<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
REGISTRATION NO. 333-27323
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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>
<S> <C> <C>
DELAWARE 7370 77-0408542
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
----------------
425 BROADWAY STREET
REDWOOD CITY, CALIFORNIA 94063
(415) 569-5000
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KENNETH A. GOLDMAN
CHIEF FINANCIAL OFFICER
AT HOME CORPORATION
425 BROADWAY STREET
REDWOOD CITY, CALIFORNIA 94063
(415) 569-5000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
<TABLE>
<S> <C>
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
</TABLE>
----------------
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 June 20, 1997
8,000,000 Shares
[LOGO OF @HOME NETWORK(TM)]
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
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
The Company......................... 22
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Consolidated Financial
Data............................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 27
Business............................ 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management....................... 52
Certain Transactions............. 63
Principal Stockholders........... 70
Description of Capital Stock..... 71
Shares Eligible for Future Sale.. 73
Underwriters..................... 75
Legal Matters.................... 77
Experts.......................... 77
Change in Independent Auditors... 77
Additional Information........... 77
Index to Consolidated Financial
Statements...................... F-1
</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 (i) assumes no exercise of the Underwriters'
over-allotment option, (ii) includes the April 1997 Series C Preferred Stock
financing as though it had occurred as of March 31, 1997 and (iii) assumes 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. 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 97% 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... 109,803,587 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.. 87,525,927 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................................................ 117,803,587 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 THREE MONTHS
MARCH 28, 1995 ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------
1995 1996 1996 1997
-------------- ------------ ------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues....................... $ -- $ 676 $ -- $ 806
Total costs and expenses....... 2,886 25,703 3,794 11,747
Loss from operations........... (2,886) (25,027) (3,794) (10,941)
Net loss....................... (2,756) (24,513) (3,710) (10,901)
Pro forma net loss per
share(2)...................... $ (.22) $ (.10)
======== ========
Pro forma shares used in per
share calculations(2)......... 110,854 110,854
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
------- ------------ -----------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
cash investments..................... $ 6,427 $54,427 $112,947
Working capital (deficit)............. (2,335) 45,665 104,185
Total assets.......................... 26,878 74,878 133,398
Capital lease obligations, less
current portion, and other long-term
liabilities.......................... 8,085 8,085 8,085
Stockholders' equity.................. 7,670 55,670 114,190
</TABLE>
- -------
(1) Based on the number of shares outstanding as of March 31, 1997. Excludes
(i) 939,250 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 $.21 per share, (ii)
652,423 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") and (iv) 200,000 shares of Series A Common Stock issuable
upon the exercise of outstanding warrants with an exercise price of $15.00
per share. Subsequent to March 31, 1997, the Company (i) issued and sold
240,000 shares of its Series C Preferred Stock at a price of $200 per
share, which will convert upon the closing of this offering into 6,000,000
shares of Series A Common Stock, which are included in the numbers of
shares shown above to be outstanding prior to and after this offering, (ii)
issued warrants to purchase, commencing December 31, 1997, 100,000 shares
of its Series C Preferred Stock at a price of $200 per share, which will
convert upon the closing of this offering into warrants to purchase
2,000,000 shares of Series A Common Stock at a purchase price per share
equal to the lesser of $10.00 or the initial public offering price, and
(iii) granted options to purchase 858,000 shares of Series A Common Stock
under the 1996 Plans with a weighted average exercise price of $3.35 per
share. See "Management--Employee Benefit Plans," "Description of Capital
Stock" and Notes 5 and 9 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of pro forma shares used in per share
calculations.
(3) Reflects the gross proceeds from the sale on April 11, 1997 of 240,000
shares of the Company's Series C Preferred Stock at a price of $200 per
share.
(4) 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 Model; 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 March 31, 1997, the Company had
an accumulated deficit of $38.2 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 6,000 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 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 current
and future cable partners upgrade their cable infrastructures, the success of
the LCOs in marketing the @Home service to subscribers in their local cable
areas and the prices that the LCOs set for the @Home service and its
installation. Because of the foregoing factors, among others, the Company is
unable to forecast its revenues with any degree of accuracy. There can also be
no assurance that the Company will ever achieve 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 @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
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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
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 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."
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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 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'
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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, 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
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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 is 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 do
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 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
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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 to Cablevision
Systems Corporation of 10 cable systems in New York and New Jersey, and to
Adelphia Communications Corporation ("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.
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 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
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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 release 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 model 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
model will not be viable. Each of the Principal Cable Stockholders and its
Affiliated 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."
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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
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
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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."
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."
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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 Corporation's Microsoft
Network ("MSN"), Prodigy, Inc. ("Prodigy") and WebTV Networks Inc. ("WebTV")
(which has agreed to be acquired by Microsoft Corporation) 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 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.
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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."
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
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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 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
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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
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
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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 heard oral arguments on the appeal of 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 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 one patent application and is in the process of preparing
additional patent applications
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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, 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
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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
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 103,803,587
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 1,052,423 shares of
Series A Common Stock reserved for issuance under the Company's Purchase Plan
and 1997 Equity Incentive Plan and a total of 1,413,000 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."
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
20
<PAGE>
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 $7.03. 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. 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 97% 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 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 March 31, 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 gross proceeds
from the sale of 240,000 shares of the Company's Series C Preferred Stock
(which were issued on April 11, 1997), as if outstanding on March 31, 1997,
and 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 estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of capital lease
obligations(1)................................ $ 4,766 $ 4,766 $ 4,766
======== ======== ========
Capital lease obligations, less current
portion, and other long-term liabilities(1)... $ 8,085 $ 8,085 $ 8,085
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.01 par value;
14,522,613 shares authorized, 4,522,613
shares issued and outstanding actual;
9,650,000 shares authorized, no shares issued
and outstanding pro forma and as
adjusted(2).................................. 44,993 -- --
Common stock, $.01 par value; 180,277,660
shares authorized, 13,351,327 shares issued
and outstanding actual; 180,277,660 shares
authorized, 109,803,587 shares issued and
outstanding pro forma, 230,277,660 shares
authorized, 117,803,587 shares issued and
outstanding as adjusted(2)................... 6,212 99,205 157,725
Notes receivable from stockholders............ (515) (515) (515)
Deferred compensation......................... (4,850) (4,850) (4,850)
Accumulated deficit........................... (38,170) (38,170) (38,170)
-------- -------- --------
Total stockholders' equity................. 7,670 55,670 114,190
-------- -------- --------
Total capitalization..................... $ 15,755 $ 63,755 $122,275
======== ======== ========
</TABLE>
- --------
(1) See Notes 3 and 4 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 939,250 shares of Series A Common Stock issuable upon the
exercise of stock options outstanding as of March 31, 1997 under the First
1996 Plan and the Second 1996 Plan with a weighted average exercise price
of $.21 per share, (ii) 652,423 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 and
(iv) 200,000 shares of Series A Common Stock issuable upon exercise of
outstanding warrants with an exercise price of $15.00 per share.
