<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1997
REGISTRATION NO. 333-27323
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
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>
DELAWARE 7370 77-0408542
<S> <C> <C>
(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. [_]
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 8, 1997
8,000,000 Shares
[LOGO OF @HOME CORPORATION]
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 72.2% 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." IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE WILL BE BETWEEN $7 AND $9 PER SHARE. SEE "UNDERWRITERS"
FOR A DISCUSSION OF THE FACTORS TO BE 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" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
----------
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 $ A SHARE
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</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 1,200,000
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
$ , $ and $ , 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 , 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
, 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 , 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... 109,720,996 shares(1)
Series A Common Stock offered........................... 8,000,000 shares
Common Stock to be outstanding after this offering:
Series A Common Stock outstanding after this offering.. 87,443,336 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................................................ 117,720,996 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 SIX MONTHS
MARCH 28, 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)......... 111,161 111,161
======== ========
</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 $99,449
Working capital........................................ 29,032 87,552
Total assets........................................... 69,145 127,665
Capital lease obligations, less current portion, and
other long-term liabilities........................... 11,953 11,953
Stockholders' equity................................... 42,936 101,456
</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 per share
equal to the lesser of $10.00 or the initial public offering price. 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 8,000,000 Shares of Series A Common Stock offered
hereby at an assumed initial public offering price of $8.00 per Share and
after deducting estimated 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 72.2% 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 ten 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.
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."
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 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,
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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
6,000,000 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 96,452,260 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."
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."
20
<PAGE>
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 will be 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 to be 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 $7.14. 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 8,000,000 Shares of
Series A Common Stock offered hereby are estimated to be approximately $58.5
million (approximately $67.4 million if the Underwriters' over-allotment
option is exercised in full), at an assumed initial public offering price of
$8.00 per share and after deducting estimated 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 8,000,000 Shares of Series A Common Stock offered hereby, at an assumed
initial public offering price of $8.00 per share and after deducting the
estimated 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; 230,277,660 shares
authorized, 117,720,996 shares issued and
outstanding as adjusted(2)................... 6,785 98,380 156,900
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 42,936 101,456
-------- -------- --------
Total capitalization..................... $ 54,889 $ 54,889 $113,409
======== ======== ========
</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 per share equal to the lesser
of $10.00 or the initial public offering price. 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 $.39 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 8,000,000 Shares of Series A Common Stock offered hereby
(at an assumed initial public offering price of $8.00 per Share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses), the Company's net tangible book value as of June 30, 1997
would have been $101,456,000, or $.86 per share of Common Stock. This
represents an immediate increase in net tangible book value of $.47 per share
to existing stockholders and an immediate dilution of $7.14 per share to new
public investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $8.00
Net tangible book value per share at June 30, 1997................. $.39
Increase in net tangible book value per share attributable to new
investors......................................................... .47
----
Net tangible book value per share after offering.................... .86
-----
Dilution per share to new public investors.......................... $7.14
=====
</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 (at an assumed
initial public offering price of $8.00 per Share and before deducting
estimated 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).............. 109,720,996 93.2% $ 94,459,455 59.6% $ .86
New public investors
(Series A Common
Stock)(2).............. 8,000,000 6.8 64,000,000 40.4 8.00
----------- ----- ------------ -----
Total................. 117,720,996 100.0% $158,459,455 100.0%
=========== ===== ============ =====
</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 per
share of the lesser of $10.00 or the initial public offering price, 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
(INCEPTION) SIX MONTHS ENDED
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)......... 111,161 111,161
======== ========
</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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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
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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
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<PAGE>
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.
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.
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 III(1)(2)... 48 Vice Chairman
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. Ravenel(2)(3)(4)..... 47 Director
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 35.5%, 16.6% and 16.6%, 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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<PAGE>
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 on July 22, 1996,
and an
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additional 2.08% will 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 excess of $5.00 per share over 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 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 indemnity of 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 its directors and
officers the expenses (including attorneys' fees) incurred in defending any
proceeding provided such directors and officers 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.
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 subject to
adjustment of the Series C Preferred Stock conversion rate if the offering
price is less than $10.00 per share of Series A 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 the lower of $10.00 or the
initial public offering price 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 to Cablevision Systems Corporation of 10
cable systems in New York and New Jersey, and to Adelphia of certain cable
systems in Buffalo, N.Y. The cable systems proposed to be transferred in these
transactions have approximately 1.1 million and 260,000 homes passed,
respectively. 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.
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
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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 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
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<PAGE>
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 8,000,000 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 -- 42.3% 39.5% 74.5% 72.2%
Brendan R. Clouston
John C. Malone
Bruce W. Ravenel
Larry E. Romrell
Comcast(4).............. 14,557,300 -- -- 13.3 12.4 5.9 5.7
Brian L. Roberts
Cox(5).................. 14,557,300 -- -- 13.3 12.4 5.9 5.7
David M. Woodrow
KPCB(6)................. 400,000 -- 12,877,660 12.1 11.3 5.3 5.2
L. John Doerr
William R. Hearst III
Thomas A. Jermoluk(7)... 3,000,000 -- 1,000,000 3.6 3.4 1.6 1.6
Rogers(8)............... 1,875,000 -- -- 1.7 1.6 * *
Edward S. Rogers
Milo S. Medin(9)........ 600,000 -- -- * * * *
Kenneth A. Goldman(10).. 550,000 -- -- * * * *
James L. Barksdale(11).. 625,000 -- -- * * * *
Netscape
Dean A. Gilbert(12)..... 490,000 -- -- * * * *
Sean Doherty............ 198,150 -- -- * * * *
All directors and
executive officers as a
group (18 persons)(13). 69,244,600 15,400,000 13,877,660 89.7 83.6 95.4 92.4
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 109,720,996 shares outstanding as of
June 30, 1997, after conversion of all outstanding Preferred Stock into
Common Stock in connection with this offering, and 117,720,996 shares
outstanding after the offering (assuming no adjustment to the number of
shares of Series A Common Stock issuable upon the conversion of the
Series C Preferred Stock). 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
1,200,000 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 1,875,000 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 125,000 shares held of record by Mr. Barksdale and 500,000
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.
(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 155,000 shares of Series A Common Stock that are subject to
options that were exercisable on June 30, 1997 but, if exercised, subject
to repurchase by the Company.
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 79,443,336
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 96,452,260 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 117,720,996 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
109,720,996 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 6,000,000 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 1,177,000 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 96,452,260 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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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..................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................
Alex. Brown & Sons Incorporated....................................
Hambrecht & Quist LLC..............................................
---------
Total............................................................ 8,000,000
=========
</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 $ a share under the initial public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ 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 1,200,000 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 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.
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<PAGE>
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 will be determined by
negotiations among the Company and the Representatives. Among the factors to
be 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. The estimated initial
public offering price range set forth on the cover page of this Preliminary
Prospectus is subject to change as a result of market conditions and other
factors.
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 May 12, 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--109,720,996).......... -- 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 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........... 111,160,637 111,160,637
=========== ===========
- --------
(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.
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............................................. $ 19,516
NASD Filing Fee.................................................. 6,940
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.................................................... 28,544
----------
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 indemnity of 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 its directors and
officers the expenses (including attorneys' fees) incurred in defending any
proceeding provided such directors and officers 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 is being sought 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 7TH DAY OF JULY, 1997.
AT HOME CORPORATION
Kenneth A. Goldman
By:
----------------------------------
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 7, 1997
Executive Officer
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Kenneth A. Goldman
- ----------------------------- Senior Vice President July 7, 1997
KENNETH A. GOLDMAN and Chief Financial Officer
DIRECTORS:
William R. Hearst III* Vice Chairman July 7, 1997
James L. Barksdale* Director July 7, 1997
Brendan R. Clouston* Director July 7, 1997
L. John Doerr* Director July 7, 1997
John C. Malone* Director July 7, 1997
Bruce W. Ravenel* Director July 7, 1997
Brian L. Roberts* Director July 7, 1997
Edward S. Rogers* Director July 7, 1997
Larry E. Romrell* Director July 7, 1997
David M. Woodrow* Director July 7, 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 is being sought 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 1.01
[_______] Shares
AT HOME CORPORATION
Series A Common Stock, $.01 par value
UNDERWRITING AGREEMENT
___________, 1997
<PAGE>
_______, 1997
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Alex. Brown & Sons Incorporated
Hambrecht & Quist LLC
as Representatives of the several Underwriters
named in Scheduled I hereto
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
At Home Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters (as defined below) an aggregate of
[___________] shares of its Series A Common Stock ($.01 per share par value)
(the "Firm Shares"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional [___________] shares of its Series A
Common Stock ($.01 per share par value) (the "Additional Shares"), if and to the
extent that you as Managers of the offering shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of Common Stock
granted to the Underwriters in Article II hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares." The
shares of Series A Common Stock ($.01 per share par value) of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Series A Common Stock." All shares of Common Stock of the
Company outstanding after the issuance of Series A Common Stock, together with
the shares of Series A Common Stock, are hereinafter collectively referred to as
the "Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set
forth opposite its name on Schedule I to this Agreement, up to ___________
shares, for sale to the Company's, employees, officers, and directors and other
parties associated with the Company (collectively, "Participants"), as set forth
in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be
<PAGE>
sold by Morgan Stanley pursuant to the Directed Share Program (the "Directed
Shares") will be sold by Morgan Stanley pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by Morgan Stanley as set
forth in the Prospectus.
I.
The Company represents and warrants to and agrees with each of the
Underwriters that:
(a) The Registration Statement has become effective, no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph (b) do not apply
to statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and the Subsidiary (as defined below), taken as a whole.
(d) The Company has only one subsidiary, athome net (the
"Subsidiary"), which has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and the Subsidiary, taken as a whole. All of the
issued shares of capital stock of the Subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims. The
-2-
<PAGE>
Company does not own, directly or indirectly, an interest in any corporation,
partnership, business, trust or other entity required to be set forth in Exhibit
21.01 to the Registration Statement.
(e) The Company and the Subsidiary have good and marketable title in fee
simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and the
Subsidiary, taken as a whole, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and the
Subsidiary, and any real property and buildings held under lease by the Company
and the Subsidiary are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and the Subsidiary, in each case except as described in or contemplated by the
Prospectus.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are validly
issued, fully paid and non-assessable. Except as set forth in the Prospectus,
neither the Company nor the Subsidiary has outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. All outstanding shares of capital stock
of the Company and options and other rights to acquire capital stock have been
issued in compliance with the registration and qualification provisions of all
applicable federal and state securities laws and were not issued in violation of
any preemptive rights, rights of first refusal or other similar rights.
(h) The Shares have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be subject to
any preemptive rights, rights of first refusal or similar rights.
(i) This Agreement has been duly authorized, executed and delivered by
the Company.
(j) The execution and delivery by the Company of, and the performance by
the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or the Subsidiary or any agreement or other instrument binding upon
the Company or the Subsidiary that is material to the Company and the
Subsidiary, taken as a whole, or any judgement, order or decree of any
governmental body, agency or court having jurisdiction over the Company or the
Subsidiary, and no consent, approval, authorization or order of or
qualification with any governmental body or governmental agency is required for
the performance by the Company of its obligations under this
-3-
<PAGE>
Agreement, except as may be required by the securities or Blue Sky laws of the
various states and foreign jurisdictions in connection with the offer and sale
of the Shares by the Underwriters or by the rules and regulations of the NASD.
(k) There has not occurred any material adverse change, or development
involving a prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and the
Subsidiary, taken as a whole, from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement).
(l) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (i) the Company and the
Subsidiary have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (ii) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock other than ordinary and customary dividends; and (iii)
there has not been any material change in the capital stock, short-term debt or
long-term debt of the Company and the Subsidiary, except in each case as
described in or contemplated by the Prospectus.
(m) There are no legal or governmental proceedings pending or, to the
best of the Company's knowledge, threatened to which the Company or the
Subsidiary is a party or to which any of the properties of the Company or the
Subsidiary is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required
(n) Each of the Company and the Subsidiary has all necessary consents,
authorizations, approvals, orders, certificates and permits of and from, and has
made all declarations and filings with, all federal, state, local, foreign and
other governmental or regulatory authorities, all self-regulatory organizations
and all courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner described in the
Prospectus, except to the extent that the failure to obtain or file would not
have a material adverse effect on the Company and the Subsidiary taken as a
whole. Neither the Company nor the Subsidiary has received any notice of
proceedings related to the revocation or modification of any such consent,
authorization, approval, order, certificate or permit which, singly or in the
aggregate, if the subject of any unfavorable decision, ruling or finding, would
result in a material adverse change in the condition, financial or otherwise, or
in the earnings, business or operations of the Company and the Subsidiary, taken
as a whole, except as described in or contemplated by the Prospectus.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder, except for the omission of a price
range and other information derived therefrom.
-4-
<PAGE>
(p) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(q) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company or to require
the Company to include such securities with the Shares registered pursuant to
the Registration Statement.
(r) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor the Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor the Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company and the Subsidiary, taken
as a whole, except as described in or contemplated by the Prospectus.
(s) The Company and the Subsidiary (i) are in compliance with any and
all applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (collectively,
"Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and the Subsidiary, taken as a whole.
(t) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, licenses or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the Company and the
Subsidiary, taken as a whole.
(u) Except as disclosed in the Prospectus, (i) the Company and the
Subsidiary own or possess, or can acquire on reasonable terms, adequate licenses
or other rights to use all material patents, copyrights, trademarks, service
marks, trade names, technology and know-how currently employed by them to
conduct their respective business in the manner described in the Prospectus,
(ii) neither the Company nor the Subsidiary has received any notice of
infringement or conflict with (and neither the Company nor the Subsidiary knows
of any infringement or conflict with) asserted rights of others with respect to
any patents, copyrights, trademarks, service
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marks, trade names, trade secrets, technology or know-how which could reasonably
be expected to result in any material adverse effect upon the Company and the
Subsidiary, taken as a whole, and (iii) the discoveries, inventions, products or
processes of the Company and the Subsidiary referred to in the Prospectus do
not, to the best knowledge of the Company or the Subsidiary, infringe or
conflict with any right or patent of any third party, or any discovery,
invention, product or process which is the subject of a published patent
application filed by any third party, known to the Company or the Subsidiary
which could reasonably be expected to have a material adverse effect on the
Company and the Subsidiary, taken as a whole.
(v) Each of the Company and the Subsidiary maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) No material labor dispute with the employees of the Company or the
Subsidiary exists, except as described in or contemplated by the Prospectus, or,
to the best knowledge of the Company, is imminent; and, without conducting any
independent investigation, the Company is not aware of any existing, threatened
or imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers or contractors that could reasonably be expected to
have a material adverse effect on the Company and the Subsidiary, taken as a
whole.
(x) All outstanding shares of Common Stock, and all securities
convertible into or exercisable or exchangeable for Common Stock, are subject to
valid, binding and enforceable agreements (collectively, the "Lock-up
Agreements") that restrict the holders thereof from selling, making any short
sale of, granting any option for the purchase of, or otherwise transferring or
disposing of, any of such shares of Common Stock, or any such securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 180 days after the date of the Prospectus without the prior written consent
of the Company or Morgan Stanley & Co. Incorporated.
(y) The Company (i) has notified each holder of a currently outstanding
option issued under either the 1996 Incentive Stock Option Plan No. 1 or the
1996 Incentive Stock Option Plan No. 2 (collectively, the "Option Plan") and
each person who has acquired shares of Common Stock pursuant to the exercise of
any option granted under the Option Plan that pursuant to the terms of the
Option Plan, none of such options or shares may be sold or otherwise transferred
or disposed of for a period of 180 days after the date of the initial public
offering of the Shares and (ii) has imposed a stop-transfer instruction with the
Company's transfer agent in order to enforce the foregoing lock-up provision
imposed pursuant to the Option Plan.
(z) As of the date the Registration Statement becomes effective, the
Series A Common Stock will be authorized for listing on the Nasdaq National
Market upon official notice of issuance.
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(aa) The Company has complied with all provisions of Section
517.075, Florida Statutes, relating to doing business with the Government
of Cuba or any person or affiliate located in Cuba.
Furthermore, the Company represents and warrants to Morgan Stanley
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other that such as have been obtained, is necessary under the securities
laws and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
II.
The Company hereby agrees to sell to the several Underwriters, and
each Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from the Company the respective numbers of Firm
Shares set forth in Schedule I hereto opposite the name of such Underwriter at
$_______ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to [________________]
Additional Shares at the Purchase Price. If, you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Company in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Article IV hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth in Schedule I
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (1) 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, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall
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not apply to (i) the Shares to be sold hereunder and (ii) the Company's issuance
of Common Stock upon the exercise of warrants and stock options that are
presently outstanding and described as such in the Prospectus, or any other
issuances of Common Stock hereafter under the option or equity incentive plans
described in the Prospectus, and (iii) the Company's issuance of Common Stock
under the employee stock purchase plan described in the Prospectus.
III.
The Company is advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares are
to be offered to the public initially at $___________ a share (the "Public
Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of $_____ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $________ a share, to any Underwriter or
to certain other dealers.
IV.
Payment for the Firm Shares shall be made to the Company in Federal or
other funds immediately available in New York City against delivery of such Firm
Shares for the respective accounts of the several Underwriters at 10:00 A.M.,
New York City time, on [_____________, 1997], or at such other time on the same
or such other date, not later than [_____________, 1997], as shall be designated
in writing by you. The time and date of such payment are hereinafter referred
to as the "Closing Date".
Payment for Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 A.M., New York City time, on the date specified in the notice described in
Article II or at such other time on the same or on such other date, in any event
not later than [____________, 1997] as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "Option
Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
V.
The obligations of the Company to sell the Shares to the Underwriters
and the several obligations of the Underwriters to purchase and pay for the
Shares on the Closing Date are subject to the
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condition that the Registration Statement shall have become effective not later
than 5:30 P.M. (New York City time) on the date hereof.
The several obligations of the Underwriters hereunder are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's securities by
any "nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act, and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise, or
in the earnings, business or operations, of the Company and the Subsidiary,
taken as a whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement)
that, in your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company on behalf of the Company, to
the effect set forth in clause (a) above, and to the effect that the
representations and warranties of the Company contained in this Agreement are
true and correct in all material respects as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officers signing and delivering such certificate may rely upon
the best of their knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of Fenwick &
West LLP counsel for the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the State of Delaware,
has the corporate power and corporate authority to own its property and
to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in ____________,
____________, ____________. All of the issued shares of capital stock of
the Subsidiary have been duly and validly authorized and issued, are
fully paid and non-assessable and, to such counsel's knowledge, are
owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims;
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(ii) the Subsidiary has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and corporate authority to own its
property and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in ________, ________,
________;
(iii) the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus;
(iv) the shares of Common Stock outstanding prior to the issuance of the
Shares have been duly authorized, are validly issued and non-assessable, and to
such counsel's knowledge, are fully paid;
(v) the Shares have been duly authorized, and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and, to such counsel's knowledge, the
issuance of such Shares will not be subject to any preemptive rights, rights of
first refusal or similar rights;
(vi) to such counsel's knowledge, no shares of Common Stock are required
pursuant to any agreement or other right to be registered under the Registration
Statement, and no person or entity has any right to cause Common Stock to be
registered under the Registration Statement, which rights have not been validly
waived;
(vii) this Agreement has been duly authorized, executed and delivered by
the Company;
(viii) the execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of the certificate of incorporation or by-laws of the Company or the
Subsidiary, to such counsel's knowledge, any agreement or other instrument
binding upon the Company or the Subsidiary that is material to the Company and
the Subsidiary (where such agreements and instruments have been identified to
such counsel by the Company as all material agreements and instruments binding
on the Company and the Subsidiary), taken as a whole, or, to such counsel's
knowledge, any judgement, order or decree of any governmental body, agency or
court having jurisdiction over the Company or the Subsidiary that specifically
refers to or is binding on the Company, and no consent, approval, authorization
or order of or qualification with any governmental body or governmental agency
is required for the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the Shares by the
Underwriters or the rules and regulations of the NASD (as to which such counsel
need not express any opinion);
(ix) the statements (1) in the Prospectus under the captions "Risk
Factors--Shares Eligible for Future Sale," "Dividend Policy," "Certain
Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale"
and, to the extent such
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statements summarize this Agreement, "Underwriters" and (2) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein;
(x) such counsel does not know of any legal, regulatory or
governmental proceeding pending or threatened to which the Company or
the Subsidiary is a party or to which any of the properties of the
Company or the Subsidiary is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or, in the case of contracts or other documents, to be filed as exhibits
to the Registration Statement that are not described of filed as
required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the net proceeds
therefrom as described in the Prospectus will not be, and "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xii) to such counsel's knowledge: (1) based solely on oral
advice of the Staff of the Commission, the Registration Statement has
become effective under the Securities Act; (2) no stop order proceedings
with respect to the Registration Statement have been instituted or are
pending or threatened under the Securities Act and nothing has come to
such counsel's attention to lead it to believe that such proceedings are
contemplated; and (3) are required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) under the Securities Act has
been made in the manner and within the time period required by such Rule
424(b);
(xiii) based on a letter from Nasdaq Stock Market, the Shares to
be sold under this Agreement to the Underwriters are duly authorized for
quotation on the Nasdaq National Market; and
(xiv) In addition to the matters set forth above, counsel
rendering the foregoing opinion shall also include a statement to the effect
that nothing has come to the attention of such counsel that causes it to believe
that (i) the Registration Statement (except as to the financial statements, the
notes thereto and the other financial and statistical data contained therein, as
to which such counsel need not express any opinion or belief) at the date the
Registration Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, (2) the Prospectus
(except as to the financial statements, the notes thereto and the other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) as of its date contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (3) the Registration
Statement or the Prospectus (except as to the financial statements, the notes
thereto and the other financial and statistical data contained therein, as to
which such counsel need not express
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any opinion or belief) did not comply as to form in all material respects with
the Securities Act and the applicable rules and regulations thereunder.
The opinion of Fenwick & West LLP described in this paragraph (c)
above shall be rendered to the Underwriters at the request of the Company,
and shall so state therein.
(d) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in subparagraphs
(v), (vii), (ix) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters"), (xi) and (xiv) of
paragraph (c) above.
With respect to subparagraph (xiv) of paragraph (c) above, Fenwick &
West LLP and Wilson Sonsini Goodrich & Rosati may state that their opinion and
belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and reviewed and discussion of the contents thereof, but are without independent
check or verification except as specified.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(f) The Lock-Up Agreements, each substantially in the form of Exhibit
A hereto, between the Underwriters and certain stockholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
(g) The shares of Series A Common Stock of the Company shall have
received approval for listing, upon official notice of issuance, on the
Nasdaq National Market.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed in compliance with the provisions
hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as they may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
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VI.
In further consideration of the agreements of the Underwriters herein
contained, the Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, four (4) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto), and to furnish to you in New York City, without charge,
prior to 5:00 P.M. New York City time on the business day next succeeding
the date of this Agreement and during the period mentioned in paragraph (c)
below, as many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the reasonable opinion of Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, the Prospectus is required
by law to be delivered in connection with sales by an Underwriter or dealer,
any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the reasonable opinion
of counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with
the Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company) to
which Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus
is delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdiction as you shall reasonably
request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the twelve-
month period ending September 30, 1998 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all
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reports, financial statements and proxy or information statements filed by the
Company with the Commission or any national securities exchange.
(g) The Company will apply the proceeds from the sale of the Shares as set
forth under in "Use of Proceeds" in the Prospectus.
(h) The Company will use its best efforts to obtain and maintain in effect
the quotation of the Shares on the Nasdaq National Market and will take all
necessary steps to cause the Shares to be included on the Nasdaq National Market
as promptly as practicable and to maintain such inclusion for a period of three
years after the date hereof or until such earlier date as the Shares shall be
listed for regular trading privileges on another national securities exchange
approved by you.
(i) The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 under the Securities Act.
(j) The Company will comply with all registration, filing and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which may from time to time be applicable to the Company.
(k) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(l) Prior to the Closing Date, the Company will not, directly or
indirectly, issue any press release or other communication and will not hold any
press conference with respect to the Company, or its financial condition,
results of operations, business, properties, assets, or prospects or this
offering, without your prior written consent.
(m) The Company agrees: (i) to enforce the terms of each Lock-up Agreement
and (ii) issue stop-transfer instructions to the transfer agent for the Common
Stock with respect to any transaction or contemplated transaction that would
constitute a breach of or default under the applicable Lock-up Agreement. In
addition, except with the prior written consent of Morgan Stanley, the Company
agrees (i) not to amend or terminate, or waive any right under, any Lock-up
Agreement, or take any other action that would directly or indirectly have the
same effect as an amendment or termination, or waiver of any right under, any
Lock-up Agreement, that would permit any holder of shares of Common Stock, or
securities convertible into or exercisable or exchangeable for Common Stock, to
sell, make any short sale of, grant any option for the purchase of, or otherwise
transfer or dispose of, any of such shares of Common Stock or other securities
prior to the expiration of 180 days after the date of the Prospectus, an (ii)
not to consent to any sale, short sale, grant of an option for the purchase of,
or other disposition or transfer of shares of Common Stock, or securities
convertible into or exercisable or exchangeable for Common Stock, subject to a
Lock-up Agreement.
(n) The Company will place a restrictive legend on any shares of Common
Stock acquired pursuant to the exercise, after the date hereof and prior to the
expiration of the 180-day period after the date of the initial public offering
of the Shares, of any option granted
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under the Option Plan, which legend shall restrict the transfer of such shares
prior to the expiration of such 180-day period. In addition, the Company agrees
that, without the prior written consent of Morgan Stanley, it will not release
any stockholder or option holder from the market standoff provision imposed by
the Company pursuant to the terms of the Option Plan earlier than 180 days after
the date of the initial public offering of the Shares.
(o) In connection with the Direct Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration Statement.
Morgan Stanley will notify the Company as to which Participants will need to be
so restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(p) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with Morgan Stanley that the Company
will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
VII.
The Company agrees, whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants in connection with the registration and
delivery of the Shares under the Securities Act and all other fees or expenses
in connection with the preparation and filing of the Registration Statement, any
preliminary prospectus, the Prospectus and amendments and supplements to any of
the foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection with the
Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable
fees and disbursements (including filing fees) of counsel to the Underwriters
incurred in connection with the review and qualification of the offering of the
Shares by the NASD (v) all fees and expenses in connection with the preparation
and filing of the registration statement on Form 8-A relating to the Common
Stock and all costs and expenses incident to listing the Shares on the Nasdaq
National Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges
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of any transfer agent, registrar or depositary, (viii) the costs and expenses of
the Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Article VII. It is understood, however, that except as provided in this
Article VII, Article VIII and the last paragraph of Article X below, the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
VIII.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; and provided further
that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person at or prior to the written confirmation of the sale
of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities.
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
respectively, and each person, if any, who controls Morgan Stanley and Merrill
Lynch, as the case may be, and within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act (respectively, the "Morgan
Stanley Entities" and "Merrill Lynch Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such
-16-
<PAGE>
action or claim) (i) caused by any untrue statement or alleged untrue statement
of a material fact contained in the prospectus wrapper material prepared by or
with the consent of the Company for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, when considered in conjunction with the Prospectus or any
applicable preliminary prospectus, not misleading; (ii) caused by the failure
of any Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement, were
subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided
that, the Company shall not be responsible under this clause (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities or Merrill Lynch Entities, as the case
may be.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the directors of the Company, the officers of the
Company who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the indemnity from
the Company to such Underwriter set forth in paragraph (a) of this Article VIII,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by or on behalf of such Underwriter through you expressly
for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a), (b) or (c) of this Article VIII, such person
(the "Indemnified Party") shall promptly notify the person against whom such
indemnity may be sought (the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain counsel
reasonably satisfactory to the Indemnified Party to represent the Indemnified
Party and any others the Indemnifying Party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any Indemnified Party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in respect of the legal expenses of any Indemnified Party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such Indemnified Parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley in the case of parties indemnified
pursuant to paragraph (a) of this Article VIII, and by the Company in the case
of parties indemnified pursuant to the paragraph (c) of this Article VIII.
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<PAGE>
Notwithstanding anything contained herein to the contrary, if indemnity may be
sought pursuant to paragraph (b) of this Article VIII in respect of such action
or proceeding, then in addition to such separate firm for the Indemnified
Parties, the Indemnifying Party shall be liable for the reasonable fees and
expenses of not more that one separate firm (in addition to any local counsel)
for Morgan Stanley and Merrill Lynch for the defense of any losses, claims,
damages and liabilities arising out of the Directed Share Program, and all
persons, if any who control Morgan Stanley and Merrill Lynch, respectively,
within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act. The Indemnifying Party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgement for the plaintiff, the Indemnifying
Party agrees to indemnify the Indemnified Party from and against any loss or
liability by reason of such settlement or judgement. Notwithstanding the
foregoing sentence, if at any time an Indemnified Party shall have requested an
Indemnifying Party to reimburse the Indemnified Party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
Indemnifying Party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such Indemnifying Party of the
aforesaid request and (ii) such Indemnifying Party shall not have reimbursed the
Indemnified Party in accordance with such request prior to the date of such
settlement. No Indemnifying Party shall, without the prior written consent of
the Indemnified Party, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Party is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Party,
unless such settlement includes an unconditional release of such Indemnified
Party from all liability on claims that are the subject matter of such
proceeding.
