct and indirect benefits as a result
of a transaction with the Company that are no less favorable than those
offered to any other cable operator individually or collectively from time to
time. This MFN provision requires identical treatment of the Principal Cable
Stockholders and their controlled affiliates without regard to size or
identity with respect to each other and with respect to the terms and
conditions provided to unaffiliated third parties (except as to exclusivity
and certain other terms applicable to third parties).
The Principal Cable Stockholders and their affiliates are entitled to
create, author, promote and otherwise engage in the business of local content
offerings, and will retain all revenue from such local content offerings and
associated advertising within the designated local area of the @Home service's
home page. The Company is responsible for the aggregation and promotion of
national content offerings as part of the @Home service and will retain all
revenues from associated advertising within the designated national area of
the @Home service's home page and Web site. Each Principal Cable Stockholder
has the right to exclude the promotion of specified national content providers
from the @Home service offered through such Principal Cable Stockholder's
cable systems, subject to an adjustment in the split of premium service
revenues between the Principal Cable Stockholder and the Company if the number
of specified exclusions exceeds certain limits. In addition, a Principal Cable
Stockholder has the right to block access to content that (i) includes
streaming video segments of more than ten minutes in duration, (ii) is
pornographic or overly violent or (iii) could adversely affect a cable
operator's franchise to deliver cable television service or the @Home service,
and the Company is obligated to use its best efforts to block such access.
The Company is obligated to use reasonable best efforts to consult with and
involve each of the Principal Cable Stockholders in the development of
requirements for and design of enhancements, new features and new applications
of the @Home service and coordinate with respect to the introduction of such
enhancements, features and applications that could have a significant effect
on the cable operations of a Principal Cable Stockholder with respect to its
delivery of the @Home service to its customers. If Principal Cable
Stockholders representing a majority of the residential subscribers of the
@Home service object to such enhancement, feature or application, the Company
has agreed not to implement such enhancement, feature or application in the
territories of objecting Principal Cable Stockholders.
Services Provided by Affiliates of Principal Stockholders. During 1995, KPCB
advanced $210,000 of general and administrative expenses to the Company. The
Company repaid $117,000 of these advances in 1995 and the remainder in 1996.
During 1995, the Company made expense-sharing payments in the amount of
$109,000 to an affiliate of TCI. During 1995 and 1996, the Company contracted
for development and system integration of back office systems in the amounts
of $291,000 and $2,631,000, respectively, from a company in which TCI has a
30% ownership interest. During 1995 and 1996, the Company contracted for
$123,000 and $77,000, respectively, of prototype development for the @Home
user interface from a company owned by TCI.
Agreement with Rogers and Shaw. In March 1997, in connection with the equity
investment in the Company by Rogers and Shaw, the Company, Rogers and Shaw
entered into an agreement for the distribution by Rogers and Shaw in Canada of
a localized version of the @Home service referred to as "Wave@Home." The
Company has granted Rogers and Shaw the exclusive rights for an initial period
of six years, subject to achievement of certain performance milestones, to
distribute, market and promote the service in Canada either directly in
jurisdictions where they are licensed to operate cable systems or indirectly
through the sublicensing of other cable operators in Canada. During the term
of the exclusivity of such licenses, Rogers and Shaw have each agreed, subject
to the same exceptions to exclusivity available to the Principal Cable
Stockholders, not to market, promote or control any other residential Internet
service (other than dial-up services at data transmission speeds of 128 Kbps
or less). However, Rogers and Shaw are not precluded from distributing other
residential Internet Services. Rogers and Shaw will be responsible, among
other things, for (i) upgrading their cable systems for two-way data
transmission services, (ii) providing the necessary cable data routers and
cable modems, (iii) providing the telecommunications systems necessary to
connect their subscribers to cable headends or fiber
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<PAGE>
nodes, to connect such headends or fiber nodes to the Company's RDCs in Canada
and to connect such RDCs to the nearest points of presence of the @Home
backbone in the United States, (iv) providing customer installation, billing,
customer service and technical support, (v) providing the Company with space
to co-locate its RDCs and related equipment within Rogers' and Shaw's network
distribution facilities, (vi) providing necessary modifications to billing,
subscriber and network management systems to interface with the Company,
(vii) distributing and promoting the Wave@Home Service and (viii) programming
local content and customizing certain national content for the Canadian
market.
The Company will be responsible under the Agreement, among other things,
for: (i) treating Rogers and Shaw with a priority equal to TCI, Comcast and
Cox in matters of deployment, (ii) granting Rogers and Shaw access to the
Company's broadband networks, (iii) installing and maintaining an optimal
number of RDCs and providing the same level of performance received by the
Principal Cable Stockholders, (iv) providing software necessary for the
Wave@Home Service, (v) providing the telecommunications facilities connecting
the nearest points of presence of the Company's backbone in the United States
to the @Network, (vi) providing network support, (vii) providing general
engineering, operations, marketing and management support, when reasonably
requested, (viii) providing training programs, (ix) providing access and
automated exchange of data from the Company to Rogers and Shaw necessary for
billing and subscriber management, (x) working with Rogers and Shaw to develop
a network architecture that minimizes inter-city data transport within Rogers'
and Shaw's networks, (xi) developing and maintaining the user interface and
page templates for national content and (xii) providing the same or additional
content platform technologies provided to the Principal Cable Stockholders.
The Company is restricted from offering, promoting, marketing or providing (or
carrying third-party advertising or promotion with respect to) any streaming
video transmissions that include video segments longer than ten minutes in
duration.
Agreement with TCG. In April 1997, the Company and TCG, of which TCI,
Comcast and Cox collectively hold a majority of the voting stock, entered into
a Master Communications Services Agreement, with an initial term of five
years, under which TCG has agreed to provide the Company with facilities
management and telecommunications network services for the local
telecommunications transport requirements of the Company's services. TCG is
the largest CLEC in the United States, providing high-speed fiber optic
telecommunications to more than 7,700 commercial customer sites in 57
metropolitan centers in the United States. In markets served by TCG networks,
TCG will provide the Company with (i) the ability to co-locate its RDCs within
TCG's network distribution facilities and (ii) all intralata and interlata
transport access facilities to and from the co-located RDC, including all
services provided completely on TCG's network and services provided through a
combination of TCG's network and the network of a third-party local exchange
carrier. In market areas not served by TCG, TCG will serve as a facility
manager to procure co-location space and intralata and interlata transport
facilities. The agreement provides the Company with such telecommunications
services at rates generally at or below those of competing carriers, and the
ability to co-locate the Company's RDCs within TCG's network distribution
facilities at favorable rates.
Agreement with Netscape. Pursuant to an OEM Software License Agreement,
Netscape has granted the Company a nonexclusive, worldwide license to use
certain Netscape Internet client, Internet server and Internet applications
software internally, distribute the Netscape Internet client software to
subscribers of the Company's services, and distribute the Netscape Internet
server and Internet applications software to the Company's cable affiliates
until December 31, 1998. Under the terms of the agreement, the Company paid
Netscape $1,388,000 during 1996 and is obligated to pay Netscape an additional
$2,331,000 during 1997 as nonrefundable license fees and prepaid support and
service fees. James L. Barksdale, a director of the Company, is the Chief
Executive Officer of Netscape.
The Company believes that the terms of each of the transactions described
above, taken as a whole, were no less favorable than the Company could have
obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997 and as
adjusted to reflect the sale of the 9,000,000 shares of Series A Common Stock
offered hereby by: (i) each person who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director of
the Company, (iii) each of the Named Executive Officers and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF SHARES COMMON STOCK VOTE OF ALL SERIES OF
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1) COMMON STOCK(1)
-------------------------------- -------------------------- --------------------------
BEFORE AFTER BEFORE AFTER
NAME OF BENEFICIAL OWNER SERIES A SERIES B SERIES K OFFERING OFFERING(2) OFFERING OFFERING(2)
- ------------------------ ---------- ---------- ---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TCI(3).................. 31,060,000 15,400,000 -- 42.8% 39.5% 74.9% 72.3%
Brendan R. Clouston
John C. Malone
Bruce W. Ravenel
Larry E. Romrell
Comcast(4).............. 14,557,300 -- -- 13.4 12.4 5.9 5.7
Brian L. Roberts
Cox(5).................. 14,557,300 -- -- 13.4 12.4 5.9 5.7
David M. Woodrow
KPCB(6)................. 400,000 -- 12,877,660 12.2 11.3 5.4 5.2
L. John Doerr
William R. Hearst III
Thomas A. Jermoluk(7)... 3,000,000 -- 1,000,000 3.7 3.4 1.6 1.6
Rogers(8)............... 1,500,000 -- -- 1.4 1.3 * *
Edward S. Rogers
Milo S. Medin(9)........ 600,000 -- -- * * * *
Kenneth A. Goldman(10).. 550,000 -- -- * * * *
James L. Barksdale(11).. 500,000 -- -- * * * *
Netscape
Dean A. Gilbert(12)..... 490,000 -- -- * * * *
Sean Doherty............ 198,150 -- -- * * * *
All directors and
executive officers as a
group
(18 persons)(13)....... 68,744,600 15,400,000 13,877,660 90.3 83.4 96.1 92.4
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 108,520,996 shares outstanding as of
June 30, 1997, after conversion of all outstanding Preferred Stock into
Common Stock in connection with this offering, and 117,520,996 shares
outstanding after the offering. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject
to community property laws where applicable.
(2) Assumes the Underwriters' over-allotment option to purchase up to
1,350,000 Shares of Series A Common Stock is not exercised.