Subsequent to March 31, 1997, the Company (i) issued and sold 240,000
shares of its Series C Preferred Stock at a price of $200 per share, which
will convert upon the closing of this offering into 6,000,000 shares of
Series A Common Stock, assuming an initial public offering price of $8.00,
(ii) issued warrants to purchase, commencing December 31, 1997, 100,000
shares of its Series C Preferred Stock at a price of $200 per share, which
will convert upon the closing of this offering into warrants to purchase
2,000,000 shares of Series A Common Stock at a per share purchase price
equal to the lesser of $10.00 or the initial public offering price and
(iii) granted options to purchase 858,000 shares of Series A Common Stock
under the 1996 Plans with a weighted average exercise price of $3.35 per
share. See "Management--Employee Benefit Plans," "Description of Capital
Stock" and Notes 5 and 9 of Notes to Consolidated Financial Statements.
24
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $55,670,000, or $.51 per share of Common Stock. "Pro forma
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 (giving pro forma effect to the gross proceeds from the sale
of 240,000 shares of the Company's Series C Preferred Stock (which were issued
on April 11, 1997), as if issued on March 31, 1997, and to 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 pro
forma net tangible book value as of March 31, 1997 would have been
$114,190,000, or $.97 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $.46 per share to existing
stockholders and an immediate dilution of $7.03 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
Pro forma net tangible book value per share at March 31, 1997...... $.51
Increase in pro forma net tangible book value per share
attributable to new investors..................................... .46
----
Pro forma net tangible book value per share after offering.......... .97
-----
Dilution per share to new public investors.......................... $7.03
=====
</TABLE>
The following table summarizes, as of March 31, 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).............. 109,803,587 93.2% $ 94,408,643 59.6% $ .86
New public investors
(Series A Common
Stock)(2).............. 8,000,000 6.8 64,000,000 40.4 8.00
----------- ----- ------------ -----
Total................. 117,803,587 100.0% $158,408,643 100.0%
=========== ===== ============ =====
</TABLE>
- --------
(1) After conversion of Preferred Stock upon the closing of this offering.
(2) The foregoing computations assume no exercise of stock options outstanding
as of March 31, 1997. As of March 31, 1997, there were options outstanding
to purchase a total of 939,250 shares of Series A Common Stock with a
weighted average exercise price of $.21 per share and warrants to purchase
200,000 shares of Series A Common Stock with an exercise price of $15.00
per share. To the extent that any of these options are exercised, there
could be further dilution to new public investors. Subsequent to March 31,
1997, the Company (i) issued warrants to purchase, commencing December 31,
1997, 100,000 shares of its Series C Preferred Stock at a price of $200
per share, which will convert upon the closing of this offering into
warrants to purchase 2,000,000 shares of Series A Common Stock at a
purchase price per share of the lesser of $10.00 or the initial public
offering price, and (ii) granted options to purchase 858,000 shares of
Series A Common Stock under the 1996 Plans with a weighted average
exercise price of $3.35 per share. 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
three months ended March 31, 1996 and 1997 and the selected consolidated
balance sheet data as of March 31, 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
three months ended March 31, 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) THREE MONTHS
TO YEAR ENDED ENDED MARCH 31,
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 $ -- $ 806
Costs and expenses:
Operating costs............... -- 6,969 679 4,325
Product development and
engineering.................. 1,447 6,312 1,286 2,330
Sales and marketing........... 496 6,368 831 2,934
General and administrative.... 943 6,054 998 2,158
------- -------- ------- --------
Total costs and expenses....... 2,886 25,703 3,794 11,747
------- -------- ------- --------
Loss from operations........... (2,886) (25,027) (3,794) (10,941)
Interest income, net........... 130 514 84 40
------- -------- ------- --------
Net loss....................... $(2,756) $(24,513) $(3,710) $(10,901)
======= ======== ======= ========
Pro forma net loss per
share(1)...................... $ (.22) $ (.10)
======== ========
Pro forma shares used in per
share calculations(1)......... 110,854 110,854
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
MARCH 31,
1995 1996 1997
------ ------- ---------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term cash
investments......................................... $6,907 $16,770 $ 6,427
Working capital (deficit)............................ 6,244 10,573 (2,335)
Total assets......................................... 8,124 33,388 26,878
Capital lease obligations, less current portion, and
other long-term liabilities......................... -- 7,329 8,085
Stockholders' equity................................. 7,212 18,317 7,670
</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 March 31, 1997, the Company has expended more than $57.7
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 March 31, 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 12 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 18, 1997, the Company had more than 6,000
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 18, 1997, the Company was receiving revenues
from 20 business customers and had agreements with more than 130 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 March 31, 1997, had an accumulated deficit of $38.2
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 model, and the profit potential
of the Company's subscription-based business model 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
$30.0 million during the period from April 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 five 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,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................... $ -- $ -- $ 141 $ 535 $ 806
Costs and expenses:
Operating costs............... 679 1,102 1,968 3,220 4,325
Product development and
engineering.................. 1,286 1,520 1,918 1,588 2,330
Sales and marketing........... 831 1,289 1,855 2,393 2,934
General and administrative.... 998 737 1,858 2,461 2,158
------- ------- ------- ------- --------
Total costs and expenses....... 3,794 4,648 7,599 9,662 11,747
------- ------- ------- ------- --------
Loss from operations........... (3,794) (4,648) (7,458) (9,127) (10,941)
Interest income, net........... 84 79 212 139 40
------- ------- ------- ------- --------
Net loss....................... $(3,710) $(4,569) $(7,246) $(8,988) $(10,901)
======= ======= ======= ======= ========
</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 and $806,000 for the year
ended December 31, 1996 and the quarter ended March 31, 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 86% of revenues in the three months ended March 31,
1997.