(e) To the extent the indemnification provided for in paragraph (a), (b)
or (c) of this Article VIII is unavailable to an Indemnified Party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each Indemnifying Party under such paragraph, in lieu of
indemnifying such Indemnified Party thereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Underwriters on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
in connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statements of a
material fact or the omission or alleged omission to state a material relates to
information supplied by the Company or by
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<PAGE>
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute pursuant
to this Article VIII are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Article VIII were determined
by pro rata allocation (even if the Underwriters were treated as one entity
--- ----
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (e) of
this Article VIII. The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Article VIII, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Article VIII are not exclusive and shall not limit any rights or remedies
which may otherwise by available to any Indemnified Party at law or in
equity.
(g) The indemnity and contribution provisions contained in this
Article VIII and the representations, warranties and other statements of
the Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
IX.
This Agreement shall be subject to termination by notice given by you
to the Company, if (a) after the execution and delivery of this Agreement and
prior to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either Federal or New York State authorities, or
(iv) there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your judgement,
is material and adverse and (b) in the case of any of the events specified in
clauses (a)(i) through (iv), such event singly or together with any other such
event makes it, in your
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<PAGE>
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
X.
This Agreement shall become effective upon execution and delivery
hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more that one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Article X by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to
be purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
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<PAGE>
This Agreement may be signed in two or more counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
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<PAGE>
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York.
Very truly yours,
AT HOME CORPORATION
By:
--------------------------------------
Thomas A. Jermoluk
Chairman of the Board, President and
Chief Executive Officer
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Alex, Brown & Sons Incorporated
Hambrecht & Quist LLC
Acting severally on behalf of themselves and the
several U.S. Underwriters named in Schedule I hereto
By: Morgan Stanley & Co. Incorporated
By:
------------------------------------
William R. Salisbury, Principal
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<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
----------
Underwriter Number of Firm Shares
- --------------------------------------------------------- To Be Purchased
------ ---------------------
<S> <C>
Morgan Stanley & Co. Incorporated.........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
Alex Brown & Sons Incorporated............................
Hambrecht & Quist LLC.....................................
Total Firm Shares.....................
</TABLE>
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<PAGE>
EXHIBIT A
AT HOME CORPORATION
FORM OF LOCK-UP AGREEMENT
May __, 1997
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Hambrecht & Quist LLC
Alex. Brown & Sons Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Merrill Lynch International Limited
Hambrecht & Quist LLC
Alex. Brown International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E 14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and Morgan Stanley & Co. International Limited ("MSIL"), as
Representatives of the several Underwriters, propose to enter into an
Underwriting Agreement (the "Underwriting Agreement") with At Home Corporation,
a Delaware corporation (the "Company") providing for the initial public offering
(the "Public Offering") by the several Underwriters, including Morgan Stanley
and MSIL (the "Underwriters"), of Series A Common Stock, $.01 par value per
share, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) 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, any shares of Common Stock or any
securities
<PAGE>
Morgan Stanley & Co. Incorporated
May 16, 1997
Page 2
convertible into or exercisable or exchangeable for Common Stock (collectively
the "Shares") (provided that such Shares are either now owned by the undersigned
or are hereafter acquired prior to or in connection with the Public Offering),
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Shares,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to the sale of any Shares to
the Underwriters pursuant to the Underwriting Agreement. In addition, the
undersigned agrees that, without the prior written consent to Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the Prospectus, make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
Notwithstanding the foregoing, if the undersigned is an individual, he
or she may transfer any or all of the Shares either during his or her lifetime
or on death by gift, will or intestacy to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned and/or a member
or members of his or her immediate family; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement. For purposes
of this paragraph, "immediate family" shall mean spouse, lineal descendant,
father, mother, brother or sister of the transferor.
In addition, notwithstanding the foregoing, if the undersigned is a
partnership, the partnership may transfer any Shares to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner, and any partner
who is an individual may transfer any such Shares by gift, will or intestate
succession to his or her spouse or lineal descendants or ancestors; if the
undersigned is a trust, the trust may transfer any Shares to any beneficiary of
such trust or to the estate of any such beneficiary, and any beneficiary who is
an individual may transfer any such Shares by gift, will or intestate
succession to his or her spouse or lineal descendants or ancestors; and if the
undersigned is a corporation, the corporation may transfer any Shares to any
shareholder of such corporation, and any shareholder who is an individual may
transfer any such Shares by gift, will or intestate succession, to his or her
spouse or lineal descendant or ancestors; provided however, that in any case, it
shall be a condition to the transfer that the transferee execute an agreement
stating that the transferee is receiving and holding the Shares subject to the
provisions of this Agreement, and there shall be no further transfer of such
Shares except in accordance with this Agreement.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to an
agreement between the Company and the Underwriters. This Agreement shall
terminate and be of no further effect if the Registration Statement for the
Public Offering
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<PAGE>
Morgan Stanley & Co. Incorporated
May 16, 1997
Page 3
is not declared effective by the Securities and Exchange Commission by December
31, 1997. The undersigned agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
securities of the Company held by the undersigned except in compliance with the
terms and conditions of this Agreement.
Very truly yours,
-------------------------------
(Name)
-------------------------------
(Address)
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<PAGE>
EXHIBIT 3.04
CERTIFICATE OF AMENDMENT OF
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AT HOME CORPORATION
(A DELAWARE CORPORATION)
AT HOME CORPORATION, a corporation organized and existing under the
laws of the State of Delaware (the "CORPORATION"), hereby certifies as follows:
FIRST. The name of the Corporation is At Home Corporation. The
original Certificate of Incorporation of the Corporation was filed on March 28,
1995. An Amended and Restated Certificate of Incorporation was filed on August
29, 1995, a Second Amended and Restated Certificate of Incorporation was filed
on August 1, 1996, a Certificate of Retirement was filed on August 2, 1996, a
Third Amended and Restated Certificate of Incorporation was filed on August 14,
1996, a Certificate of Amendment was filed on April 11, 1997 and a Certificate
of Designation of Series C Convertible Participating Preferred Stock was filed
on April 11, 1997. The name under which the Corporation was originally
incorporated is "at Home Corporation."
SECOND. Pursuant to Section 242(b) of the Delaware General
Corporation Law (the "DGCL") the Board of Directors of the Corporation has duly
adopted by unanimous written consent in accordance with DGCL Section 141(f), and
a majority of each class of the outstanding stock entitled to vote as a class
has approved by written consent in accordance with DGCL Section 228, this
Certificate of Amendment, which amends the Third Amended and Restated
Certificate of Incorporation of the Corporation.
THIRD. Pursuant to Section 242 of the DGCL, the text of Articles I
through VIII of the Third Amended and Restated Certificate of Incorporation is
hereby amended to read in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is At Home Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State
of Delaware is One Rodney Square, 10th Floor, Tenth and King Streets, in the
City of Wilmington, County of New Castle, 19801. The name of its registered
agent at such address is RL&F Service Corp.
<PAGE>
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation
shall have authority to issue is two hundred forty four million eight hundred
thousand two hundred seventy-three (244,800,273) shares, of which two hundred
thirty million two hundred seventy-seven thousand six hundred sixty
(230,277,660) shares shall be common stock with a par value of $.01 per share
("COMMON STOCK"), and fourteen million five hundred twenty-two thousand six
hundred thirteen (14,522,613) shares shall be preferred stock with a par value
of $.01 per share ("PREFERRED STOCK"). Said shares of Common Stock and
Preferred Stock shall be divided into the following series:
(a) Two hundred million (200,000,000) shares of Common Stock shall be
of a series designated as "SERIES A COMMON STOCK";
(b) Fifteen million four hundred thousand (15,400,000) shares of
Common Stock shall be of a series designated as "SERIES B COMMON STOCK";
(c) Fourteen million eight hundred seventy-seven thousand six hundred
sixty (14,877,660) shares of Common Stock shall be of a series designated as
"SERIES K COMMON STOCK";
(d) Seven hundred twenty-seven thousand eight hundred sixty-five
(727,865) shares of Preferred Stock shall be of a series designated as "Series
AM Convertible Participating Preferred Stock" (the "SERIES AM PREFERRED STOCK");
(e) One million five hundred fifty-three thousand (1,553,000) shares
of Preferred Stock shall be of a series designated as "Series AT Convertible
Participating Preferred Stock" (the "SERIES AT PREFERRED STOCK");
(f) Seven hundred twenty-seven thousand eight hundred sixty-five
(727,865) shares of Preferred Stock shall be of a series designated as "Series
AX Convertible Participating Preferred Stock" (the "SERIES AX PREFERRED STOCK");
(g) Seven hundred forty-three thousand eight hundred eighty-three
(743,883) shares of Preferred Stock shall be of a series designated as "Series K
Convertible Participating Preferred Stock" (the "SERIES K PREFERRED STOCK");
2
<PAGE>
(h) Seven hundred seventy thousand (770,000) shares of Preferred Stock
shall be of a series designated as "Series T Convertible Participating Preferred
Stock" (the "SERIES T PREFERRED STOCK"); and
(i) Ten million (10,000,000) shares of Preferred Stock, which are
undesignated as to series and are issuable in accordance with the provisions of
Section D of this Article IV (the "SERIES PREFERRED STOCK").
The description of the Common Stock and the Preferred Stock of the
Corporation, and the relative rights, preferences, privileges and limitations
thereof, or the method of fixing and establishing the same, are as hereinafter
in this Article IV set forth:
SECTION A
CERTAIN DEFINITIONS
Unless the context otherwise requires, the terms defined in this
Section A shall have, for all purposes of this Certificate, the meanings herein
specified:
"BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of
the Corporation and, unless the context indicates otherwise, shall also mean, to
the extent permitted by law, any committee thereof authorized, with respect to
any particular matter, to exercise the power of the Board of Directors of the
Corporation with respect to such matter.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in New York, New York are not required to be
open.
"CAPITAL STOCK" shall mean any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock.
"CERTIFICATE" shall mean this Third Amended and Restated Certificate
of Incorporation of the Corporation, as it may from time to time hereafter be
amended or restated.
"CONVERTIBLE COMMON STOCK" shall mean the Series B Common Stock and
the Series K Common Stock, collectively.
"CONVERTIBLE PREFERRED STOCK" shall mean the Series A Preferred Stock,
the Series K Preferred Stock and the Series T Preferred Stock, collectively.
"IPO" shall mean the closing of an initial public offering of the
Series A Common Stock.
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"PERSON" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization,
3
<PAGE>
government or agency or political subdivision thereof, or other entity, whether
acting in an individual, fiduciary or other capacity.
"SELECTED PREFERRED STOCK" shall mean, collectively, the Series AM
Preferred Stock, the Series AX Preferred Stock and the Series T Preferred Stock.
"SELECTED PREFERRED STOCK DIRECTORS" shall mean, collectively, the
Series AM Preferred Stock Director, if any, the Series AX Preferred Stock
Director, if any, and the Series T Preferred Stock Directors, if any.
"SERIES A COMMON STOCK" shall mean the Series A Common Stock, par
value $.01 per share, of the Corporation.
"SERIES A PREFERRED STOCK" shall mean, collectively, the three
separate series of Preferred Stock designated as the Series AM Preferred Stock,
the Series AT Preferred Stock and the Series AX Preferred Stock.
"SERIES B COMMON STOCK" shall mean the Series B Common Stock, par
value $.01 per share, of the Corporation.
"SERIES K COMMON STOCK" shall mean the Series K Common Stock, par
value $.01 per share, of the Corporation.
SECTION B
SERIES A, SERIES B AND SERIES K COMMON STOCK
Each share of the Series A Common Stock, each share of the Series B
Common Stock and each share of Series K Common Stock shall, except as otherwise
provided in this Section B, be identical in all respects and shall have equal
rights and privileges.
1. Voting Rights.
-------------
(a) General Voting Rights.
---------------------
Holders of Series A Common Stock shall be entitled to one vote for
each share of such stock held, holders of Series B Common Stock shall be
entitled to ten votes for each share of such stock held, and holders of Series K
Common Stock shall be entitled to one vote for each share of such stock held on
all matters presented to the holders of Common Stock of the Corporation. Except
as otherwise provided in this Certificate and except as may otherwise be
required by the DGCL or, with respect to any series of Series Preferred Stock,
in any resolution or resolutions providing for the establishment of such series
pursuant to authority vested in the Board of Directors by this Certificate, the
holders of shares of Series A Common Stock, the holders of shares of Series B
Common Stock, the holders of shares of Series K Common Stock and the holders of
shares of each series of Preferred Stock entitled to vote thereon, if any, shall
vote as one class with respect to the election of directors and with respect to
all other matters to be voted on by stockholders of the Corporation (including,
without limitation, any proposed amendment to this Certificate that would
increase the number of authorized shares
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of Series A Common Stock, of Series B Common Stock, of Series K Common Stock or
of any other class or series of stock or decrease the number of authorized
shares of any such class or series of stock (but not below the number of shares
thereof then outstanding)), and no separate vote or consent of the holders of
shares of Series A Common Stock, the holders of shares of Series B Common Stock,
the holders of shares of Series K Common Stock or the holders of shares of any
such series of Preferred Stock shall be required for the approval of any such
matter.
(b) Election of Series Common Stock Directors.
-----------------------------------------
(i) In the event that the holders of the Selected Preferred
Stock were entitled to elect Selected Preferred Stock Directors
immediately prior to the Mandatory Conversion (as hereinafter
defined), then upon and after such Mandatory Conversion, so long
as there are not less than 5,000,000 shares of Series B Common
Stock outstanding, the holders of Series B Common Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
1(b)(vi) below or by vote at a meeting called for that purpose,
to elect five directors to the Board of Directors (such directors
elected by the holders of the Series B Common Stock are
hereinafter collectively referred to as the "SERIES B COMMON
STOCK DIRECTORS").
In the event the holders of the Series K Preferred
Stock were entitled to elect a Series K Preferred Stock Director
immediately prior to the Mandatory Conversion, then, upon and
after such Mandatory Conversion, so long as there are not less
than 5,000,000 shares of Series K Common Stock outstanding, the
holders of Series K Common Stock, voting separately as a single
series, shall have the exclusive right, acting by written consent
given in accordance with paragraph 1(b)(vi) below or by vote at a
meeting called for that purpose, to elect one director to the
Board of Directors (such director elected by the holders of the
Series K Common Stock is hereinafter referred to as the "SERIES K
COMMON STOCK DIRECTOR").
In the event that the holders of Series B Common Stock
are entitled to elect any Series B Common Stock Director(s) or
the holders of Series K Common Stock are entitled to elect the
Series K Common Stock Director, then so long as there are any
shares of Series A Common Stock outstanding, the holders of
Series A Common Stock, voting separately as a single series,
shall have the right, acting by written consent given in
accordance with paragraph 1(b)(vi) below or by vote at a meeting
called for that purpose, to elect two directors, each of whom
must qualify as an Outside Director as defined in Section B(1) of
Article V of this Certificate, to the Board of Directors (such
directors elected by the holders of the Series A Common Stock are
hereinafter referred to as the "SERIES A COMMON STOCK DIRECTORS,"
and together with the Series B Common Stock
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<PAGE>
Directors and the Series K Common Stock Director, the "SERIES
COMMON STOCK DIRECTORS").
(ii) Notwithstanding any other provision in this
Certificate, those persons who were Series AM Preferred Stock
Directors, Series AX Preferred Stock Directors, or Series T
Preferred Stock Directors (each as defined below) immediately
prior to the Mandatory Conversion (as defined below) shall be
deemed to be the initial Series B Common Stock Directors
immediately following the Mandatory Conversion; those persons who
were Series AT Preferred Stock Directors (as defined below)
immediately prior to the Mandatory Conversion shall be deemed to
be the initial Series A Common Stock Directors immediately
following the Mandatory Conversion; that person who was a Series
C Preferred Stock Director (as defined below) immediately prior
to the Mandatory Conversion shall be deemed to be an Additional
Director (as defined below) immediately following the Mandatory
Conversion; that person who was a Series K Preferred Stock
Director (as defined below) immediately prior to the Mandatory
Conversion shall be deemed to be the initial Series K Common
Stock Director immediately following the Mandatory Conversion;
and those persons who were Additional Directors immediately prior
to the Mandatory Conversion shall continue as Additional
Directors immediately following the Mandatory Conversion. In
the event there is a vacancy in the office of a Series Common
Stock Director immediately following the Mandatory Conversion,
such initial Series Common Stock Director will be that person
first elected, by written consent given in accordance with
paragraph 1(b)(vi) or by vote at a meeting called for that
purpose, of the holders of the series of Common Stock entitled to
vote for such director on or after the date on which holders of
such series of Common Stock are first entitled to elect such
Series Common Stock Director in accordance with paragraph
1(b)(i). Each such person shall hold such positions until the
earliest of the next meeting or written consent of stockholders
entitled to vote on the election of said director, his
resignation or his removal.
(iii) At any meeting of stockholders having as a purpose
the election of directors by holders of the Series A Common
Stock, holders of the Series B Common Stock and/or holders of the
Series K Common Stock, as the case may be, the presence, in
person or by proxy, of the holders of a majority of the shares of
the applicable series of Common Stock entitled to vote in such
election then outstanding shall be required and be sufficient to
constitute a quorum of such series for the election of any
director by such holders. Each Series Common Stock Director to
be elected at such meeting shall be elected by a plurality of the
votes of the shares of the applicable series of Common Stock
present in person or represented by proxy at such meeting and
entitled to vote in the election of such Series Common Stock
Director or by written consent of the holders of such shares
given in accordance with paragraph 1(b)(vi) below. At any
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such meeting or adjournment thereof, (i) the absence of a quorum
of such holders of Series A Common Stock, Series B Common Stock
or Series K Common Stock, as the case may be, shall not prevent
the election of the directors to be elected by the holders of
shares other than the series of Common Stock the holders of which
do not constitute a quorum for such election at such meeting, and
the absence of a quorum of holders of shares other than the
Series A Common Stock, Series B Common Stock or Series K Common
Stock shall not prevent the election of the directors to be
elected by the holders of the Series A Common Stock, Series B
Common Stock or Series K Common Stock, as the case may be, and
(ii) in the absence of a quorum of holders of (x) shares of the
Series A Common Stock, Series B Common Stock or Series K Common
Stock, (y) shares other than the Series A Common Stock, Series B
Common Stock or Series K Common Stock, or (z) shares of all such
classes and series, holders of a majority of the shares, present
in person or by proxy, of each class or series of stock which
lack a quorum shall have power to adjourn the meeting for the
election of directors which such class or series is entitled to
elect, from time to time, without notice (subject to applicable
law) other than announcement at the meeting, until a quorum shall
be present.
(iv) Except as provided in paragraph 1(b)(v), any vacancy in
the office of a Series Common Stock Director occurring during the
effectiveness of the applicable provisions of paragraph 1(b)(i)
shall be filled solely by the holders of the series of Common
Stock entitled to vote for such Series Common Stock Director by
vote of such holders as provided in paragraph 1(b)(iii) above at
a meeting called for such purpose or by written consent of such
holders given in accordance with paragraph 1(b)(vi) below.
(v) A Series Common Stock Director may be removed without
cause by the vote or by written consent of the holders of a
majority of the outstanding shares of Series A Common Stock,
Series B Common Stock or Series K Common Stock, as the case may
be, which elected such Series Common Stock Director. Any vacancy
in the office of a Series Common Stock Director shall be filled
by the affirmative vote of the holders of a majority of the
outstanding shares of the applicable series of Common Stock
entitled to elect the Series Common Stock Director so removed at
a meeting, which may be the same meeting at which the removal of
such Series Common Stock Director was voted upon, or by written
consent of the holders of such series of Common Stock given in
accordance with paragraph 1(b)(vi) below; provided, however, that
-----------------
if there is a vacancy in the office of one of the two Series A
Common Stock Directors, the remaining Series A Common Stock
Director shall have the power to fill the vacancy. Any director
elected to fill a vacancy shall serve the same remaining term as
that of his or her predecessor and until his or her successor has
been chosen and has qualified.
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<PAGE>
(vi) With respect to actions by the holders of the Series A
Common Stock, Series B Common Stock or Series K Common Stock upon
those matters on which such holders are each entitled to vote
separately as a separate series, such actions may be taken
without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares of
Series A Common Stock, Series B Common Stock or Series K Common
Stock, as the case may be, having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which all shares of such series of Series
A Common Stock, Series B Common Stock or Series K Common Stock
entitled to vote thereon were present and voted, and shall be
delivered to the Corporation as provided in the DGCL. Notice
shall be given in accordance with the applicable provisions of
the DGCL of the taking of corporate action without a meeting by
less than unanimous written consent.
(vii) The right of the holders of any series of Common
Stock to elect Series Common Stock Directors shall be in addition
to their right to vote, together as a single class with the
holders of the Series A, Series B and Series K Common Stock and
any series of Preferred Stock so entitled to vote, acting by
written consent or by vote at a meeting called for the purpose of
election of directors, in the election of all Additional
Directors, as defined in Section A(3) of Article V of this
Certificate.
2. Conversion Rights.
-----------------
Each share of Series B Common Stock shall be convertible at any time,
at the option of the holder thereof, into one share of Series A Common Stock.
Each share of Series K Common Stock shall be convertible at any time, at the
option of the holder thereof, into one share of Series A Common Stock. Any such
conversion may be effected by any holder of any series of Convertible Common
Stock by surrendering such holder's certificate or certificates for the series
of Convertible Common Stock to be converted, duly endorsed, at the office of the
Corporation or any transfer agent for the Convertible Common Stock, together
with a written notice to the Corporation at such office that such holder elects
to convert all or a specified number of shares of such series of Convertible
Common Stock represented by such certificate and stating the name or names in
which such holder desires the certificate or certificates for Series A Common
Stock to be issued. If so required by the Corporation, any certificate for
shares surrendered for conversion shall be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the holder
of such shares or the duly authorized representative of such holder. Promptly
thereafter, the Corporation shall issue and deliver to such holder or such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Series A Common Stock to which such holder shall be entitled as herein
provided (provided that the Corporation will use commercially reasonable efforts
to make such delivery within two Business Days after receipt of the certificate
or certificates, notice, and if required, instruments of transfer referred to
above). Such conversion shall be deemed to have been made at the close of
business on the date of receipt by the Corporation or any such transfer agent of
the
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<PAGE>
certificate or certificates, notice and, if required, instruments of transfer
referred to above, and the Person or Persons entitled to receive the Series A
Common Stock issuable on such conversion shall be treated for all purposes as
the record holder or holders of such Series A Common Stock on that date;
provided, however, that the conversion may, at the option of any holder
- -------- -------
surrendering Convertible Common Stock for conversion, be conditioned upon the
IPO or upon notice by such holder to the Corporation of the occurrence of any
other specified event. A number of shares of Series A Common Stock equal to the
number of shares of Series B Common Stock and Series K Common Stock,
respectively, outstanding from time to time shall be set aside and reserved for
issuance upon conversion of shares of Series B Common Stock and of Series K
Common Stock, respectively. Shares of Series B Common Stock and Series K Common
Stock that have been converted hereunder shall be retired and shall not be
reissued. Shares of Series A Common Stock shall not be convertible into shares
of Series B Common Stock or Series K Common Stock.
3. Dividends. Subject to paragraph 4 of this Section B, whenever a
---------
dividend is paid to the holders of one series of Common Stock, the Corporation
also shall pay to the holders of all other series of Common Stock a dividend per
share equal to the dividend per share paid to the holders of such first series
of Common Stock. Dividends shall be payable only if, as and when declared by
the Board of Directors out of the assets of the Corporation legally available
therefor.
4. Share Distributions. If at any time a distribution paid in
-------------------
Series A Common Stock, Series B Common Stock, Series K Common Stock or any other
securities of the Corporation or any other Person (hereinafter sometimes called
a "SHARE DISTRIBUTION") is to be made with respect to the Series A Common Stock,
Series B Common Stock or Series K Common Stock, such share distribution may be
declared and paid only as follows:
(a) a share distribution consisting of shares of Series A Common Stock
(or any securities of the Corporation that are convertible into, or exercisable
or exchangeable for, or evidence the right to purchase shares of Series A Common
Stock) to holders of Series A Common Stock, Series B Common Stock and Series K
Common Stock, on an equal per share basis; or consisting of shares of Series A
Common Stock (or securities of the Corporation that are convertible into, or
exercisable or exchangeable for, or evidence the right to purchase shares of
Series A Common Stock) to holders of Series A Common Stock and, on an equal per
share basis, shares of Series B Common Stock (or securities of the Corporation
that are convertible into, or exercisable or exchangeable for, or evidence the
right to purchase shares of Series B Common Stock) to holders of Series B Common
Stock and, on an equal per share basis, shares of Series K Common Stock (or
securities of the Corporation that are convertible into, or exercisable or
exchangeable for, or evidence the right to purchase shares of Series K Common
Stock) to holders of Series K Common Stock; and
(b) a share distribution consisting of any class or series of
securities of the Corporation or any other Person other than as described in
paragraph 4(a) above, on the basis of a distribution of identical securities, on
an equal per share basis, to holders of Series A Common Stock, Series B Common
Stock and Series K Common Stock or on the basis of a distribution of different
classes or series of securities to holders of Series A Common Stock, Series B
Common Stock and Series K Common Stock, provided that (i) the securities so
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<PAGE>
distributed (and, if applicable, the securities into which the distributed
securities are convertible, or for which they are exercisable or exchangeable,
or which the distributed securities evidence the right to purchase) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion and share distribution provisions, (ii)
such rights and provisions shall not differ to a greater extent than the
corresponding differences in voting rights, designation, conversion and share
distribution provisions among the Series A Common Stock, the Series B Common
Stock and the Series K Common Stock and (iii) in each case such distribution is
otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine any series
of Common Stock without reclassifying, subdividing or combining all other series
of Common Stock, on an equal per share basis.
5. Liquidation and Dissolution. In the event of a liquidation,
---------------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and liabilities of the
Corporation and subject to the prior payment in full of the preferential amounts
to which any series of Preferred Stock (including the Convertible Preferred
Stock) is entitled, the holders of Series A Common Stock, the holders of Series
B Common Stock, the holders of Series K Common Stock and the holders of any
class or series of Preferred Stock entitled to participate in such distribution
shall share equally, on a share for share basis (on an as converted into Common
Stock basis with respect to any shares of Preferred Stock which are convertible
into Common Stock, unless the designations, preferences, rights and
qualifications, limitations or restrictions of such Preferred Stock provide
otherwise), in the assets of the Corporation remaining for distribution to
holders of Common Stock. Neither the consolidation or merger of the Corporation
with or into any other Person or Persons nor the sale, transfer or lease of all
or substantially all of the assets of the Corporation shall itself be deemed to
be a liquidation, dissolution or winding up of the Corporation within the
meaning of this paragraph 5.
6. Limitation on Issuance of Series B Common Stock and of Series K
---------------------------------------------------------------
Common Stock. No shares of Series B Common Stock shall be issued except
- ------------
pursuant to paragraph 4 of this Section B, upon conversion of shares of Series T
Preferred Stock or shares of any series of Series Preferred Stock which have
been authorized in accordance with this Certificate, having the right to convert
into shares of Series B Common Stock. No shares of Series K Common Stock shall
be issued except pursuant to paragraph 4 of this Section B, upon conversion of
shares of Series K Preferred Stock or shares of any series of Series Preferred
Stock, which have been authorized in accordance with this Certificate, having
the right to convert into shares of Series K Common Stock.
SECTION C
SERIES AM, SERIES AT, SERIES AX,
SERIES K AND SERIES T PREFERRED STOCK
The Convertible Preferred Stock shall have the following preferences,
limitations and relative rights:
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<PAGE>
1. Certain Definitions. Unless the context otherwise requires, the
-------------------
terms defined in this paragraph 1 shall have, for all purposes of this
Certificate, the meanings herein specified:
"@HOME REPURCHASE RIGHT" has the meaning given to such term in the
Master Distribution Agreement.
"CABLE PARENT" shall mean, as applicable, each of (i) TCI Internet
Services, Inc., a Colorado corporation ("TCI SERVICES"), TCI.NET, Inc., a
Delaware corporation ("TCI.NET"), TCI Communications, Inc., a Delaware
corporation, and TCI Cable Investments Inc., a Delaware corporation (TCI
Communications, Inc., TCI Cable Investments, Inc., TCI.NET and TCI Services
collectively being a single Cable Parent), (ii) Comcast On-Line Communications,
Inc., a Delaware corporation, and Comcast Cable Communications, Inc., a Delaware
corporation (collectively being a single Cable Parent) and (iii) Cox
Communications, Inc., a Delaware corporation. In addition, each Parent (as
defined below) shall be entitled to designate one or more members of such
Parent's Stockholder Group (as defined in the Stockholders' Agreement) to be
included within the Cable Parent of such Parent's Stockholder Group. Any such
additional entities are required to execute and deliver to the Corporation and
each other Parent, an instrument, in form and substance reasonably acceptable to
the Corporation, agreeing to be bound by the provisions of the Stockholders'
Agreement applicable to the other Persons which are included within the Cable
Parent of such Parent's Stockholder Group. Such designation shall not
constitute an assignment by or release of any other Person which is a Cable
Parent of such Stockholder Group.
"COMMON STOCK" shall mean any series of Common Stock of the
Corporation.
"COMCAST" shall mean Comcast Corporation, a Pennsylvania corporation.
"COMCAST STOCKHOLDER GROUP" has the meaning given to such term in the
Stockholders' Agreement.
"COMCAST SUB" shall mean Comcast PC Investments, Inc., a Delaware
corporation, and any Controlled Affiliate of Comcast to which Company Securities
are transferred in accordance with the terms of the Stockholders' Agreement.
"COMPANY SECURITIES" has the meaning given to such term in the
Stockholders' Agreement.