(3) Represents shares held of record by TCI Internet Holdings, Inc., a wholly
owned subsidiary of TCI. Messrs. Clouston, Malone, Ravenel and Romrell
are officers of TCI or its affiliates. Messrs. Clouston, Ravenel and
Romrell serve as TCI's designees as Series B Common Stock Directors. The
address of TCI and Messrs. Clouston, Malone, Ravenel and Romrell is TCI,
5619 DTC Parkway, Englewood, Colorado 80111.
(4) Represents shares held of record by Comcast PC Investments, Inc., a
wholly owned subsidiary of Comcast. Mr. Roberts is the President of
Comcast and serves as its designee as a Series B Common Stock Director.
The address of Comcast and Mr. Roberts is Comcast, 1500 Market Street,
35th Floor, Philadelphia, Pennsylvania 19102.
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<PAGE>
(5) Represents shares held of record by Cox @Home, Inc., a wholly owned
subsidiary of Cox. Mr. Woodrow is the Senior Vice President of Broadband
Services of Cox and serves as its designee as a Series B Common Stock
Director. The address of Cox and Mr. Woodrow is Cox @Home, Inc., 1400
Lake Hearn Drive, Atlanta, Georgia 30319.
(6) Represents 12,555,720 shares of Series K Common Stock held of record by
Kleiner Perkins Caufield & Byers VII, 321,940 shares of Series K Common
Stock held of record by KPCB Information Sciences Zaibatsu Fund II and
400,000 shares of Series A Common Stock held of record by Mr. Hearst.
KPCB disclaims beneficial ownership of the shares held of record by Mr.
Hearst. Messrs. Doerr and Hearst, directors of the Company, are general
partners of KPCB, which is the general partner of the general partner of
these funds. Mr. Doerr serves as the designee of the Series K Common
Stock on the Board. Mr. Hearst is Vice Chairman of the Company. The
address of KPCB and Messrs. Doerr and Hearst is Kleiner Perkins Caufield
& Byers, 2750 Sand Hill Road, Menlo Park, California 94025.
(7) Mr. Jermoluk is the Chairman, President and Chief Executive Officer of
the Company. Of these shares, 2,250,000 were subject to repurchase at
June 30, 1997.
(8) Represents 1,500,000 shares held of record by Rogers, a wholly owned
subsidiary of Rogers Communications, Inc. Mr. Rogers is the President and
Chief Executive Officer of Rogers Communications, Inc. and the designee
of Rogers and Shaw on the Board.
(9) Mr. Medin is the Vice President, Networks of the Company. Of these
shares, 299,520 were subject to repurchase at June 30, 1997.
(10) Mr. Goldman is a Senior Vice President and the Chief Financial Officer of
the Company. Of these shares 499,584 were subject to repurchase at June
30, 1997.
(11) Represents 100,000 shares held of record by Mr. Barksdale and 400,000
shares held of record by Netscape. Mr. Barksdale, a director of the
Company, is the President and Chief Executive Officer of Netscape.
Mr. Barksdale disclaims beneficial ownership of the shares held of record
by Netscape.
(12) Mr. Gilbert is a Senior Vice President and the General Manager, @Home
Group of the Company. Of these shares, 293,216 were subject to repurchase
at June 30, 1997 and 50,000 were subject to options that were exercisable
on June 30, 1997 but, if exercised, subject to repurchase.
(13) Includes all of the shares shown in the table and an additional 1,425,000
shares of Series A Common Stock held of record by four other executive
officers and 105,000 shares of Series A Common Stock that are subject to
options that were exercisable on June 30, 1997 but, if exercised, subject
to repurchase.
DESCRIPTION OF CAPITAL STOCK
As of June 30, 1997, assuming the conversion of all outstanding shares of
Preferred Stock into shares of Common Stock, there were outstanding 78,243,336
shares of Series A Common Stock held of record by approximately 261
stockholders, 15,400,000 shares of Series B Common Stock held of record by one
stockholder, 14,877,660 shares of Series K Common Stock held of record by five
stockholders, options to purchase 1,687,000 shares of Series A Common Stock
and warrants to purchase 2,200,000 shares of Series A Common Stock.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation, which is included as an exhibit to the Registration Statement,
of which this Prospectus forms a part, and by the provisions of applicable
law.
COMMON STOCK
The Company is authorized to issue 230,277,660 shares of Common Stock, $.01
par value, of which 200,000,000 have been designated Series A Common Stock,
15,400,000 have been designated Series B Common Stock and 14,877,660 have been
designated Series K Common Stock. Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board may from time to time determine. Holders of Series A Common Stock and
Series K Common Stock are entitled to one vote for each share held, and
holders of Series B Common Stock are entitled to ten votes for each
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<PAGE>
share held, on all matters presented to stockholders. The Series A Common
Stock is the only series of Common Stock that is registered in this offering.
Each share of Series B Common Stock and Series K Common Stock is convertible,
at the option of the holder, into one share of Series A Common Stock. Shares
of Series A Common Stock are not convertible into shares of Series B or Series
K Common Stock. All other rights and privileges are equal with respect to
holders of Series A, B and K Common Stock, except that, so long as there are
at least 5,000,000 shares of Series B Common Stock outstanding, the holders of
Series B Common Stock (all of which will be owned by a subsidiary of TCI
following the offering), voting separately as a single series, have the right
to elect five directors to the Board; so long as there are at least 5,000,000
shares of Series K Common Stock outstanding (the substantial majority of which
will be controlled by KPCB following the offering), the holders of Series K
Common Stock, voting separately as a single series, have the right to elect
one director to the Board; so long as the holders of Series B Common Stock or
Series K Common Stock are entitled to elect any Series B Common Stock Director
or any Series K Common Stock Director, the holders of Series A Common Stock,
voting separately as a single series, have the right to elect two directors
who are not officers (other than any Vice Chairman) or employees of the
Company and are not affiliates or associates of TCI, Comcast or Cox. The
Common Stock is not entitled to preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if
any, on any outstanding Preferred Stock and payment of other claims of
creditors. Each outstanding share of Common Stock is, and all shares of Common
Stock to be outstanding upon completion of this offering will be, duly and
validly issued, fully paid and nonassessable. See "Management--Board
Composition and Procedures."
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into shares of Common Stock at a conversion rate of 20
shares of the applicable series of Common Stock for each share of Preferred
Stock. The Preferred Stock so converted will be retired and may not be
reissued. See Notes 5 and 10 of Notes to Financial Statements for a
description of the Preferred Stock. The Board is authorized, subject to any
limitation prescribed by Delaware law, to issue, from time to time, in one or
more series, up to 9,650,000 additional shares of Preferred Stock, with such
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, as
shall be stated and expressed in a Board resolution or resolutions providing
for the issue of such series without any further vote or action by the
stockholders. The Board may authorize the issuance of such Preferred Stock
with voting or conversion rights that could adversely affect the voting power
or other rights of the holders of Common Stock. Thus, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plan to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 95,252,260 shares of
Series A Common Stock issuable upon conversion of the Preferred Stock (and
other series of Common Stock) and holders of warrants to purchase a total of
2,000,000 shares of Series A Common Stock will have certain rights to cause
the Company to register those shares (the "Registrable Shares") under the
Securities Act at any time after the first anniversary of the closing date of
this offering. Thereafter, the Company may be required to effect up to four
registrations requested by the TCI stockholder group, two registrations
requested by the Comcast stockholder group, two registrations requested by the
Cox stockholder group, two registrations requested by the KPCB stockholder
group and two registrations requested by the persons who held Series C
Preferred Stock and warrants to purchase Series C Preferred Stock prior to
this offering. Stockholder groups not part of the initial registration demand
are entitled to notice of such registration and are entitled to include shares
of Registrable Securities therein. These registration rights are subject to
certain conditions and limitations, including (i) the right, under certain
circumstances, of the underwriters of an offering to limit the number of
shares included in such registration and (ii) the right of the Company to
delay the filing of a registration statement for not more than 120 days after
receiving the registration demand. Notwithstanding the foregoing, the exercise
of the Principal Stockholders'
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<PAGE>
registration rights are subject to the other Principal Stockholders' rights of
first offer as set forth in the Stockholders' Agreement, unless specifically
exempted therefrom. If any stockholder group requests registration of at least
500,000 Registrable Shares, the Company is obligated to pay all registration
expenses incurred in connection with such registration (other than
underwriters' discounts and commissions and stock transfer fees or expenses)
and the fees and expenses of a single counsel to the selling stockholders.
These demand registration rights expire with respect to the Series C Preferred
stockholder group upon the fifth anniversary of the closing of this offering.
In addition, if the Company proposes to register any of its equity
securities under the Securities Act, whether or not for sale for its own
account, other than in connection with a Company employee benefit plan or a
corporate reorganization, the holders of Registrable Shares and the holder of
a warrant to purchase 200,000 shares of Series A Common Stock are entitled to
notice of such registration and are entitled to include Registrable Shares and
the shares issuable upon exercise of such warrant therein. These rights are
subject to certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in such
registration under certain circumstances and the right of the Company to delay
or withdraw any such registration. The Company is obligated to pay all
registration expenses incurred in connection with such registration other than
underwriters' discounts and commissions, stock transfer fees or expenses, the
pro rata share of the incremental filing fee under the Securities Act
attributable to the applicable Registrable Shares and the fees and
disbursements of counsel to the holders of the Registrable Shares. These
"piggyback" registration rights expire with respect to the Series C Preferred
stockholder group upon the fifth anniversary of the closing of this offering.