COSTS AND EXPENSES
Quarterly expenses for the Company increased sequentially during 1995, 1996
and the first quarter 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 quarter of 1997 were $679,000, $1.1 million,
$2.0 million, $3.2 million and $4.3 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 quarter 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.
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 quarter of 1997 were $1.3 million, $1.5
million, $1.9 million, $1.6 million and $2.3 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 increase in expenses in the first quarter of 1997 over the
fourth quarter of 1996 is principally attributable to the increase in
personnel and related expenses. Product development and engineering expenses
are primarily due to 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 quarter of 1997 were $831,000, $1.3 million, $1.9 million, $2.4
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. 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.
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 quarter of 1997 were
$998,000, $737,000, $1.9 million, $2.5 million and $2.2 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.
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INTEREST INCOME, NET
Interest income, net was $84,000, $79,000, $212,000, $139,000 and $40,000
for the four quarters of 1996 and the first quarter of 1997, respectively.
Interest income, net was $130,000 and $514,000 for the Inception Period and
the year ended December 31, 1996, 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 March 31, 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 and $10.9 million for the four quarters of 1996 and
the first quarter of 1997. 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 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
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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 March 31, 1997, the principal source of liquidity for the Company
was $6.4 million of cash, cash equivalents and short-term cash investments. In
April 1997, the Company raised approximately $48.0 million, less issuance
costs, from the sale of convertible preferred stock. 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 quarter
ended March 31, 1997 was $2.1 million, $19.3 million and $8.3 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 quarter ended March
31, 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 quarter ended March 31, 1997 were $963,000, $15.2
million and $4.5 million, respectively, of which $0, $7.9 million and $3.1
million, respectively, were financed through capital leases. The Company
expects to expend a minimum of $30.0 million in leasehold improvements,
equipment, software and fixtures from April 1, 1997 to December 31, 1997, much
of which will be financed through capital leases.
Cash provided by financing activities for the Inception period and the year
ended December 31, 1996, was $10.0 million and $36.5 million, respectively,
resulting primarily from net proceeds from the sale of Preferred Stock. Cash
used in financing activities for the quarter ended March 31, 1997 was $688,000
resulting primarily from payments on capital lease obligations.
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. 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 97% 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 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 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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<PAGE>
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 27 Mbps; Upstream--up to 10 Mbps); (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 of cable systems having
approximately 1.4 million homes passed to other cable companies 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
18, 1997, the Company had more than 6,000 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 first
quarter of 1997 were $1.4 million, $6.3 million and $2.3 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 one patent application 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
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<PAGE>
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 March 31, 1997, the Company had 246 employees, excluding temporary
personnel and consultants. Of the total, 60 were employed in networking
engineering, 75 supported the @Home service including customer support and
related activities, 27 supported the @Work services, 53 were employed in the
@Media group and 31 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)... 40 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 47 Vice Chairman
III(1)(2)..............
James L. Barksdale(1)... 54 Director
Brendan R. Clouston(3).. 44 Director
L. John Doerr(1)(4)..... 45 Director
John C. Malone.......... 56 Director
Bruce W. 47 Director
Ravenel(2)(3)(4).......
Brian L. Roberts........ 37 Director
Edward S. Rogers........ 63 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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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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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 March 31, 1997, options to purchase
2,559,426 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 265,574 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 (6,825,150 such shares were sold through
March 31, 1997 (net of repurchases)). As of March 31, 1997, options to
purchase 3,946,751 shares had been exercised (net of repurchases), options to
purchase 764,250 shares were outstanding at exercise prices ranging from $.05
to $.25 per share, and 1,483,849 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 June 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
June 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
The Company's Certificate of Incorporation includes a provision that
eliminates, to the fullest extent permitted by the Delaware General
Corporation Law (the "Delaware Law"), the personal liability of its directors
for monetary damages for breach of fiduciary duty as a director.
As permitted by Section 145 of the Delaware Law, the Company's Certificate
of Incorporation provides that (i) the Company is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware Law,
(ii) the Company is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding after receipt of
an undertaking by such directors or officers to repay all amounts to which
they are ultimately determined not to be entitled, (iii) to the extent that
the Company is obligated to indemnify a person who is serving at its request
as a director, officer, employee or agent of another entity, the Company's
obligation will be reduced by any amount the indemnitee collects from such
other entity and (iv) the rights conferred in the Company's Certificate of
Incorporation are not exclusive.
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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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 April 11, 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% 39.4% 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)..... 440,000 -- -- * * * *
Sean Doherty............ 198,150 -- -- * * * *
All directors and
executive officers as a
group (18 persons)(13). 69,089,600 15,400,000 13,877,660 89.6 83.5 95.4 92.4
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 109,803,587 shares outstanding as of
April 11, 1997, after conversion of all outstanding Preferred Stock into
Common Stock in connection with this offering, and 117,803,587 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, 3,000,000 were subject to repurchase at
April 11, 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, 324,600 were subject to repurchase at April 11, 1997.
(10) Mr. Goldman is a Senior Vice President and the Chief Financial Officer of
the Company. Of these shares 513,333 were subject to repurchase at April
11, 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, 311,608 were subject to repurchase
at April 11, 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.
DESCRIPTION OF CAPITAL STOCK
As of April 11, 1997, assuming the conversion of all outstanding shares of
Preferred Stock into shares of Common Stock, there were outstanding 79,525,927
shares of Series A Common Stock held of record by approximately 254
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 939,250 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
2,200,000 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 are entitled to
notice of such registration and are entitled to include Registrable Shares
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 117,803,587 shares of Common Stock (based upon shares outstanding
at April 11, 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
109,803,587 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
73
<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) 103,803,587 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 1,178,000 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 2,465,423 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 March 31, 1997, options to purchase 939,250 shares of Series A
Common Stock were issued and outstanding under the 1996 Plans. Subsequent to
March 31, 1997, the Board granted options to purchase an additional 858,000
shares of Series A Common Stock under the 1996 Plans. See "Management--
Employee Benefit Plans." Such registration statement is expected to be filed
and become effective as soon as practicable after the effective date of this
offering. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to Affiliates, be
available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the lock-up agreements described
above.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") for whom Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated
and Hambrecht & Quist LLC are acting as Representatives (the
"Representatives") have severally agreed to purchase, and the Company has
agreed to sell to them, severally, the respective number of Shares of Series A
Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
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.