"CONTROL" shall mean the direct or indirect power to direct the
management and policies of any Person, whether through the ownership of voting
securities, by contract, management agreement or otherwise.
"CONTROLLED AFFILIATE" shall mean, as to any Person, any other Person
which is Controlled by such Person; provided, however, that the Corporation
-------- -------
shall not be deemed to be a Controlled Affiliate of any Parent or such Parent's
Controlled Affiliates.
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<PAGE>
"CONVERTIBLE SECURITIES" shall mean securities, other than shares of
Series B Common Stock or Series K Common Stock, that are convertible into, or
exercisable or exchangeable for, or evidence the right to purchase, shares of
Series A Common Stock, Series B Common Stock or Series K Common Stock.
"COX SUB" shall mean Cox @Home, Inc. a Delaware corporation, and any
Controlled Affiliate of Cox Communications, Inc. to which Company Securities are
transferred in accordance with the terms of the Stockholders' Agreement.
"DIVIDEND PAYMENT DATE" shall mean the first day of January, April,
July and October in each year commencing on the first Dividend Payment Date
after the Filing Date, or if any such day is not a Business Day, then on the
next succeeding Business Day, as and if designated by the Board of Directors.
"DIVIDEND PERIOD" shall mean any three-month period from and including
any Dividend Payment Date to (but not including) the next successive Dividend
Payment Date; provided, however, that the first Dividend Period shall be the
-------- -------
period (even if less than three months) from and including the Filing Date to
(but not including) the first Dividend Payment Date.
"FILING DATE" shall mean August 14, 1996.
"ISSUE PRICE" of a share of Convertible Preferred Stock shall
initially be $10.00, and shall be appropriately adjusted to take into account
any stock splits, reverse splits and the like occurring after the Filing Date.
"JUNIOR STOCK" shall mean, as the context requires, (i) the Common
Stock, (ii) any other class or series of capital stock, whether now existing or
hereafter created, of the Corporation, other than (A) the Convertible Preferred
Stock, (B) any class or series of Parity Stock (except to the extent provided
under clause (iii) hereof) and (C) any Senior Stock, and (iii) any class or
series of Parity Stock to the extent that it ranks junior to the Convertible
Preferred Stock as to dividend rights, rights of redemption and/or rights on
liquidation, as the case may be. For purposes of clause (iii) above, a class or
series of Parity Stock shall rank junior to the Convertible Preferred Stock as
to dividend rights, rights of redemption and/or rights on liquidation if the
holders of shares of Convertible Preferred Stock shall be entitled to dividend
payments, payments on redemption or payments of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as the case may be,
in preference or priority to the holders of shares of such class or series.
"KPCB AFFILIATES" shall mean collectively, Kleiner, Perkins, Caufield
& Byers VII and KPCB Information Sciences Zaibatsu Fund II, each a California
partnership, and James Clark.
"LIQUIDATION PRICE" measured per share of the Convertible Preferred
Stock as of the date in question (the "DETERMINATION DATE"), shall mean an
amount equal to the sum of (a) $10.00, as appropriately adjusted to take into
account any stock splits, reverse splits and the like occurring after the Filing
Date, plus (b) an amount equal to all dividends which have
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<PAGE>
theretofore been declared but which are unpaid as of the Determination Date on
such share of Convertible Preferred Stock. In the event that the Special
Directors and the Special K Director determine by a Supermajority Vote not to
require the Mandatory Conversion (as defined below) upon the IPO, then upon the
IPO the amount in clause (a) of this definition shall be deemed to be $.01 (as
appropriately adjusted to take into account any stock splits, reverse splits and
the like occurring after the Filing Date), unless the Special Directors and the
Special K Director have determined by a Supermajority Vote not to so reduce the
Liquidation Price. In connection with the determination of the Liquidation Price
of a share of Convertible Preferred Stock upon any liquidation, dissolution or
winding up of the Corporation, the Determination Date shall be the record date
for the distribution of amounts payable to stockholders in connection with any
such liquidation, dissolution or winding up.
"MASTER DISTRIBUTION AGREEMENT" shall mean the provisions of the
Master Distribution Agreement Term Sheet, set forth as Exhibit A to the letter
agreement dated May 15, 1997, among TCI Sub, Comcast Sub, and Cox Sub and
certain of their respective Affiliates and the Corporation (the "MASTER
DISTRIBUTION AGREEMENT TERM SHEET"); provided that if the matters set forth in
the Master Distribution Agreement Term Sheet are superseded by a definitive
agreement which is executed by the necessary parties thereto, such definitive
agreement will constitute the Master Distribution Agreement for all purposes
hereunder.
"PARENT" has the meaning given to such term in the Stockholders'
Agreement.
"PARITY STOCK" shall mean, as the context requires, any class or
series of capital stock, whether now existing or hereafter created, of the
Corporation ranking on a parity basis with the Convertible Preferred Stock as to
dividend rights, rights of redemption and/or rights on liquidation, as the case
may be. Capital stock of any class or series shall rank on a parity as to
dividend rights, rights of redemption or rights on liquidation with the
Convertible Preferred Stock, whether or not the dividend rates, dividend payment
dates, redemption or liquidation prices per share or sinking fund or mandatory
redemption provisions, if any, are different from those of the Convertible
Preferred Stock, if the holders of shares of such class or series shall be
entitled to dividend payments, payments on redemption or payments of amounts
distributable upon dissolution, liquidation or winding up of the Corporation, as
the case may be, in proportion to their respective accrued and unpaid dividends,
redemption prices or liquidation prices, respectively, without preference or
priority, one over the other, as between the holders of shares of such class or
series and the holders of Convertible Preferred Stock. No class or series of
capital stock that ranks junior to the Convertible Preferred Stock as to rights
on liquidation shall rank or be deemed to rank on a parity basis with the
Convertible Preferred Stock as to dividend rights or rights of redemption,
unless the instrument creating or evidencing such class or series of capital
stock otherwise expressly provides. The Series AM Preferred Stock, the Series
AT Preferred Stock, the Series AX Preferred Stock, the Series K Preferred Stock
and the Series T Preferred Stock shall each be deemed to be Parity Stock as to
each of the other such series.
"PUBLIC COMPANY" shall mean the Corporation shall be deemed to be a
"Public Company" at such time as the Series A Common Stock is (i) registered
under Section 12(b) or 12(g), or such entity is required to file reports
pursuant to Section 15(d), of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT") (or any successor or comparable provisions of the federal
securities laws), and (ii) actively traded.
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<PAGE>
"RECORD DATE" for the dividends payable on any Dividend Payment Date
shall mean the fifteenth day of the month preceding the month during which such
Dividend Payment Date shall occur, or if any such day is not a Business Day,
then on the next succeeding Business Day, as and if designated by the Board of
Directors.
"SENIOR STOCK" shall mean, as the context requires, any class or
series of capital stock, whether now existing or hereafter created, of the
Corporation ranking prior to the Convertible Preferred Stock as to dividend
rights, rights of redemption and/or rights on liquidation, as the case may be.
Capital stock of any class or series shall rank prior to the Convertible
Preferred Stock as to dividend rights, rights of redemption or rights on
liquidation if the holders of shares of such class or series shall be entitled
to dividend payments, payments on redemption or payments of amounts
distributable upon dissolution, liquidation or winding up of the Corporation, as
the case may be, in preference or priority to the holders of shares of
Convertible Preferred Stock. No class or series of capital stock that ranks on
a parity basis with or junior to the Convertible Preferred Stock as to rights on
liquidation shall rank or be deemed to rank prior to the Convertible Preferred
Stock as to dividend rights or rights of redemption, notwithstanding that the
dividend rate, dividend payment dates, sinking fund provisions, if any, or
redemption provisions thereof are different from those of the Convertible
Preferred Stock, unless the instrument creating or evidencing such class or
series of capital stock otherwise expressly provides. Notwithstanding the
foregoing, any class or series of capital stock which requires the Corporation
to cumulate or accrue dividends on such shares, or to pay such dividends in
shares of capital stock in the event such dividends are not declared and paid
during any dividend period applicable to such class or series, or to add any
such unpaid dividends to the liquidation or redemption price of any such class
or series of capital stock, shall constitute Senior Stock.
"SPECIAL DIRECTORS" shall mean (i) the Selected Preferred Stock
Directors prior to the Mandatory Conversion and (ii) following the Mandatory
Conversion, the Series B Common Stock Directors.
"SPECIAL K DIRECTOR" shall mean (i) the Series K Preferred Stock
Director prior to the Mandatory Conversion and (ii) following the Mandatory
Conversion, the Series K Common Stock Director.
"SPECIAL VOTING STOCK" shall mean any class or series of capital stock
of the Corporation established or authorized after the Filing Date (including
pursuant to the authority granted herein to the Board to establish the
designations, preferences, rights and qualifications, limitations and
restrictions of any series of Series Preferred Stock pursuant to Board Action)
having voting rights deemed senior to those of the holders of Series A Common
Stock or Series K Common Stock. A class or series of capital stock shall be
deemed to have senior voting rights and to be Special Voting Stock if holders of
such security (x) are entitled to more than one vote per share (determined on an
as-converted into Common Stock basis) when voting with the holders of Common
Stock or (y) are entitled to vote as a separate class or series upon any matter
submitted to a vote of all of the stockholders of the Corporation other than (i)
as required by Section 242(b) of the DGCL, (ii) with respect to the creation or
issuance of a class or series of capital stock which is to rank senior to such
capital stock as to liquidation rights or rights relating
14
<PAGE>
to dividends, distributions, repurchases and redemptions, (iii) with respect to
amendments to the terms and provisions of such securities, or (iv) such
additional matters as would be customary or appropriate in the context of the
issuance of such class or series of capital stock in a financing transaction
with a third party (as opposed to a strategic transaction) in light of the
circumstances under which such financing transaction is being consummated.
"STOCKHOLDERS' AGREEMENT" shall mean that certain Amended and Restated
Stockholders' Agreement, dated as of August 1, 1996, by and among the
Corporation, TCI Sub, Comcast Sub, Cox Sub and the KPCB Affiliates and certain
Affiliates of such Persons, as amended from time to time.
"SUBJECT SHARES" has the meaning given to such term in the Master
Distribution Agreement.
"SUBSIDIARY" of any Person shall mean (i) a corporation a majority of
the capital stock of which, having voting power under ordinary circumstances to
elect directors, is at the time, directly or indirectly, owned by such Person
and/or one or more Subsidiaries of such Person and (ii) any other Person (other
than a corporation) in which such Person and/or one or more Subsidiaries of such
Person, directly or indirectly, has (x) a majority ownership interest or (y) the
power to elect or direct the election of a majority of the members of the
governing body of such first-named Person.
"SUPERMAJORITY VOTE" has the meaning given to such term in Section
B(4)(a) of Article V of this Certificate.
"TCI" shall mean Tele-Communications, Inc., a Delaware corporation,
but in the event of a Qualified Spin Off Transaction (as defined in the
Stockholders' Agreement) relating to the TCI Stockholder Group (as defined in
the Stockholders' Agreement), such term shall mean the Spin Off Parent (as
defined in the Stockholders' Agreement) resulting from such Qualified Spin Off
Transaction.
"TCI SUB" shall mean TCI Internet Holdings, Inc., a Colorado
corporation, and any Controlled Affiliate of TCI, to which Company Securities
are transferred in accordance with the terms of the Stockholders' Agreement.
"UNANIMOUS VOTE" has the meaning given to such term in Section B(4)(b)
of Article V of this Certificate.
2. Dividends.
---------
(a) Dividend Rights; Dividend Payment Dates. Subject to the prior
---------------------------------------
preferences and other rights of any Senior Stock and the provisions of this
Article IV, the holders of Convertible Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, in its discretion,
but prior and in preference to any declaration or payment of dividends on any
Junior Stock, out of unrestricted funds legally available therefor, quarterly
cash dividends per share at the rate of 10.0% per annum of the Issue Price (the
"CONVERTIBLE PREFERRED DIVIDEND"). The Convertible Preferred Dividend shall be
noncumulative; that is, the Convertible
15
<PAGE>
Preferred Dividend shall be paid only when, as and if declared by the Board of
Directors, it being intended that a Convertible Preferred Dividend not declared
in any quarter will not be carried over to a future quarter.
(b) Dividends on Junior Stock. In addition, following the payment of
-------------------------
the Convertible Preferred Dividend for any period, in the event that the Board
of Directors proposes, subject to the provisions of this paragraph, to declare
or pay a dividend on any Junior Stock in cash or consisting of assets, property
or securities other than Common Stock, then the holders of Convertible Preferred
Stock shall be entitled to receive, when and as declared by the Board of
Directors, an additional dividend amount (the "PARTICIPATING DIVIDEND")
determined as follows: (i) in the event that a dividend is declared with
respect to Junior Stock (other than Common Stock (or any other security that is
convertible into, or exercisable or exchangeable for, Common Stock)), the
Participating Dividend payable to the holders of the Convertible Preferred Stock
shall equal an amount per share equal to the dividend to be paid on each share
or other unit of Junior Stock multiplied by a fraction, the numerator of which
is the Liquidation Price of a share of Convertible Preferred Stock and the
denominator of which is the lowest of (x) the liquidation price (if applicable),
(y) the redemption price (if applicable) and (z) the price at which such share
or unit was originally purchased (as adjusted for stock splits, stock dividends
and the like occurring after the Filing Date), of a share or other unit of such
Junior Stock; or (ii) in the event that a dividend is declared with respect to
Junior Stock which is Common Stock or such Junior Stock is convertible into, or
exercisable or exchangeable for, Common Stock, then the amount of the
Participating Dividend per share of Convertible Preferred Stock shall be (x) (1)
the amount of the dividend to be paid on a single share of Common Stock, or (2)
if such Junior Stock is convertible into, or exercisable or exchangeable for,
Common Stock, such amount as would be payable on each share of Common Stock into
which such Junior Stock is convertible into or exercisable or exchangeable for,
multiplied by (y) the number of shares of Common Stock into which a share of
Convertible Preferred Stock may then be converted. Dividends payable on the
Convertible Preferred Stock shall be calculated on the basis of a 360-day year
of twelve 30-day months. Dividends on the Convertible Preferred Stock will be
payable, as provided in paragraph 2(e) below, to the holders of record of the
Convertible Preferred Stock as of the close of business on the Record Date for
such dividend payment.
(c) Dividends on Parity Stock. So long as any shares of Convertible
-------------------------
Preferred Stock are outstanding and dividends on such shares of Convertible
Preferred Stock have not been (or are not contemporaneously) declared and paid
in full for the two immediately preceding Dividend Periods, no dividends shall
be declared or paid or set apart for payment by the Corporation upon any Parity
Stock; provided, however, that a dividend may be declared and paid (regardless
-------- -------
of whether such dividends have been paid for any preceding Dividend Period) pro
rata with respect to all Convertible Preferred Stock and Parity Stock then
outstanding such that the amounts of any dividends declared per share on the
Convertible Preferred Stock and such Parity Stock shall in all cases bear to
each other the same ratio that the Convertible Preferred Dividend (assuming such
dividend had been declared by the Board) and, if applicable, any Participating
Dividend (collectively, the "CONVERTIBLE FULL DIVIDEND") per share of
Convertible Preferred Stock for the then-current Dividend Period and dividends
on shares of such other Parity Stock for the then-current Dividend Period
(excluding any accumulated or accrued dividends on such Parity Stock) bear to
each other.
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<PAGE>
(d) Other Limitations on Dividends and Repurchases. If the
-----------------------------------------------
Convertible Full Dividend has not been declared and paid or set apart for
payment for the Dividend Payment Date falling in the then-current Dividend
Period, then, with respect to such then-current Dividend Period, (i) the
Corporation shall not declare or pay any dividend on, or make any distribution
with respect to, any Junior Stock or set aside any money or assets for such
purpose and (ii) the Corporation shall not repurchase, redeem or otherwise
acquire for value any shares of its Junior Stock, any equity securities of any
Subsidiary of the Corporation or any options, warrants or other rights to
acquire such securities; provided, however, that the Corporation may at any
-------- -------
time, out of funds legally available therefor, repurchase (x) from employees,
directors or consultants of the Corporation or any Subsidiary thereof, shares of
equity securities of the Corporation, equity securities of any Subsidiary of the
Corporation or options, warrants or other rights to acquire such securities
issued to such employees, directors or consultants provided that such repurchase
is pursuant to repurchase or redemption rights contained in the instrument
pursuant to which such securities were originally issued and (y) from the
Comcast Stockholder Group any Subject Shares upon the Corporation's exercise of
the @Home Repurchase Right pursuant to the Master Distribution Agreement (the
right or obligation of the Corporation to so repurchase or redeem such
securities pursuant to the foregoing clauses (x) and (y), is hereinafter
referred to as a "PERMITTED REPURCHASE").
(e) Special Record Date. Dividends may be declared and paid at any
-------------------
time (subject to the rights of any Senior Stock and, if applicable, to the
concurrent satisfaction of any dividend arrearages then existing with regard to
any Parity Stock which ranks on a parity basis with the Convertible Preferred
Stock as to the payment of dividends) without reference to the regular Dividend
Payment Date, to holders of record as of the close of business on such date, not
more than 45 days nor less than 10 days preceding the payment date thereof, as
may be fixed by the Board of Directors (the "SPECIAL RECORD DATE"). Notice of
each Special Record Date shall be given, not more than 45 days nor less than 10
days prior thereto, to the holders of record of the shares of Convertible
Preferred Stock.
(f) Pro Rata Payment. All dividends paid with respect to the shares
----------------
of Convertible Preferred Stock pursuant to this paragraph 2 shall be paid pro
rata to all the holders of shares of Convertible Preferred Stock outstanding on
the applicable Record Date or Special Record Date, as the case may be.
(g) Termination of Convertible Preferred Dividend Right. In the event
---------------------------------------------------
that the Special Directors and the Special K Director determine by a
Supermajority Vote not to require the Mandatory Conversion upon the IPO, then
upon the IPO, unless the Special Directors and the Special K Director have also
determined by a Supermajority Vote not to terminate the Convertible Preferred
Dividend right, the provisions of paragraph 2(a), (b), (c) and (d) shall
terminate and the holders of Convertible Preferred Stock shall be entitled to
receive dividends if, as and when the Board shall declare dividends on the
Common Stock other than dividends payable in Common Stock pursuant to which such
Convertible Preferred Stock is entitled to an adjustment pursuant to paragraph
6(c) below. The amount of such dividend per share of Convertible Preferred
Stock shall be the amount of the dividend to be paid on a single share of Common
Stock multiplied by the number of shares of Common Stock into which a share of
Convertible Preferred Stock may then be converted.
17
<PAGE>
3. Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
(a) Liquidation Preference Prior to IPO. Prior to the IPO and subject
-----------------------------------
to the prior payment in full of the preferential amounts to which any Senior
Stock is entitled, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of Convertible
Preferred Stock shall be entitled to receive from the assets of the Corporation
available for distribution to stockholders, before any payment or distribution
shall be made to the holders of any Junior Stock, an amount in cash (and, to the
extent sufficient cash is not available for such payment, property at its fair
market value) per share, equal to the Liquidation Price of such share of
Convertible Preferred Stock as of the date of payment or distribution, which
payment or distribution shall be made pari passu with any such payment or
---- -----
distribution made to the holders of any Parity Stock ranking on a parity basis
with the Convertible Preferred Stock with respect to distributions upon
liquidation, dissolution or winding up of the Corporation. Except as provided
in paragraph 3(b) below, the holders of Convertible Preferred Stock shall be
entitled to no other or further distribution of or participation in any
remaining assets of the Corporation after receiving the Liquidation Price per
share. If, upon distribution of the Corporation's assets in liquidation,
dissolution or winding up, the assets of the Corporation to be distributed among
the holders of the Convertible Preferred Stock and to all holders of any Parity
Stock ranking on a parity basis with the Convertible Preferred Stock with
respect to distributions upon liquidation, dissolution or winding up shall be
insufficient to permit payment in full to such holders of the respective
preferential amounts to which they are entitled, then the entire assets of the
Corporation to be distributed to holders of the Convertible Preferred Stock and
such Parity Stock shall be distributed pro rata to such holders based upon the
aggregate of the full preferential amounts to which the shares of Convertible
Preferred Stock and such Parity Stock would otherwise respectively be entitled.
In the event of (i) a consolidation or merger of the Corporation with or into
any other corporation or other entity in which the holders of all of the
Corporation's outstanding shares of capital stock immediately before the
effectiveness of such transaction do not, immediately after the effectiveness of
such transaction, own capital stock representing a majority of the voting power
of the surviving corporation or other entity of such transaction (or the
immediate parent of such surviving corporation or other entity), or (ii) a sale
of all or substantially all of the assets of the Corporation other than in
connection with a Related Business Transaction (as defined below), the holders
of a majority of the outstanding shares of each series of the Corporation's
Preferred Stock, voting separately as a series (or consenting in writing), shall
be entitled to deem, solely as to the series of Preferred Stock which has so
voted or consented, such merger, consolidation or sale of assets to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this paragraph 3, provided, that written notice of such vote or such written
consents must be received by the Corporation at least five (5) days prior to the
effectiveness of such transaction; and provided further, that the Corporation
shall have provided holders of Convertible Preferred Stock with the notice
required to be delivered to them pursuant to paragraph 6(g) of Section C of this
Article IV of such deemed liquidation, dissolution or winding up of the
Corporation. For purposes of this Certificate, a "RELATED BUSINESS TRANSACTION"
shall mean any sale or other disposition of all or substantially all of the
properties and assets of the Corporation in which (i) the Corporation receives
as proceeds of such disposition primarily equity securities (including, without
limitation, capital stock, convertible securities, partnership or limited
partnership interests and other types of equity securities, without regard to
the voting power or contractual or other management or governance rights related
to such equity securities) of the purchaser or acquiror of such properties
18
<PAGE>
and assets of the Corporation, including but not limited to any entity which
succeeds (by merger, formation of a joint venture enterprise or otherwise) to
such properties and assets of the Corporation (or the immediate parent of such
purchaser or acquiror), and (ii) the securities received by the Corporation,
immediately after the effectiveness of such transaction, have a majority of the
voting power of the purchaser or acquiror of such properties and assets of the
Corporation, including but not limited to any entity which succeeds (by merger,
formation of a joint venture enterprise or otherwise) to such properties and
assets of the Corporation (or the immediate parent of such purchaser or
acquiror). Notice of the liquidation, dissolution or winding up of the
Corporation shall be given, not less than 20 days prior to the date on which
such liquidation, dissolution or winding up or merger or sale of assets is
expected to take place or become effective, to the holders of record of the
shares of Convertible Preferred Stock, during which 20 day period such holders
shall continue to be entitled to exercise their conversion rights as set forth
in paragraph 6 of this Section C.
(b) Liquidation Preference After IPO. In the event that the Special
--------------------------------
Directors and the Special K Director determine by a Supermajority Vote not to
require the Mandatory Conversion upon the IPO, then upon the IPO, unless the
Special Directors and the Special K Director have also determined by a
Supermajority Vote not to change the Liquidation Price of the Convertible
Preferred Stock as described in paragraph 1 of this Section C, subject to prior
payment in full of the Liquidation Price (as changed as described in paragraph 1
of this Section C) on each outstanding share of Convertible Preferred Stock and
if there are any assets of the Corporation available for distribution to
stockholders, such remaining assets shall be distributed among the holders of
the then outstanding Common Stock and Convertible Preferred Stock pro rata
according to the number of shares of Common Stock held by each holder thereof
(where, for this purpose, holders of shares of Convertible Preferred Stock will
be deemed to hold the greatest whole number of shares of Common Stock then
issuable upon conversion in full of such shares of Convertible Preferred Stock).
4. Limitations on Dividends and Redemptions. So long as any shares
----------------------------------------
of Convertible Preferred Stock are outstanding, the Corporation shall not,
absent the requisite Board Action and the approval of the holders of the
Convertible Preferred Stock, as required pursuant to paragraph 7(c) of this
Section C, (a) declare or pay any dividend, or make any distribution, on, or (b)
repurchase, redeem or otherwise acquire for value any shares of, any Junior
Stock, any equity securities of any Subsidiary of the Corporation or any
options, warrants or other rights to acquire such securities other than (i) the
payment of dividends on any Junior Stock solely in shares of Junior Stock or the
redemption, purchase or other acquisition of Junior Stock solely in exchange for
(together with a cash adjustment for fractional shares, if any) shares of Junior
Stock; or (ii) a repurchase or redemption of equity securities of the
Corporation, any equity securities of any Subsidiary of the Corporation, or any
options, warrants or other rights to acquire any such securities which is a
Permitted Repurchase.
5. Status of Reacquired Convertible Preferred Stock. In the event
------------------------------------------------
that the Corporation repurchases or otherwise reacquires shares of Convertible
Preferred Stock, such shares shall be retired and shall not be reissued.
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<PAGE>
6. Conversion.
----------
(a) Optional and Mandatory Conversion. Each outstanding share of
----------------------------------
Series AM Preferred Stock shall be convertible at the option of the holder at
any time into fully paid and non-assessable full shares of Series A Common Stock
at the then effective Conversion Rate (as defined below) for such shares. Each
outstanding share of Series AT Preferred Stock shall be convertible at the
option of the holder at any time into fully paid and non-assessable full shares
of Series A Common Stock at the then effective Conversion Rate for such shares.
Each outstanding share of Series AX Preferred Stock shall be convertible at the
option of the holder at any time into fully paid and non-assessable full shares
of Series A Common Stock at the then effective Conversion Rate for such shares.
Each outstanding share of Series K Preferred Stock shall be convertible at the
option of the holder at any time into fully paid and non-assessable full shares
of Series K Common Stock at the then effective Conversion Rate for such shares.
Each outstanding share of Series T Preferred Stock shall be convertible at the
option of the holder at any time into fully paid and non-assessable full shares
of Series B Common Stock at the then effective Conversion Rate for such shares.
In addition, unless the Special Directors and the Special K Director determine
by a Supermajority Vote not to require conversion of all outstanding shares of
Convertible Preferred Stock upon the IPO, then, subject to the receipt of any
required regulatory consents or approvals or the filing of any required notices
with any governmental entities and the expiration of any waiting period related
thereto, the holders of all shares of Convertible Preferred Stock shall be
deemed to have converted such shares into shares of Series A Common Stock,
Series B Common Stock or Series K Common Stock (whichever series of Common Stock
such shares of Convertible Preferred Stock are initially convertible into)
immediately prior to the IPO (or at such earlier or later time as is determined
by a Unanimous Vote) (such conversion upon the IPO or such earlier or later time
is referred to herein as the "MANDATORY CONVERSION"). All such conversions of
Convertible Preferred Stock shall be effected in such manner and upon such terms
and conditions as hereinafter provided in this paragraph 6. In case cash,
securities or property other than Series A Common Stock, Series B Common Stock
or Series K Common Stock, as applicable, shall be payable, deliverable or
issuable upon conversion as provided herein, then all references to Series A
Common Stock, Series B Common Stock or Series K Common Stock in this paragraph 6
shall be deemed to apply, so far as appropriate and as nearly as may be, to such
cash, property or other securities. Notwithstanding anything to the contrary in
this Article IV, subject to the provisions for adjustment hereinafter set forth
in this paragraph 6, any provisions in this Article that refer to a conversion
of the Convertible Preferred Stock shall mean, (i) in the case of the Series T
Preferred Stock, the conversion of the Series T Preferred Stock into the Series
B Common Stock, (ii) in the case of the Series K Preferred Stock, the conversion
of the Series K Preferred Stock into the Series K Common Stock, and (iii) in the
case of the Series A Preferred Stock, the conversion of the Series A Preferred
Stock into the Series A Common Stock.
(b) Initial Conversion Rates. Subject to the provisions for
-------------------------
adjustment hereinafter set forth in this paragraph 6, (i) each series of the
Series A Preferred Stock may be converted into Series A Common Stock at the
initial conversion rate of twenty fully paid and non-assessable shares of Series
A Common Stock for each share of Series A Preferred Stock so converted; (ii) the
Series K Preferred Stock may be converted into Series K Common Stock at the
initial conversion rate of twenty fully paid and non-assessable shares of Series
K Common Stock for each share of Series K Preferred Stock so converted; and
(iii) the Series T Preferred
20
<PAGE>
Stock may be converted into Series B Common Stock at the initial conversion rate
of twenty fully paid and non-assessable shares of Series B Common Stock for each
share of Series T Preferred Stock so converted. (This conversion rate as from
time to time adjusted cumulatively pursuant to the provisions of this paragraph
is hereinafter referred to as the "CONVERSION RATE").
(c) Adjustments for Stock Splits, Stock Dividends, Etc. In case
---------------------------------------------------
after the Filing Date the Corporation shall (i) pay a dividend or make a
distribution on its outstanding shares of Series A Common Stock, Series B Common
Stock or Series K Common Stock in shares of its Common Stock, (ii) subdivide the
then outstanding shares of Series A Common Stock, Series B Common Stock or
Series K Common Stock into a greater number of shares of Series A Common Stock,
Series B Common Stock or Series K Common Stock, (iii) combine the then
outstanding shares of Series A Common Stock, Series B Common Stock or Series K
Common Stock into a smaller number of shares of Series A Common Stock, Series B
Common Stock or Series K Common Stock, or (iv) issue by reclassification of its
shares of Series A Common Stock, Series B Common Stock or Series K Common Stock
any shares of any other class of capital stock of the Corporation (including any
such reclassification in connection with a merger in which the Corporation is
the continuing corporation), then the Conversion Rate in effect immediately
prior to the opening of business on the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be adjusted so that the holder of each share of the
Convertible Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number and kind of shares of capital stock of the
Corporation that such holder would have owned or been entitled to receive
immediately following such action had such shares of Convertible Preferred Stock
been converted immediately prior to such time into the series of Common Stock
into which such series of Convertible Preferred Stock is initially convertible.