DELAWARE TAKEOVER STATUTE
The Company is not subject to Section 203 of the Delaware Law, which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder. See "Risk Factors--Ability of TCI to Transfer Control of the
Company."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Boston
EquiServe. The Transfer Agent's telephone number is (617) 575-3120.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Series A
Common Stock of the Company. Future sales of substantial amounts of Series A
Common Stock in the public market could materially and adversely affect
prevailing market prices from time to time. Furthermore, since no shares will
be available for sale shortly after this offering because of certain
contractual and legal restrictions on resale (as described below), sales of
substantial amounts of Series A Common Stock of the Company in the public
market after these restrictions lapse could materially and adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 117,520,996 shares of Common Stock (based upon shares outstanding
at June 30, 1997), assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares,
all of the Shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless such
shares are purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act (the "Affiliates"). The remaining
108,520,996 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 promulgated under the Securities Act, which
rules are summarized below. All officers, directors, stockholders and option
and warrant holders of the Company have agreed, subject to
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<PAGE>
certain exceptions, not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly (or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of), any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for shares of Common Stock, for a period of 180
days after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated. As a result of the contractual restrictions
described below and the provisions of Rule 144 and 701, the Restricted Shares
will be available for sale in the public market as follows: (i) no shares will
be eligible for immediate sale on the date of this Prospectus;
(ii) 103,720,996 shares will be eligible for sale upon expiration of the lock-
up agreements 180 days after the date of this Prospectus, subject in most
instances to the volume limitations of Rule 144 and subject to certain
restrictions on transfer by the Principal Cable Stockholders set forth in the
Stockholders' Agreement, and (iii) the remaining 4,800,000 shares will become
eligible for sale on April 11, 1998, subject to the volume limitation of Rule
144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 1,175,000 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering. In general, under Rule 701 of the Securities Act
as currently in effect, any employee, consultant or advisor of the Company who
purchases shares from the Company in connection with a compensatory stock or
option plan or other written agreement is eligible to resell such shares 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period,
contained in Rule 144.
Upon completion of this offering, the holders of 95,252,260 shares of Series
A Common Stock issuable upon conversion of Preferred Stock (and other series
of Common Stock), and holders of warrants to purchase a total of 2,200,000
shares of Series A Common Stock, or their transferees, will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights."
Registration of such shares under the Securities Act would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for share purchases by Affiliates) immediately upon the effectiveness
of such registration.
The Company intends to file a registration statement under the Securities
Act covering approximately 2,751,264 shares of Series A Common Stock reserved
for issuance under the Company's 1997 Equity Incentive Plan or the Stock
Purchase Plan and the shares subject to outstanding options under the 1996
Plans. As of June 30, 1997, options to purchase 1,687,000 shares of Series A
Common Stock were issued and outstanding under the 1996 Plans. See
"Management--Employee Benefit Plans." Such registration statement is expected
to be filed and become effective as soon as practicable after the effective
date of this offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") for whom Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated and
Hambrecht & Quist LLC are acting as Representatives (the "Representatives")
have severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of Shares of Series A Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................. 1,575,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................... 1,575,000
Alex. Brown & Sons Incorporated.................................... 1,575,000
Hambrecht & Quist LLC.............................................. 1,575,000
Sanford C. Bernstein & Inc. ....................................... 100,000
Cazenove Incorporated.............................................. 100,000
Cowen & Company.................................................... 100,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 200,000
A.G. Edwards & Sons, Inc. ......................................... 200,000
Furman Selz LLC.................................................... 100,000
Gabelli & Company, Inc. ........................................... 100,000
Goldman, Sachs & Co. .............................................. 200,000
Janco Partners, Inc. .............................................. 100,000
Montgomery Securities.............................................. 200,000
Nesbitt Burns Securities Inc. ..................................... 100,000
Oppenheimer & Co., Inc. ........................................... 200,000
Brad Peery Inc. ................................................... 100,000
RBC Dominion Securities Inc. ...................................... 100,000
Robertson, Stephens & Company LLC.................................. 200,000
Salomon Brothers Inc. ............................................. 200,000
Smith Barney Inc. ................................................. 200,000
TD Securities (USA) Inc. .......................................... 100,000
Wessels, Arnold & Henderson, L.L.C. ............................... 100,000
---------
Total.............................................................. 9,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares of Series A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the Shares of Series A Common Stock offered hereby
(other than those covered by the Underwriters' over-allotment option described
below) if any such shares are taken.
The Underwriters initially propose to offer part of the Shares of Series A
Common Stock directly to the public at the initial public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $.455 a share under the initial public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 a share to other Underwriters or to certain
dealers.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 1,350,000 additional Shares of
Series A Common Stock at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase solely for the
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<PAGE>
purpose of covering over-allotments, if any, made in connection with the
offering of the Shares of Series A Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional Shares of Series A Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Series A Common Stock set forth next to the names of all Underwriters in the
preceding table.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Series A Common Stock, for a
period of 180 days after the date of this Prospectus, except under certain
circumstances.
The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of Shares
of Series A Common Stock offered by them.
The Underwriters have reserved for sale, at the initial public offering
price, up to 10% of the Shares of the Series A Common Stock offered hereby
(including Shares subject to the Underwriters' over-allotment option) for
certain individuals who have expressed an interest in purchasing such Shares of
Series A Common Stock in the offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
In order to facilitate the offering of the Series A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series A Common Stock. Specifically, the Underwriters
may over-allot in connection with the offering, creating a short position in
the Series A Common Stock for their own account. In addition, to cover over-
allotments or to stabilize the price of the Series A Common Stock, the
Underwriters may bid for, and purchase, shares of Series A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an Underwriter or a dealer for distributing the Series A
Common Stock in the offering, if the syndicate repurchases previously
distributed Series A Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Series A Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Series A
Common Stock or any other securities of the Company. The initial public
offering price for the Series A Common Stock has been determined by
negotiations among the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company.
76
<PAGE>
LEGAL MATTERS
The validity of the Shares of Series A Common Stock offered hereby will be
passed upon for the Company by Fenwick & West LLP, Palo Alto, California.
Fenwick & West LLP holds an option to purchase 25,000 shares of Series A
Common Stock of the Company. Certain legal matters will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The consolidated financial statements of At Home Corporation as of December
31, 1995 and 1996, and for the period from March 28, 1995 (inception) to
December 31, 1995 and the year ended December 31, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
Effective April 1, 1997, the Company selected Ernst & Young LLP as its
principal independent auditors to replace KPMG Peat Marwick LLP, who were
dismissed as auditors of the Company on that date. The decision to change
independent auditors was approved by the Board. In connection with the audit
for the period from March 28, 1995 (inception) to December 31, 1995, and the
subsequent interim periods through April 1, 1997, there were no disagreements
with KPMG Peat Marwick LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures
that, if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have
caused them to make reference to the matter in their report. The former
accountant's report for the period from March 28, 1995 (inception) to December
31, 1995 is not a part of the financial statements of the Company included in
this Prospectus. The report of KPMG Peat Marwick LLP on the consolidated
financial statements of the Company for the period from March 28, 1995
(inception) to December 31, 1995 did not contain any adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, of which this Prospectus forms a part, with respect
to the Shares of Series A Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Certain items are omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Series A Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement, and the
exhibits thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
77
<PAGE>
AT HOME CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
At Home Corporation
We have audited the accompanying consolidated balance sheets of At Home
Corporation as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from March 28, 1995 (inception) to December 31, 1995 and for the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of At Home
Corporation at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the period from March 28, 1995 (inception)
to December 31, 1995 and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
May 1, 1997,
except for Note 9,
as to which the date is
July 8, 1997
F-2
<PAGE>
AT HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
----------------- JUNE 30, JUNE 30,
1995 1996 1997 1997
------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 6,844 $ 9,709 $ 39,924
Short-term cash investments..... 63 7,061 1,005
------- -------- --------
Total cash, cash equivalents and
short-term cash investments.... 6,907 16,770 40,929
Accounts receivable............. -- 164 133
Accounts receivable--related
parties........................ -- 640 312
Other current assets............ 249 741 1,914
------- -------- --------
Total current assets.............. 7,156 18,315 43,288
Property, equipment and
improvements, net................ 921 14,328 23,906
Other assets...................... 47 745 1,951
------- -------- --------
Total assets...................... $ 8,124 $ 33,388 $ 69,145
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities:
Accounts payable................ $ 392 $ 1,946 $ 1,745
Accounts payable--related
parties........................ 431 1,482 549
Accrued compensation and related
expenses....................... 89 248 522
Other accrued liabilities....... -- 885 4,787
Current portion of capital lease
obligations.................... -- 3,181 6,653
------- -------- --------
Total current liabilities......... 912 7,742 14,256
Capital lease obligations, less
current portion.................. -- 5,654 10,154
Other long-term liabilities....... -- 1,675 1,799
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock,
$0.01 par value:
Authorized shares--14,522,613
(pro forma--9,650,000)
Issued and outstanding
shares--1,000,000 in 1995,
4,522,613 in 1996 and
4,762,613 in 1997 (pro
forma--none)................. 9,968 44,993 91,595 $ --
Common stock, $0.01 par value:
Authorized shares--180,277,660
Issued and outstanding
shares--none in 1995,
11,855,088 in 1996 and
13,268,736 in 1997 (pro
forma--108,520,996).......... -- 1,035 6,785 98,380
Notes receivable from
stockholders................... -- (170) (320) (320)
Deferred compensation........... -- (272) (5,051) (5,051)
Accumulated deficit............. (2,756) (27,269) (50,073) (50,073)
------- -------- -------- --------
Total stockholders' equity........ 7,212 18,317 42,936 $ 42,936
------- -------- -------- ========
Total liabilities and
stockholders' equity............. $ 8,124 $ 33,388 $ 69,145
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (1)............ $ -- $ 676 $ -- $ 1,830
Costs and expenses:
Operating costs....... -- 6,969 1,781 9,165
Product development
and engineering...... 1,447 6,312 2,806 5,274
Sales and marketing... 496 6,368 2,120 5,878
General and
administrative....... 943 6,054 1,735 4,660
------- ----------- ------- -----------
Total costs and
expenses............... 2,886 25,703 8,442 24,977
------- ----------- ------- -----------
Loss from operations.... (2,886) (25,027) (8,442) (23,147)
Interest income, net.... 130 514 163 343
------- ----------- ------- -----------
Net loss................ $(2,756) $ (24,513) $(8,279) $ (22,804)
======= =========== ======= ===========
Pro forma net loss per
share.................. $ (0.22) $ (0.21)
=========== ===========
Pro forma shares used in
per share
calculations........... 110,065,127 110,065,127
=========== ===========
- --------
(1)Revenues from related
parties $ -- $ 634 $ -- $ 1,348
</TABLE>
See accompanying notes.