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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 the last paragraph of Note 5 and 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
----------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 6,844 $ 9,709 $ 4,067
Short-term cash investments..... 63 7,061 2,360
------- -------- --------
Total cash, cash equivalents and
short-term cash investments.... 6,907 16,770 6,427
Accounts receivable............. -- 164 81
Accounts receivable--related
parties........................ -- 640 445
Other current assets............ 249 741 1,835
------- -------- --------
Total current assets.............. 7,156 18,315 8,788
Property, equipment and
improvements, net................ 921 14,328 17,343
Other assets...................... 47 745 747
------- -------- --------
Total assets...................... $ 8,124 $ 33,388 $ 26,878
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................ $ 392 $ 1,946 $ 2,859
Accounts payable--related
parties........................ 431 1,482 665
Accrued compensation and related
expenses....................... 89 248 366
Other accrued liabilities....... -- 885 2,467
Current portion of capital lease
obligations.................... -- 3,181 4,766
------- -------- --------
Total current liabilities......... 912 7,742 11,123
Capital lease obligations, less
current portion.................. -- 5,654 6,410
Other long-term liabilities....... -- 1,675 1,675
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 and
4,522,613 in 1996 and 1997
(pro forma--none)............ 9,968 44,993 44,993 $ --
Common stock, $0.01 par value:
Authorized shares--180,277,660
Issued and outstanding
shares--none in 1995,
11,855,088 in 1996 and
13,351,327 in 1997 (pro
forma--103,803,587).......... -- 1,035 6,212 51,205
Notes receivable from
stockholders................... -- (170) (515) (515)
Deferred compensation........... -- (272) (4,850) (4,850)
Accumulated deficit............. (2,756) (27,269) (38,170) (38,170)
------- -------- -------- --------
Total stockholders' equity........ 7,212 18,317 7,670 $ 7,670
------- -------- -------- ========
Total liabilities and
stockholders' equity............. $ 8,124 $ 33,388 $ 26,878
======= ======== ========
</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 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (1)............ $ -- $ 676 $ -- $ 806
Costs and expenses:
Operating costs....... -- 6,969 679 4,325
Product development
and engineering...... 1,447 6,312 1,286 2,330
Sales and marketing... 496 6,368 831 2,934
General and
administrative....... 943 6,054 998 2,158
------- ----------- ------- -----------
Total costs and
expenses............... 2,886 25,703 3,794 11,747
------- ----------- ------- -----------
Loss from operations.... (2,886) (25,027) (3,794) (10,941)
Interest income, net.... 130 514 84 40
------- ----------- ------- -----------
Net loss................ $(2,756) $ (24,513) $(3,710) $ (10,901)
======= =========== ======= ===========
Pro forma net loss per
share.................. $ (0.22) $ (0.10)
=========== ===========
Pro forma shares used in
per share
calculations........... 110,854,478 110,854,478
=========== ===========
- --------
(1)Revenues from related
parties $ -- $ 634 $ -- $ 690
</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
Series A common stock
issued under stock
option plans and
restricted stock
agreements
(unaudited)............ -- -- 1,914,251 465 (345) -- -- 120
Repurchases of Series A
common stock
(unaudited)............ -- -- (417,932) (25) -- -- -- (25)
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- 4,737 -- (4,737) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- -- 159 -- 159
Net loss (unaudited).... -- -- -- -- -- -- (10,901) (10,901)
--------- ------- ---------- ------ ----- ------- -------- --------
BALANCES AT MARCH 31,
1997 (UNAUDITED)....... 4,522,613 $44,993 13,351,327 $6,212 $(515) $(4,850) $(38,170) $ 7,670
========= ======= ========== ====== ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDED MARCH 31,
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) $(3,710) $(10,901)
Adjustments to reconcile
net loss to cash used in
operating activities:
Amortization of deferred
compensation............ -- 74 -- 159
Depreciation and
amortization............ 42 1,829 75 1,452
Changes in assets and
liabilities:
Accounts receivable...... -- (804) -- 278
Other assets............. (296) (1,190) 186 (1,096)
Accounts payable......... 823 2,605 (33) 96
Accrued compensation and
related expenses........ 89 159 91 118
Other accrued
liabilities............. -- 885 264 1,582
Other long-term
liabilities............. -- 1,675 -- --
------- -------- ------- --------
Cash (used in) operating
activities............... (2,098) (19,280) (3,127) (8,312)
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchase of short-term
cash investments......... (63) (8,998) -- (299)
Sales and maturities of
short-term cash
investments.............. -- 2,000 -- 5,000
Purchase of property,
equipment and
improvements............. (963) (7,320) (1,274) (1,343)
------- -------- ------- --------
Cash provided by (used in)
investing activities..... (1,026) (14,318) (1,274) 3,358
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from issuance of
convertible preferred
stock.................... 9,968 35,025 -- --
Proceeds from sale of
common stock............. -- 519 -- 95
Proceeds from capital
lease financing.......... -- 1,500 -- --
Payments on capital lease
obligations.............. -- (581) -- (783)
------- -------- ------- --------
Cash provided by (used in)
financing activities..... 9,968 36,463 -- (688)
------- -------- ------- --------
Net increase (decrease) in
cash and cash
equivalents.............. 6,844 2,865 (4,401) (5,642)
Cash and cash equivalents,
beginning of period...... -- 6,844 6,844 9,709
------- -------- ------- --------
Cash and cash equivalents,
end of period............ $ 6,844 $ 9,709 $ 2,443 $ 4,067
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
Interest paid............ $ -- $ 143 $ -- $ 134
======= ======== ======= ========
Acquisition of equipment
under capital leases.... $ -- $ 7,916 $ -- $ 3,124
======= ======== ======= ========
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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information
The interim financial information as of March 31, 1997 and for the three
months ended March 31, 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 three months ended March 31, 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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 March 31,
1997:
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING
------------------------
SHARES DECEMBER 31, MARCH 31,
SERIES AUTHORIZED 1996 1997
------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
A....................................... 150,000,000 11,855,008 13,351,327
B....................................... 15,400,000 -- --
K....................................... 14,877,660 -- --
----------- ---------- ----------
180,277,660 11,855,008 13,351,327
=========== ========== ==========
</TABLE>
F-12
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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........................ 2,611,501 $0.25 $0.25
Options exercised (nonvested shares)... (1,894,251) $0.05 - $0.25 $0.25
Options forfeited...................... (1,000) $0.10 $0.10
---------- ------------- -----
Balance at March 31, 1997............... 939,250 $0.05 - $0.25 $0.21
========== ============= =====
</TABLE>
The following table summarizes information about options outstanding at
March 31, 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 9.5 $0.05
$0.10...................................... 27,000 9.8 $0.10
$0.25...................................... 737,250 9.9 $0.25
------- --- -----
$0.05 - $0.25.............................. 939,250 9.5 $0.21
======= === =====
</TABLE>
At March 31, 1997, outstanding options to purchase 41,720 shares were vested
and 5,569,071 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 THREE MONTHS ENDED MARCH 31, 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 $4,737,000 during the three months ended
March 31, 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.