An adjustment made pursuant to this paragraph 6(c) for a dividend or
distribution shall become effective immediately after the record date for the
dividend or distribution and an adjustment made pursuant to this paragraph 6(c)
for a subdivision, combination or reclassification shall become effective
immediately after the effective date of the subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any action
listed above shall be taken. For purposes of this paragraph 6(c), in the event
the Corporation takes any of the actions described in clauses (i) through (iv)
above with respect to the Series A Common Stock at a time when no shares of
Series B Common Stock or Series K Common Stock are issued and are outstanding
such that a corresponding dividend, subdivision, combination or reclassification
with respect to the Series B Common Stock or Series K Common Stock is not
required in accordance with paragraph 4 of Section B of this Certificate, then
the Conversion Rate of the Convertible Preferred Stock shall be adjusted in
accordance with the foregoing provisions of this paragraph 6(c) as if shares of
Series B Common Stock and/or Series K Common Stock were outstanding on the
record date for such dividend or distribution or the effective date for such
subdivision, combination or reclassification and the Corporation otherwise
satisfied its obligations under paragraph 4 of Section B of this Certificate.
(d) Adjustments for Reclassification, Merger, Etc. In case of any
----------------------------------------------
reclassification or change in the Series A Common Stock, Series B Common Stock
or Series K Common Stock (other than any reclassification or change referred to
in paragraph 6(c) and other than a change in par value) or in case of any
consolidation of the Corporation with any other corporation or any merger of the
Corporation into another corporation or of another corporation into the
Corporation (other than a merger in which the Corporation is the continuing
corporation
21
<PAGE>
and which does not result in any reclassification or change (other than a change
in par value or any reclassification or change to which paragraph 6(c) is
applicable) in the outstanding Series A Common Stock, Series B Common Stock or
Series K Common Stock), or in case of any sale or transfer to another
corporation or entity (other than by mortgage or pledge) of all or substantially
all of the properties and assets of the Corporation, in any such case after the
Filing Date, the Corporation (or its successor in such consolidation or merger)
or the purchaser of such properties and assets shall make appropriate provision
so that the holder of a share of the Convertible Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property that such holder would have owned
immediately after such reclassification, change, consolidation, merger, sale or
transfer if such holder had converted such share into Series A Common Stock,
Series B Common Stock or Series K Common Stock, as applicable, immediately prior
to the effective date of such reclassification, change, consolidation, merger,
sale or transfer (assuming for this purpose (to the extent applicable) that such
holder failed to exercise any rights of election and received per share of
Series A Common Stock, Series B Common Stock or Series K Common Stock, as
applicable, the kind and amount of shares of stock and other securities and
property received per share by a plurality of the non-electing shares), and the
holders of the Convertible Preferred Stock shall have no other conversion rights
under these provisions; provided, that effective provision shall be made, in the
Articles or Certificate of Incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale or transfer, so that the
provisions set forth herein for the protection of the conversion rights of the
Convertible Preferred Stock shall thereafter be made applicable, as nearly as
reasonably may be to any such other shares of stock and other securities and
property deliverable upon conversion of the Convertible Preferred Stock
remaining outstanding or other convertible preferred stock or other Convertible
Securities received by the holders of Convertible Preferred Stock in place
thereof; and provided, further, that any such resulting or surviving corporation
or purchaser shall expressly assume the obligation to deliver, upon the exercise
of the conversion privilege, such shares, securities or property as the holders
of the Convertible Preferred Stock remaining outstanding, or other convertible
preferred stock or other convertible securities received by the holders in place
thereof, shall be entitled to receive pursuant to the provisions hereof, and to
make provisions for the protection of the conversion rights as above provided.
(e) Notice of Adjustments in Conversion Rates. Whenever the
------------------------------------------
Conversion Rate or the conversion privilege shall be adjusted as provided in
paragraphs 6(c) or (d), the Corporation shall promptly cause a notice to be
mailed to the holders of record of the Convertible Preferred Stock describing
the nature of the event requiring such adjustment, the Conversion Rate in effect
immediately thereafter and the kind and amount of stock or other securities or
property into which the Convertible Preferred Stock shall be convertible after
such event. Where appropriate, such notice may be given in advance and included
as a part of a notice required to be mailed under the provisions of paragraph
6(g).
(f) Calculation and Timing of Adjustments. The Corporation may,
--------------------------------------
but shall not be required to, make any adjustment of the Conversion Rate if such
adjustment would require an increase or decrease of less than 1% in such
Conversion Rate; provided, however, that any adjustments which by reason of this
paragraph 6(f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this paragraph
6 shall be made to the nearest 1/100th of a share. In any case in which this
paragraph
22
<PAGE>
6(f) shall require that an adjustment shall become effective immediately after a
record date for such event, the Corporation may defer until the occurrence of
such event (x) issuing to the holder of any shares of Convertible Preferred
Stock converted after such record date and before the occurrence of such event
the additional shares of Series A Common Stock, Series B Common Stock or Series
K Common Stock or other capital stock issuable upon such conversion by reason of
the adjustment required by such event over and above the shares of Series A
Common Stock, Series B Common Stock or Series K Common Stock or other capital
stock issuable upon such conversion before giving effect to such adjustment and
(y) paying to such holder cash in lieu of any fractional interest to which such
holder is entitled pursuant to paragraph 6(l); provided, however, that, if
requested by such holder, the Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to receive
such additional shares of Series A Common Stock, Series B Common Stock or Series
K Common Stock or other capital stock, and such cash, upon the occurrence of the
event requiring such adjustment.
(g) Notice of Certain Events. In case at any time:
-------------------------
(i) the Corporation shall take any action which would
require an adjustment in the Conversion Rate pursuant to this paragraph 6;
(ii) there shall be any capital reorganization or
reclassification of the Common Stock (other than a change in par value), or
any consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required, or any
sale, transfer or lease of all or substantially all of the properties and
assets of the Corporation, or a tender offer for shares of Common Stock
representing at least a majority of the total voting power represented by
the outstanding shares of Common Stock which has been recommended by the
Board of Directors as being in the best interests of the holders of Common
Stock; or
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any such event, the Corporation shall give written notice to the
holders of the Convertible Preferred Stock at their respective addresses as the
same appear on the books of the Corporation, at least twenty days (or ten days
in the case of a recommended tender offer as specified in clause (ii) above)
prior to any record date for such action, dividend or distribution or the date
as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property, if any, deliverable upon such reorganization, reclassification,
consolidation, merger, sale, transfer, lease, tender offer, dissolution,
liquidation or winding up, during which period such holders may exercise their
conversion rights; provided, however, that any notice required by any event
described in clause (ii) of this paragraph 6(g) shall be given in the manner and
at the time that such notice is given to the holders of Common Stock. Without
limiting the obligations of the Corporation to provide notice of corporate
actions hereunder, the failure to give the notice required by this paragraph
6(g) or any defect therein shall not affect the legality or validity of any such
corporate action of the Corporation or the vote upon such action.
23
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(h) Procedures for Conversion. Before any holder of Convertible
--------------------------
Preferred Stock shall be entitled to convert the same into Series A Common
Stock, Series B Common Stock or Series K Common Stock, as applicable (or, in the
case of the Mandatory Conversion, before any holder of Convertible Preferred
Stock so converted shall be entitled to receive a certificate or certificates
evidencing the shares of Series A Common Stock, Series B Common Stock or Series
K Common Stock, as applicable, issuable upon such conversion), such holder shall
surrender the certificate or certificates for such Convertible Preferred Stock
at the office of the Corporation or at the office of the transfer agent for the
Convertible Preferred Stock, which certificate or certificates, if the
Corporation shall so request, shall be duly endorsed to the Corporation or in
blank or accompanied by proper instruments of transfer to the Corporation or in
blank (such endorsements or instruments of transfer to be in form satisfactory
to the Corporation), and shall give written notice to the Corporation at said
office that such holder elects to convert all or a part of the shares
represented by said certificate or certificates (or, in the case of the
Mandatory Conversion, that such holder is surrendering the same) in accordance
with the terms of this paragraph 6, and shall state in writing therein the name
or names in which such holder wishes the certificates for Series A Common Stock,
Series B Common Stock or Series K Common Stock, as applicable, to be issued.
Every such notice of election to convert shall constitute a contract between the
holder of such Convertible Preferred Stock and the Corporation, whereby the
holder of such Convertible Preferred Stock shall be deemed to subscribe for the
amount of Series A Common Stock, Series B Common Stock or Series K Common Stock,
as applicable, which such holder shall be entitled to receive upon conversion of
the number of shares of Convertible Preferred Stock to be converted, and, in
satisfaction of such subscription, to deposit the shares of Convertible
Preferred Stock to be converted, and thereby the Corporation shall be deemed to
agree that the surrender of the shares of Convertible Preferred Stock to be
converted shall constitute full payment of such subscription for Series A Common
Stock, Series B Common Stock or Series K Common Stock, as applicable, to be
issued upon such conversion. The Corporation will as soon as practicable after
such deposit of a certificate or certificates for Convertible Preferred Stock,
accompanied by the written notice and the statement above prescribed, issue and
deliver at the office of the Corporation or of said transfer agent to the Person
for whose account such Convertible Preferred Stock was so surrendered, or to his
nominee(s) or, subject to compliance with applicable law, transferee(s), a
certificate or certificates for the number of full shares of Series A Common
Stock, Series B Common Stock or Series K Common Stock, as applicable, to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share as hereinafter provided together with an amount in cash equal to the full
amount of any cash dividend declared (or required to be declared) on the
Convertible Preferred Stock which, as of the date of such conversion, remains
unpaid (provided that the Corporation will use commercially reasonable efforts
to make such delivery within two Business Days after such deposit and such
notice and statement). If surrendered certificates for Convertible Preferred
Stock are converted only in part, the Corporation will issue and deliver to the
holder, or to his nominee(s), without charge therefor, a new certificate or
certificates representing the aggregate of the unconverted shares. Such
conversion shall be deemed to have been made as of the date of such surrender of
the Convertible Preferred Stock to be converted or immediately prior to the
Mandatory Conversion; and the Person or Persons entitled to receive the Series A
Common Stock, Series B Common Stock or Series K Common Stock, as applicable,
issuable upon conversion of such Convertible Preferred Stock shall be treated
for all purposes as the record holder or holders of such Series A Common Stock,
Series B Common Stock or Series
24
<PAGE>
K Common Stock, as applicable, on such date; provided, however, that the
-----------------
conversion may, at the option of any holder surrendering Convertible Preferred
Stock for conversion, be conditioned upon the IPO or upon notice by such holder
to the Corporation of the occurrence of any other specified event, as the case
may be.
(i) Transfer Taxes. The issuance of certificates for shares of
---------------
Series A Common Stock, Series B Common Stock or Series K Common Stock, as
applicable, upon conversion of shares of Convertible Preferred Stock shall be
made without charge for any issue, stamp or other similar tax in respect of such
issuance, provided, however, if any such certificate is to be issued in a name
other than that of the registered holder of the share or shares of Convertible
Preferred Stock converted, the Person or Persons requesting the issuance thereof
shall pay to the Corporation the amount of any tax which may be payable in
respect of any transfer involved in such issuance or shall establish to the
satisfaction of the Corporation that such tax has been paid.
(j) Reservation of Shares. The Corporation shall reserve and keep
----------------------
available at all times thereafter, solely for the purpose of issuance upon
conversion of the outstanding shares of Convertible Preferred Stock, such number
of shares of Series A Common Stock, Series B Common Stock and Series K Common
Stock as shall be issuable upon the conversion of all outstanding shares of
Convertible Preferred Stock, provided that nothing contained herein shall be
construed to preclude the Corporation from satisfying its obligations in respect
of the conversion of the outstanding shares of Convertible Preferred Stock by
delivery of shares of Series A Common Stock, Series B Common Stock or Series K
Common Stock which are held in the treasury of the Corporation. The Corporation
shall take all such corporate and other actions as from time to time may be
necessary to insure that all shares of Series A Common Stock, Series B Common
Stock and Series K Common Stock issuable upon conversion of shares of
Convertible Preferred Stock at the Conversion Rate in effect from time to time
will, upon issue, be duly and validly authorized and issued, fully paid and
nonassessable and free of any preemptive or similar rights.
(k) Retirement of Convertible Preferred Stock. All shares of
------------------------------------------
Convertible Preferred Stock received by the Corporation upon conversion thereof
into Series A Common Stock, Series B Common Stock or Series K Common Stock, as
applicable, shall be retired and shall not be reissued.
(l) Payment in Lieu of Fractional Shares. The Corporation shall
-------------------------------------
not be required to issue fractional shares of Series A Common Stock, Series B
Common Stock or Series K Common Stock or scrip upon conversion of the
Convertible Preferred Stock. As to any final fraction of a share of Series A
Common Stock, Series B Common Stock or Series K Common Stock, as applicable,
which a holder of one or more shares of Convertible Preferred Stock would
otherwise be entitled to receive upon conversion of such shares in the same
transaction, the Corporation shall pay a cash adjustment in respect of such
final fraction in an amount equal (I) if the Corporation is a Public Company, to
the same fraction of the market value of a full share of Series A Common Stock
or (II) if the Corporation is not a Public Company, to the same fraction of the
fair market value of a share of Series A Common Stock, Series B Common Stock or
Series K Common Stock, as applicable, as determined in good faith by the Board
of Directors. For the purpose of any computation under this paragraph 6
requiring the
25
<PAGE>
determination of the current market value per share of Series A Common Stock, if
the Corporation is a Public Company, such value at any date shall be deemed to
be the average of the daily closing prices for a share of Series A Common Stock
for the ten (10) consecutive trading days before the day in question. The
closing price for each day shall be the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the
composite tape, or if the shares of Series A Common Stock are not quoted on the
composite tape, on the principal United States securities exchange registered
under the Exchange Act, on which the shares of Series A Common Stock are listed
or admitted to trading, or if they are not listed or admitted to trading on any
such exchange, the last reported sale price (or the average of the quoted
closing bid and asked prices if there were no reported sales) as reported by the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or any comparable system, or if the Series A Common Stock is not quoted on
Nasdaq or any comparable system, the average of the closing bid and asked prices
as furnished by any member of the National Association of Securities Dealers,
Inc. selected from time to time by the Corporation for that purpose or, in the
absence of such quotations, such other method of determining market value as the
Board of Directors shall from time to time deem to be fair.
(m) Regulatory Matters. If any shares of Series A Common Stock,
------------------
Series B Common Stock or Series K Common Stock which would be issuable upon
conversion of shares of Convertible Preferred Stock require registration with or
approval of any governmental authority before such shares may be issued upon
conversion, the Corporation will in good faith and as expeditiously as possible
cause such shares to be duly registered or approved, as the case may be.
Without limiting the foregoing, if the conversion of shares of Convertible
Preferred Stock shall be subject to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations promulgated thereunder
(the "HSR ACT AND RULES"), the Corporation shall promptly comply with any
applicable filing or notice requirements under the HSR Act and Rules and use its
reasonable commercial efforts to furnish the information required in connection
therewith to the Federal Trade Commission and the Antitrust Division of the
Department of Justice. If applicable, the Corporation shall use its reasonable
commercial efforts to list (i) the shares of Series A Common Stock issuable upon
conversion of the Series A Preferred Stock, (ii) the shares of Series A Common
Stock issuable upon conversion of the Series K Common Stock required to be
delivered upon conversion of the Series K Preferred Stock, and (iii) the shares
of Series A Common Stock issuable upon conversion of the Series B Common Stock
required to be delivered upon conversion of the Series T Preferred Stock, in
each case prior to delivery of such shares of Series A Common Stock upon such
conversion, on the principal national securities exchange (including, but not
limited to, the Nasdaq National Market) on which the outstanding Series A Common
Stock is listed at the time of such delivery.
7. Voting.
------
(a) General Voting Rights. In connection with any matter as to
---------------------
which the holders of Common Stock are entitled to vote including, but not
limited to, the election of Common Stock Directors (as hereinafter defined),
each share of Convertible Preferred Stock issued and outstanding as of the
record date for such meeting shall have (and the holder of record thereof shall
be entitled to cast) the number of votes equal to the number of votes such
holder
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<PAGE>
would have been entitled to cast had it converted its shares of Convertible
Preferred Stock into shares of Series A Common Stock (in the case of Series A
Preferred Stock), Series B Common Stock (in the case of shares of Series T
Preferred Stock), or Series K Common Stock (in the case of Series K Preferred
Stock) immediately prior to the record date for the determination of
stockholders entitled to vote upon such matter. Except as provided below and in
paragraph 1 of Section B of this Article IV and except as otherwise may be
required by law, the holders of Common Stock, the holders of Convertible
Preferred Stock and the holders of any other series of Series Preferred Stock
shall be entitled to notice of and to attend any meeting of stockholders and to
vote together as a single class.
(b) Election of Preferred Stock Directors.
-------------------------------------
(i) The holders of the Series AM Preferred Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
7(b)(vi) below or by vote at a meeting called for that purpose,
to elect one director to the Board of Directors so long as there
are at least 250,000 shares of Series AM Preferred Stock (as
adjusted for stock splits, stock dividends and the like occurring
after the Filing Date) outstanding (such director elected by the
holders of the Series AM Preferred Stock is hereinafter referred
to as the "SERIES AM PREFERRED STOCK DIRECTOR").
The holders of the Series AT Preferred Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
7(b)(vi) below or by vote at a meeting called for that purpose,
to elect (x) two directors to the Board of Directors so long as
at least 750,000 shares of Series AT Preferred Stock remain
outstanding or (y) one director to the Board of Directors in the
event that less than 750,000 shares of Series AT Preferred Stock
remain outstanding but so long as at least 250,000 shares of
Series AT Preferred Stock remain outstanding, in each case as
adjusted for stock splits, stock dividends and the like occurring
after the Filing Date (such directors elected by the holders of
the Series AT Preferred Stock are hereinafter referred to as the
"SERIES AT PREFERRED STOCK DIRECTORS").
The holders of the Series AX Preferred Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
7(b)(vi) below or by vote at a meeting called for that purpose,
to elect one director to the Board of Directors so long as there
are at least 250,000 shares of Series AX Preferred Stock (as
adjusted for stock splits, stock dividends and the like occurring
after the Filing Date) outstanding (such director elected by the
holders of the Series AX Preferred Stock is hereinafter referred
to as the "SERIES AX PREFERRED STOCK DIRECTOR," and the Series AX
Preferred Stock Director, the Series AM Preferred Stock Director
and the Series AT Preferred Stock Directors are hereinafter
referred to as the "SERIES A PREFERRED STOCK DIRECTORS").
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<PAGE>
The holders of the Series K Preferred Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
7(b)(vi) below or by vote at a meeting called for that purpose,
to elect one director to the Board of Directors so long as there
are at least 250,000 shares of Series K Preferred Stock (as
adjusted for stock splits, stock dividends and the like occurring
after the Filing Date) outstanding (such director elected by the
holders of the Series K Preferred Stock is hereinafter referred
to as the "SERIES K PREFERRED STOCK DIRECTOR").
The holders of the Series T Preferred Stock, voting
separately as a single series, shall have the exclusive right,
acting by written consent given in accordance with paragraph
7(b)(vi) below or by vote at a meeting called for that purpose,
to elect (x) three directors to the Board of Directors so long as
at least 385,000 shares of Series T Preferred Stock remain
outstanding; (y) two directors to the Board of Directors in the
event that less than 385,000 shares of Series T Preferred Stock
remain outstanding but so long as at least 317,500 shares of
Series T Preferred Stock remain outstanding; or (z) one director
to the Board of Directors in the event that less than 317,500
shares of Series T Preferred Stock remain outstanding but so long
as at least 250,000 shares of Series T Preferred Stock remain
outstanding, in each case as adjusted for stock splits, stock
dividends and the like occurring after the Filing Date (such
directors elected by the holders of the Series T Preferred Stock
are hereinafter referred to as the "SERIES T PREFERRED STOCK
DIRECTORS," and together with the Series A Preferred Stock
Directors and the Series K Preferred Stock Director, the
"PREFERRED STOCK DIRECTORS").
(ii) Each of the Preferred Stock Directors will be that
person elected, by written consent given in accordance with
paragraph 7(b)(vi) below or by vote at a meeting called for that
purpose, of the holders of the series of Preferred Stock entitled
to vote for such director.
(iii) At any meeting having as a purpose the election of
directors by holders of the Series AM Preferred Stock, the Series
AT Preferred Stock, the Series AX Preferred Stock, the Series K
Preferred Stock and/or holders of the Series T Preferred Stock,
as the case may be, the presence, in person or by proxy, of the
holders of a majority of the shares of the applicable series of
Convertible Preferred Stock entitled to vote in such election
then outstanding shall be required and be sufficient to
constitute a quorum of such series for the election of any
director by such holders. Each Preferred Stock Director to be
elected at such meeting shall be elected by a plurality of the
votes of the shares of the series of Convertible Preferred Stock
present in person or represented by proxy at such meeting and
entitled to vote in the election of such Preferred Stock Director
or by written consent of the holders of the shares of such series
given in
28
<PAGE>
accordance with paragraph 7(b)(vi) below. At any such meeting or
adjournment thereof, (i) the absence of a quorum of such holders
of Series AM Preferred Stock, Series AT Preferred Stock, Series
AX Preferred Stock, Series K Preferred Stock or Series T
Preferred Stock, as the case may be, shall not prevent the
election of the directors to be elected by the holders of shares
other than the series of Convertible Preferred Stock the holders
of which do not constitute a quorum for such election at such
meeting, and the absence of a quorum of holders of shares other
than the Series AM Preferred Stock, Series AT Preferred Stock,
Series AX Preferred Stock, Series K Preferred Stock or Series T
Preferred Stock shall not prevent the election of the directors
to be elected by the holders of the Series AM Preferred Stock,
Series AT Preferred Stock, Series AX Preferred Stock, the Series
K Preferred Stock or the Series T Preferred Stock, as the case
may be, and (ii) in the absence of a quorum of holders of any of
(x) shares of the Series AM Preferred Stock, the Series AT
Preferred Stock, the Series AX Preferred Stock, the Series K
Preferred Stock or Series T Preferred Stock, (y) shares other
than the Series AM Preferred Stock, the Series AT Preferred
Stock, the Series AX Preferred Stock, the Series K Preferred
Stock or the Series T Preferred Stock, or (z) shares of all such
classes and series, holders of a majority of the shares, present
in person or by proxy, of each class or series of stock which
lack a quorum shall have power to adjourn the meeting for the
election of directors which such class or series is entitled to
elect, from time to time, without notice (subject to applicable
law) other than announcement at the meeting, until a quorum shall
be present.
(iv) Except as provided in paragraph 7(b)(v), any vacancy in
the office of a Preferred Stock Director occurring during the
effectiveness of the applicable provisions of paragraph 7(b)(i)
shall be filled solely by the holders of the series of
Convertible Preferred Stock entitled to elect such Preferred
Stock Director by vote of such holders as provided in paragraph
7(b)(iii) above at a meeting called for such purpose or by
written consent of such holders given in accordance with
paragraph 7(b)(vi) below.
(v) A Preferred Stock Director elected by a specified
series of Convertible Preferred Stock may be removed without
cause by the vote or by written consent of the holders of a
majority of the outstanding shares of such series of Convertible
Preferred Stock which elected such Preferred Stock Director. Any
vacancy in the office of a Preferred Stock Director shall be
filled by the affirmative vote of the holders of a majority of
the outstanding shares of the applicable series of Convertible
Preferred Stock entitled to elect the Preferred Stock Director so
removed at a meeting, which may be the same meeting at which the
removal of such Preferred Stock Director was voted upon, or by
written consent of the holders of such series of Preferred Stock
given in accordance with paragraph 7(b)(vi) below. Any director
elected to fill a vacancy shall serve the same
29
<PAGE>
remaining term as that of his or her predecessor and until his or
her successor has been chosen and has qualified.
(vi) With respect to actions by the holders of the Series
AM Preferred Stock, the Series AT Preferred Stock, the Series AX
Preferred Stock, the Series K Preferred Stock or the Series T
Preferred Stock upon those matters on which such holders are
entitled to vote as a separate series, such actions may be taken
without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares of
Series AM Preferred Stock, Series AT Preferred Stock, Series AX
Preferred Stock, Series K Preferred Stock or Series T Preferred
Stock, as the case may be, having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which all shares of such series of
Convertible Preferred Stock entitled to vote thereon were present
and voted, and shall be delivered to the Corporation as provided
in the DGCL. Notice shall be given in accordance with the
applicable provisions of the DGCL of the taking of corporate
action without a meeting by less than unanimous written consent.
(vii) The right of the holders of Convertible Preferred
Stock to elect the Preferred Stock Directors shall be in addition
to their right to vote, on an as-converted basis (in the case of
the Series A Preferred Stock into Series A Common Stock, in the
case of Series K Preferred Stock into Series K Common Stock and
in the case of the Series T Preferred Stock into Series B Common
Stock), with the holders of the Common Stock and any other series
of Series Preferred Stock so entitled to vote, together as a
single class, in the election of all other members of the Board
of Directors (other than the Series B and Series K Common Stock
Directors).
(c) Protective Covenants. Notwithstanding the rights and
--------------------
privileges of any class or series of Preferred Stock then outstanding, so long
as any shares of Convertible Preferred Stock shall remain outstanding, the
Corporation shall not, without first obtaining the affirmative vote (or, except
with respect to clause (iii) below, the written consent) of the holders of not
less than a majority of the outstanding shares of the Convertible Preferred
Stock (with the holders of the Series AM Preferred Stock, the Series AT
Preferred Stock, the Series AX Preferred Stock, the Series K Preferred Stock and
the Series T Preferred Stock voting together as a single class except as
otherwise provided in clause (i) below):
(i) adopt, amend, alter or repeal any provision of the
Certificate or any resolution of the Board of Directors or any
other instrument establishing and designating the Convertible
Preferred Stock, any series of Series Preferred Stock or any
Common Stock and determining the relative voting powers,
designations, preferences, rights and qualifications, limitations
and restrictions thereof, so as to effect any adverse change in
the voting powers, designations, preferences, rights and
qualifications, limitations and restrictions of the holders of
the Convertible
30
<PAGE>
Preferred Stock; provided, however, that the Corporation will not
-------- -------
make any such amendment, alteration or repeal which would affect
adversely the voting powers, designations, preferences, rights
and qualifications, limitations or restrictions of the shares of
one or more series of Convertible Preferred Stock without the
consent of the holders of a majority of the outstanding shares of
each such series of Preferred Stock so affected, each voting
separately as a separate series of Preferred Stock (or, if such
amendment, alteration or repeal would affect adversely the voting
powers, designations, preferences, rights and qualifications,
limitations or restrictions of the shares of all series of
Convertible Preferred Stock in the same manner, without the
consent of the holders of a majority of the outstanding shares of
Convertible Preferred Stock voting as a single class);
(ii) create, designate or issue any capital stock which is
Special Voting Stock;
(iii) (a) consolidate with, or merge with or into, any
Person or enter into a binding share exchange or similar
transaction with any person (other than a merger of the
Corporation with a wholly owned Subsidiary thereof which does not
effect a change in the capital stock of the Corporation) (b)
dispose of assets or properties in one transaction or a series of
related transactions having an aggregate value in excess of 50%
of the fair market value of the consolidated assets of the
Corporation other than a transfer to a wholly-owned Subsidiary of
the Corporation or (c) consent to any liquidation, dissolution or
winding up of the Corporation or any of its material
Subsidiaries; or
(iv) (a) declare or pay any dividend on, or make any
distribution to holders of, Junior Stock or equity securities of
any Subsidiary of the Corporation or (b) purchase, redeem or
otherwise acquire for value any Junior Stock, any equity
securities of any Subsidiary of the Corporation or any options,
warrants or other rights to acquire such securities (other than a
repurchase or redemption of shares of Junior Stock, any equity
securities of any Subsidiary of the Corporation or any options,
warrants or other rights to acquire such securities which is a
Permitted Repurchase).
Any approval obtained pursuant to this paragraph 7(c) with respect to
any matter described in clause (iii) above shall not be valid unless such matter
shall have been presented to the holders of the Convertible Preferred Stock for
a vote at a meeting held on not less than thirty (30) days' prior written
notice, which notice shall have described in detail each such matter to be voted
upon.
8. Waiver. Unless otherwise provided in this Certificate, any
------
provision which, for the benefit of the holders of the Convertible Preferred
Stock or any series thereof, prohibits, limits or restricts actions by the
Corporation, or imposes obligations on the Corporation, may be waived in whole
or in part, or the application of all or any part of such
31
<PAGE>
provision in any particular circumstance or generally may be waived, in each
case only pursuant to (i) a waiver which has been approved by Board Action (as
if the subject of such waiver were a Supermajority Item (or a Unanimous Item if
the matter that is the subject of such waiver would otherwise be a Unanimous
Item)) and (ii) the consent of the holders of a majority (or such greater
percentage thereof as may be required by applicable law or any applicable rules
of any national securities exchange or national interdealer quotation system) of
the outstanding shares of (x) each series of Convertible Preferred Stock, each
consenting separately as a separate series of Preferred Stock, or (y) if such
waiver would affect adversely the voting powers, designations, preferences,
rights and qualifications, limitations or restrictions of the shares of all
series of Convertible Preferred Stock in the same manner, all series of
Convertible Preferred Stock consenting together as a single class of Preferred
Stock. Any such waiver shall be binding on all holders, including any subsequent
holders, of the Convertible Preferred Stock.