F-4
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL
----------------- ------------------ FROM DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION DEFICIT EQUITY
--------- ------- ---------- ------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of preferred
stock, less issuance
costs of $32........... 1,000,000 $ 9,968 -- $ -- $ -- $ -- $ -- $ 9,968
Net loss................ -- -- -- -- -- -- (2,756) (2,756)
--------- ------- ---------- ------ ----- ------- -------- --------
BALANCES AT DECEMBER 31,
1995................... 1,000,000 9,968 -- -- -- -- (2,756) 7,212
Issuance of preferred
stock, less issuance
costs of $232.......... 3,522,613 35,025 -- -- -- -- -- 35,025
Series A common stock
issued under stock
option plans and
restricted stock
agreements............. -- -- 12,402,500 718 (170) -- -- 548
Repurchases of Series A
common stock........... -- -- (547,492) (29) -- -- -- (29)
Deferred compensation
related to grant of
stock options.......... -- -- -- 346 -- (346) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 74 -- 74
Net loss................ -- -- -- -- -- -- (24,513) (24,513)
--------- ------- ---------- ------ ----- ------- -------- --------
BALANCES AT DECEMBER 31,
1996................... 4,522,613 44,993 11,855,008 1,035 (170) (272) (27,269) 18,317
Issuance of Series C
preferred stock, less
issuance costs of
$1,400 (unaudited)..... 240,000 46,602 -- -- -- -- -- 46,602
Series A common stock
issued under stock
option plans and
restricted stock
agreements
(unaudited)............ -- -- 2,117,501 521 (345) -- -- 176
Repurchases of Series A
common stock
(unaudited)............ -- -- (703,773) (28) 28 -- -- --
Repayment of notes
receivable............. -- -- -- -- 167 -- -- 167
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- 5,257 -- (5,257) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- -- 478 -- 478
Net loss (unaudited).... -- -- -- -- -- -- (22,804) (22,804)
--------- ------- ---------- ------ ----- ------- -------- --------
BALANCES AT JUNE 30,
1997 (UNAUDITED)....... 4,762,613 $91,595 13,268,736 $6,785 $(320) $(5,051) $(50,073) $ 42,936
========= ======= ========== ====== ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH USED IN OPERATING
ACTIVITIES
Net loss.................. $(2,756) $(24,513) $(8,279) $(22,804)
Adjustments to reconcile
net loss to cash used in
operating activities:
Amortization of deferred
compensation............ -- 74 -- 478
Depreciation and
amortization............ 42 1,829 316 3,225
Changes in assets and
liabilities:
Accounts receivable...... -- (804) -- 359
Other assets............. (296) (1,190) 13 (2,379)
Accounts payable......... 823 2,605 372 (1,134)
Accrued compensation and
related expenses........ 89 159 (10) 274
Other accrued
liabilities............. -- 885 283 3,902
Other long-term
liabilities............. -- 1,675 -- 124
------- -------- ------- --------
Cash (used in) operating
activities............... (2,098) (19,280) (7,305) (17,955)
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchase of short-term
cash investments......... (63) (8,998) -- (1,005)
Sales and maturities of
short-term cash
investments.............. -- 2,000 -- 7,061
Purchase of property,
equipment and
improvements............. (963) (7,320) (2,843) (2,638)
------- -------- ------- --------
Cash provided by (used in)
investing activities..... (1,026) (14,318) (2,843) 3,418
CASH PROVIDED BY FINANCING
ACTIVITIES
Proceeds from issuance of
convertible preferred
stock.................... 9,968 35,025 10,000 46,602
Proceeds from sale of
common stock............. -- 519 -- 176
Proceeds from capital
lease financing.......... -- 1,500 -- --
Payments on capital lease
obligations.............. -- (581) -- (2,193)
Repayment of notes
receivable from
stockholders............. -- -- -- 167
------- -------- ------- --------
Cash provided by financing
activities............... 9,968 36,463 10,000 44,752
------- -------- ------- --------
Net increase (decrease) in
cash and cash
equivalents.............. 6,844 2,865 (148) 30,215
Cash and cash equivalents,
beginning of period...... -- 6,844 6,844 9,709
------- -------- ------- --------
Cash and cash equivalents,
end of period............ $ 6,844 $ 9,709 $ 6,696 $ 39,924
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
Interest paid............ $ -- $ 143 $ -- $ 243
======= ======== ======= ========
Acquisition of equipment
under capital leases.... $ -- $ 7,916 $ -- $ 10,165
======= ======== ======= ========
Notes receivable from
stockholders issued in
connection with exercise
of stock options and
restricted stock
purchases............... $ -- $ 170 $ -- $ 345
======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
At Home Corporation (the "Company") was incorporated in the state of
Delaware on March 28, 1995. The Company provides Internet services to
consumers and businesses over the cable television infrastructure. As of
December 31, 1996, the Company's services were available through cable systems
in a limited number of cities in the United States.
Dependence on Cable Companies
The Company has strategic relationships with seven major cable companies
which are expected to provide through their cable systems the principal
distribution network for the Company's services to its subscribers. The
Company's three principal cable stockholders have granted the Company the
exclusive right to offer high-speed residential consumer Internet services
over their cable systems, subject to certain exceptions. However, the
principal cable stockholders are under no obligation to carry the Company's
services. In addition, the principal cable stockholders' exclusivity
obligations in favor of the Company expire in June 2002, and may be terminated
prior to that date under certain circumstances.
Transmission of data over cable is dependent on the availability of high-
speed two-way hybrid fiber coaxial cable infrastructure. Currently, a
substantial majority of existing cable plants in the United States have not
been upgraded from coaxial cable to hybrid fiber-coaxial cable and, in
addition, are not capable of two-way transmission. Cable system operators have
announced and begun to implement major infrastructure investments in order to
deploy data-over-cable services. However, there can be no assurance that such
infrastructure improvements will be completed.
Dependence on Key Technology Suppliers
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material adverse effect on the Company's financial
condition and results of operations.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information
The interim financial information as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and
its results of operations and cash flows for those periods. Operating results
for the six months ended June 30, 1997 are not necessarily indicative of
results that may be expected for any future periods.
Revenue Recognition
Monthly customer subscription revenue is recognized in the period in which
subscription services are provided. The Company also earns revenue from cable
system operators for providing certain support services, such as customer
support, local area content development and pre-commercial deployment fees.
Revenue from cable system operators is recognized as the services are
performed. For the period from March 28, 1995 (inception) to December 31, 1995
and the year ended December 31, 1996, such revenue was derived from cable
system operators that are also stockholders of the Company. Revenues also
include the sale of online advertising primarily based on fixed-fee charter
programs.
Property, Equipment and Improvements
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The adoption did not have a
material impact on the Company's financial statements.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123").
Pro Forma Net Loss Per Share
Except as noted below, pro forma net loss per share is computed using the
weighted average number of common shares outstanding and also gives effect to
the assumed conversion of all outstanding shares of convertible preferred
stock into common stock upon the closing of the Company's initial public
offering (using the as-if-converted method). Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that
pursuant to applicable Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares (from stock options and
warrants) issued during the period commencing
F-8
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro Forma Net Loss Per Share (continued)
twelve months prior to the initial filing date of the proposed public offering
at prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method).
Historical net loss per share is not presented since such amounts are not
considered meaningful as a result of the significant change in the Company's
capital structure (Note 5) that will occur in connection with the initial
public offering of its common stock.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings (loss) per share and to restate such
amounts previously reported. Under the new requirements for calculating
primary (basic) earnings (loss) per share, the dilutive effect of stock
options and warrants and convertible preferred stock will be excluded. Fully
diluted earnings per share will include the dilutive effect of common stock
equivalents. The Company has not determined what the impact of FAS 128 will be
on the calculation of primary and fully diluted net loss per share.
2. FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of three months or less and are stated at amounts
that approximate fair value, based on quoted market prices. Cash equivalents
consist principally of investments in interest-bearing demand deposit accounts
with financial institutions and highly liquid debt securities of corporations
and the U.S. Government. The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within three months of their
acquisition date.
Short-Term Cash Investments
The Company has classified all short-term cash investments as available-for-
sale. Available-for-sale securities are carried at amounts that approximate
fair market value based on quoted market prices. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. Interest on securities classified
as available-for-sale is also included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Commercial paper.......................................... $ -- $ 1,003
U.S. government obligations............................... -- 4,000
Money market instruments.................................. 63 9,933
------- -------
63 14,936
Included in cash and cash equivalents..................... -- 7,875
------- -------
Included in short-term cash investments................... $ 63 $ 7,061
======= =======
</TABLE>
F-9
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
2. FINANCIAL INSTRUMENTS (CONTINUED)
Short-Term Cash Investments (continued)
Unrealized gains and losses at December 31, 1995 and 1996 and realized gains
and losses for the periods then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its consolidated balance
sheets. The cost of securities sold is based on the specific identification
method. All available-for-sale securities at December 31, 1996 have maturity
dates in 1997.