Unaudited Pro Forma Stockholders' Equity
Unaudited pro forma stockholders' equity at March 31, 1997 gives effect to
the conversion into common stock of outstanding shares of preferred stock that
will convert to common stock upon the closing of the Company's initial public
offering of its common stock.
F-15
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Unaudited Pro Forma Stockholders' Equity (continued)
Unaudited pro forma stockholders' equity as of March 31, 1997 as further
adjusted to give effect to the issuance of 240,000 shares of Series C
preferred stock in April 1997, the conversion of such shares to 6,000,000
shares of Series A common stock upon the closing of the initial public
offering, assuming an initial public offering price of $8.00 per share (Note
9), and the changes in authorized shares of capital stock approved by the
Board of Directors in May 1997 (subject to stockholder approval) is as follows
(in thousands except per share data):
<TABLE>
<S> <C>
Preferred stock, $0.01 par value:
Authorized shares--9,650,000
Issued and outstanding shares--none.............................. $ --
Common stock, $0.01 par value:
Authorized shares--230,277,660
Issued and outstanding shares--109,803,587....................... 99,205
Notes receivable from stockholders................................. (515)
Deferred compensation.............................................. (4,850)
Accumulated deficit................................................ (38,170)
--------
Total pro forma stockholders' equity........................... $ 55,670
========
</TABLE>
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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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
<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 $ .
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 June , 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,
Inc. .................. 8/29/95 Series T Preferred Stock 770,000(1) $7,700,000 Cash
3 venture capital
funds.................. 8/29/95 Series K Preferred Stock 230,000(1) $2,300,000 Cash
TCI Internet Holdings,
Inc. .................. 5/9/96 Series T Preferred Stock 770,000(1)(2) $7,700,000 Cash
2 venture capital
funds.................. 5/9/96 Series K Preferred Stock 230,000(1) $2,300,000 Cash
One company............. 7/19/96 Series A Common Stock 20,000 $1,000 Property(3)
TCI Internet Holdings,
Inc. .................. 8/1/96 Series AT Preferred Stock 783,000(1) $7,830,000 Cash
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,
Inc. .................. 8/1/96 Series AM Preferred Stock 727,865(1) $7,278,650 Cash
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
employees.............. 5/31/96- Series A Common Stock 7,527,000(4) $400,800(5) Cash and notes(5)
10/1/96 (restricted stock purchases)
236 officers and
employees.............. 8/14/96- Series A Common Stock 6,769,751(6) $780,713(7) Cash and notes(7)
3/31/97 (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, 701,850 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, 263,574 have been repurchased by the Registrant.
(7) Each individual paid a portion or all of the purchase price in cash
(aggregating $541,313). 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 June , 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 effective upon 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.***
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.
*** To be supplied by amendment.
(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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE REDWOOD CITY, STATE OF
CALIFORNIA, ON THE 18TH DAY OF JUNE, 1997.
AT HOME CORPORATION
By: Kenneth A. Goldman
----------------------------------
KENNETH A. GOLDMAN SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
In accordance with the requirements of the Securities Act, this Registration
Statement was signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
Chairman, President and Chief Executive June 18, 1997
Thomas A. Jermoluk* Officer
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Kenneth A. Goldman
- ----------------------------- Senior Vice President and Chief Financial June 18, 1997
Officer
KENNETH A. GOLDMAN June 18, 1997
DIRECTORS:
Vice Chairman June 18, 1997
William R. Hearst III*
James L. Barksdale* Director June 18, 1997
Director June 18, 1997
Brendan R. Clouston*
L. John Doerr* Director June 18, 1997
Director June 18, 1997
John C. Malone*
Director June 18, 1997
Bruce W. Ravenel*
Brian L. Roberts* Director June 18, 1997
Director June 18, 1997
Edward S. Rogers*
Larry E. Romrell* Director June 18, 1997
Director June 18, 1997
David M. Woodrow*
*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 June , 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 effective upon 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> <C>
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.***
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.
*** To be supplied by amendment.
<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
4
<PAGE>
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 who
qualify as Outside Directors 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 Directors and
5
<PAGE>
the Series K Common Stock Director, the "SERIES COMMON STOCK
DIRECTORS").
(ii) The initial Series Common Stock Directors will be those
persons 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
directors on or after the date on which holders of such series of
Common Stock are first entitled to elect such Series Common Stock
Directors in accordance with paragraph 1(b)(i).
(iii) At any meeting 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
effectiveness of the applicable provisions of paragraph 1(b)(i) shall
be
6
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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
7
<PAGE>
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 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.
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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 (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
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<PAGE>
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:
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.
"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.
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"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
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be deemed to be a Controlled Affiliate of any Parent or such Parent's Controlled
Affiliates.