9. Method of Giving Notices. Any notice required or permitted
------------------------
hereby to be given to the holders of shares of Convertible Preferred Stock shall
be deemed duly given if deposited in the United States mail, first class mail,
postage prepaid, and addressed to each holder of record at the holder's address
appearing on the books of the Corporation or supplied by the holder in writing
to the Corporation for the purpose of such notice.
10. Exclusion of Other Rights. Except as provided in the Bylaws of
-------------------------
the Corporation or as may otherwise be required by law and except for the
equitable rights and remedies which may otherwise be available to holders of
Convertible Preferred Stock, the shares of Convertible Preferred Stock shall not
have any designations, preferences, limitations or relative rights other than
those specifically set forth herein.
11. Heading of Subdivisions. The headings of the various
-----------------------
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
SECTION D
SERIES PREFERRED STOCK
The Series Preferred Stock may be issued, from time to time, in one or
more series, 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 resolution or
resolutions providing for the issue of such series adopted pursuant to Board
Action (as hereinafter defined); the Series Preferred Stock may rank senior to,
junior to or on a parity with the Convertible Preferred Stock with respect to
(i) rights upon liquidation, dissolution or winding up of the Corporation, (ii)
the payment of dividends or (iii) distributions on, or the repurchase or
redemption of any other shares of capital stock of the Corporation. The
Convertible Preferred Stock will rank on a parity with any Series Preferred
Stock that is not by its terms made senior or junior to the Convertible
Preferred Stock. Subject to the provisions of paragraph 7(c)(ii) of Section C,
the Board of Directors, in such resolution or resolutions (a copy of which shall
be filed and recorded as required by law), is also expressly authorized to fix:
(i) the distinctive serial designations and the division of
such shares into series and the number of shares of a particular
series, which may be increased
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<PAGE>
or decreased, but not below the number of shares thereof then
outstanding, by a certificate made, signed, filed and recorded as
required by law;
(ii) the dividend rate or amounts, if any, for the particular
series, the date or dates from which dividends on all shares of such
series shall be cumulative, if dividends on stock of the particular
series shall be cumulative and the relative rights of priority, if
any, or participation, if any, with respect to payment of dividends on
shares of that series;
(iii) the rights of the shares of each series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment
of shares of each series;
(iv) the right, if any, of the holders of a particular series to
convert or exchange such stock into or for other classes or series of
a class of stock or indebtedness of the Corporation, and the terms and
conditions of such conversion or exchange, including provision for the
adjustment of the conversion or exchange rate in such events as the
Board of Directors shall determine; provided that no series of Series
Preferred Stock shall have the right to convert into Series B Common
Stock;
(v) the voting rights, if any, of the holders of a particular
series;
(vi) the terms and conditions, if any, for the Corporation to
purchase or redeem shares of a particular series; and
(vii) any other relative rights, powers, preferences and
limitations of a particular series of the Series Preferred Stock.
The Board of Directors, acting through Board Action, is authorized to
exercise its authority with respect to fixing and designating various series of
the Series Preferred Stock and determining the relative rights, powers and
preferences thereof to the full extent permitted by applicable law, subject to
any stockholder vote that may be required by this Certificate.
All shares of any one series of the Series Preferred Stock shall be
alike in every particular. Except to the extent otherwise provided in the
resolution or resolutions providing for the issue of any series of Series
Preferred Stock, the holders of shares of such series shall have no voting
rights except as may be required by the laws of the State of Delaware. Further,
unless otherwise expressly provided in the Certificate of Designation for a
series of Series Preferred Stock, no consent or vote of the holders of shares of
Series Preferred Stock or any series thereof shall be required for any amendment
to this Certificate that would increase the number of authorized shares of
Series Preferred Stock or the number of authorized shares of any series thereof
or decrease the number of authorized shares of Series Preferred Stock or the
number of authorized shares of any series thereof (but not below the number of
shares of Series Preferred Stock or of such series, as the case may be, then
outstanding).
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<PAGE>
Except as may be provided by the Board of Directors in a Certificate
of Designation or by law, shares of any series of Series Preferred Stock that
have been redeemed (whether through the operation of a sinking fund or
otherwise) or purchased by the Corporation, or which, if convertible or
exchangeable, have been converted into or exchanged for shares of stock of any
other class or classes shall be retired and shall not be reissued.
ARTICLE V
DIRECTORS
SECTION A
NUMBER AND DESIGNATION
The governing body of the Corporation shall be a Board of Directors
which shall consist of not less than three (3) and not more than seventeen (17)
(the "MAXIMUM NUMBER") directors, with the exact number of directors
constituting the entire Board of Directors (the "ENTIRE BOARD") to be specified
from time to time in accordance with this Certificate by Board Action of (i) so
long as the Special Directors are entitled to exercise the Special Director
Approval Right, the Series B Committee, or (ii) at any time at which the Special
Directors are not entitled to exercise the Special Director Approval Right, the
Board of Directors; provided, however, that the total number of directors
constituting the Entire Board shall not be less than the total number (the
"MINIMUM NUMBER") of (x) Series Common Stock Directors the holders of Common
Stock are entitled to elect, (y) Preferred Stock Directors the holders of
Convertible Preferred Stock are entitled to elect and (z) any directors the
holders of any series of Series Preferred Stock, voting as a separate series of
Preferred Stock and not with the holders of the Common Stock, are entitled to
elect, which Minimum Number shall not be more than the Maximum Number.
1. Preferred Stock Directors. The Preferred Stock Directors shall
-------------------------
be elected by the holders of the Convertible Preferred Stock, subject to, and in
the manner provided in, Article IV of this Certificate.
2. Series Common Stock Directors. The Series Common Stock Directors
-----------------------------
shall be elected by the holders of the applicable series of Common Stock,
subject to, and in the manner provided in, Article IV of this Certificate.
3. Additional Directors. At any meeting of stockholders having as a
--------------------
purpose the election of directors, to the extent that the total number of
directors constituting the Entire Board exceeds the Minimum Number, any
additional directors (the "ADDITIONAL DIRECTORS") shall be elected by the
holders of the Common Stock and Convertible Preferred Stock and, if so fixed by
the resolution or resolutions of the Board of Directors adopted by Board Action
creating, designating and establishing such series of Series Preferred Stock,
the holders of Series Preferred Stock, subject to, and in the manner provided
in, Article IV of this Certificate and subject to Section B(8) of this Article
V.
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SECTION B
BOARD ACTIONS
1. Definitions. Unless the context otherwise requires, the terms
-----------
defined in this paragraph 1 shall have, for all purposes of this Certificate,
the meanings herein specified:
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries Controls, is
Controlled by, or is under common Control with such Person.
"ASSOCIATE" shall have the meaning set forth in Rule 405 under the
Securities Act.
"@HOME SERVICES" means the business of providing Internet connectivity
service and Internet "backbone" service, which includes (without limitation) the
following: (i) direct connectivity to the Internet through the development,
packaging, marketing and distribution of a suite of branded Internet
connectivity services and certain branded applications, including one or more
custom browsers, for use by subscribers and information providers, together with
connections to various on-line hosting services (such as America Online,
Prodigy, CompuServe and MSN) and information providers, both in the United
States and internationally (in countries where the Corporation is capable of
providing such service), (ii) directory services and navigation services to
content created by third parties, provided, however, that it is not contemplated
-------- -------
that the Corporation would itself be a creator of content (other than with
respect to content created as part of the Corporation's navigation services
(such as the "video barker" and "templates" for the creation of navigation home
pages), the aggregation and organization of content created by third parties and
technological assistance to such third party creators), and (iii) systems for
(a) "backbone" transmission, (b) network management, and (c) billing and
associated support functions.
".COM AGREEMENT" means any agreement between the Corporation (or any
Cable Parent or a Controlled Affiliate thereof acting in the capacity of a sales
agent by and on behalf of the Corporation pursuant to a sales agency agreement
to be entered into by such Cable Parent or Controlled Affiliate and the
Corporation, which agreement will, among other things, specify the terms and
conditions upon which such Person may act as a sales agent for the Corporation,
including specification of the terms upon which such Person may enter into a
.Com Agreement on the Corporation's behalf) and a content provider which
provides (i) physical connectivity and access to the @Home Network (as defined
in the Master Distribution Agreement) and (ii) for compensation, if any, to the
Corporation in accordance with its charges therefor.
"BOARD ACTION" means, with respect to any matter considered by the
Board of Directors or any committee thereof, the action of the Board or such
committee with respect thereto for purposes of Section 141 of the DGCL, which
action shall be deemed taken:
(i) in the case of action by the Board of Directors, by the approval
of such action by:
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(a) with respect to any matter that is not a Related Party
------
Transaction or a Related Party .Com Agreement or Related Party Promotional
Agreement, (x) a majority of the members of the Board present at a meeting at
which a quorum of the Board is present or a written consent to such action
executed by all the members of the Board and (y) so long as the holders of any
series of Common Stock or Preferred Stock are entitled to elect a Special
Director, (1) as to matters that are not Supermajority Items or Unanimous Items,
so long as the Special Directors are entitled to exercise the Special Director
Approval Right, a majority of the total number of Special Directors or (2) with
respect to any matter that is a Supermajority Item or a Unanimous Item, a
Supermajority Vote or Unanimous Vote of the Special Directors and the Special K
Director, if any;
(b) with respect to any matter that is a Related Party
Transaction, either (I)(x) a majority of the members of the Board present at a
meeting at which a quorum of the Board is present, the notice of which meeting
set forth the matter that is a Related Party Transaction and a reasonably
detailed description of such matter, or by Special Written Consent; and (y) so
long as the holders of any series of Common Stock or Preferred Stock are
entitled to elect a Special Director, (1) a majority of the total number of
Special Directors (regardless of whether or not such Special Directors are
Disinterested Directors) and (2) a majority of the Special Directors and Special
K Director, if any, who are Disinterested Directors; provided, however, that, so
-----------------
long as the holders of any series of Common Stock or Preferred Stock are
entitled to elect a Special Director, in addition to the requirements set forth
above in this paragraph (b)(I)(y)(2), (A) if the Related Party Transaction is a
Supermajority Item, the approval of such Related Party Transaction shall require
the affirmative vote or written consent of seventy-five percent (75%) (rounded
up to the nearest whole number of directors) (or two-thirds if there are only
three such directors) of the total number of Special Directors and Special K
Director, if any, who are Disinterested Directors; and (B) if the Related Party
Transaction is a Unanimous Item, the approval of such Related Party Transaction
shall require the affirmative vote or written consent of the total number of
Special Directors and Special K Director, if any (regardless of whether or not
such directors are Disinterested Directors); or (II)(x) a majority of the
members of the Board present at a meeting at which a quorum of the Board is
present, the notice of which meeting set forth the matter that is a Related
Party Transaction and a reasonably detailed description of such matter, or by
Special Written Consent; and (y) so long as the holders of any series of Common
Stock or Preferred Stock are entitled to elect a Special Director, all of the
Special Directors (regardless of whether or not such Special Directors are
Disinterested Directors); or
(c) with respect to the approval of a Related Party .Com
Agreement or Related Party Promotional Agreement, approval in accordance with
clauses (y) or (z) of paragraph 5 below (but subject to paragraph 7 below),
provided that no Board Action is required for such approval in the circumstances
specified in clause (x) of paragraph 5;
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(ii) in the case of action by any committee of the Board of
Directors (other than the .Com Committee or the Series B Committee),
by the approval of such action by: (a) either a majority of the
members of such committee present at a meeting at which a quorum of
such committee is present or a written consent to such action executed
by all the members of such committee; and (b) so long as the holders
of any series of Common Stock or Preferred Stock are entitled to elect
a Special Director and the Special Directors are entitled to exercise
the Special Director Approval Right, a majority of the total number of
Special Directors; provided, however, that the approval of the Special
-----------------
Directors shall not be required in connection with the approval of any
matter as to which the Board of Directors and the Special Directors
have specifically provided in the specification of powers and duties
of such committee by resolution or Bylaw approved by Board Action,
that the approval of the Special Directors shall not be required;
(iii) in the case of action by the .Com Committee, either (1)
a majority of the total number of members of the .Com Committee or (2)
a written consent to such action executed by all of the members of the
.Com Committee; and
(iv) in the case of action by the Series B Committee, either
(1) a majority of the members of the Series B Committee present at a
meeting at which a quorum of the Series B Committee is present or (2)
a written consent to such action executed by all of the members of the
Series B Committee.
"CLOSING AGREEMENTS" means the Stock Purchase and Exchange Agreement
among the Corporation and the purchasers that are parties thereto, the First
Amended and Restated Registration Rights Agreement among the Corporation and the
stockholders and investors that are parties thereto, each dated as of August 1,
1996, and the Stockholders' Agreement.
"DISINTERESTED DIRECTORS" means any member of the Board of Directors
who is not an interested director for purposes of DGCL Section 144(a); provided,
--------
however, that any director who is an officer, director, employee or partner of a
- -------
Related Party shall, notwithstanding the fact that such director is not
otherwise personally interested in a Related Party Transaction, be deemed
interested in such Related Party Transaction.
"LCO AGREEMENT" means the provisions of the LCO Agreement Term Sheet,
set forth as Exhibit B to the letter agreement dated May 15, 1997, among TCI
Sub, Comcast Sub and Cox Sub and certain of their respective Affiliates and the
Corporation (the "LCO AGREEMENT TERM SHEET"); provided that if the matters set
forth in the LCO Agreement Term Sheet are superseded by a definitive agreement
which is executed by the necessary parties thereto, such definitive agreement
will constitute the LCO Agreement for all purposes hereunder.
"OUTSIDE DIRECTOR" means any director of the Corporation who (i) is
not an officer (other than any Vice Chairman) of, or employed by, the
Corporation or its Subsidiaries and (ii) is not an Affiliate or Associate of any
of Cox Enterprises, Inc., a Delaware corporation, Comcast or
37
<PAGE>
TCI or any of their respective Controlled Affiliates (other than the Corporation
and its Subsidiaries).
"PROMOTIONAL AGREEMENT" means an agreement entered into between a
content provider and the Corporation (individually and not through an agency
relationship with a Cable Parent or any of its Controlled Affiliates) providing
for the promotion of such content or content provider on the @Home Services
(e.g., through button or hot link placement on the browsers, home pages or theme
pages in the National Area (as defined in the Master Distribution Agreement), by
the @Home video barker or otherwise) as the Corporation and such content
provider shall agree, at which point such promotional activity shall become a
part of the @Home Services, subject, however, to the Cable Parent Exclusion
Right (as defined in the Master Distribution Agreement).
"SPECIAL DIRECTOR APPROVAL RIGHT" means the requirement for certain
Board Actions that a majority of the total number of Special Directors have
approved such matter, which requirement shall continue in effect so long as TCI
Sub beneficially owns at least (i) 385,000 shares of Series T Preferred Stock or
7,700,000 shares of Series B Common Stock (or any combination thereof
aggregating 7,700,000 shares of Series B Common Stock on an as converted basis)
(in each case, which shares are Company Securities and as adjusted for stock
splits, stock dividends and the like occurring after the Filing Date), and (ii)
---
securities representing a majority of the outstanding voting power of the
Corporation.
"SPECIAL WRITTEN CONSENT" when used with respect to the approval of
any action by the Board, means a written consent to such action executed by all
of the members of the Board, provided, that such written consent is executed by
--------
directors subsequent to a meeting of the Board, the notice of which meeting set
forth the matter which is the subject of such written consent and a reasonably
detailed description of such matter.
2. Vote Required for Actions of the Board or Committees.
----------------------------------------------------
(a) Except as otherwise provided by law or this Certificate and
subject to the rights of approval set forth in paragraphs 3, 4, 5, 7 and 8
below, any action or approval by the Board of Directors or any committee thereof
shall require that approval therefor be obtained by Board Action.
(b) Any approval of the Special Directors may be evidenced by the
affirmative vote of such Special Directors (i) at the Board meeting or committee
meeting at which such action is approved, (ii) by unanimous written consent of
the Board or a committee thereof including such Special Directors, or (iii) by a
separate approval granted at a meeting of such Special Directors or by written
consent of a majority of such Special Directors. The requirements for Special
Director approval herein and the procedures thereof are included by virtue of
the authority contained in Section 141(a) of the DGCL.
(c) Except as specifically provided in paragraph 6 below with
respect to the powers of the .Com Committee, no committee of the Board shall
have the power to act on any Related Party Transaction, Supermajority Item,
Unanimous Item or any Related Party .Com Agreement or Related Party Promotional
Agreement.
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<PAGE>
3. Related Party Transactions.
--------------------------
(a) Without limiting the application of any provision of Delaware
law, including but not limited to DGCL Section 144, relating to the approval of
transactions by members of the Board who are interested directors, any Related
Party Transaction must be approved by a Board Action.
(b) A "RELATED PARTY" shall mean any holder of more than 5% of
the voting power of the Corporation or a Related Party Affiliate of such holder.
The term "RELATED PARTY TRANSACTION" shall mean any transaction between the
Corporation and a Related Party; provided, however, that the following
transactions will not be Related Party Transactions: (i) any transaction or
series of related transactions, that (x) are in the ordinary course of business,
(y) are on arms' length terms, and (z) involve an aggregate amount that is less
than $1,000,000; (ii) the entering into of LCO Agreements and other agreements
for the provision of ancillary or related services by the Corporation, between a
Related Party or its Related Party Affiliates, on the one hand, and the
Corporation, on the other hand, provided that the terms of such LCO Agreements
--------
or such other agreements are no more favorable to such Related Party and its
Related Party Affiliates than the terms of similar agreements then currently
offered by or generally available from the Corporation to each other Cable
Parent or its Controlled Affiliates (without regard to the size (through volume
discounts or otherwise) or identity of such Cable Parent or its ownership of
securities of the Corporation); (iii) the entering into or performance under any
.Com Agreement or Promotional Agreement; and (iv) any actions taken by the
Series B Committee pursuant to the powers set forth in paragraph 8 below. The
term "RELATED PARTY AFFILIATE" shall mean, with respect to any Person, any other
Person that directly or indirectly, through one or more intermediaries,
Controls, is Controlled by, or is under common Control with, such first Person;
provided, that (i) any Person owning, directly or indirectly, in excess of 25%
- --------
of the equity interests (on a fully diluted basis) of any other Person shall be
deemed to Control such other Person, and (ii) the Corporation will not be deemed
to be a Related Party Affiliate of any Parent or such Parent's Related Party
Affiliates.
4. Supermajority and Unanimous Approval Requirements.
-------------------------------------------------
(a) Supermajority Items. For purposes of determining whether or
--------------------
not there has been Board Action with respect to any of the following matters
("SUPERMAJORITY ITEMS"), so long as the holders of any series of Common Stock or
Preferred Stock are entitled to elect a Special Director or a Special K
Director, the affirmative vote or written consent of seventy-five percent (75%)
(rounded up to the nearest whole number of directors) of the total number of (x)
the Special Directors and (y) the Special K Director, if any, voting separately
from the other directors of the Corporation shall be required (such vote or
consent, a "SUPERMAJORITY VOTE"):
(1) The merger, consolidation or other business combination
by the Corporation or any Controlled Affiliate of the Corporation into or with
any other entity, other than any transaction involving only the Corporation
and/or one or more directly or indirectly wholly owned Subsidiaries of the
Corporation; provided, however, that the provisions of this paragraph shall not
-------- -------
apply to transactions which have been approved in accordance with subparagraphs
(2) or (4) below, or which would not otherwise require approval thereunder.
39
<PAGE>
(2) The acquisition (other than an acquisition covered by
subparagraph (4) below) by the Corporation or any Controlled Affiliate of the
Corporation of any assets or properties (including stock or other equity
interests of a third party) in one transaction or a series of related
transactions, which assets or properties have an aggregate purchase price or
value in excess of 20% of the fair market value of the assets of the Corporation
(on a consolidated basis).
(3) The disposition by the Corporation or any Controlled
Affiliate of the Corporation of any assets or properties (including stock or
other equity interests of a third party) in one transaction or a series of
related transactions having an aggregate value in excess of fifty percent (50%)
of the fair market value of the assets of the Corporation (on a consolidated
basis).
(4) The acquisition by the Corporation or any Controlled
Affiliate of the Corporation of any assets or properties in exchange for or in
consideration of the sale or issuance to any Person of capital stock of the
Corporation which sale or issuance would constitute in excess of 16-2/3% of the
fully diluted shares of the Corporation (on a common stock equivalent basis)
(including such shares to be issued or sold); provided, however, that the
provisions of this subparagraph (4) shall not be deemed to apply to any
issuances or sales of capital stock solely for cash.
(5) The approval of the Chief Executive Officer of the
Corporation, and the removal of any Chief Executive Officer and the appointment
of any successor thereto.
(6) Any actions resulting in the voluntary dissolution or
liquidation of the Corporation, or the initiation of any proceedings relating to
the voluntary bankruptcy of the Corporation.
(7) Any amendment, alteration or repeal of any provision of
this Certificate or the Bylaws of the Corporation, other than (A) the filing of
any Certificate of Designation or amendment to this Certificate establishing any
class or series of Series Preferred Stock of the Corporation, the establishment,
issuance and sale of which would not require a Supermajority Vote pursuant to
subparagraph (8) below, and (B) any amendment to or a modification of this
Certificate which is necessary in order to implement any action which has been
otherwise approved by a Supermajority Vote.
(8) The (A) establishment, creation or designation of any
additional class or series of capital stock or any security having a direct or
indirect equity participation in the Corporation and (B) sale or issuance of (i)
shares of capital stock or securities having a direct or indirect equity
participation in the Corporation, or (ii) warrants, options or rights to acquire
shares of capital stock or securities having a direct or indirect equity
participation in the Corporation or securities convertible into or exchangeable
for capital stock or any security having a direct or indirect equity
participation in the Corporation, in each case, which capital stock or other
security constitutes Special Voting Stock; provided that subject to the
--------
requirements of law, this Certificate and the Bylaws of the Corporation, it is
intended that the
40
<PAGE>
Board of Directors would be entitled, without a Supermajority Vote or a
Unanimous Vote, to create, designate and issue shares of Series Preferred Stock
that are not Special Voting Stock which rank senior to or pari passu with the
---- -----
Convertible Preferred Stock as to liquidation rights and rights relating to
dividends, distributions, repurchases and redemptions; and provided further,
-------- -------
however, that no capital stock of the Corporation, the issuance of which would,
- -------
in accordance with this paragraph 4, require a Unanimous Vote of the Special
Directors and the Special K Director, shall be issued without such Unanimous
Vote of the Special Directors and the Special K Director.
(9) Any increase in the aggregate number of shares of Series A
Common Stock issued or reserved for issuance to management (including shares
reserved for issuance upon exercise of options, warrants or other rights)
pursuant to all incentive compensation plans (collectively, the "MANAGEMENT
STOCK PLAN") in excess of an aggregate amount calculated at the time of such
proposed increase equal to (i) 16,000,000 (as adjusted for stock splits, stock
dividends and the like occurring after the Filing Date), plus (ii) the greater
----
of (x) 0.075 multiplied by the number of shares of Series A Common Stock (or
options, warrants or other rights to acquire shares) issued by the Corporation
subsequent to August 1, 1996 (other than shares (or options, warrants or other
rights to acquire shares) issued pursuant to the Management Stock Plan or shares
issued upon conversion of shares of Convertible Preferred Stock) and (y) the
number of shares (or options, warrants or other rights to acquire shares) the
issuance of which would represent a dilution of the fully diluted equity of the
Corporation (including the assumed issuance of all shares in the Management
Stock Plan prior to such increase) of four percent (4%) per year from August 1,
1996 to the date of such proposed increase.
(10) (A) The declaration or payment of any dividend on, or the
making of any distribution to holders of, Junior Stock or equity securities of
any Controlled Affiliate of the Corporation (other than a wholly owned
Subsidiary) or (B) the purchase, redemption or other acquisition for value of
any Junior Stock or equity securities of any Controlled Affiliate of the
Corporation or any options, warrants or other rights to acquire such securities
(other than a Permitted Repurchase).
(11) The adoption of any budget which is or contains a Non-Pro
Rata Roll-Out Budget (as defined in the Master Distribution Agreement).
(12) The appointment of any Outside Directors to the .Com
Committee following the IPO (other than the Corporation's Chief Executive
Officer and the members of the .Com Committee immediately prior to the IPO).
(b) Unanimous Items. For purposes of determining whether or not
----------------
there has been Board Action with respect to the following matters ("UNANIMOUS
ITEMS"), so long as the holders of any series of Common Stock or Preferred
Stock are entitled to elect a Special Director or a Special K Director, the
affirmative vote or written consent of 100% of the total number of (x) the
Special Directors and (y) the Special K Director, if any, voting separately from
the other directors of the Corporation (such vote or consent, a "UNANIMOUS
VOTE") shall be required:
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(1) The authorization or issuance of any shares of Convertible
Preferred Stock following consummation of the transactions contemplated by the
Closing Agreements.
(2) Any amendments to or modifications of the items listed in
this paragraph 4 or the requisite vote or consent for approval thereof.
(3) Any increase in the number of the Series B or Series K Common
Stock Directors.
(4) Any modification of the rights of the holders of the Series B
or Series K Common Stock to designate and elect directors.
(5) The appointment of any directors (other than the
Corporation's Chief Executive Officer and the other initial members thereof
elected following the Filing Date or any Outside Directors elected in accordance
with subparagraph (a)(13) above), to the .Com Committee.
(6) Any amendment or modification to the Specifications and
Standards set forth in the Master Distribution Agreement which would require the
Operator Facilities (as defined in the Master Distribution Agreement) of any
Cable Parent to be capable of distributing or providing Video Services (as
defined in the Master Distribution Agreement) in excess of the duration
limitation set forth in the Specifications and Standards.
5. Approval of .Com and Promotional Agreements. The execution,
-------------------------------------------
delivery and performance of any .Com Agreement or Promotional Agreement between
a Related Party or its Related Party Affiliates, on the one hand, and the
Corporation or its Affiliates, on the other hand (a "RELATED PARTY .COM
AGREEMENT" or a "RELATED PARTY PROMOTIONAL AGREEMENT," respectively), may be
approved by the Corporation pursuant to any of the following methods: (x)
approval by the authorized officers of the Corporation (without the approval of
the Board of Directors) to the extent such agreement contains the Corporation's
standard terms and conditions for agreements of that sort to the extent such
standard terms and conditions exist (i.e., the Corporation's applicable "rate
card"), (y) approval of a majority of the total number of members of the .Com
Committee or (z) approval by a majority of the Board of Directors, including all
of the Special Directors so long as the holders of any series of Common Stock or
Preferred Stock are entitled to elect a Special Director. The Cable Parent
which is, or whose Related Party Affiliate is, such Related Party shall be
entitled to select which of the foregoing methods pursuant to which such
approval will be sought, or if more than one method is to be sought, the
priority therefor. All decisions of the .Com Committee shall be made in
accordance with the policies and provisions for the .Com Agreements and
Promotional Agreements set forth in the Stockholders' Agreement. A Stockholder
who is or whose Related Party Affiliate is the Related Party whose .Com
Agreement or Promotional Agreement has been disapproved by the .Com Committee or
the Board pursuant to clause (y) or (z) above, as the case may be, shall be
entitled to a written explanation from the members of the .Com Committee or the
Board, as the case may be, voting against such approval. Nothing contained in
this section shall limit the right of the Directors under applicable law to
inspect any .Com Agreements or Promotional Agreements.
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6. .Com Committee. There is hereby established a .Com Committee,
--------------
which shall have the power and authority provided herein, and the Board of
Directors shall cause members to be elected thereto pursuant to paragraphs 2 and
4 above. The .Com Committee shall have the following powers: to approve the
execution, delivery and performance of any Related Party .Com Agreement or
Related Party Promotional Agreement submitted to the .Com Committee pursuant to
paragraph 5 above. The .Com Committee shall report all of its actions to the
Board of Directors. The authorization to the .Com Committee shall not extend to
the approval of any .Com Agreement or Promotional Agreement that is not a
Related Party .Com Agreement or Related Party Promotional Agreement.
7. Powers of Board with Respect to Certain Committees. Except upon
--------------------------------------------------
the vote of a majority of the Board of Directors (including, so long as the
holders of any series of Common Stock or Preferred Stock are entitled to elect a
Special Director, all of the Special Directors), the Board of Directors shall
not (i) rescind, amend, repeal, supplement or otherwise modify any action or
determination made by the .Com Committee, (ii) remove any member of the .Com
Committee, (iii) amend any of the provisions of this Certificate (including this
paragraph 7 and the preceding paragraph (6)) or the Bylaws of this Corporation
with respect to the .Com Committee, or (iv) dissolve or terminate the .Com
Committee.
8. Series B Committee. There is hereby established the Series B
------------------
Committee, which shall have the power and authority provided herein and shall
not have any other power or authority. The Series B Committee shall consist of
those Special Directors who are officers, directors or employees of TCI or any
Subsidiary of TCI. So long as the Special Directors are entitled to exercise
the Special Director Approval Right, (a) the Series B Committee shall have the
sole and exclusive power; subject to the first sentence of Section A of Article
V of this Certificate to (i) specify the number of directors constituting the
Entire Board from time to time, (ii) increase the number of directors
constituting the Entire Board and (iii) decrease the number of directors
constituting the Entire Board; provided, however, that (1) no such decrease in
-------- -------
the number of directors constituting the Entire Board shall have the effect of
shortening the term of any incumbent director (except to the extent that any
such director is a Series Common Stock Director and the holders of such series
of Common Stock shall have ceased to be entitled to elect such number of
directors) and (2) the number of directors constituting the Entire Board shall
not be less than the Minimum Number; and (b) subject to the provisions of
Section B(1)(b) of Article IV of this Certificate, the Series B Committee shall
have the sole and exclusive right to elect or appoint Persons to fill any
vacancy in the office of any Additional Director resulting from any increase in
the number of directors constituting the Entire Board or the death, resignation
or removal of any Additional Director.