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- ESTIMATED
1995 1996 USEFUL LIVES
------- ------- ------------
<S> <C> <C> <C>
Computer equipment and software............. $ 763 $13,952 3-4 years
Furniture and fixtures...................... 200 1,881 5 years
Leasehold improvements...................... -- 366 lease term
------- -------
963 16,199
Less accumulated depreciation and
amortization............................... 42 1,871
------- -------
$ 921 $14,328
======= =======
</TABLE>
Equipment and improvements include amounts for assets acquired under capital
leases, principally computer equipment and software and furniture and fixtures
of $0 and $9,949,000 at December 31, 1995 and 1996, respectively. Accumulated
amortization of these assets was $817,000 at December 31, 1996.
4. LEASE OBLIGATIONS
The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2009, and which require the
Company 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 reflected on a straight-line basis over the
terms of the leases. The Company also has obligations under a number of
capital equipment leases.
F-10
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
4. LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments under non-cancelable operating and capital
leases having terms in excess of one year as of December 31, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year Ending December 31,
1997................................................... $ 1,843 $ 3,739
1998................................................... 2,854 3,439
1999................................................... 2,850 2,316
2000................................................... 2,835 379
2001................................................... 2,834 --
Thereafter............................................. 18,859 --
-------- -------
Total minimum lease payments......................... $ 32,075 9,873
========
Less amounts representing interest..................... (1,038)
-------
Present value of minimum capital lease obligations..... 8,835
Less current portion................................... (3,181)
-------
Noncurrent portion..................................... $ 5,654
=======
</TABLE>
The Company is also committed under an operating lease to make expenditures
for tenant improvements estimated to be approximately $5,500,000 in 1997.
Facility rent expense for the period from March 28, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 amounted to $98,000
and $600,000, respectively.
5. STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consists of the following at December 31, 1996:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
<S> <C> <C> <C>
AT.................................... 1,553,000 1,553,000 $15,530,000
AX.................................... 727,865 727,865 7,278,650
AM.................................... 727,865 727,865 7,278,650
K..................................... 743,883 743,883 7,438,830
T..................................... 770,000 770,000 7,700,000
Undesignated.......................... 10,000,000 -- --
---------- --------- -----------
14,522,613 4,522,613 $45,226,130
========== ========= ===========
</TABLE>
F-11
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (continued)
Shares of Series AT, AX and AM preferred stock are convertible into Series A
common stock. Shares of Series T preferred stock are convertible into Series B
common stock, and shares of Series K preferred stock are convertible into
Series K common stock, each on a 20-for-1 basis, subject to antidilution
provisions. Conversion is at the option of the holder, or mandatorily as
determined by the appropriate members of the Board of Directors, and automatic
upon the Company's initial public offering of common stock unless the
appropriate number of members of the Board of Directors vote not to require
such automatic conversion.
Holders of the Company's Series AT, AX, AM, K and T preferred stock are
entitled to receive noncumulative dividends in the amount of 10% of the
original issuance price per year in preference to holders of common stock at
the discretion of the Board of Directors. No such dividends have been declared
since the inception of the Company.
In the event of the liquidation of the Company, holders of Series AT, AX,
AM, K and T preferred stock are entitled to receive an amount per share equal
to the original issuance price plus declared and unpaid dividends, prior and
in preference to any distribution of assets to holders of common stock.
The holder of Series T preferred stock has the right, for 60 days after
August 29, 2001 and each anniversary thereof until August 29, 2005, to
purchase all Series K preferred stock at fair market value (the "Call") and,
during the same period and certain other periods, the holders of Series K
preferred stock have the right to require the holder of Series T preferred
stock to purchase all of the Series K preferred stock at fair market value
(the "Put"). The holder of Series T preferred stock has the right to require
an initial public offering of the Company's common stock in lieu of purchasing
Series K preferred stock pursuant to the Put. The Call and the Put expire upon
the Company's initial public offering.
Upon the exercise of the Call or Put, all other holders of Series AT, AX, AM
and K preferred stock will have the right to participate in the purchase of
the affected securities on a pro rata basis, and such preferred stockholders
will also have the right to exercise a put to the holder of Series T preferred
stock with terms similar to those provided by the Put as described above.
Holders of preferred stock are entitled to the same number of votes per
share as the common shares into which the preferred shares are convertible. As
of December 31, 1996, one principal cable stockholder controlled approximately
76% of the voting power of the Company as a result of ownership of convertible
preferred stock.
Common Stock
Common stock consists of the following at December 31, 1996 and June 30,
1997:
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING
------------------------
SHARES DECEMBER 31, JUNE 30,
SERIES AUTHORIZED 1996 1997
------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
A....................................... 150,000,000 11,855,008 13,268,736
B....................................... 15,400,000 -- --
K....................................... 14,877,660 -- --
----------- ---------- ----------
180,277,660 11,855,008 13,268,736
=========== ========== ==========
</TABLE>
F-12
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock (continued)
The holders of Series A, B and K common stock have one, ten and one vote(s)
per share, respectively. Each share of Series B and K common stock is
convertible into one share of Series A common stock at the option of the
holders.
Stock Splits
In August 1996, the Company completed a one-for-ten reverse stock split of
the outstanding shares of Series K and T preferred stock and a two-for-one
stock split of the outstanding shares of Series A common stock. All share and
per share amounts in the accompanying consolidated financial statements have
been retroactively adjusted to reflect the stock splits.
Stock Purchase Agreements
During 1996, the Company entered into stock purchase agreements with certain
employees, officers, directors and consultants under which the Company issued
7,527,000 shares of Series A common stock at prices ranging from $0.01 to
$0.10 per share, and 50,000 shares of Series K preferred stock at $10.00 per
share. Proceeds from the issuance of the restricted stock were received in the
form of cash or five-year secured promissory notes bearing interest at a rate
of approximately 5.9% per annum. Certain of the agreements provide that the
unvested shares are subject to repurchase by the Company upon termination of
employment at the original price paid for the shares. The shares generally
vest at the rate of 25% after one year and ratably on a monthly basis for
three years thereafter. During the year ended December 31, 1996, the Company
repurchased 400,000 shares of common stock pursuant to such agreements.
Under the terms of an employment agreement with an executive officer, so
long as the officer is employed by the Company, and for 90 days thereafter if
his employment is terminated without cause, to the extent the officer sells
any of his vested common shares during a five-year guarantee period beginning
in July 2000 at an average price less than $5 per share, if the Company's
stock is publicly traded, the Company is obligated to pay the officer the
difference between $5 per share and the average price for each share sold. At
December 31, 1996, the officer owned 3,000,000 shares of Series A common stock
and 50,000 shares of Series K common stock (convertible into 1,000,000 shares
of Series K common stock upon completion of an initial public offering of the
Company's common stock). During the year ended December 31, 1996, the Company
accrued compensation expense of $1,675,000 in connection with this agreement,
which amount is included in other long-term liabilities in the consolidated
balance sheet.
Warrants
In October 1996, the Company issued a warrant to its facilities lessor that
gives the lessor the right to purchase 200,000 shares of Series A common stock
for $15 per share. The warrant is exercisable for a five-year period beginning
in October 1997, or immediately upon an initial public offering of the
Company's common stock. The Company deemed the warrant to have insignificant
fair value at the time of issuance.
Stock Options
In January 1996, the Company adopted the 1996 Incentive Stock Option Plan,
and in July 1996, the Company adopted the 1996 Incentive Stock Option Plan No.
2. The plans provide for incentive stock options, as defined by the Internal
Revenue Code, to be granted to employees, at an exercise price not less than
100% of the fair value at the grant date as determined by the Board of
Directors. The plans also provide for nonqualified
F-13
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options (continued)
stock options to be issued to nonemployee officers, directors and consultants
at an exercise price of not less than 85% of the fair value at the grant date.
The options are exercisable immediately upon issuance and generally have a
term of ten years. The Company reserves the right of first refusal to purchase
all shares held by the participant upon termination. Unvested shares may be
repurchased by the Company at the original purchase price. Fully vested shares
may be repurchased by the Company at the higher of the original purchase price
or the fair market value of the shares as determined by the Board of
Directors. The vesting schedule is determined by the Board of Directors at the
time of issuance. Stock options generally vest at the rate of 25% after one
year and ratably on a monthly basis for three years thereafter. The repurchase
right for vested shares expires upon the completion of an initial public
offering of the Company's common stock. The Company has reserved 16,000,000
shares of Series A common stock (less the number of shares purchased by
employees, officers, directors and consultants outside of the plans) for
issuance under the plans.
A summary of activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
---------- -------------- --------
<S> <C> <C> <C>
Balance at December 31, 1995............ -- -- --
Options granted........................ 5,296,500 $0.05 - $0.10 $0.06
Options exercised (nonvested shares)... (4,875,500) $0.05 - $0.10 $0.06
Options forfeited...................... (198,000) $0.05 - $0.10 $0.05
---------- ------------- -----
Balance at December 31, 1996............ 223,000 $0.05 - $0.10 $0.06
Options granted........................ 3,570,501 $0.25 - $4.00 $1.10
Options exercised (nonvested shares)... (2,097,501) $0.05 - $0.25 $0.25
Options forfeited...................... (9,000) $0.10 - $1.00 $0.40
---------- ------------- -----
Balance at June 30, 1997................ 1,687,000 $0.05 - $4.00 $2.03
========== ============= =====
</TABLE>
The following table summarizes information about options outstanding at June
30, 1997, all of which were exercisable upon grant into shares of nonvested
stock:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
--------------- ----------- ------------ --------
<S> <C> <C> <C>
$0.05...................................... 175,000 8.9 $0.05
$0.10...................................... 22,000 9.3 $0.10
$0.25...................................... 534,000 9.6 $0.25
$1.00...................................... 182,000 9.8 $1.00
$4.00...................................... 774,000 9.9 $4.00
--------- --- -----
$0.05 - $4.00.............................. 1,687,000 9.7 $2.03
========= === =====
</TABLE>
At June 30, 1997, outstanding options to purchase 97,260 shares were vested
and 5,237,479 shares of nonvested common stock issued pursuant to exercises of
options were subject to repurchase at the Company's option in the event of
employee terminations.