"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
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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
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<PAGE>
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 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
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<PAGE>
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.
"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.
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<PAGE>
"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 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 as of May 15, 1997 and as such agreement
may be further 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, or any
related Spin Off Parent (as defined in the Stockholders' Agreement).
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<PAGE>
"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 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.
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(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
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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.
(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
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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
16
<PAGE>
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.
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
17
<PAGE>
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 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
18
<PAGE>
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.
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
19
<PAGE>
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 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
20
<PAGE>
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 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.
21
<PAGE>
(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 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
22
<PAGE>
(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.
(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
23
<PAGE>
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 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.
24
<PAGE>
(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 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
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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 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
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<PAGE>
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").
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").
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(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 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
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<PAGE>
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 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).
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<PAGE>
(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 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
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<PAGE>
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 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
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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 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.
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<PAGE>
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).
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 (as defined below) 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 Series Preferred 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.
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2. Series Common Stock Directors. The Series Common Stock Directors shall
-----------------------------
be elected by the holders of the Convertible Common Stock, subject to, and in
the manner provided in, Article IV of this Certificate.
3. Additional 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, 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:
"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.
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<PAGE>
"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 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 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 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 (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
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<PAGE>
(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;
(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 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
36
<PAGE>
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 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).
"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 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
37
<PAGE>
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.
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
38
<PAGE>
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.
(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.
39
<PAGE>
(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, (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 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).
40
<PAGE>
(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:
(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
41
<PAGE>
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 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
B Common Stock Director or Series K 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.
42
<PAGE>
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.
(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
43
<PAGE>
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.
44
<PAGE>
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
45
<PAGE>
EXHIBIT 3.05
At Home Corporation
A Delaware Corporation
SECOND AMENDED AND RESTATED BYLAWS*
________________________
As Adopted August 28, 1995
And Amended as of August 1, 1996
And as of ____ ___, 1997
________________________
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
---------------
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors in the notice of meeting.
Section 1.2 Special Meetings.
-----------------
Except as otherwise provided in the terms of any class or series of
preferred stock or unless otherwise provided by law or by the Certificate of
Incorporation, special meetings of stockholders of the Corporation, for any
purpose or purposes, shall be called by the Secretary of the Corporation (i)
upon written request of the holders of not less than 10% of the total voting
power of the outstanding capital stock of the Corporation entitled to vote at
such meeting or (ii) at the request of a majority of the members of the Board of
Directors then in office.
Section 1.3 Notice of Meetings.
-------------------
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
there be one, the President, any Vice President,
- --------------------------------
* Defined terms are listed in Section 5.5.
<PAGE>
the Secretary, or an Assistant Secretary, to each stockholder entitled to vote
thereat at least ten days but not more than sixty days before the date of the
meeting, unless a different period is prescribed by law.
Section 1.4 Quorum.
-------
Subject to the rights of the holders of any class or series of preferred
stock or common stock and except as otherwise provided by law or in the
Certificate of Incorporation or these Bylaws, at any meeting of stockholders,
the holders of a majority in total voting power of the outstanding shares of
stock entitled to vote at the meeting shall be present or represented by proxy
in order to constitute a quorum for the transaction of any business. In the
absence of a quorum, the holders of a majority in total voting power of the
shares that are present in person or by proxy or the chairman of the meeting may
adjourn the meeting from time to time in the manner provided in Section 1.5 of
these Bylaws until a quorum shall attend.
Section 1.5 Adjournment.
------------
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 1.6 Organization.
-------------
The Chairman of the Board, if there be one, or in his absence the
President, or in their absence any Vice President, shall call to order meetings
of stockholders and shall act as chairman of such meetings. The Board of
Directors or, if the Board fails to act, the stockholders, may appoint any
stockholder, director, or officer of the Corporation to act as chairman of any
meeting in the absence of the Chairman of the Board, if there be one, the
President, and all Vice Presidents.
2
<PAGE>
The Secretary shall act as secretary of all meetings of stockholders, but,
in the absence of the Secretary, the chairman of the meeting may appoint any
other person to act as secretary of the meeting.
Section 1.7 Voting.
-------
Subject to the rights of the holders of any class or series of preferred
stock or common stock and except as otherwise provided by law, the Certificate
of Incorporation or these Bylaws and except for the election of directors, at
any meeting duly called and held at which a quorum is present, the affirmative
vote of the majority in voting power of shares present in person or represented
by proxy at the meeting and entitled to vote on the subject matter shall be the
act of the stockholders. Subject to the rights of the holders of any class or
series of preferred stock or common stock, at any meeting duly called and held
for the election of directors at which a quorum is present, directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
Section 1.8 Voting List.
------------
(a) A complete list of the stockholders of the Corporation entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number and class of shares registered in the name of
each stockholder shall be prepared by the officer who has charge of the stock
ledger of the Corporation at least 10 days before every meeting of stockholders.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
(b) Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting.
3
<PAGE>
(c) The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation or to vote in person or by proxy at any
meeting of stockholders.
Section 1.9 Stockholder Action Without a Meeting.
-------------------------------------
Subject to the rights of the holders of any class or series of preferred
stock, to the rights of the holders of Series A Common Stock, Series B Common
Stock and Series K Common Stock, and to the Certificate of Incorporation, any
action required to be taken or which may be taken at any annual meeting or
special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent or counterpart consents in writing,
setting forth the action so taken, shall be signed by the holder or holders of
shares having not less than the minimum number of votes that would be necessary
to authorize the taking of such actions at a meeting at which all shares
entitled to vote on the action were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
Section 1.10 Inspectors of Election. The Corporation may, and shall if
----------------------
required by law, in advance of any meeting of stockholders, appoint one or more
inspectors of election, who may be employees of the Corporation, to act at the
meeting or any adjournment thereof and to make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. In the event that no inspector so appointed or
designated is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspector or
inspectors so appointed or designated shall (i) ascertain the number of shares
of capital stock of the Corporation outstanding and the voting power of each
such share, (ii) determine the shares of capital stock of the Corporation
represented at the meeting and the validity of proxies and ballots, (iii) count
all votes and ballots, (iv) determine and retain for a
4
<PAGE>
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office at
an election may serve as an inspector at such election.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number.