SECTION C
LIMITATION ON LIABILITY AND INDEMNIFICATION
1. Limitation On Liability.
-----------------------
To the fullest extent permitted by the DGCL as the same exists or may
hereafter be amended, a director of the Corporation shall not be liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director. Any repeal or modification of this paragraph 1
shall be prospective only and shall not adversely affect any
43
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limitation, right or protection of a director of the Corporation existing at the
time of such repeal or modification.
2. Indemnification.
---------------
(a) Right to Indemnification. The Corporation shall indemnify and
------------------------
hold harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any Person who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"PROCEEDING") by reason of the fact that he, or a Person for whom he is the
legal representative, is or was a director or officer of the Corporation or is
or was serving at the request of the Corporation 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. Such right of
indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Section C. The Corporation shall be
required to indemnify a Person in connection with a proceeding (or part thereof)
initiated by such Person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the Corporation.
(b) Prepayment of Expenses. The Corporation shall pay the
----------------------
expenses (including attorneys' fees) incurred in defending any proceeding in
advance of its final disposition, provided, however, that the payment of
expenses incurred by a director or officer in advance of the final disposition
of the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified under
this paragraph or otherwise.
(c) Claims. If a claim for indemnification or payment of expenses
------
under this paragraph is not paid in full within 60 days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
(d) Non-Exclusivity of Rights. The rights conferred on any Person
-------------------------
by this paragraph shall not be exclusive of any other rights which such Person
may or hereafter acquire under any statute, provision of this Certificate, the
Bylaws of the Corporation, agreement, vote of stockholders or disinterested
directors or otherwise.
(e) Other Indemnification. The Corporation's obligation, if any,
---------------------
to indemnify any Person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such Person
may collect as indemnification from such other corporation, partnership, joint
venture, trust, enterprise or nonprofit entity.
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3. Amendment or Repeal.
-------------------
Any repeal or modification of the foregoing provisions of this
Section C shall not adversely affect any right or protection hereunder of any
Person in respect of any act or omission occurring prior to the time of such
repeal or modification.
SECTION D
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors, by action taken in
accordance with the provisions of the Bylaws of the Corporation is hereby
expressly authorized and empowered to adopt, amend or repeal any provision of
the Bylaws of the Corporation.
ARTICLE VI
TERM
The term of existence of the Corporation shall be perpetual.
ARTICLE VII
STOCK NOT ASSESSABLE
The capital stock of the Corporation shall not be assessable. It
shall be issued as fully paid, and the private property of the stockholders
shall not be liable for the debts, obligations or liabilities of the
Corporation. This Certificate shall not be subject to amendment in this
respect.
ARTICLE VIII
DGCL SECTION 203
The Corporation shall not be governed by Section 203 of the DGCL.
45
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IN WITNESS WHEREOF, said corporation has caused this Certificate of
Amendment to be executed and attested by its duly authorized officers on this
___ day of ______________, 1997.
AT HOME CORPORATION
By:______________________________
Name: Thomas A. Jermoluk
Title: President
Attest: _________________________
Name: David G. Pine
Title: Secretary
46
<PAGE>
EXHIBIT 3.06
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AT HOME CORPORATION
(A DELAWARE CORPORATION)
AT HOME CORPORATION, a corporation organized and existing under the
laws of the State of Delaware (the "CORPORATION"), hereby certifies as follows:
FIRST. The name of the Corporation is At Home Corporation. The
original Certificate of Incorporation of the Corporation was filed on March 28,
1995. An Amended and Restated Certificate of Incorporation was filed on August
29, 1995, a Second Amended and Restated Certificate of Incorporation was filed
on August 1, 1996, a Certificate of Retirement was filed on August 2, 1996, a
Third Amended and Restated Certificate of Incorporation was filed on August 14,
1996, a Certificate of Amendment was filed on April 11, 1997, a Certificate of
Designation of Series C Convertible Participating Preferred Stock was filed on
April 11, 1997 and a Certificate of Amendment was filed on ____________, 1997.
The name under which the Corporation was originally incorporated is "at Home
Corporation."
SECOND. Pursuant to Section 242(b) of the Delaware General
Corporation Law (the "DGCL") the Board of Directors of the Corporation has duly
adopted by unanimous written consent in accordance with DGCL Section 141(f), and
a majority of the outstanding stock entitled to vote thereon and a majority of
each class of the outstanding stock entitled to vote as a class has approved by
written consent in accordance with DGCL Section 228, this Fourth Amended and
Restated Certificate of Incorporation of the Corporation, which amends and
restates the Third Amended and Restated Certificate of Incorporation of the
Corporation, as amended. This Fourth Amended and Restated Certificate of
Incorporation of the Corporation was duly adopted in accordance with Section 245
of the DGCL.
THIRD. Pursuant to Sections 242 and 245 of the DGCL, the text of the
Third Amended and Restated Certificate of Incorporation is hereby restated to
read in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is At Home Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State
of Delaware is One Rodney Square, 10th Floor, Tenth and King Streets, in the
City of Wilmington, County of New Castle, 19801. The name of its registered
agent at such address is RL&F Service Corp.
<PAGE>
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation
shall have authority to issue is two hundred thirty-nine million nine hundred
twenty-seven thousand six hundred sixty (239,927,660) shares, of which two
hundred thirty million two hundred seventy-seven thousand six hundred sixty
(230,277,660) shares shall be common stock with a par value of $.01 per share
("COMMON STOCK"), and nine million six hundred fifty thousand (9,650,000) shares
shall be preferred stock with a par value of $.01 per share ("PREFERRED STOCK").
Said shares of Common Stock and Preferred Stock shall be divided into the
following series:
(a) Two hundred million (200,000,000) shares of Common Stock shall be
of a series designated as "SERIES A COMMON STOCK";
(b) Fifteen million four hundred thousand (15,400,000) shares of
Common Stock shall be of a series designated as "SERIES B COMMON STOCK";
(c) Fourteen million eight hundred seventy-seven thousand six hundred
sixty (14,877,660) shares of Common Stock shall be of a series designated as
"SERIES K COMMON STOCK"; and
(d) Nine million six hundred fifty thousand (9,650,000) shares of
Preferred Stock, which are undesignated as to series and are issuable in
accordance with the provisions of Section C of this Article IV (the "SERIES
PREFERRED STOCK").
The description of the Common Stock and the Preferred Stock of the
Corporation, and the relative rights, preferences, privileges and limitations
thereof, or the method of fixing and establishing the same, are as hereinafter
in this Article IV set forth:
SECTION A
CERTAIN DEFINITIONS
Unless the context otherwise requires, the terms defined in this
Section A shall have, for all purposes of this Certificate, the meanings herein
specified:
"BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of
the Corporation and, unless the context indicates otherwise, shall also mean, to
the extent permitted by law, any committee thereof authorized, with respect to
any particular matter, to exercise the power of the Board of Directors of the
Corporation with respect to such matter.
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"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in New York, New York are not required to be
open.
"CAPITAL STOCK" shall mean any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock.
"CERTIFICATE" shall mean this Fourth Amended and Restated Certificate
of Incorporation of the Corporation, as it may from time to time hereafter be
amended or restated.
"CONVERTIBLE COMMON STOCK" shall mean the Series B Common Stock and
the Series K Common Stock, collectively.
"IPO" shall mean the closing of an initial public offering of the
Series A Common Stock.
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"PERSON" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or other
capacity.
"SERIES A COMMON STOCK" shall mean the Series A Common Stock, par
value $.01 per share, of the Corporation.
"SERIES B COMMON STOCK" shall mean the Series B Common Stock, par
value $.01 per share, of the Corporation.
"SERIES K COMMON STOCK" shall mean the Series K Common Stock, par
value $.01 per share, of the Corporation.
SECTION B
SERIES A, SERIES B AND SERIES K COMMON STOCK
Each share of the Series A Common Stock, each share of the Series B
Common Stock and each share of Series K Common Stock shall, except as otherwise
provided in this Section B, be identical in all respects and shall have equal
rights and privileges.
1. Voting Rights.
-------------
(a) General Voting Rights.
---------------------
Holders of Series A Common Stock shall be entitled to one vote
for each share of such stock held, holders of Series B Common Stock shall be
entitled to ten votes for each share of such stock held, and holders of Series K
Common Stock shall be entitled to one vote for each share of such stock held on
all matters presented to the holders of Common Stock
3
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of the Corporation. Except as otherwise provided in this Certificate and except
as may otherwise be required by the DGCL or, with respect to any series of
Series Preferred Stock, in any resolution or resolutions providing for the
establishment of such series pursuant to authority vested in the Board of
Directors by this Certificate, the holders of shares of Series A Common Stock,
the holders of shares of Series B Common Stock, the holders of shares of Series
K Common Stock and the holders of shares of each series of Preferred Stock
entitled to vote thereon, if any, shall vote as one class with respect to the
election of directors and with respect to all other matters to be voted on by
stockholders of the Corporation (including, without limitation, any proposed
amendment to this Certificate that would increase the number of authorized
shares of Series A Common Stock, of Series B Common Stock, of Series K Common
Stock or of any other class or series of stock or decrease the number of
authorized shares of any such class or series of stock (but not below the number
of shares thereof then outstanding)), and no separate vote or consent of the
holders of shares of Series A Common Stock, the holders of shares of Series B
Common Stock, the holders of shares of Series K Common Stock or the holders of
shares of any such series of Preferred Stock shall be required for the approval
of any such matter.
(b) Election of Series Common Stock Directors.
-----------------------------------------
(i) So long as there are not less than 5,000,000 shares of
Series B Common Stock outstanding, the holders of Series B Common
Stock, voting separately as a single series, shall have the
exclusive right, acting by written consent given in accordance
with paragraph 1(b)(vi) below or by vote at a meeting called for
that purpose, to elect five directors to the Board of Directors
(such directors elected by the holders of the Series B Common
Stock are hereinafter collectively referred to as the "SERIES B
COMMON STOCK DIRECTORS").
So long as there are not less than 5,000,000 shares of
Series K Common Stock outstanding, the holders of Series K Common
Stock, voting separately as a single series, shall have the
exclusive right, acting by written consent given in accordance
with paragraph 1(b)(vi) below or by vote at a meeting called for
that purpose, to elect one director to the Board of Directors
(such director elected by the holders of the Series K Common
Stock is hereinafter referred to as the "SERIES K COMMON STOCK
DIRECTOR").
In the event that the holders of Series B Common Stock
are entitled to elect any Series B Common Stock Director(s) or
the holders of Series K Common Stock are entitled to elect the
Series K Common Stock Director, then so long as there are any
shares of Series A Common Stock outstanding, the holders of
Series A Common Stock, voting separately as a single series,
shall have the right, acting by written consent given in
accordance with paragraph 1(b)(vi) below or by vote at a meeting
called for that purpose, to elect two directors, each of whom
must qualify as an Outside Director as defined in Section B(1) of
Article V of this Certificate,
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<PAGE>
to the Board of Directors (such directors elected by the holders
of the Series A Common Stock are hereinafter referred to as the
"SERIES A COMMON STOCK DIRECTORS," and together with the Series B
Common Stock Directors and the Series K Common Stock Director,
the "SERIES COMMON STOCK DIRECTORS").
(ii) The initial Series Common Stock Directors will be
those persons serving at the date of filing of this Certificate.
Each such person shall hold such positions until the earliest of
the next meeting or written consent of stockholders entitled to
vote on the election of said director, his resignation or his
removal.
(iii) At any meeting of stockholders having as a purpose
the election of directors by holders of the Series A Common
Stock, holders of the Series B Common Stock and/or holders of the
Series K Common Stock, as the case may be, the presence, in
person or by proxy, of the holders of a majority of the shares of
the applicable series of Common Stock entitled to vote in such
election then outstanding shall be required and be sufficient to
constitute a quorum of such series for the election of any
director by such holders. Each Series Common Stock Director to
be elected at such meeting shall be elected by a plurality of the
votes of the shares of the applicable series of Common Stock
present in person or represented by proxy at such meeting and
entitled to vote in the election of such Series Common Stock
Director or by written consent of the holders of such shares
given in accordance with paragraph 1(b)(vi) below. At any such
meeting or adjournment thereof, (i) the absence of a quorum of
such holders of Series A Common Stock, Series B Common Stock or
Series K Common Stock, as the case may be, shall not prevent the
election of the directors to be elected by the holders of shares
other than the series of Common Stock the holders of which do not
constitute a quorum for such election at such meeting, and the
absence of a quorum of holders of shares other than the Series A
Common Stock, Series B Common Stock or Series K Common Stock
shall not prevent the election of the directors to be elected by
the holders of the Series A Common Stock, Series B Common Stock
or Series K Common Stock, as the case may be, and (ii) in the
absence of a quorum of holders of (x) shares of the Series A
Common Stock, Series B Common Stock or Series K Common Stock, (y)
shares other than the Series A Common Stock, Series B Common
Stock or Series K Common Stock, or (z) shares of all such classes
and series, holders of a majority of the shares, present in
person or by proxy, of each class or series of stock which lack a
quorum shall have power to adjourn the meeting for the election
of directors which such class or series is entitled to elect,
from time to time, without notice (subject to applicable law)
other than announcement at the meeting, until a quorum shall be
present.
(iv) Except as provided in paragraph 1(b)(v), any vacancy
in the office of a Series Common Stock Director occurring during
the
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<PAGE>
effectiveness of the applicable provisions of paragraph 1(b)(i)
shall be filled solely by the holders of the series of Common
Stock entitled to vote for such Series Common Stock Director by
vote of such holders as provided in paragraph 1(b)(iii) above at
a meeting called for such purpose or by written consent of such
holders given in accordance with paragraph 1(b)(vi) below.
(v) A Series Common Stock Director may be removed without
cause by the vote or by written consent of the holders of a
majority of the outstanding shares of Series A Common Stock,
Series B Common Stock or Series K Common Stock, as the case may
be, which elected such Series Common Stock Director. Any vacancy
in the office of a Series Common Stock Director shall be filled
by the affirmative vote of the holders of a majority of the
outstanding shares of the applicable series of Common Stock
entitled to elect the Series Common Stock Director so removed at
a meeting, which may be the same meeting at which the removal of
such Series Common Stock Director was voted upon, or by written
consent of the holders of such series of Common Stock given in
accordance with paragraph 1(b)(vi) below; provided, however, that
-----------------
if there is a vacancy in the office of one of the two Series A
Common Stock Directors, the remaining Series A Common Stock
Director shall have the power to fill the vacancy. Any director
elected to fill a vacancy shall serve the same remaining term as
that of his or her predecessor and until his or her successor has
been chosen and has qualified.
(vi) With respect to actions by the holders of the Series A
Common Stock, Series B Common Stock or Series K Common Stock upon
those matters on which such holders are each entitled to vote
separately as a separate series, such actions may be taken
without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares of
Series A Common Stock, Series B Common Stock or Series K Common
Stock, as the case may be, having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which all shares of such series of Series
A Common Stock, Series B Common Stock or Series K Common Stock
entitled to vote thereon were present and voted, and shall be
delivered to the Corporation as provided in the DGCL. Notice
shall be given in accordance with the applicable provisions of
the DGCL of the taking of corporate action without a meeting by
less than unanimous written consent.
(vii) The right of the holders of any series of Common
Stock to elect Series Common Stock Directors shall be in addition
to their right to vote, together as a single class with the
holders of the Series A, Series B and Series K Common Stock and
any series of Preferred Stock so entitled to vote, acting by
written consent or by vote at a meeting called for the
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<PAGE>
purpose of election of directors, in the election of all
Additional Directors, as defined in Section A(2) of Article V of
this Certificate.
2. Conversion Rights.
-----------------
Each share of Series B Common Stock shall be convertible at any
time, at the option of the holder thereof, into one share of Series A Common
Stock. Each share of Series K Common Stock shall be convertible at any time, at
the option of the holder thereof, into one share of Series A Common Stock. Any
such conversion may be effected by any holder of any series of Convertible
Common Stock by surrendering such holder's certificate or certificates for the
series of Convertible Common Stock to be converted, duly endorsed, at the office
of the Corporation or any transfer agent for the Convertible Common Stock,
together with a written notice to the Corporation at such office that such
holder elects to convert all or a specified number of shares of such series of
Convertible Common Stock represented by such certificate and stating the name or
names in which such holder desires the certificate or certificates for Series A
Common Stock to be issued. If so required by the Corporation, any certificate
for shares surrendered for conversion shall be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the holder
of such shares or the duly authorized representative of such holder. Promptly
thereafter, the Corporation shall issue and deliver to such holder or such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Series A Common Stock to which such holder shall be entitled as herein
provided (provided that the Corporation will use commercially reasonable efforts
to make such delivery within two Business Days after receipt of the certificate
or certificates, notice, and if required, instruments of transfer referred to
above). Such conversion shall be deemed to have been made at the close of
business on the date of receipt by the Corporation or any such transfer agent of
the certificate or certificates, notice and, if required, instruments of
transfer referred to above, and the Person or Persons entitled to receive the
Series A Common Stock issuable on such conversion shall be treated for all
purposes as the record holder or holders of such Series A Common Stock on that
date; provided, however, that the conversion may, at the option of any holder
-------- -------
surrendering Convertible Common Stock for conversion, be conditioned upon notice
by such holder to the Corporation of the occurrence of any specified event. A
number of shares of Series A Common Stock equal to the number of shares of
Series B Common Stock and Series K Common Stock, respectively, outstanding from
time to time shall be set aside and reserved for issuance upon conversion of
shares of Series B Common Stock and of Series K Common Stock, respectively.
Shares of Series B Common Stock and Series K Common Stock that have been
converted hereunder shall be retired and shall not be reissued. Shares of
Series A Common Stock shall not be convertible into shares of Series B Common
Stock or Series K Common Stock.
3. Dividends. Subject to paragraph 4 of this Section B, whenever a
---------
dividend is paid to the holders of one series of Common Stock, the Corporation
also shall pay to the holders of all other series of Common Stock a dividend per
share equal to the dividend per share paid to the holders of such first series
of Common Stock. Dividends shall be payable only if, as and when declared by
the Board of Directors out of the assets of the Corporation legally available
therefor.
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<PAGE>
4. Share Distributions. If at any time a distribution paid in
-------------------
Series A Common Stock, Series B Common Stock, Series K Common Stock or any other
securities of the Corporation or any other Person (hereinafter sometimes called
a "SHARE DISTRIBUTION") is to be made with respect to the Series A Common Stock,
Series B Common Stock or Series K Common Stock, such share distribution may be
declared and paid only as follows:
(a) a share distribution consisting of shares of Series A Common
Stock (or any securities of the Corporation that are convertible into, or
exercisable or exchangeable for, or evidence the right to purchase shares of
Series A Common Stock) to holders of Series A Common Stock, Series B Common
Stock and Series K Common Stock, on an equal per share basis; or consisting of
shares of Series A Common Stock (or securities of the Corporation that are
convertible into, or exercisable or exchangeable for, or evidence the right to
purchase shares of Series A Common Stock) to holders of Series A Common Stock
and, on an equal per share basis, shares of Series B Common Stock (or securities
of the Corporation that are convertible into, or exercisable or exchangeable
for, or evidence the right to purchase shares of Series B Common Stock) to
holders of Series B Common Stock and, on an equal per share basis, shares of
Series K Common Stock (or securities of the Corporation that are convertible
into, or exercisable or exchangeable for, or evidence the right to purchase
shares of Series K Common Stock) to holders of Series K Common Stock; and
(b) a share distribution consisting of any class or series of
securities of the Corporation or any other Person other than as described in
paragraph 4(a) above, on the basis of a distribution of identical securities, on
an equal per share basis, to holders of Series A Common Stock, Series B Common
Stock and Series K Common Stock or on the basis of a distribution of different
classes or series of securities to holders of Series A Common Stock, Series B
Common Stock and Series K Common Stock, provided that (i) the securities so
distributed (and, if applicable, the securities into which the distributed
securities are convertible, or for which they are exercisable or exchangeable,
or which the distributed securities evidence the right to purchase) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion and share distribution provisions, (ii)
such rights and provisions shall not differ to a greater extent than the
corresponding differences in voting rights, designation, conversion and share
distribution provisions among the Series A Common Stock, the Series B Common
Stock and the Series K Common Stock and (iii) in each case such distribution is
otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine any
series of Common Stock without reclassifying, subdividing or combining all other
series of Common Stock, on an equal per share basis.
5. Liquidation and Dissolution. In the event of a liquidation,
---------------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and liabilities of the
Corporation and subject to the prior payment in full of the preferential amounts
to which any series of Preferred Stock is entitled, the holders of Series A
Common Stock, the holders of Series B Common Stock, the holders of Series K
Common Stock and the holders of any class or series of Preferred Stock entitled
to participate in such distribution shall share equally, on a share for share
basis (on an as converted into Common Stock basis with respect to any shares of
Preferred Stock which are convertible into Common Stock, unless the
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<PAGE>
designations, preferences, rights and qualifications, limitations or
restrictions of such Preferred Stock provide otherwise), in the assets of the
Corporation remaining for distribution to holders of Common Stock. Neither the
consolidation or merger of the Corporation with or into any other Person or
Persons nor the sale, transfer or lease of all or substantially all of the
assets of the Corporation shall itself be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
paragraph 5.
6. Limitation on Issuance of Series B Common Stock and of Series K
---------------------------------------------------------------
Common Stock. No shares of Series B Common Stock shall be issued except
- ------------
pursuant to paragraph 4 of this Section B or upon conversion of shares of any
series of Series Preferred Stock which have been authorized in accordance with
this Certificate, having the right to convert into shares of Series B Common
Stock. No shares of Series K Common Stock shall be issued except pursuant to
paragraph 4 of this Section B or upon conversion of shares of any series of
Series Preferred Stock, which have been authorized in accordance with this
Certificate, having the right to convert into shares of Series K Common Stock.
7. Regulatory Matters. If any shares of Series A Common Stock which
------------------
would be issuable upon conversion of shares of Convertible Common Stock require
registration with or approval of any governmental authority before such shares
may be issued upon conversion, the Corporation will in good faith and as
expeditiously as possible cause such shares to be duly registered or approved,
as the case may be. Without limiting the foregoing, if the conversion of shares
of Convertible Common Stock shall be subject to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR ACT AND RULES"), the Corporation shall promptly comply with
any applicable filing or notice requirements under the HSR Act and Rules and use
its reasonable commercial efforts to furnish the information required in
connection therewith to the Federal Trade Commission and the Antitrust Division
of the Department of Justice. If applicable, the Corporation shall use its
reasonable commercial efforts to list (i) the shares of Series A Common Stock
issuable upon conversion of the Series K Common Stock and (ii) the shares of
Series A Common Stock issuable upon conversion of the Series B Common Stock, in
each case prior to delivery of such shares of Series A Common Stock upon such
conversion, on the principal national securities exchange (including, but not
limited to, the Nasdaq National Market) on which the outstanding Series A Common
Stock is listed at the time of such delivery.
SECTION C
SERIES PREFERRED STOCK
The Series Preferred Stock may be issued, from time to time, in one or
more series, 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 resolution or
resolutions providing for the issue of such series adopted pursuant to Board
Action (as hereinafter defined). The Board of Directors, in such resolution or
resolutions (a copy of which shall be filed and recorded as required by law), is
also expressly authorized to fix:
(i) the distinctive serial designations and the division of such
shares into series and the number of shares of a particular series,
which may be increased
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<PAGE>
or decreased, but not below the number of shares thereof then
outstanding, by a certificate made, signed, filed and recorded as
required by law;
(ii) the dividend rate or amounts, if any, for the particular
series, the date or dates from which dividends on all shares of such
series shall be cumulative, if dividends on stock of the particular
series shall be cumulative and the relative rights of priority, if
any, or participation, if any, with respect to payment of dividends on
shares of that series;
(iii) the rights of the shares of each series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment
of shares of each series;
(iv) the right, if any, of the holders of a particular series to
convert or exchange such stock into or for other classes or series of
a class of stock or indebtedness of the Corporation, and the terms and
conditions of such conversion or exchange, including provision for the
adjustment of the conversion or exchange rate in such events as the
Board of Directors shall determine; provided that no series of Series
Preferred Stock shall have the right to convert into Series B Common
Stock;
(v) the voting rights, if any, of the holders of a particular
series;
(vi) the terms and conditions, if any, for the Corporation to
purchase or redeem shares of a particular series; and
(vii) any other relative rights, powers, preferences and
limitations of a particular series of the Series Preferred Stock.
The Board of Directors, acting through Board Action, is authorized to
exercise its authority with respect to fixing and designating various series of
the Series Preferred Stock and determining the relative rights, powers and
preferences thereof to the full extent permitted by applicable law, subject to
any stockholder vote that may be required by this Certificate.
All shares of any one series of the Series Preferred Stock shall be
alike in every particular. Except to the extent otherwise provided in the
resolution or resolutions providing for the issue of any series of Series
Preferred Stock, the holders of shares of such series shall have no voting
rights except as may be required by the laws of the State of Delaware. Further,
unless otherwise expressly provided in the Certificate of Designation for a
series of Series Preferred Stock, no consent or vote of the holders of shares of
Series Preferred Stock or any series thereof shall be required for any amendment
to this Certificate that would increase the number of authorized shares of
Series Preferred Stock or the number of authorized shares of any series thereof
or decrease the number of authorized shares of Series Preferred Stock or the
number of authorized shares of any series thereof (but not below the number of
shares of Series Preferred Stock or of such series, as the case may be, then
outstanding).
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<PAGE>
Except as may be provided by the Board of Directors in a Certificate
of Designation or by law, shares of any series of Series Preferred Stock that
have been redeemed (whether through the operation of a sinking fund or
otherwise) or purchased by the Corporation, or which, if convertible or
exchangeable, have been converted into or exchanged for shares of stock of any
other class or classes shall be retired and shall not be reissued.
ARTICLE V
DIRECTORS
SECTION A
NUMBER AND DESIGNATION
The governing body of the Corporation shall be a Board of Directors
which shall consist of not less than three (3) and not more than seventeen (17)
(the "MAXIMUM NUMBER") directors, with the exact number of directors
constituting the entire Board of Directors (the "ENTIRE BOARD") to be specified
from time to time in accordance with this Certificate by Board Action of (i) so
long as the Series B Common Stock Directors are entitled to exercise the Special
Director Approval Right, the Series B Committee, or (ii) at any time at which
the Series B Common Stock Directors are not entitled to exercise the Special
Director Approval Right, the Board of Directors; provided, however, that the
total number of directors constituting the Entire Board shall not be less than
the total number (the "MINIMUM NUMBER") of (x) Series Common Stock Directors the
holders of Common Stock are entitled to elect and (y) any directors the holders
of any series of Series Preferred Stock, voting as a separate series of
Preferred Stock and not with the holders of the Common Stock, are entitled to
elect, which Minimum Number shall not be more than the Maximum Number.
1. Series Common Stock Directors. The Series Common Stock Directors
-----------------------------
shall be elected by the holders of the applicable series of Common Stock,
subject to, and in the manner provided in, Article IV of this Certificate.
2. Additional Directors. At any meeting of stockholders having as a
--------------------
purpose the election of directors, to the extent that the total number of
directors constituting the Entire Board exceeds the Minimum Number, any
additional directors (the "ADDITIONAL DIRECTORS") shall be elected by the
holders of the Common Stock and, if so fixed by the resolution or resolutions of
the Board of Directors adopted by Board Action creating, designating and
establishing such series of Series Preferred Stock, the holders of Series
Preferred Stock, subject to, and in the manner provided in, Article IV of this
Certificate and subject to Section B(8) of this Article V.
SECTION B
BOARD ACTIONS
1. Definitions. Unless the context otherwise requires, the terms
-----------
defined in this paragraph 1 shall have, for all purposes of this Certificate,
the meanings herein specified:
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"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries Controls, is
Controlled by, or is under common Control with such Person.
"ASSOCIATE" shall have the meaning set forth in Rule 405 under the
Securities Act.
"@HOME REPURCHASE RIGHT" has the meaning given to such term in the
Master Distribution Agreement.
"@HOME SERVICES" means the business of providing Internet connectivity
service and Internet "backbone" service, which includes (without limitation) the
following: (i) direct connectivity to the Internet through the development,
packaging, marketing and distribution of a suite of branded Internet
connectivity services and certain branded applications, including one or more
custom browsers, for use by subscribers and information providers, together with
connections to various on-line hosting services (such as America Online,
Prodigy, CompuServe and MSN) and information providers, both in the United
States and internationally (in countries where the Corporation is capable of
providing such service), (ii) directory services and navigation services to
content created by third parties, provided, however, that it is not contemplated
-------- -------
that the Corporation would itself be a creator of content (other than with
respect to content created as part of the Corporation's navigation services
(such as the "video barker" and "templates" for the creation of navigation home
pages), the aggregation and organization of content created by third parties and
technological assistance to such third party creators), and (iii) systems for
(a) "backbone" transmission, (b) network management, and (c) billing and
associated support functions.