F-14
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options (continued)
The Company has recorded deferred compensation expense of $346,000 during
the year ended December 31, 1996 and $5,257,000 during the six months ended
June 30, 1997 for the difference between the exercise or purchase price and
the deemed fair value of certain of the Company's stock options granted and
stock issued under stock purchase agreements. These amounts are being
amortized by charges to operations over the vesting periods of the individual
stock options and stock purchase agreements, which are generally four years. A
portion of the shares issued under certain stock purchase agreements during
the year ended December 31, 1996 vested immediately. As a result the related
compensation charge for the vested shares was recorded in the period in which
the shares were issued.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for stock-based awards to employees as if the Company had
accounted for such awards using a valuation method permitted under FAS 123.
From inception through December 31, 1995, the Company made no stock-based
awards to employees. Stock-based awards to employees under stock options and
stock purchase agreements during the year ended December 31, 1996 were valued
using the minimum value method, assuming no expected dividends, a weighted-
average expected life of four years and a weighted-average risk-free interest
rate of 6.5%. Should the Company complete an initial public offering of its
common stock, stock-based awards granted thereafter will be valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with FAS 123, in arriving at an estimated fair value.
The minimum value method does not consider stock price volatility. Further,
certain other assumptions necessary to apply the Black-Scholes model may
differ significantly from assumptions used to calculate the value of stock-
based awards under the minimum value method.
The weighted-average minimum values of options and nonvested shares issued
to employees during 1996 were each $0.01. For pro forma purposes, the
estimated minimum value of the Company's stock-based awards to employees is
amortized over the vesting period of the underlying instruments. The results
of applying FAS 123 to the Company's stock-based awards to employees for the
period from inception through December 31, 1995 would have no effect on the
Company's results of operations or net loss per share reflected in the
consolidated statement of operations because no such awards were made during
the period. The effect of applying FAS 123 for the year ended December 31,
1996 would not be material to the Company's results of operations or net loss
per share.
F-15
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
6. INCOME TAXES
The Company's income tax provision (benefit) differs from the income tax
benefit determined by applying the U.S. federal statutory rate to the net loss
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- -------
<S> <C> <C>
Tax provision (benefit) at U.S. statutory rate............. $(937) $(8,334)
Net operating losses and temporary differences not
recognized................................................ 937 8,334
----- -------
Total.................................................. $ -- $ --
===== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities for federal and state
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 525 $ 6,568
Tax credit carryforwards................................ 13 120
Capitalized start-up costs.............................. 574 4,284
Accrued expenses, not currently deductible.............. 31 525
------- --------
Total gross deferred tax assets........................... 1,143 11,497
Less valuation allowance................................ (1,143) (10,977)
------- --------
Deferred tax assets..................................... -- 520
Deferred tax liabilities:
Property and equipment.................................. -- (520)
------- --------
Total gross deferred tax liabilities...................... -- (520)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
F-16
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of December
31, 1995 and 1996, has been established to reflect these uncertainties.
At December 31, 1996, the Company has net operating loss and research and
development tax credit carryforwards for federal and state tax purposes of
approximately $16,002,000 and $120,000, respectively, that will begin to
expire at various dates beginning in years 2003 through 2011, if not utilized.
Certain changes in ownership of the Company, as defined in the Tax Reform Act
of 1996 and similar state provisions, may restrict the utilization of such
carryforwards.
7. RELATED PARTY TRANSACTIONS
For the period from March 28, 1995 (inception) to December 31, 1995 and for
the year ended December 31, 1996, the Company purchased services of
approximately $733,000 and $2,726,000 respectively, from certain preferred
stockholders.
The Company entered into an OEM software license agreement under which the
Company paid the vendor $1,388,000 during 1996 and is obligated to pay an
additional $2,331,000 during 1997 as nonrefundable license fees, prepaid
support and services. A member of the Company's Board of Directors is also an
executive officer of the vendor.
Related party transactions with principal cable stockholders are described
in Note 1.
8. RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
9. SUBSEQUENT EVENTS
Series C Preferred Stock Financing
In April 1997, the Company issued 240,000 shares of Series C convertible
preferred stock to investors at $200 per share, resulting in cash proceeds of
$48,000,000, less issuance costs. In connection with the issuance, the Company
authorized the designation of 350,000 shares of authorized Series C preferred
shares. Holders of Series C preferred stock are entitled to noncumulative
annual dividends equal to 10% of the issue price if and when declared by the
Board of Directors. Each share of Series C preferred stock is convertible into
20 shares of Series A common stock at the option of the holder, subject to
certain adjustments. Each share of Series C preferred stock will automatically
convert into Series A common stock upon the closing date of an initial public
offering of the Company's common stock. If the offering price per share of the
Series A common stock in an initial public offering is less than the effective
price per share paid for the Series A common stock upon conversion of the
Series C preferred stock, the conversion rate will be adjusted so that the
effective price per share of the Series A common stock issued upon such
conversion will equal the offering price.
F-17
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
Series C Preferred Stock Financing (continued)
The Company also issued warrants to purchase 100,000 additional shares of
Series C preferred stock at a price of $200 per share to certain of the Series
C preferred stock investors that are also cable system operators. The warrants
are exercisable from June 2004 or earlier, subject to certain performance
standards being met by the cable systems operators, as specified in the
agreement. The exercise price per share of the warrants will be reduced to the
extent the offering price per share in an initial public offering of the
Company's common stock is less than the exercise price of the warrants on as-
if-converted basis.
Proposed Public Offering of Common Stock
In May 1997, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
permitting the Company to sell shares of its Series A common stock to the
public. In addition, the Company's Board of Directors authorized an increase
in the number of authorized shares of Series A common stock from 150,000,000
to 200,000,000 and a decrease in the number of authorized shares of preferred
stock from 14,522,613 to 9,650,000 upon completion of its initial public
offering, subject to stockholder approval. In addition, the Board of Directors
approved the conversion of all outstanding preferred stock into common stock
upon the closing of the initial public offering.
1997 Equity Incentive Plan
The Company's 1997 Equity Incentive Plan was adopted by the Board of
Directors in May 1997 to be effective upon the completion of the Company's
initial public offering of its Series A common stock, subject to stockholder
approval. The 1997 Plan provides for the grant of incentive stock options,
nonqualified stock options, restricted stock awards and stock bonuses to
employees, directors and consultants of the Company. The total number of
shares of Series A common stock reserved for issuance under the 1997 Plan is
16,000,000 less the total number of shares issued or issuable to employees,
officers, directors and consultants under restricted stock purchase agreements
and the 1996 Incentive Stock Option Plans (Note 5) and shares issued under the
1997 Employee Stock Purchase Plan.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan was adopted by the Board of
Directors in May 1997 to be effective upon the completion of the Company's
initial public offering of its common stock, subject to stockholder approval.
The Company has reserved a total of 400,000 shares of Series A common stock
for issuance under the plan. Eligible employees may purchase common stock at
85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable offering period or the last day of the
applicable purchase period.
Litigation
On July 8, 1997, PCTV, Inc. ("PCTV") filed a complaint against the Company
in the United States District Court for the District of New Hampshire
asserting rights in the @Home trademark. In the complaint, PCTV alleges
trademark infringement and unfair competition based on the Company's use of
the @Home mark and requests damages and injunctive relief. PCTV is a New
Hampshire corporation that produces computer-related television programs such
as "Business Computing," "Computer Chronicles" and "@Home." PCTV alleges that
it first used the @Home mark in August 1994. The Company intends to defend the
suit vigorously and does not expect the outcome of this litigation to have a
material adverse effect on the Company's business, operating results or
financial condition.
F-18
<PAGE>
[LOGO OF @HOME NETWORK]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with this offering
are as follows. All amounts other than the SEC registration fee, NASD filing
fee and Nasdaq National Market application fee are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 23,176
NASD Filing Fee.................................................. 8,148
Nasdaq National Market Application Fee........................... 50,000
Printing......................................................... 250,000
Legal Fees and Expenses.......................................... 400,000
Accounting Fees and Expenses..................................... 230,000
NASD and Blue Sky Fees and Expenses.............................. 10,000
Transfer Agent and Registrar Fees................................ 5,000
Miscellaneous.................................................... 23,676
----------
Total.......................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors to the Registrant or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) under Section 174
of the Delaware General Corporation Law or (iv) for any transaction from which
the director derived an improper personal benefit. As permitted by Section 145
of the Delaware General Corporation Law, Registrant's Certificate of
Incorporation further provides (i) for mandatory indemnification, to the
fullest extent permitted by applicable law, for any person who is or was a
director or officer of the Company, or a person who is a legal representative
of such director or officer, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
person, (ii) that the Registrant's obligation to indemnify any person who was
or is serving at the Company's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, enterprise or
nonprofit entity must be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit entity, (iii) that the Registrant must advance
to all indemnified parties the expenses (including attorneys' fees) incurred
in defending any proceeding provided that indemnified parties (if they are
directors or officers) must provide Registrant an undertaking to repay such
advances if indemnification is determined to be unavailable, (iv) that the
rights conferred in the Certificate of Incorporation are not exclusive and (v)
that Registrant may not retroactively amend the Certification of Incorporation
provisions relating to indemnity. Registrant has also entered into
Indemnification Agreements with each of its directors and executive officers.
Reference is also made to Article VIII of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities.
The indemnification provision in the Company's Certificate of Incorporation
and the Indemnification Agreements entered into between the Registrant and
each of its directors and executive officers may be sufficiently broad to
permit indemnification of the Registrant's directors and officers for
liabilities arising under the Securities Act.