-------
The authorized number of directors of the Corporation shall be as specified
in the Certificate of Incorporation. The number of directors from time to time
constituting the Entire Board shall be determined in the manner specified in the
Certificate of Incorporation.
Section 2.2 Election.
---------
At each annual meeting of stockholders of the Corporation, all directors
shall be elected to hold office for a term expiring at the next annual meeting
of stockholders. Such directors will serve until their respective successors are
elected and qualified.
Section 2.3 Resignations.
-------------
Any director of the Corporation, or any member of any committee, may resign
at any time by giving written notice to the Board of Directors, the Chairman of
the Board, if there be one, the President or Secretary of the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
be not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.
5
<PAGE>
Section 2.4 Removal of Directors.
---------------------
Subject to the rights of the holders of any class or series of preferred
stock or common stock and to the Certificate of Incorporation, directors may be
removed from office upon the affirmative vote of the holders of not less than a
majority of the total voting power of the then outstanding capital stock of the
Corporation entitled to vote thereon, voting together as a single class.
Section 2.5 Newly Created Directorships and Vacancies.
------------------------------------------
Subject to the rights of the holders of any class or series of preferred
stock or common stock and except as otherwise provided in the Certificate of
Incorporation, vacancies on the Board of Directors resulting from death,
resignation, removal, disqualification or other cause, and newly created
directorships resulting from any increase in the number of directors on the
Board of Directors, shall be filled by the affirmative vote of a majority of the
remaining directors then in office (even though less than a quorum) or by the
sole remaining director. Any director elected in accordance with the preceding
sentence shall hold office for a term expiring at the next annual meeting of
stockholders, and until such director's successor shall have been elected and
qualified. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director, except as may be
provided in the terms of any class or series of preferred stock or common stock
with respect to any director elected solely by the holders of such class or
series of preferred stock or common stock.
Section 2.6 Chairman of the Board.
----------------------
The directors may elect one of their members to be Chairman of the Board of
Directors. He shall perform such duties as may from time to time be assigned to
him by the Board of Directors.
Section 2.7 Meetings.
---------
Notice of each regular meeting shall be furnished in writing to each member
of the Board of Directors not less than five days in advance of said meeting,
unless such notice requirement is waived in writing by each member. The notice
of any regular Board of Directors
6
<PAGE>
meeting at which any Supermajority Item, Unanimous Item or Related Party
Transaction is to be considered shall include a reasonably detailed description
of any such matter(s).
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting. Special meetings of
the Board of Directors may be called by the Chairman of the Board, if there be
one, and shall be called by the President or Secretary of the Corporation upon
the written request to such effect of a majority of the members of the Board of
Directors.
Section 2.8 Notice of Special Meetings.
---------------------------
The Secretary, or in his absence any other officer of the Corporation,
shall give each director, at the director's normal business address most
recently provided by the director to the Company in writing, notice of the time
and place of holding of special meetings of the Board of Directors by mail at
least 10 days before the meeting, or by facsimile, telegram, cable or personal
service at least 3 days before the meeting, unless such notice requirement is
waived in writing by each member. Unless otherwise stated in the notice thereof,
any and all business may be transacted at any meeting without specification of
such business in the notice; provided that the notice of any Board of Directors
--------
meeting at which any Supermajority Item, Unanimous Item or Related Party
Transaction is to be considered shall include a reasonably detailed description
of such matter(s).
Section 2.9 Quorum and Organization of Meetings.
------------------------------------
A quorum for the taking of any action at a meeting of the Board of Directors
shall require the presence of a majority of the members of the Board of
Directors.
The Chairman of the Board, if there be one, or in his absence, such other
person as the directors may select shall act as chairman and shall preside at
all meetings of the Board of Directors. The Board of Directors shall keep
written minutes of its meetings. The Secretary of the Corporation shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
7
<PAGE>
Section 2.10 Committees of the Board of Directors.
-------------------------------------
Except to the extent that the powers of any committee are set forth in the
Certificate of Incorporation or these Bylaws, the Board of Directors may by
Board Action establish committees and shall specify with particularity the
powers and duties of any such committee. Subject to the limitations of the laws
of the State of Delaware, the Certificate of Incorporation and these Bylaws, and
provided that any action taken by any committee shall require a Board Action,
any such committee shall exercise all powers and authority specifically granted
to it by the Board of Directors, which powers may include the authority to
authorize the issuance of shares of capital stock of the Corporation in an
amount not in excess of such number of shares as shall be specifically
authorized from time to time by the Board of Directors in respect of a
particular transaction. Such committees, other than the .Com Committee and the
Series B Committee established pursuant to Sections B(6) and B(8), respectively,
of Article V of the Certificate of Incorporation, shall serve at the pleasure of
the Board and shall have such names as the Board of Directors by resolution may
determine. All such committees shall keep minutes of their meetings and shall
be responsible to the Board of Directors for the conduct of the enterprises and
affairs entrusted to them.
Section 2.11 Committees Generally.
---------------------
Subject to the limitations set forth in these Bylaws and in the Certificate
of Incorporation, the Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such committee; and in the absence or disqualification
of a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. A quorum for the
taking of any action at a meeting of the Series B Committee shall require the
presence of not less than one-third of the members of the Series B Committee.
The .Com Committee, the Series B Committee and each other committee which may be
established by the Board of Directors
8
<PAGE>
pursuant to these Bylaws may fix its own rules and procedures. Notice of
meetings of committees, other than of regular meetings provided for by such
rules, shall be given to committee members.
Section 2.12 Directors' Compensation.
------------------------
Directors may receive such compensation for attendance at any meetings of
the Board and any expenses incidental to the performance of their duties as the
Board of Directors shall determine by resolution. Such compensation may be in
addition to any compensation received by the members of the Board of Directors
in any other capacity.
Section 2.13 Action Without Meeting.
-----------------------
Subject to the provisions of the Certificate of Incorporation, nothing
contained in these Bylaws shall be deemed to restrict the power of members of
the Board of Directors or any committee designated by the Board to take any
action required or permitted to be taken by them by written consent without a
meeting.
Section 2.14 Telephone Meetings.