"BOARD ACTION" means, with respect to any matter considered by the
Board of Directors or any committee thereof, the action of the Board or such
committee with respect thereto for purposes of Section 141 of the DGCL, which
action shall be deemed taken:
(i) in the case of action by the Board of Directors, by the
approval of such action by:
(a) with respect to any matter that is not a Related Party
------
Transaction or a Related Party .Com Agreement or Related Party
Promotional Agreement, (x) a majority of the members of the Board
present at a meeting at which a quorum of the Board is present or a
written consent to such action executed by all the members of the Board
and (y) so long as the holders of Series B Common Stock are entitled to
elect at least one Series B Common Stock Director, (1) as to matters
that are not Supermajority Items or Unanimous Items, so long as the
Series B Common Stock Directors are entitled to exercise the Special
Director Approval Right, a majority of the total number of Series B
Common Stock Directors or (2) with respect to any matter that is a
Supermajority Item or a Unanimous Item, a Supermajority Vote or
Unanimous Vote of the Series B Common Stock Directors and the Series K
Common Stock Director, if any;
(b) with respect to any matter that is a Related Party
--
Transaction, either (I)(x) a majority of the members of the Board
present at a
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meeting at which a quorum of the Board is present, the notice of which
meeting set forth the matter that is a Related Party Transaction and a
reasonably detailed description of such matter, or by Special Written
Consent; and (y) so long as the holders of Series B Common Stock are
entitled to elect at least one Series B Common Stock Director, (1) a
majority of the total number of Series B Common Stock Directors
(regardless of whether or not such Series B Common Stock Directors are
Disinterested Directors) and (2) a majority of the Series B Common Stock
Directors and the Series K Common Stock Director, if any, who are
Disinterested Directors; provided, however, that, so long as the holders
-----------------
of Series B Common Stock are entitled to elect at least one Series B
Common Stock Director, in addition to the requirements set forth above
in this paragraph (b)(I)(y)(2), (A) if the Related Party Transaction is
a Supermajority Item, the approval of such Related Party Transaction
shall require the affirmative vote or written consent of seventy-five
percent (75%) (rounded up to the nearest whole number of directors) (or
two-thirds if there are only three such directors) of the total number
of Series B Common Stock Directors and the Series K Common Stock
Director, if any, who are Disinterested Directors; and (B) if the
Related Party Transaction is a Unanimous Item, the approval of such
Related Party Transaction shall require the affirmative vote or written
consent of the total number of Series B Common Stock Directors and the
Series K Common Stock Director, if any (regardless of whether or not
such directors are Disinterested Directors); or (II)(x) a majority of
the members of the Board present at a meeting at which a quorum of the
Board is present, the notice of which meeting set forth the matter that
is a Related Party Transaction and a reasonably detailed description of
such matter, or by Special Written Consent; and (y) so long as the
holders of Series B Common Stock are entitled to elect a Series B Common
Stock Director, all of the Series B Common Stock Directors (regardless
of whether or not such Series B Common Stock Directors are Disinterested
Directors); or
(c) with respect to the approval of a Related Party .Com
Agreement or Related Party Promotional Agreement, approval in accordance
with clauses (y) or (z) of paragraph 5 below (but subject to paragraph 7
below), provided that no Board Action is required for such approval in
the circumstances specified in clause (x) of paragraph 5;
(ii) in the case of action by any committee of the
Board of Directors (other than the .Com Committee or the Series B
Committee), by the approval of such action by: (a) either a majority of
the members of such committee present at a meeting at which a quorum of
such committee is present or a written consent to such action executed
by all the members of such committee; and (b) so long as the holders of
Series B Common Stock are entitled to elect at least one Series B Common
Stock Director and the Series B Common Stock Directors are entitled to
exercise the Special Director Approval Right, a majority of the total
number of Series B Common Stock Directors; provided, however, that the
-------- -------
approval of the Series B Common Stock Directors shall not be required in
connection with the approval of any matter as to which the Board of
Directors and the Series B Common Stock Directors have specifically
provided in the
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<PAGE>
specification of powers and duties of such committee by resolution or
Bylaw approved by Board Action, that the approval of the Series B Common
Stock Directors shall not be required;
(iii) in the case of action by the .Com Committee,
either (1) a majority of the total number of members of the .Com
Committee or (2) a written consent to such action executed by all of the
members of the .Com Committee; and
(iv) in the case of action by the Series B Committee,
either (1) a majority of the members of the Series B Committee present
at a meeting at which a quorum of the Series B Committee is present or
(2) a written consent to such action executed by all of the members of
the Series B Committee.
"CABLE PARENT" shall mean, as applicable, each of (i) TCI
Internet Services, Inc., a Colorado corporation ("TCI SERVICES"), TCI.NET, Inc.,
a Delaware corporation ("TCI.NET"), TCI Communications, Inc., a Delaware
corporation, and TCI Cable Investments Inc., a Delaware corporation (TCI
Communications, Inc., TCI Cable Investments, Inc., TCI.NET and TCI Services
collectively being a single Cable Parent), (ii) Comcast On-Line Communications,
Inc., a Delaware corporation, and Comcast Cable Communications, Inc., a Delaware
corporation (collectively being a single Cable Parent) and (iii) Cox
Communications, Inc., a Delaware corporation. In addition, each Parent (as
defined below) shall be entitled to designate one or more members of such
Parent's Stockholder Group (as defined in the Stockholders' Agreement) to be
included within the Cable Parent of such Parent's Stockholder Group. Any such
additional entities are required to execute and deliver to the Corporation and
each other Parent, an instrument, in form and substance reasonably acceptable to
the Corporation, agreeing to be bound by the provisions of the Stockholders'
Agreement applicable to the other Persons which are included within the Cable
Parent of such Parent's Stockholder Group. Such designation shall not constitute
an assignment by or release of any other Person which is a Cable Parent of such
Stockholder Group.
".COM AGREEMENT" means any agreement between the Corporation (or
any Cable Parent or a Controlled Affiliate thereof acting in the capacity of a
sales agent by and on behalf of the Corporation pursuant to a sales agency
agreement to be entered into by such Cable Parent or Controlled Affiliate and
the Corporation, which agreement will, among other things, specify the terms and
conditions upon which such Person may act as a sales agent for the Corporation,
including specification of the terms upon which such Person may enter into a
.Com Agreement on the Corporation's behalf) and a content provider which
provides (i) physical connectivity and access to the @Home Network (as defined
in the Master Distribution Agreement) and (ii) for compensation, if any, to the
Corporation in accordance with its charges therefor.
"COMCAST" shall mean Comcast Corporation, a Pennsylvania
corporation.
"COMCAST STOCKHOLDER GROUP" has the meaning given to such term
in the Stockholders' Agreement.
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<PAGE>
"COMCAST SUB" shall mean Comcast PC Investments, Inc., a Delaware
corporation, and any Controlled Affiliate of Comcast to which Company Securities
are transferred in accordance with the terms of the Stockholders' Agreement.
"COMPANY SECURITIES" has the meaning given to such term in the
Stockholders' Agreement.
"CONTROL" shall mean the direct or indirect power to direct the
management and policies of any Person, whether through the ownership of voting
securities, by contract, management agreement or otherwise.
"CONTROLLED AFFILIATE" shall mean, as to any Person, any other Person
which is Controlled by such Person; provided, however, that the Corporation
-------- -------
shall not be deemed to be a Controlled Affiliate of any Parent or such Parent's
Controlled Affiliates.
"COX SUB" shall mean Cox @Home, Inc. a Delaware corporation, and any
Controlled Affiliate of Cox Communications, Inc. to which Company Securities are
transferred in accordance with the terms of the Stockholders' Agreement.
"DISINTERESTED DIRECTORS" means any member of the Board of Directors
who is not an interested director for purposes of DGCL Section 144(a); provided,
--------
however, that any director who is an officer, director, employee or partner of a
- -------
Related Party shall, notwithstanding the fact that such director is not
otherwise personally interested in a Related Party Transaction, be deemed
interested in such Related Party Transaction.
"FILING DATE" shall mean August 14, 1996.
"KPCB AFFILIATES" shall mean collectively, Kleiner, Perkins, Caufield
& Byers VII and KPCB Information Sciences Zaibatsu Fund II, each a California
partnership, and James Clark.
"LCO AGREEMENT" means the provisions of the LCO Agreement Term Sheet,
set forth as Exhibit B to the letter agreement dated May 15, 1997, among TCI
Sub, Comcast Sub and Cox Sub and certain of their respective Affiliates and the
Corporation (the "LCO AGREEMENT TERM SHEET"); provided that if the matters set
forth in the LCO Agreement Term Sheet are superseded by a definitive agreement
which is executed by the necessary parties thereto, such definitive agreement
will constitute the LCO Agreement for all purposes hereunder.
"MASTER DISTRIBUTION AGREEMENT" shall mean the provisions of the
Master Distribution Agreement Term Sheet, set forth as Exhibit A to the letter
agreement dated May 15, 1997, among TCI Sub, Comcast Sub, and Cox Sub and
certain of their respective Affiliates and the Corporation (the "MASTER
DISTRIBUTION AGREEMENT TERM SHEET"); provided that if the matters set forth in
the Master Distribution Agreement Term Sheet are superseded by a definitive
agreement which is executed by the necessary parties thereto, such definitive
agreement will constitute the Master Distribution Agreement for all purposes
hereunder.
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<PAGE>
"OUTSIDE DIRECTOR" means any director of the Corporation who (i) is
not an officer (other than any Vice Chairman) of, or employed by, the
Corporation or its Subsidiaries and (ii) is not an Affiliate or Associate of any
of Cox Enterprises, Inc., a Delaware corporation, Comcast or TCI or any of their
respective Controlled Affiliates (other than the Corporation and its
Subsidiaries).
"PARENT" has the meaning given to such term in the Stockholders'
Agreement.
"PERMITTED REPURCHASES" means the right or obligation of the
Corporation to repurchase or redeem securities at any time, out of funds legally
available therefor, (x) from employees, directors or consultants of the
Corporation or any Subsidiary thereof, shares of equity securities of the
Corporation, equity securities of any Subsidiary of the Corporation or options,
warrants or other rights to acquire such securities issued to such employees,
directors or consultants provided that such repurchase is pursuant to repurchase
or redemption rights contained in the instrument pursuant to which such
securities were originally issued and (y) from the Comcast Stockholder Group any
Subject Shares upon the Corporation's exercise of the @Home Repurchase Right
pursuant to the Master Distribution Agreement.
"PROMOTIONAL AGREEMENT" means an agreement entered into between a
content provider and the Corporation (individually and not through an agency
relationship with a Cable Parent or any of its Controlled Affiliates) providing
for the promotion of such content or content provider on the @Home Services
(e.g., through button or hot link placement on the browsers, home pages or theme
pages in the National Area (as defined in the Master Distribution Agreement), by
the @Home video barker or otherwise) as the Corporation and such content
provider shall agree, at which point such promotional activity shall become a
part of the @Home Services, subject, however, to the Cable Parent Exclusion
Right (as defined in the Master Distribution Agreement).
"SPECIAL DIRECTOR APPROVAL RIGHT" means the requirement for certain
Board Actions that a majority of the total number of Series B Common Stock
Directors have approved such matter, which requirement shall continue in effect
so long as TCI Sub beneficially owns at least (i) 7,700,000 shares of Series B
Common Stock, which shares are Company Securities and as adjusted for stock
splits, stock dividends and the like occurring after the Filing Date, and (ii)
---
securities representing a majority of the outstanding voting power of the
Corporation.
"SPECIAL VOTING STOCK" shall mean any class or series of capital stock
of the Corporation established or authorized after the Filing Date (including
pursuant to the authority granted herein to the Board to establish the
designations, preferences, rights and qualifications, limitations and
restrictions of any series of Series Preferred Stock pursuant to Board Action)
having voting rights deemed senior to those of the holders of Series A Common
Stock or Series K Common Stock. A class or series of capital stock shall be
deemed to have senior voting rights and to be Special Voting Stock if holders of
such security (x) are entitled to more than one vote per share (determined on an
as-converted into Common Stock basis) when voting with the holders of Common
Stock or (y) are entitled to vote as a separate class or series upon any matter
submitted to a vote of all of the stockholders of the Corporation other than (i)
as required by Section 242(b) of the DGCL, (ii) with respect to the creation or
issuance of a class or series of capital stock which is to rank senior to such
capital stock as to liquidation rights or rights relating
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<PAGE>
to dividends, distributions, repurchases and redemptions, (iii) with respect to
amendments to the terms and provisions of such securities, or (iv) such
additional matters as would be customary or appropriate in the context of the
issuance of such class or series of capital stock in a financing transaction
with a third party (as opposed to a strategic transaction) in light of the
circumstances under which such financing transaction is being consummated.
"SPECIAL WRITTEN CONSENT" when used with respect to the approval of
any action by the Board, means a written consent to such action executed by all
of the members of the Board, provided, that such written consent is executed by
--------
directors subsequent to a meeting of the Board, the notice of which meeting set
forth the matter which is the subject of such written consent and a reasonably
detailed description of such matter.
"STOCKHOLDERS' AGREEMENT" shall mean that certain Amended and Restated
Stockholders' Agreement, dated as of August 1, 1996, by and among the
Corporation, TCI Sub, Comcast Sub, Cox Sub and the KPCB Affiliates and certain
Affiliates of such Persons, as amended from time to time.
"SUBJECT SHARES" has the meaning given to such term in the Master
Distribution Agreement.
"SUBSIDIARY" of any Person shall mean (i) a corporation a majority of
the capital stock of which, having voting power under ordinary circumstances to
elect directors, is at the time, directly or indirectly, owned by such Person
and/or one or more Subsidiaries of such Person and (ii) any other Person (other
than a corporation) in which such Person and/or one or more Subsidiaries of such
Person, directly or indirectly, has (x) a majority ownership interest or (y) the
power to elect or direct the election of a majority of the members of the
governing body of such first-named Person.
"SUPERMAJORITY VOTE" has the meaning given to such term in Section
B(4)(a) of Article V of this Certificate.
"TCI" shall mean Tele-Communications, Inc., a Delaware corporation,
but in the event of a Qualified Spin Off Transaction (as defined in the
Stockholders' Agreement) relating to the TCI Stockholder Group (as defined in
the Stockholders' Agreement), such term shall mean the Spin Off Parent (as
defined in the Stockholders' Agreement) resulting from such Qualified Spin Off
Transaction.
"TCI SUB" shall mean TCI Internet Holdings, Inc., a Colorado
corporation, and any Controlled Affiliate of TCI, to which Company Securities
are transferred in accordance with the terms of the Stockholders' Agreement.
"UNANIMOUS VOTE" has the meaning given to such term in Section B(4)(b)
of Article V of this Certificate.
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2. Vote Required for Actions of the Board or Committees.
----------------------------------------------------
(a) Except as otherwise provided by law or this Certificate and
subject to the rights of approval set forth in paragraphs 3, 4, 5, 7 and 8
below, any action or approval by the Board of Directors or any committee thereof
shall require that approval therefor be obtained by Board Action.
(b) Any approval of the Series B Common Stock Directors may be
evidenced by the affirmative vote of such Series B Common Stock Directors (i) at
the Board meeting or committee meeting at which such action is approved, (ii) by
unanimous written consent of the Board or a committee thereof including such
Series B Common Stock Directors, or (iii) by a separate approval granted at a
meeting of such Series B Common Stock Directors or by written consent of a
majority of such Series B Common Stock Directors. The requirements for Series B
Common Stock Director approval herein and the procedures thereof are included by
virtue of the authority contained in Section 141(a) of the DGCL.
(c) Except as specifically provided in paragraph 6 below with
respect to the powers of the .Com Committee, no committee of the Board shall
have the power to act on any Related Party Transaction, Supermajority Item,
Unanimous Item or any Related Party .Com Agreement or Related Party Promotional
Agreement.
3. Related Party Transactions.
--------------------------
(a) Without limiting the application of any provision of Delaware
law, including but not limited to DGCL Section 144, relating to the approval of
transactions by members of the Board who are interested directors, any Related
Party Transaction must be approved by a Board Action.
(b) A "RELATED PARTY" shall mean any holder of more than 5% of
the voting power of the Corporation or a Related Party Affiliate of such holder.
The term "RELATED PARTY TRANSACTION" shall mean any transaction between the
Corporation and a Related Party; provided, however, that the following
transactions will not be Related Party Transactions: (i) any transaction or
series of related transactions, that (x) are in the ordinary course of business,
(y) are on arms' length terms, and (z) involve an aggregate amount that is less
than $1,000,000; (ii) the entering into of LCO Agreements and other agreements
for the provision of ancillary or related services by the Corporation, between a
Related Party or its Related Party Affiliates, on the one hand, and the
Corporation, on the other hand, provided that the terms of such LCO Agreements
--------
or such other agreements are no more favorable to such Related Party and its
Related Party Affiliates than the terms of similar agreements then currently
offered by or generally available from the Corporation to each other Cable
Parent or its Controlled Affiliates (without regard to the size (through volume
discounts or otherwise) or identity of such Cable Parent or its ownership of
securities of the Corporation); (iii) the entering into or performance under any
.Com Agreement or Promotional Agreement; and (iv) any actions taken by the
Series B Committee pursuant to the powers set forth in paragraph 8 below. The
term "RELATED PARTY AFFILIATE" shall mean, with respect to any Person, any other
Person that directly or indirectly, through one or more intermediaries,
Controls, is Controlled by, or is under common Control with, such first Person;
provided, that (i) any Person owning, directly or indirectly, in excess of 25%
- --------
of the equity interests (on a fully diluted basis) of any other Person shall be
deemed to
18
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Control such other Person, and (ii) the Corporation will not be deemed to be a
Related Party Affiliate of any Parent or such Parent's Related Party Affiliates.
4. Supermajority and Unanimous Approval Requirements.
-------------------------------------------------
(a) Supermajority Items. For purposes of determining whether or
-------------------
not there has been Board Action with respect to any of the following matters
("SUPERMAJORITY ITEMS"), so long as the holders of Series B Common Stock are
entitled to elect at least one Series B Common Stock Director or the holders of
Series K Common Stock are entitled to elect a Series K Common Stock Director,
the affirmative vote or written consent of seventy-five percent (75%) (rounded
up to the nearest whole number of directors) of the total number of (x) the
Series B Common Stock Directors and (y) the Series K Common Stock Director, if
any, voting separately from the other directors of the Corporation shall be
required (such vote or consent, a "SUPERMAJORITY VOTE"):
(1) The merger, consolidation or other business combination
by the Corporation or any Controlled Affiliate of the Corporation into or with
any other entity, other than any transaction involving only the Corporation
and/or one or more directly or indirectly wholly owned Subsidiaries of the
Corporation; provided, however, that the provisions of this paragraph shall not
-------- -------
apply to transactions which have been approved in accordance with subparagraphs
(2) or (4) below, or which would not otherwise require approval thereunder.
(2) The acquisition (other than an acquisition covered by
subparagraph (4) below) by the Corporation or any Controlled Affiliate of the
Corporation of any assets or properties (including stock or other equity
interests of a third party) in one transaction or a series of related
transactions, which assets or properties have an aggregate purchase price or
value in excess of 20% of the fair market value of the assets of the Corporation
(on a consolidated basis).
(3) The disposition by the Corporation or any Controlled
Affiliate of the Corporation of any assets or properties (including stock or
other equity interests of a third party) in one transaction or a series of
related transactions having an aggregate value in excess of fifty percent (50%)
of the fair market value of the assets of the Corporation (on a consolidated
basis).
(4) The acquisition by the Corporation or any Controlled
Affiliate of the Corporation of any assets or properties in exchange for or in
consideration of the sale or issuance to any Person of capital stock of the
Corporation which sale or issuance would constitute in excess of 16-2/3% of the
fully diluted shares of the Corporation (on a common stock equivalent basis)
(including such shares to be issued or sold); provided, however, that the
provisions of this subparagraph (4) shall not be deemed to apply to any
issuances or sales of capital stock solely for cash.
(5) The approval of the Chief Executive Officer of the
Corporation, and the removal of any Chief Executive Officer and the appointment
of any successor thereto.
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(6) Any actions resulting in the voluntary dissolution or
liquidation of the Corporation, or the initiation of any proceedings relating to
the voluntary bankruptcy of the Corporation.
(7) Any amendment, alteration or repeal of any provision of
this Certificate or the Bylaws of the Corporation, other than (A) the filing of
any Certificate of Designation or amendment to this Certificate establishing any
class or series of Series Preferred Stock of the Corporation, the establishment,
issuance and sale of which would not require a Supermajority Vote pursuant to
subparagraph (8) below, and (B) any amendment to or a modification of this
Certificate which is necessary in order to implement any action which has been
otherwise approved by a Supermajority Vote.
(8) The (A) establishment, creation or designation of any
additional class or series of capital stock or any security having a direct or
indirect equity participation in the Corporation and (B) sale or issuance of (i)
shares of capital stock or securities having a direct or indirect equity
participation in the Corporation, or (ii) warrants, options or rights to acquire
shares of capital stock or securities having a direct or indirect equity
participation in the Corporation or securities convertible into or exchangeable
for capital stock or any security having a direct or indirect equity
participation in the Corporation, in each case, which capital stock or other
security constitutes Special Voting Stock; provided that no capital stock of the
--------
Corporation, the issuance of which would, in accordance with this paragraph 4,
require a Unanimous Vote of the Series B Common Stock Directors and the Series K
Common Stock Director, shall be issued without such Unanimous Vote of the Series
B Common Stock Directors and the Series K Common Stock Director.
(9) Any increase in the aggregate number of shares of Series
A Common Stock issued or reserved for issuance to management (including shares
reserved for issuance upon exercise of options, warrants or other rights)
pursuant to all incentive compensation plans (collectively, the "MANAGEMENT
STOCK PLAN") in excess of an aggregate amount calculated at the time of such
proposed increase equal to (i) 16,000,000 (as adjusted for stock splits, stock
dividends and the like occurring after the Filing Date), plus (ii) the greater
----
of (x) 0.075 multiplied by the number of shares of Series A Common Stock (or
options, warrants or other rights to acquire shares) issued by the Corporation
subsequent to August 1, 1996 (other than shares (or options, warrants or other
rights to acquire shares) issued pursuant to the Management Stock Plan or shares
issued upon conversion of shares of Preferred Stock outstanding on August 1,
1996) and (y) the number of shares (or options, warrants or other rights to
acquire shares) the issuance of which would represent a dilution of the fully
diluted equity of the Corporation (including the assumed issuance of all shares
in the Management Stock Plan prior to such increase) of four percent (4%) per
year from August 1, 1996 to the date of such proposed increase.
(10) (A) The declaration or payment of any dividend on, or
the making of any distribution to holders of, equity securities of any
Controlled Affiliate of the Corporation (other than a wholly owned Subsidiary)
or (B) the purchase, redemption or other acquisition for value of any equity
securities of any Controlled Affiliate of the Corporation or any options,
warrants or other rights to acquire such securities (other than a Permitted
Repurchase).
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(11) The adoption of any budget which is or contains a Non-
Pro Rata Roll-Out Budget (as defined in the Master Distribution Agreement).
(12) The appointment of any Outside Directors to the .Com
Committee following the IPO (other than the Corporation's Chief Executive
Officer and the members of the .Com Committee immediately prior to the IPO).
(b) Unanimous Items. For purposes of determining whether or not
---------------
there has been Board Action with respect to the following matters ("UNANIMOUS
ITEMS"), so long as the holders of Series B Common Stock are entitled to elect
at least one Series B Common Stock Director or the holders of Series K Common
Stock are entitled to elect a Series K Common Stock Director, the affirmative
vote or written consent of 100% of the total number of (x) the Series B Common
Stock Directors and (y) the Series K Common Stock Director, if any, voting
separately from the other directors of the Corporation (such vote or consent, a
"UNANIMOUS VOTE") shall be required:
(1) Any amendments to or modifications of the items listed in
this paragraph 4 or the requisite vote or consent for approval thereof.
(2) Any increase in the number of the Series B or Series K
Common Stock Directors.
(3) Any modification of the rights of the holders of the
Series B or Series K Common Stock to designate and elect directors.
(4) The appointment of any directors (other than the
Corporation's Chief Executive Officer and the other initial members thereof
elected following the Filing Date or any Outside Directors elected in accordance
with subparagraph (a)(13) above), to the .Com Committee.
(5) Any amendment or modification to the Specifications and
Standards set forth in the Master Distribution Agreement which would require the
Operator Facilities (as defined in the Master Distribution Agreement) of any
Cable Parent to be capable of distributing or providing Video Services (as
defined in the Master Distribution Agreement) in excess of the duration
limitation set forth in the Specifications and Standards.
5. Approval of .Com and Promotional Agreements. The execution,
-------------------------------------------
delivery and performance of any .Com Agreement or Promotional Agreement between
a Related Party or its Related Party Affiliates, on the one hand, and the
Corporation or its Affiliates, on the other hand (a "RELATED PARTY .COM
AGREEMENT" or a "RELATED PARTY PROMOTIONAL AGREEMENT," respectively), may be
approved by the Corporation pursuant to any of the following methods: (x)
approval by the authorized officers of the Corporation (without the approval of
the Board of Directors) to the extent such agreement contains the Corporation's
standard terms and conditions for agreements of that sort to the extent such
standard terms and conditions exist (i.e., the Corporation's applicable "rate
card"), (y) approval of a majority of the total number of members of the .Com
Committee or (z) approval by a majority of the Board of Directors, including all
of the Series B Common Stock Directors so long as the holders of Series B Common
Stock are
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<PAGE>
entitled to elect at least one Series B Common Stock Director. The Cable Parent
which is, or whose Related Party Affiliate is, such Related Party shall be
entitled to select which of the foregoing methods pursuant to which such
approval will be sought, or if more than one method is to be sought, the
priority therefor. All decisions of the .Com Committee shall be made in
accordance with the policies and provisions for the .Com Agreements and
Promotional Agreements set forth in the Stockholders' Agreement. A Stockholder
who is or whose Related Party Affiliate is the Related Party whose .Com
Agreement or Promotional Agreement has been disapproved by the .Com Committee or
the Board pursuant to clause (y) or (z) above, as the case may be, shall be
entitled to a written explanation from the members of the .Com Committee or the
Board, as the case may be, voting against such approval. Nothing contained in
this section shall limit the right of the Directors under applicable law to
inspect any .Com Agreements or Promotional Agreements.
6. .Com Committee. There is hereby established a .Com Committee,
--------------
which shall have the power and authority provided herein, and the Board of
Directors shall cause members to be elected thereto pursuant to paragraphs 2 and
4 above. The .Com Committee shall have the following powers: to approve the
execution, delivery and performance of any Related Party .Com Agreement or
Related Party Promotional Agreement submitted to the .Com Committee pursuant to
paragraph 5 above. The .Com Committee shall report all of its actions to the
Board of Directors. The authorization to the .Com Committee shall not extend to
the approval of any .Com Agreement or Promotional Agreement that is not a
Related Party .Com Agreement or Related Party Promotional Agreement.
7. Powers of Board with Respect to Certain Committees. Except upon
--------------------------------------------------
the vote of a majority of the Board of Directors (including, so long as the
holders of Series B Common Stock are entitled to elect at least one Series B
Common Stock Director, all of the Series B Common Stock Directors), the Board of
Directors shall not (i) rescind, amend, repeal, supplement or otherwise modify
any action or determination made by the .Com Committee, (ii) remove any member
of the .Com Committee, (iii) amend any of the provisions of this Certificate
(including this paragraph 7 and the preceding paragraph 6) or the Bylaws of this
Corporation with respect to the .Com Committee, or (iv) dissolve or terminate
the .Com Committee.
8. Series B Committee. There is hereby established the Series B
------------------
Committee, which shall have the power and authority provided herein and shall
not have any other power or authority. The Series B Committee shall consist of
those Series B Common Stock Directors who are officers, directors or employees
of TCI or any Subsidiary of TCI. So long as the Series B Common Stock Directors
are entitled to exercise the Special Director Approval Right, (a) the Series B
Committee shall have the sole and exclusive power; subject to the first sentence
of Section A of Article V of this Certificate to (i) specify the number of
directors constituting the Entire Board from time to time, (ii) increase the
number of directors constituting the Entire Board and (iii) decrease the number
of directors constituting the Entire Board; provided, however, that (1) no such
-------- -------
decrease in the number of directors constituting the Entire Board shall have the
effect of shortening the term of any incumbent director (except to the extent
that any such director is a Series Common Stock Director and the holders of such
series of Common Stock shall have ceased to be entitled to elect such number of
directors) and (2) the number of directors constituting the Entire Board shall
not be less than the Minimum Number; and (b) subject to the provisions of
Section B(1)(b) of Article IV of this Certificate, the Series B
22
<PAGE>
Committee shall have the sole and exclusive right to elect or appoint Persons to
fill any vacancy in the office of any Additional Director resulting from any
increase in the number of directors constituting the Entire Board or the death,
resignation or removal of any Additional Director.
SECTION C
LIMITATION ON LIABILITY AND INDEMNIFICATION
1. Limitation On Liability.
-----------------------
To the fullest extent permitted by the DGCL as the same exists or
may hereafter be amended, a director of the Corporation shall not be liable to
the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director. Any repeal or modification of this paragraph 1
shall be prospective only and shall not adversely affect any limitation, right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
2. Indemnification.
---------------
(a) Right to Indemnification. The Corporation shall indemnify
------------------------
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any Person who was or is made or
is threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"PROCEEDING") by reason of the fact that he, or a Person for whom he is the
legal representative, is or was a director or officer of the Corporation or is
or was serving at the request of the Corporation 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. Such right of
indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Section C. The Corporation shall be
required to indemnify a Person in connection with a proceeding (or part thereof)
initiated by such Person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the Corporation.