The Registrant, with approval by the Registrant's Board of Directors, has
applied for, and expects to obtain, directors' and officers' liability
insurance with a per claim and annual aggregate coverage limit of $20 million.
II-1
<PAGE>
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement (draft dated July 7, 1997)........... 1.01
Third Amended and Restated Certificate of Incorporation of
Registrant................................................. 3.01
Form of Indemnification Agreement........................... 10.09
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since March 28, 1995, the Company's inception date.
<TABLE>
<CAPTION>
AGGREGATE
DATE TITLE OF NUMBER PURCHASE FORM OF
CLASS OF PURCHASER OF SALE SECURITIES OF SHARES PRICE CONSIDERATION
- ------------------ -------- --------------------------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
TCI Internet Holdings, 8/29/95 Series T Preferred Stock 770,000(1) $7,700,000 Cash
Inc. ..................
3 venture capital 8/29/95 Series K Preferred Stock 230,000(1) $2,300,000 Cash
funds..................
TCI Internet Holdings, 5/9/96 Series T Preferred Stock 770,000(1)(2) $7,700,000 Cash
Inc. ..................
2 venture capital 5/9/96 Series K Preferred Stock 230,000(1) $2,300,000 Cash
funds..................
One company............. 7/19/96 Series A Common Stock 20,000 $1,000 Property(3)
TCI Internet Holdings, 8/1/96 Series AT Preferred Stock 783,000(1) $7,830,000 Cash
Inc. ..................
Cox @Home, Inc.
(formerly known as Cox
Teleport Providence,
Inc.).................. 8/1/96 Series AX Preferred Stock 727,865(1) $7,278,650 Cash
Comcast PC Investments, 8/1/96 Series AM Preferred Stock 727,865(1) $7,278,650 Cash
Inc. ..................
2 venture capital funds,
one Company officer and
one individual......... 8/1/96 Series K Preferred Stock 283,883(1) $2,838,830 Cash
Company's landlord...... 10/18/96 Warrant to purchase -- $3,000 Cash
200,000 shares of Series A
Common Stock
2 foreign companies, 4
domestic companies and
one Company director... 4/11/97 Series C Preferred Stock 240,000(1) $48,000,000 Cash
2 foreign companies..... 4/11/97 Warrants to purchase -- $2,000 Cash
100,000 shares of Series C
Preferred Stock
17 officers and 5/31/96- Series A Common Stock 7,527,000(4) $400,800(5) Cash and notes(5)
employees.............. 10/1/96 (restricted stock purchases)
242 officers and 8/14/96- Series A Common Stock 6,973,001(6) $831,525(7) Cash and notes(7)
employees.............. 6/30/97 (stock option purchases)
</TABLE>
- --------
(1) Upon the closing of the Company's initial public offering, each share of
Preferred Stock will convert automatically into 20 shares of the
appropriate series of Common Stock subject to adjustment of the Series C
Preferred Stock conversion rate if the offering price is less than $10.00
per share.
(2) These shares were subsequently exchanged for a like number of shares of
Series AT Preferred Stock.
(3) The Registrant issued these shares in exchange for an Internet domain
name.
(4) Of these shares, 821,850 have been repurchased by the Registrant.
(5) Each individual paid a portion or all of the purchase price in cash
(aggregating $272,010). Four officers and six other employees paid most of
their respective purchase prices with promissory notes (aggregating
$128,790).
(6) Of these shares, 429,415 have been repurchased by the Registrant.
(7) Each individual paid a portion or all of the purchase price in cash
(aggregating $592,125). Two executive officers and four other employees
paid most of their respective purchase prices with promissory notes
(aggregating $239,400).
All sales of Series A Common Stock made pursuant to the exercise of stock
options granted under the Registrant's stock option plans or pursuant to
restricted stock purchase agreements were made pursuant to the exemption from
the registration requirements of the Securities Act afforded by Rule 701
promulgated under the Securities Act.
The sales to two foreign companies (Rogers Cablesystems Limited and Shaw
Cablesystems Ltd. in Canada) of Series C Preferred Stock and warrants to
purchase Series C Preferred Stock were made in reliance on Regulation S and
Section 4(2) of the Securities Act. The sales to each company were offshore
transactions, and no directed selling efforts were made in the United States
by the Registrant, a distributor, any of their respective affiliates or any
person acting on behalf of any of the foregoing. Each company represented that
(a) it was not a "U.S. person" within the meaning of Regulation S, (b) it did
not acquire the securities for the account of or
II-2
<PAGE>
benefit of any U.S. person, (c) the offer to purchase the securities was not
made to it in the United States, (d) to the best of its knowledge, the offer
and sale of the securities was made in an "offshore transaction" complying
with the provisions of Rule 903 of Regulation S under the Securities Act, (e)
it acquired the securities for investment and not with a view to the sale or
other distribution thereof within the meaning of the Securities Act and (f) it
will resell or transfer the securities only in accordance with the provisions
of Regulation S, pursuant to registration under the Securities Act or pursuant
to another available exemption from registration. Each company agreed that
until two years after the closing for the purchase of the securities or such
earlier time as may be permitted under Regulation S, it would not offer or
sell any of the securities in the United States or to any U.S. person unless
the securities are registered under the Securities Act or an exemption from
the registration requirements under the Securities Act is available. The
securities contain a legend to the effect that transfer is prohibited except
in accordance with the provisions of Regulation S. Each company acknowledged
that the Registrant is required to refuse, and will refuse, to register any
transfer of the Securities not made in accordance with the provisions of
Regulation S.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment who represented to the Registrant that the shares were
being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Underwriting Agreement (draft dated July 7, 1997).*
3.01 Third Amended and Restated Certificate of Incorporation of Registrant
filed August 14, 1996.*
3.02 Certificate of Amendment of Third Amended and Restated Certificate of
Incorporation of Registrant filed April 11, 1997.*
3.03 Certificate of Designation of Series C Convertible Participating
Preferred Stock of Registrant filed April 11, 1997.*
3.04 Form of Certificate of Amendment of the Third Amended and Restated
Certificate of Incorporation of Registrant to be effective prior to
the closing of this offering.*
3.05 Form of Second Amended and Restated Bylaws of Registrant to be
effective upon the closing of this Offering.*
3.06 Form of Fourth Amended and Restated Certificate of Incorporation of
Registrant to be filed after the closing of this offering.*
4.01 Third Amended and Restated Registration Rights Agreement, dated April
11, 1997, among Registrant and the parties indicated therein.*
4.02 Letter Agreement relating to Tag-Along/Drag-Along Rights, dated April
11, 1997, among Registrant and the parties indicated therein.*
4.03 Canadian Purchase Letter Agreement, dated April 11, 1997, among
Registrant and the parties indicated therein.*
4.04 Form of Amended and Restated Stockholders' Agreement, dated August 1,
1996, among Registrant and the parties indicated therein, as amended
on May , 1997.*
4.05 Form of certificate of Registrant's Series A Common Stock.*
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.*
9.01 Voting Agreement, dated April 11, 1997, among Registrant, TCI Internet
Holdings, Inc., Comcast PC Investments, Inc., Cox Teleport Providence,
Inc., Rogers Cablesystems Limited and Shaw Cablesystems Ltd.*
10.01 Stock Purchase Agreement, dated August 29, 1995, among Registrant, TCI
Internet Services, Inc., Kleiner Perkins Caufield & Byers VII, KPCB
VII Founders Fund and KPCB Information Sciences Zaibatsu Fund II.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.02 Letter Agreement, dated May 9, 1996, among Registrant, TCI Internet
Holdings, Inc., Kleiner Perkins Caufield & Byers VII, KPCB VII
Founders Fund and KPCB Information Sciences Zaibatsu Fund II.*
10.03 Stock Purchase and Exchange Agreement, dated August 1, 1996, among
Registrant, TCI Internet Holdings, Inc., Kleiner Perkins Caufield &
Byers VII, KPCB Information Sciences Zaibatsu Fund II, James Clark,
Comcast PC Investments, Inc. and Cox Teleport Providence, Inc.*
10.04 Term Sheet, dated June 4, 1996, among Registrant, TCI Internet
Holdings, Inc., Kleiner Perkins Caufield & Byers VII. KPCB Information
Sciences Zaibatsu Fund II, KPCB VII Founders Fund, Comcast PC
Investments, Inc. and Cox Teleport Providence, Inc.*
10.05 Stock Purchase Agreement, dated April 11, 1997, among Registrant,
Rogers Cablesystems Limited, Shaw Cablesystems Ltd., Sun Microsystems,
Inc., Netscape Communications Corporation, James Barksdale, Motorola,
Inc. and Bay Networks, Inc.*
10.06 Term Sheet dated March 18, 1997 among Registrant and Shaw Cablesystems
Ltd. and Rogers Cablesystems Limited.*/**
10.07 Master Communications Services Agreement dated April 2, 1997 between
Registrant and Teleport Communications Group Inc.*/**
10.08 Lease, dated October 17, 1996, between Registrant and Martin/Campus
Associates, L.P.*
10.09 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.*
10.10 Registrant's 1996 Incentive Stock Option Plan.*
10.11 Registrant's 1996 Incentive Stock Option Plan No. 2.*
10.12 Registrant's 1997 Equity Incentive Plan.*
10.13 Registrant's 1997 Employee Stock Purchase Plan.*
10.14 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and Thomas A. Jermoluk for purchase of Series A Common
Stock.*
10.15 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and Thomas A. Jermoluk for purchase of Series K Preferred
Stock.*
10.16 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and William R. Hearst III for purchase of Series A Common
Stock.*
10.17 Restricted Stock Purchase Agreement dated July 29, 1996 between
Registrant and Ken Goldman for purchase of Series A Common Stock.*
10.18 Form of Restricted Stock Purchase Agreement and Promissory Note
between Registrant and other officers for purchase of Series A Common
Stock.*
10.19 Employment Letter Agreement dated July 19, 1996 between Registrant and
Thomas A. Jermoluk.*
10.20 Letter Agreement dated May 15, 1997 among the Registrant and the
parties indicated therein, including as exhibits the Master
Distribution Agreement Term Sheet and the Term Sheet for Form of LCO
Agreement.*
11.01 Statement regarding the computation of net loss and of pro forma net
loss per share.
16.01 Letter regarding change in certifying accountant.*
21.01 Subsidiaries of Registrant.*
23.01 Consent of Fenwick & West, LLP (included in Exhibit 5.01).*
23.02 Consent of Ernst & Young LLP.
23.03 Consent of Paul Kagan Associates, Inc.*
23.04 Consent of Baskerville Communications.*
23.05 Consent of Forrester Research Inc.*
23.06 Consent of Jupiter Communications.*
23.07 Consent of International Data Corporation.*
23.08 Consent of Simba Information Inc.*
24.01 Form of power of attorney executed by each officer and director whose
signature has been conformed on the signature page appearing on page
II-6 of the Registration Statement.*
27.01 Financial data schedule.*
</TABLE>
- --------
* Previously filed.
** Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b)All financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements
or the notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE REDWOOD CITY, STATE OF
CALIFORNIA, ON THE 10TH DAY OF JULY, 1997.
AT HOME CORPORATION
By: Kenneth A. Goldman
----------------------------------
KENNETH A. GOLDMAN SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
In accordance with the requirements of the Securities Act, this Amendment to
Registration Statement was signed by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
Thomas A. Jermoluk* Chairman, President and Chief July 10, 1997
Executive Officer
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Kenneth A. Goldman
- ----------------------------- Senior Vice President July 10, 1997
KENNETH A. GOLDMAN and Chief Financial Officer
DIRECTORS:
William R. Hearst III* Vice Chairman July 10, 1997
James L. Barksdale* Director July 10, 1997
Brendan R. Clouston* Director July 10, 1997
L. John Doerr* Director July 10, 1997
John C. Malone* Director July 10, 1997
Bruce W. Ravenel* Director July 10, 1997
Brian L. Roberts* Director July 10, 1997
Edward S. Rogers* Director July 10, 1997
Larry E. Romrell* Director July 10, 1997
David M. Woodrow* Director July 10, 1997
*By: /s/ Kenneth A. Goldman
-------------------------
KENNETH A. GOLDMAN
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S> <C>
1.01 Underwriting Agreement (draft dated July 7, 1997).*
3.01 Third Amended and Restated Certificate of Incorporation of
Registrant filed August 14, 1996.*
3.02 Certificate of Amendment of Third Amended and Restated
Certificate of Incorporation of Registrant filed April 11,
1997.*
3.03 Certificate of Designation of Series C Convertible Participating
Preferred Stock of Registrant filed April 11, 1997.*
3.04 Form of Certificate of Amendment of the Third Amended and
Restated Certificate of Incorporation of Registrant to be
effective prior to the closing of this offering.*
3.05 Form of Second Amended and Restated Bylaws of Registrant to be
effective upon the closing of this Offering.*
3.06 Form of Fourth Amended and Restated Certificate of Incorporation
of Registrant to be filed after the closing of this offering.*
4.01 Third Amended and Restated Registration Rights Agreement, dated
April 11, 1997, among Registrant and the parties indicated
therein.*
4.02 Letter Agreement relating to Tag-Along/Drag-Along Rights, dated
April 11, 1997, among Registrant and the parties indicated
therein.*
4.03 Canadian Purchase Letter Agreement, dated April 11, 1997, among
Registrant and the parties indicated therein.*
4.04 Form of Amended and Restated Stockholders' Agreement, dated
August 1, 1996, among Registrant and the parties indicated
therein, as amended on May , 1997.*
4.05 Form of certificate of Registrant's Series A Common Stock.*
5.01 Opinion of Fenwick & West LLP regarding legality of the
securities being registered.*
9.01 Voting Agreement, dated April 11, 1997, among Registrant, TCI
Internet Holdings, Inc., Comcast PC Investments, Inc., Cox
Teleport Providence, Inc., Rogers Cablesystems Limited and Shaw
Cablesystems Ltd.*
10.01 Stock Purchase Agreement, dated August 29, 1995, among
Registrant, TCI Internet Services, Inc., Kleiner Perkins
Caufield & Byers VII, KPCB VII Founders Fund and KPCB
Information Sciences Zaibatsu Fund II.*
10.02 Letter Agreement, dated May 9, 1996, among Registrant, TCI
Internet Holdings, Inc., Kleiner Perkins Caufield & Byers VII,
KPCB VII Founders Fund and KPCB Information Sciences Zaibatsu
Fund II.*
10.03 Stock Purchase and Exchange Agreement, dated August 1, 1996,
among Registrant, TCI Internet Holdings, Inc., Kleiner Perkins
Caufield & Byers VII, KPCB Information Sciences Zaibatsu Fund
II, James Clark, Comcast PC Investments, Inc. and Cox Teleport
Providence, Inc.*
10.04 Term Sheet, dated June 4, 1996, among Registrant, TCI Internet
Holdings, Inc., Kleiner Perkins Caufield & Byers VII. KPCB
Information Sciences Zaibatsu Fund II, KPCB VII Founders Fund,
Comcast PC Investments, Inc. and Cox Teleport Providence, Inc.*
10.05 Stock Purchase Agreement, dated April 11, 1997, among
Registrant, Rogers Cablesystems Limited, Shaw Cablesystems Ltd.,
Sun Microsystems, Inc., Netscape Communications Corporation,
James Barksdale, Motorola, Inc. and Bay Networks, Inc.*
10.06 Term Sheet dated March 18, 1997 among Registrant and Shaw
Cablesystems Ltd. and Rogers Cablesystems Limited.*/**
10.07 Master Communications Services Agreement dated April 2, 1997
between Registrant and Teleport Communications Group Inc.*/**
10.08 Lease, dated October 17, 1996, between Registrant and
Martin/Campus Associates, L.P.*
10.09 Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.10 Registrant's 1996 Incentive Stock Option Plan.*
10.11 Registrant's 1996 Incentive Stock Option Plan No. 2.*
10.12 Registrant's 1997 Equity Incentive Plan.*
10.13 Registrant's 1997 Employee Stock Purchase Plan.*
10.14 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and Thomas A. Jermoluk for purchase of Series A Common
Stock.*
10.15 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and Thomas A. Jermoluk for purchase of Series K Preferred
Stock.*
10.16 Restricted Stock Purchase Agreement dated July 31, 1996 between
Registrant and William R. Hearst III for purchase of Series A Common
Stock.*
10.17 Restricted Stock Purchase Agreement dated July 29, 1996 between
Registrant and Ken Goldman for purchase of Series A Common Stock.*
10.18 Form of Restricted Stock Purchase Agreement and Promissory Note
between Registrant and other officers for purchase of Series A Common
Stock.*
10.19 Employment Letter Agreement dated July 19, 1996 between Registrant and
Thomas A. Jermoluk.*
10.20 Letter Agreement dated May 15, 1997 among the Registrant and the
parties indicated therein, including as exhibits the Master
Distribution Agreement Term Sheet and the Term Sheet for Form of LCO
Agreement.*
11.01 Statement regarding the computation of net loss and of pro forma net
loss per share.
16.01 Letter regarding change in certifying accountant.*
21.01 Subsidiaries of Registrant.*
23.01 Consent of Fenwick & West, LLP (included in Exhibit 5.01).*
23.02 Consent of Ernst & Young LLP.
23.03 Consent of Paul Kagan Associates, Inc.*
23.04 Consent of Baskerville Communications.*
23.05 Consent of Forrester Research Inc.*
23.06 Consent of Jupiter Communications.*
23.07 Consent of International Data Corporation.*
23.08 Consent of Simba Information Inc.*
24.01 Form of power of attorney executed by each officer and director whose
signature has been conformed on the signature page appearing on page
II-6 of the Registration Statement.*
27.01 Financial data schedule.*
</TABLE>
- --------
* Previously filed.
** Confidential treatment has been granted with respect to certain portions
of this agreement. Such portions have been omitted from this filing and
have been filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 11.01
STATEMENT REGARDING THE COMPUTATION OF
PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
<S> <C> <C>
Computation of pro forma net loss per share:
Net loss....................................... $ (24,513) $ (22,804)
============ ============
Computation of pro forma weighted average
common equivalent shares outstanding:
Shares of common stock issued during the
twelve-month period prior to the Company's
proposed initial public offering............ 13,268,736 13,268,736
Common equivalent shares from convertible
preferred stock issued during the twelve-
month period prior to the Company's proposed
initial public offering (as-if-converted
method)..................................... 75,252,260 75,252,260
Common equivalent shares from convertible
preferred stock issued more than twelve-
months prior to the Company's proposed
initial public offering..................... 20,000,000 20,000,000
------------ ------------
108,520,996 108,520,996
Common equivalent shares from common stock
options granted during the twelve-month
period prior to the Company's proposed
initial public offering (treasury stock
method)..................................... 1,544,131 1,544,131
------------ ------------
Shares used in computing pro forma net loss per
share........................................... 110,065,127 110,065,127
============ ============
Pro forma net loss per share..................... $ (0.22) $ (0.21)
============ ============
</TABLE>
<PAGE>
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 1, 1997, except for Note 9, as to which the
date is July 8, 1997, in Amendment No. 4 to the Registration Statement (Form
S-1 No. 333-27323) and related Prospectus of At Home Corporation for the
registration of 9,000,000 shares of its Series A common stock.
Ernst & Young LLP
San Jose, California
July 10, 1997