(b) Prepayment of Expenses. The Corporation shall pay the
----------------------
expenses (including attorneys' fees) incurred in defending any proceeding in
advance of its final disposition, provided, however, that the payment of
-----------------
expenses incurred by a director or officer in advance of the final disposition
of the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified under
this paragraph or otherwise.
(c) Claims. If a claim for indemnification or payment of
------
expenses under this paragraph is not paid in full within 60 days after a written
claim therefor has been received by the Corporation, the claimant may file suit
to recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled to be paid the expense of prosecuting such claim. In any
such action the Corporation shall have the burden of proving that the claimant
was not entitled to the requested indemnification or payment of expenses under
applicable law.
23
<PAGE>
(d) Non-Exclusivity of Rights. The rights conferred on any
-------------------------
Person by this paragraph shall not be exclusive of any other rights which such
Person may or hereafter acquire under any statute, provision of this
Certificate, the Bylaws of the Corporation, agreement, vote of stockholders or
disinterested directors or otherwise.
(e) Other Indemnification. The Corporation's obligation, if
---------------------
any, to indemnify any Person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such Person
may collect as indemnification from such other corporation, partnership, joint
venture, trust, enterprise or nonprofit entity.
3. Amendment or Repeal.
-------------------
Any repeal or modification of the foregoing provisions of this
Section C shall not adversely affect any right or protection hereunder of any
Person in respect of any act or omission occurring prior to the time of such
repeal or modification.
SECTION D
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors, by action taken in
accordance with the provisions of the Bylaws of the Corporation is hereby
expressly authorized and empowered to adopt, amend or repeal any provision of
the Bylaws of the Corporation.
ARTICLE VI
TERM
The term of existence of the Corporation shall be perpetual.
ARTICLE VII
STOCK NOT ASSESSABLE
The capital stock of the Corporation shall not be assessable. It
shall be issued as fully paid, and the private property of the stockholders
shall not be liable for the debts, obligations or liabilities of the
Corporation. This Certificate shall not be subject to amendment in this
respect.
ARTICLE VIII
DGCL SECTION 203
The Corporation shall not be governed by Section 203 of the DGCL.
24
<PAGE>
IN WITNESS WHEREOF, said corporation has caused this Amended and
Restated Certificate of Incorporation to be executed and attested by its duly
authorized officers on this ___ day of ______________, 1997.
AT HOME CORPORATION
By: ______________________________
Name: Thomas A. Jermoluk
Title: President
Attest: _________________________
Name: David G. Pine
Title: Secretary
25
<PAGE>
EXHIBIT 4.05
[LOGO OF @HOME NETWORK]
Number: Shares
ATH ____________ ________________
SERIES A SERIES A
COMMON STOCK COMMON STOCK
AT HOME CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK, NY
CUSIP 045919 10 7
This Certifies that
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF SERIES A COMMON STOCK, $0.01 PAR VALUE
PER SHARE, OF
- ------------------------------ AT HOME CORPORATION --------------------------
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated: [@ logo in background on lower 2/3,
right half of certificate]
<TABLE>
<S> <C> <C>
/s/ David G. Pine /s/ Thomas A. Jermoluk
Secretary [FACSIMILE SEAL OF AT HOME CORPORATION] Chairman, President and
Chief Executive Officer
</TABLE>
[Printed sideways in lower right corner]
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
/s/ Illegible
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of the
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - .............Custodian..............
TEN ENT - as tenants by the entireties (Cust.) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to
survivorship and not as tenants Minors Act..........................
in common (State)
UNIF TRF MIN ACT - ..........Custodian (until age).....
(Cust.)
...........(under Uniform Transfers
(Minor)
to Minors Act.......................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
X ___________________________________________
X ___________________________________________
NOTICE THE SIGNATURE(S) TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ____________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.09
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into this ___ day of
________________, 1997 ("Agreement"), by and between At Home Corporation, a
Delaware corporation ("Company"), and _____________________________
("Indemnitee"):
WHEREAS, highly competent persons have become more reluctant to serve
privately- and publicly-held corporations as directors or in other capacities
unless they are provided with adequate protection through insurance or adequate
indemnification against inordinate risks of claims and actions against them
arising out of their service to and activities on behalf of the corporation; and
WHEREAS, directors, officers, and other persons in service to
corporations or business enterprises are being increasingly subjected to
expensive and time-consuming litigation relating to, among other things, matters
that traditionally would have been brought only against the Company or business
enterprise itself; and
WHEREAS, the uncertainties relating to such insurance and to
indemnification have increased the difficulty of attracting and retaining such
persons; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that the increased difficulty in attracting and retaining such
persons is detrimental to the best interests of the Company's stockholders and
that the Company should act to assure such persons that there will be increased
certainty of such protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will service or continue to serve the
Company free from undue concern that they will not be so indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance of the
Certificate of Incorporation and the Bylaws of the Company and any resolutions
adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to
diminish or abrogate any rights of Indemnitee thereunder; and
WHEREAS, the Certificate of Incorporation, the Bylaws and the Delaware
director indemnification statute each is nonexclusive, and therefore each
contemplates that contracts may be entered into with respect to indemnification
of directors, officers and employees; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify, and to advance expenses on behalf
of, such persons to the fullest extent permitted by applicable law so that they
will serve or continue to serve the Company free from undue concern that they
will not be so indemnified; and
<PAGE>
WHEREAS, Indemnitee is willing to serve, continue to serve and to take
on additional service for or on behalf of the Company on the condition that he
be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Services by Indemnitee. Indemnitee agrees to serve and/or
----------------------
continue to serve as a director, officer, employee and/or agent of the Company
and, and at the request of the Company, as a director, officer, employee, agent
and/or fiduciary of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Indemnitee may at any time and for
any reason resign from such position (subject to any other contractual
obligation or any obligation imposed by operation of law), in which event the
Company shall have no obligation under this Agreement to continue Indemnitee in
such position. This Agreement shall not be deemed an employment contract
between the Company (or any of its subsidiaries) and Indemnitee. Indemnitee
specifically acknowledges that Indemnitee's employment with the Company (or any
of its subsidiaries), if any, is at will, and that Indemnitee may be discharged
at any time for any reason, with or without cause, except as may be otherwise
provided in any written employment contract between Indemnitee and the Company
(or any of its subsidiaries), other applicable formal severance policies duly
adopted by the Board, or, with respect to service as a director of the Company,
by the Company's Certificate of Incorporation, Bylaws, and the General
Corporation Law of the State of Delaware. The foregoing notwithstanding, this
Agreement shall continue in force after Indemnitee has ceased to serve as an
officer, director, employee and/or agent of the Company or as a director,
officer, employee, agent and/or fiduciary of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise.
Section 2. Indemnification - General. The Company shall indemnify,
-------------------------
and advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in
this Agreement and (b) (subject to the provisions of this Agreement) to the
fullest extent permitted by applicable law in effect on the date hereof and as
amended from time to time. The rights of Indemnitee provided under the
preceding sentence shall include, but shall not be limited to, the rights set
forth in the other Sections of this Agreement.
Section 3. Proceedings Other Than Proceedings by or in the Right of
--------------------------------------------------------
the Company. Indemnitee shall be entitled to the rights of indemnification
- -----------
provided in this Section 3 if, by reason of his Corporate Status (as hereinafter
defined), he is, or is threatened to be made, a party to or a participant in any
threatened, pending, or completed Proceeding (as hereinafter defined), other
than a Proceeding by or in the right of the Company. Pursuant to this Section
3, Indemnitee shall be indemnified against all Expenses, judgments, penalties,
fines and amounts paid in settlement (including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses,
judgments, penalties, fines and amounts paid in settlement) actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
or any claim, issue or matter therein, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal Proceeding, had no reasonable cause to
believe his conduct was unlawful.
-2-
<PAGE>
Section 4. Proceedings by or in the Right of the Company. Indemnitee
---------------------------------------------
shall be entitled to the rights of indemnification provided in this Section 4
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or a participant in any threatened, pending or completed Proceeding
brought by or in the right of the Company to procure a judgment in its favor.
Pursuant to this Section, Indemnitee shall be indemnified against all Expenses
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses) actually and reasonably incurred
by him or on his behalf in connection with such Proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, that, if applicable law so
-------- -------
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
Section 5. Partial Indemnification. Notwithstanding any other
-----------------------
provision of this Agreement, to the extent that Indemnitee is, by reason of his
Corporate Status, a party to (or a participant in) and is successful, on the
merits or otherwise, in defense of any Proceeding, he shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in defense of such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
indemnify Indemnitee against all Expenses actually and reasonably incurred by
him or on his behalf in connection with each successfully resolved claim, issue
or matter. For purposes of this Section and without limitation, the termination
of any claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter. If Indemnitee is entitled under any provision of this agreement to
indemnification by the Company for some or a portion of the Expenses, judgments,
penalties, fines and amounts paid in settlement (including all interest,
assessments and other charges paid or payable in connection with or in respect
of such Expenses, judgments, penalties, fines and amounts paid in settlement)
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion to which Indemnitee is entitled.
Section 6. Indemnification for Additional Expenses.
---------------------------------------
(a) The Company shall indemnify Indemnitee against any and all
Expenses and, if requested by Indemnitee, shall (within twenty (20) business
days of such request) advance such Expenses to Indemnitee, which are incurred by
Indemnitee in connection with any action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or bylaw of the Company now or hereafter in
effect; or (ii) recovery under any directors' and officers' liability insurance
policies maintained by the Company, regardless of whether Indemnitee ultimately
is determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be.
-3-
<PAGE>
(b) Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding to which Indemnitee is not a party, he shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
Section 7. Advancement of Expenses. The Company shall advance all
-----------------------
reasonable Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding within twenty (20) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 7 shall be subject to the condition
that, if, when and to the extent that the Company determines that Indemnitee
would not be permitted to be indemnified under applicable law, the Company shall
be entitled to be reimbursed, within thirty (30) days of such determination, by
Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Company that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any advance of
Expenses until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
Section 8. Procedure for Determination of Entitlement to
---------------------------------------------
Indemnification.
- ---------------
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Company shall, promptly upon
receipt of such a request for indemnification, advise the Board in writing that
Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 8(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in the specific case at the election of Indemnitee, by any of the following
procedures to the extent permissible under Delaware law: (i) by a majority vote
of the Disinterested Directors (as hereinafter defined), even though less than a
quorum of the Board, or (ii) by Independent Counsel in a written opinion to the
Board, a copy of which shall be delivered to Indemnitee or (iii) by the
stockholders of the Company; and, if it is so determined that Indemnitee is
entitled to indemnification, payment to Indemnitee shall be made within seven
(7) business days after such determination. Indemnitee shall cooperate with the
person, persons or entity making such determination with respect to Indemnitee's
entitlement to indemnification, including providing to such person, persons or
entity upon
-4-
<PAGE>
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or expenses (including reasonable attorneys' fees and disbursements)
incurred by Indemnitee in so cooperating with the person, persons or entity
making such determination shall be borne by the Company (irrespective of the
determination as to Indemnitee's entitlement to indemnification) and the Company
hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 8(b) hereof, the
Independent Counsel shall be selected as provided in this Section 8(c). The
Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall
request that such selection be made by the Board of Directors, in which event
the Board shall select such counsel and give written notice to Indemnitee of the
identity of such Independent Counsel), and Indemnitee shall give written notice
to the Company advising it of the identity of the Independent Counsel so
selected. In either event, Indemnitee or the Company, as the case may be, may,
within ten (10) days after such written notice of selection shall have been
given, deliver to the Company or to Indemnitee, as the case may be, a written
objection to such selection; provided, however, that such objection may be
-------- -------
asserted only on the ground that the Independent Counsel so selected does not
meet the requirements of "Independent Counsel" as defined in Section 17 of this
Agreement, and the objection shall set forth with particularity the factual
basis of such assertion. If such written objection is so made and
substantiated, the Independent Counsel so selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined
that such objection is without merit. If, within twenty (20) days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 8(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware for resolution of any objection which shall have been
made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the Court or by such other person as the Court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 8(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 8(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 8(c), regardless of the
manner in which such Independent Counsel was selected or appointed. Upon the
due commencement of any judicial proceeding or arbitration pursuant to Section
10(a)(iii) of this Agreement, Independent Counsel shall be discharged and
relieved of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of
Indemnitee to the settlement of any Proceeding which the Company has undertaken
to defend if the Company assumes full and sole responsibility for such
settlement and such settlement grants Indemnitee a complete and unqualified
release in respect of the potential liability. The Company shall not be liable
for any amount paid by Indemnitee in settlement of any Proceeding that is not
defended by
-5-
<PAGE>
the Company, unless the Company has consented in writing to such settlement,
which consent shall not be unreasonably withheld.
(e) In the event the Company shall be obligated to advance the
expenses for any Proceeding against Indemnitee, the Company, if appropriate,
shall be entitled to assume the defense of such proceeding, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of such
notice and the retention of such counsel by the Company, the Company will not be
liable to Indemnitee under this Agreement for any fees of counsel subsequently
incurred by Indemnitee with respect to the same Proceeding, provided that (a)
Indemnitee shall have the right to employ his own counsel in any such proceeding
at Indemnitee's expense; (b) Indemnitee shall have the right to employ his own
counsel in connection with any such Proceeding, at the expense of the Company,
if such counsel serves in a review, observer, advice and counseling capacity and
does not otherwise materially control or participate in the defense of such
Proceeding; and (c) if (i) the employment of counsel by Indemnitee has been
previously authorized by the Company, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense or (iii) the Company shall not, in
fact, have employed counsel to assume the defense of such Proceeding, then the
reasonable fees and expenses of Indemnitee's counsel shall be at the expense of
the Company.
Section 9. Presumptions and Effect of Certain Proceedings.
----------------------------------------------
(a) In making a determination with respect to entitlement to
indemnification or the advancement of expenses hereunder, the person or persons
or entity making such determination shall presume that Indemnitee is entitled to
indemnification or advancement of expenses under this Agreement if Indemnitee
has submitted a request for indemnification or the advancement of expenses in
accordance with Section 8(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
Neither the failure of the Company (including the Board or independent legal
counsel) to have made a determination prior to the commencement of any action
pursuant to this Agreement that indemnification is proper in the circumstances
because Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Company (including the Board or independent legal counsel)
that Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under
Section 8 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
-------- -------
reasonable time, not to exceed an additional thirty (30) days, if the person,
persons
-6-
<PAGE>
or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto; and provided,
--------
further, that the foregoing provisions of this Section 9(b) shall not apply (i)
- -------
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 8(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors has resolved to submit such determination
to the stockholders for their consideration at an annual meeting thereof to be
held within seventy-five (75) days after such receipt and such determination is
made thereat, or (B) a special meeting of stockholders is called within fifteen
(15) days after such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after having been so
called and such determination is made thereat, or (C) a written consent of
stockholders is solicited within fifteen (15) days after such receipt for the
purpose of making such determination, and such consent is obtained within sixty
(60) days after such solicitation, or (ii) if the determination of entitlement
to indemnification is to be made by Independent Counsel pursuant to Section 8(b)
of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of nolo
----
contendere or its equivalent, shall not (except as otherwise expressly provided
- ----------
in this Agreement) of itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) For purposes of any determination of "good faith," Indemnitee
shall be deemed to have acted in "good faith" if Indemnitee's action is based on
the records or books of account of the Company or relevant enterprise, including
financial statements, or on information supplied to Indemnitee by the officers
of the Company or relevant enterprise in the course of their duties, or on the
advice of legal counsel for the Company or relevant enterprise or on information
or records given or reports made to the Company or relevant enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Company or relevant enterprise. The
provisions of this Section 9(d) shall not be deemed to be exclusive or to limit
in any way the other circumstances in which Indemnitee may be deemed to have met
the applicable standard of conduct set forth in this Agreement.
(e) The knowledge and/or actions, or failure to act, of any other
director, officer, agent or employee of the Company or relevant enterprise shall
not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement.
Section 10. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to Section
8 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 7 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 8(b) of
-7-
<PAGE>
this Agreement within ninety (90) days after receipt by the Company of the
request for indemnification, (iv) payment of indemnification is not made
pursuant to Section 5 or 6 of this Agreement within twenty (20) days after
receipt by the Company of a written request therefor, or (v) payment of
indemnification is not made within seven (7) business days after a determination
has been made that Indemnitee is entitled to indemnification, Indemnitee shall
be entitled to an adjudication by the Court of Chancery of the State of Delaware
of his entitlement to such indemnification or advancement of Expenses.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within one hundred eighty
(180) days following the date on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 10(a); provided, however, that
-------- -------
the foregoing clause shall not apply in respect of a proceeding brought by
Indemnitee to enforce his rights under Section 5 of this Agreement.
(b) In the event that a determination shall have been made pursuant to
Section 8(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 10 shall be conducted in all respects as a de novo trial, or
-- ----
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding or arbitration commenced pursuant to this Section 10, the
Company shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 8(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 10, seeks a
judicial adjudication of or an award in arbitration to enforce his rights under,
or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 17 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
or advancement of expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated. The Company shall indemnify Indemnitee against any and all Expenses
and, if requested by Indemnitee, shall (within twenty (20) days after receipt by
the Company of a written request therefor) advance such expenses to Indemnitee,
which are incurred by Indemnitee in connection with any action brought by
Indemnitee for indemnification or advance of Expenses from the Company under
this Agreement or under any directors' and officers' liability insurance
policies maintained by the Company, regardless of whether Indemnitee ultimately
is determined to be
-8-
<PAGE>
entitled to such indemnification, advancement of Expenses or insurance recovery,
as the case may be.
(e) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 10 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
Section 11. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
-----------------------------------------------------------
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect of any action
taken or omitted by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal. To the extent that a change in the General
Corporation Law of the State of Delaware, whether by statute or judicial
decision, permits greater indemnification or advancement of Expenses than would
be afforded currently under the Company's Bylaws and this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the
greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every
other right and remedy shall be cumulative and in addition to every other right
and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
right or remedy.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at the
request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent under such policy or
policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
-9-
<PAGE>
(e) The Company's obligation to indemnify or advance expenses
hereunder to Indemnitee who is or was serving at the request of the Company as a
director, officer, employee, agent and/or fiduciary of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
shall be reduced by any amount Indemnitee has actually received as
indemnification or advancement of expenses from such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
Section 12. Duration of Agreement. This Agreement shall continue
---------------------
until and terminate upon the later of: (a) ten (10) years after the date that
Indemnitee shall have ceased to serve as a director, officer, employee and/or
agent of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which Indemnitee served at the
request of the Company; or (b) the final termination of any Proceeding then
pending in respect of which Indemnitee is granted rights of indemnification or
advancement of expenses hereunder and of any proceeding commenced by Indemnitee
pursuant to Section 10 of this Agreement relating thereto. This Agreement shall
be binding upon the Company and its successors and assigns and shall inure to
the benefit of Indemnitee and his heirs, executors and administrators.
Section 13. Severability. If any provision or provisions of this
------------
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties
hereto; and (c) to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 14. Exception to Right of Indemnification or Advancement of
-------------------------------------------------------
Expenses. Except as provided in Section 6(a) of this Agreement, Indemnitee
- --------
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding brought by Indemnitee (other than a
Proceeding by Indemnitee to enforce his rights under this Agreement) or any
claim therein prior to a Change in Control, unless the bringing of such
Proceeding or making of such claim shall have been approved by the Board of
Directors.
Section 15. Identical Counterparts. This Agreement may be executed in one
----------------------
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Section 16. Headings. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
-10-
<PAGE>
Section 17. Definitions. For purposes of this Agreement:
-----------
(a) "Change in Control" means a change in control of the Company
occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however, that,
-------- -------
without limitation, such a Change in Control shall be deemed to have occurred if
after the Effective Date (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Act) acquires "beneficial ownership" (as defined in Rule
13d-3 under the Act) directly or indirectly (other than as a result of an
Indirect Transfer which does not result in a Change in Control of a Stockholder
(as each such term is defined in the Stockholders Agreement) of securities of
the Company representing twenty percent (20%) or more of the combined voting
power of the Company's then outstanding securities without the prior approval of
at least two-thirds of the members of the Board in office immediately prior to
such person attaining such percentage interest or (ii) there occurs a proxy
contest, or the Company is a party to a merger, consolidation, sale of assets,
plan of liquidation or other reorganization not approved by at least two-thirds
of the members of the Board then in office, as a consequence of which members of
the Board in office immediately prior to such transaction or event constitute
less than a majority of the Board thereafter. Notwithstanding the foregoing, a
Change in Control shall not be deemed to have occurred so long as the members of
the TCI Stockholder Group (as defined in the Stockholders Agreement) are the
beneficial owners of securities of the Company representing fifty percent or
more of the combined voting power of the Company's outstanding securities.
(b) "Corporate Status" describes the status of a person who is or was
a director, officer, employee, fiduciary or agent of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(d) "Effective Date" means the date Indemnitee became an officer or
director of the Company.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to be a witness in, or
otherwise participating in, a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past two years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party, or (ii) any other party
to the Proceeding giving rise to a claim for indemnification here-
-11-
<PAGE>
under. Notwithstanding the foregoing, the term "Independent Counsel" shall not
include any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees of the Independent
Counsel referred to above and to fully indemnify such counsel against any and
all Expenses, claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(g) "Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing or any other actual, threatened or completed
proceeding, whether brought by or in the right of the Corporation or otherwise
and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is, may be or will be involved as a party or otherwise, by
reason of the fact that Indemnitee is or was a director, officer, employee
and/or agent of the Company, by reason of any action taken by him or of any
inaction on his part while acting as director, officer, employee and/or agent of
the Company, or by reason of the fact that he is or was serving at the request
of the Company as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification or advancement of
expenses can be provided under this Agreement; except one (i) initiated by an
Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under
this Agreement or (ii) pending on or before the Effective Date.
(h) "Stockholders Agreement" means that certain Amended and Restated
Stockholders' Agreement, dated as of August 1, 1996, by and among the
Corporation and certain of its stockholders, as amended from time to time.
Section 18. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to serve as a director, officer, employee and/or agent of the
Company, and the Company acknowledges that Indemnitee is relying upon this
Agreement in serving as a director, officer, employee and/or agent of the
Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
Section 19. Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
-12-
<PAGE>
Section 20. Notice by Indemnitee. Indemnitee agrees promptly to notify
--------------------
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder. The failure of Indemnitee to so notify the Company shall not
relieve the Company of any obligation which it may have to Indemnitee under this
Agreement or otherwise.
Section 21. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, (ii) mailed by certified
or registered mail, return receipt requested, with postage prepaid, on the third
business day after the date on which it is so mailed, (iii) dispatched by
recognized overnight courier with fees prepaid, on the first business day after
dispatch or (iv) transmitted by facsimile (confirmed by first class mail), on
the date of transmission:
(a) If to Indemnitee, to the address and facsimile number listed on
the signature page hereto.
(b) If to the Company to:
At Home Corporation
425 Broadway
Redwood City, CA 94063
Facsimile: (415) 944-8500
Attention: David G. Pine, Esq.
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Suite 800
Palo Alto, CA 94306
Facsimile: (415) 494-1417
Attention: Gordon K. Davidson, Esq.
or to such other address or facsimile number as may have been furnished to
Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 22. Contribution. To the fullest extent permissible under
------------
applicable law, if the indemnification provided for in this Agreement is
unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of
indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee,
whether for judgments, fines, penalties, excise taxes, amounts paid or to be
paid in settlement and/or for Expenses, in connection with any claim relating to
an indemnifiable event under this Agreement, in such proportion as is deemed
fair and reasonable in light of all of the circumstances of such Proceeding in
order to reflect (i) the relative benefits received by the Company and
Indemnitee as a result of the event(s) and/or transaction(s) giving cause to
such
-13-
<PAGE>
Proceeding; and/or (ii) the relative fault of the Company (and its directors,
officers, employees and agents) and Indemnitee in connection with such event(s)
and/or transaction(s).
Section 23. Governing Law; Submission to Jurisdiction; Appointment of
---------------------------------------------------------
Agent for Service of Process. This Agreement and the legal relations among the
- ----------------------------
parties shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without regard to its conflict of laws rules.
Except with respect to any arbitration commenced by Indemnitee pursuant to
Section 10(a) of this Agreement, the Company and Indemnitee hereby irrevocably
and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of
the State of Delaware (the "Delaware Court"), and not in any other state or
federal court in the United States of America or any court in any other country,
(ii) consent to submit to the exclusive jurisdiction of the Delaware Court for
purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) appoint, to the extent such party is not a resident of the
State of Delaware, irrevocably RL&F Service Corp., One Rodney Square, 10th
Floor, 10th and King Streets, Wilmington, Delaware 19801 as its agent in the
State of Delaware as such party's agent for acceptance of legal process in
connection with any such action or proceeding against such party with the same
legal force and validity as if served upon such party personally within the
State of Delaware, (iv) waive any objection to the laying of venue of any such
action or proceeding in the Delaware Court, and (v) waive, and agree not to
plead or to make, any claim that any such action or proceeding brought in the
Delaware Court has been brought in an improper or otherwise inconvenient forum.
Section 24. Miscellaneous. Use of the masculine pronoun shall be deemed
-------------
to include usage of the feminine pronoun where appropriate.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
ATTEST AT HOME CORPORATION
By: ____________________________ By: ______________________________
Name: Name:
Title: Title:
INDEMNITEE
___________________________________
Signature
___________________________________
Print Name
Address: ___________________________________
___________________________________
___________________________________
Facsimile: (____)______________________________
-15-
<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)..................................... 76,452,260 76,452,260
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
------------ ------------
109,720,996 109,720,996
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)..................................... 1,439,641 1,439,641
------------ ------------
Shares used in computing pro forma net loss per
share........................................... 111,160,637 111,160,637
============ ============
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 May 12, 1997, in Amendment No. 2 to the Registration Statement (Form
S-1 No. 333-27323) and related Prospectus of At Home Corporation for the
registration of 8,000,000 shares of its Series A common stock.
Ernst & Young LLP
San Jose, California
July 8, 1997
<PAGE>
EXHIBIT 23.03
[LETTERHEAD OF PAUL KAGAN ASSOCIATES, INC.]
July 1, 1997
VIA FAX
At Home Corporation
ATTN: David Pine, General Counsel
452 Broadway Street
Redwood City, CA 94063
RE: Your July 1 facsimile
Dear Mr. Pine:
This letter constitutes Paul Kagan Associates, Inc. permission to cite PKA as
the source of the data attributed to us on Page 33 of @Home Network's draft
prospectus forwarded for our review by the referenced facsimile subject to one
--------------
of the following modifications:
- ------------------------------
. If you use a figure of 97%, insert the word "television" or
"TV" before the word "homes," because the 97% figure, as
published in our annual projections, is based on the number of
homes passed by cable compared to all households with access
to television.
. If, however, your intent is to present the percentage of all
U.S. homes, with TV or not, then the figure should be 96%.
With either change incorporated, we hereby consent to the inclusion of certain
industry data and the use of our name in connection therewith in the
Registration Statement on Form S-1 (Registration No. 333-27323 of At Home
Corporation.
It is understood this is a one time approval, and this material may not be
used/disseminated for any other purpose without our prior consent. Thank you for
seeking prior approval to use our information.
Sincerely,
/s/ Dwight W. Beach
Dwight W. Beach
VP of Operations
<PAGE>
EXHIBIT 23.04
CONSENT OF BASKERVILLE COMMUNICATIONS
We hereby consent to the inclusion of certain industry data and the
use of our name in connection therewith in the "Prospectus Summary," "The
Company" and "Business" sections of this Registration Statement on Form S-1
(Registration No. 333-27323) of At Home Corporation.
/s/ Jodi M. Romano-Besket
------------------------------
BASKERVILLE COMMUNICATIONS
Date: 7/3
_____________, 1997
<PAGE>
EXHIBIT 23.05
CONSENT OF FORRESTER RESEARCH
We hereby consent to the inclusion of certain industry data and the
use of our name in connection therewith, as set forth in Exhibit A, in the "The
Company" and "Business" sections of this Registration Statement on Form S-1
(Registration No. 333-27323) of At Home Corporation.
/s/ Diane Reeves, CFO
------------------------------
FORRESTER RESEARCH
Date: 7/3
_____________, 1997
<PAGE>
EXHIBIT 23.06
CONSENT OF JUPITER COMMUNICATIONS
We hereby consent to the inclusion of certain industry data and the
use of our name in connection therewith in the "Business" section of this
Registration Statement on Form S-1 (Registration No. 333-27323) of At Home
Corporation.
/s/ Michelle Kuester
------------------------------
JUPITER COMMUNICATIONS
Date: 7-2
_____________, 1997
<PAGE>
EXHIBIT 23.07
CONSENT OF INTERNATIONAL DATA CORPORATION
We hereby consent to the inclusion of certain industry data and the
use of our name in connection therewith in the "Business" section of this
Registration Statement on Form S-1 (Registration No. 333-27323) of At Home
Corporation.
/s/ Hilary Demello
------------------------------
INTERNATIONAL DATA CORPORATION
Date: 1 July
_____________, 1997
<PAGE>
EXHIBIT 23.08
CONSENT OF SIMBA INFORMATION INC.
We hereby consent to the inclusion of certain industry data and the
use of our name in connection therewith in the "Business" section of this
Registration Statement on Form S-1 (Registration No. 333-27323) of At Home
Corporation.
/s/ Tom Schmalzl
------------------------------
SIMBA INFORMATION INC.
Date: July 3
_____________, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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