-------------------
Nothing contained in these Bylaws shall be deemed to restrict the power of
members of the Board of Directors, the .Com Committee, the Series B Committee or
any other committee designated by the Board of Directors to participate in a
meeting of the Board of Directors or such committee, as applicable, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
Section 2.15 Vote Required for Action or Approval of the Board or
----------------------------------------------------
Committees.
-----------
Section B of Article V of the Certificate of Incorporation specifies the
vote required for action or approval by the Board of Directors or any committee
thereof.
9
<PAGE>
ARTICLE III
OFFICERS
Section 3.1 Officers.
---------
The officers of the Corporation shall be chosen by the Board of Directors
and shall consist of a President and a Secretary. The Board of Directors, in its
discretion, may also choose a Chairman of the Board (who must be a director), a
Treasurer and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. The Board of Directors, in its discretion, may
also choose one or more Vice Chairmen (each of whom must be a director),
provided that a Vice Chairman shall not be considered to be an officer of the
Corporation by virtue of such position. Any number of offices may be held by the
same person, unless otherwise prohibited by law, the Certificate of
Incorporation or these Bylaws. The officers of the Corporation need not be
stockholders of the Corporation or, except in the case of the Chairman of the
Board, directors of the Corporation. The Board of Directors may elect or appoint
from time to time such other or additional officers as in its opinion are
desirable for the conduct of the business of the Corporation. Each officer shall
hold office until the first meeting of the Board of Directors following the next
annual meeting of stockholders following their respective election. Any person
may hold at one time two or more offices, unless otherwise provided by law.
Section 3.2 Powers and Duties of Officers.
------------------------------
The Board of Directors in its discretion may designate either the Chairman
of the Board, if there be one, or the President as the Chief Executive Officer
of the Corporation. The Chief Executive Officer shall have overall
responsibility for the management and direction of the business and affairs of
the Corporation and shall exercise such duties as customarily pertain to such
office and such other duties as may be prescribed from time to time by the Board
of Directors. He shall be the senior officer of the Corporation. He may appoint
and terminate the appointment or election of officers, agents, or employees
other than those appointed or elected by the Board of Directors. He may sign,
execute and deliver, in the name of the Corporation,
10
<PAGE>
powers of attorney, contracts, bonds and other obligations which implement
policies established by the Board of Directors.
Unless otherwise provided by the Board of Directors, the President shall be
the chief operating officer of the Corporation and shall be responsible for the
active direction of the daily business of the Corporation and shall exercise
such duties as customarily pertain to the office of President and such other
duties as may be prescribed from time to time by the Board of Directors. The
President may sign, execute and deliver, in the name of the Corporation, powers
of attorney, contracts, bonds and other obligations which implement policies
established by the Board of Directors.
Vice Presidents shall have such powers and perform such duties as may be
assigned to them by the Chief Executive Officer, the President or the Board of
Directors. A Vice President may sign and execute contracts and other obligations
pertaining to the regular course of his duties which implement policies
established by the Board of Directors.
The Treasurer, if there be one, shall be the chief financial officer of the
Corporation. Unless the Board of Directors otherwise declares by resolution,
the Treasurer shall have general custody of all the funds and securities of the
Corporation and general supervision of the collection and disbursement of funds
of the Corporation. He shall endorse for collection on behalf of the
Corporation checks, notes and other obligations, and shall deposit the same to
the credit of the Corporation in such bank or banks or depository as the Board
of Directors may designate. He may sign, with the Chief Executive Officer, the
President, or such other person or persons as may be designated for the purpose
by the Board of Directors, all bills of exchange or promissory notes of the
Corporation. He shall enter or cause to be entered regularly in the books of
the Corporation a full and accurate account of all moneys received and paid by
him on account of the Corporation; shall at all reasonable times exhibit his
books and accounts to any director of the Corporation upon application at the
office of the Corporation during business hours; and, whenever required by the
Board of Directors or the President, shall render a statement of his accounts.
He shall perform such other duties as may be prescribed from time to time by the
11
<PAGE>
Board of Directors or by these Bylaws. He may be required to give bond for the
faithful performance of his duties in such sum and with such surety as shall be
approved by the Board of Directors. Any Assistant Treasurer shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
The Secretary shall keep the minutes of all meetings of the stockholders
and of the Board of Directors. The Secretary shall cause notice to be given of
meetings of stockholders, of the Board of Directors, and of any committee
appointed by the Board of Directors. He shall have custody of the corporate
seal, minutes and records relating to the conduct and acts of the stockholders
and Board of Directors, which shall, at all reasonable times, be open to the
examination of any director. The Secretary or any Assistant Secretary may
certify the record of proceedings of the meetings of the stockholders or of the
Board of Directors or resolutions adopted at such meetings; may sign or attest
certificates, statements or reports required to be filed with governmental
bodies or officials; may sign acknowledgments of instruments; may give notices
of meetings; and shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 3.3 Bank Accounts.
--------------
In addition to such bank accounts as may be authorized in the usual manner
by resolution of the Board of Directors, the Treasurer, with approval of the
Chief Executive Officer or the President, may authorize such bank accounts to be
opened or maintained in the name and on behalf of the Corporation as he may deem
necessary or appropriate, provided payments from such bank accounts are to be
made upon and according to the check of the Corporation, which may be signed
jointly or singularly by either the manual or facsimile signature or signatures
of such officers or bonded employees of the Corporation as shall be specified in
the written instructions of the Treasurer or Assistant Treasurer of the
Corporation with the approval of the Chief Executive Officer or the President of
the Corporation.
Section 3.4 Proxies.
--------
12
<PAGE>
Unless otherwise provided in the Certificate of Incorporation or directed
by the Board of Directors, the Chief Executive Officer or the President or their
designees shall have full power and authority on behalf of this Corporation to
attend and to vote upon all matters and resolutions at any meeting of
stockholders of any corporation in which this Corporation may hold stock, and
may exercise on behalf of this Corporation any and all of the rights and powers
incident to the ownership of such stock at any such meeting, whether regular or
special, and at all adjournments thereof, and shall have power and authority to
execute and deliver proxies and consents on behalf of this Corporation in
connection with the exercise by this Corporation of the rights and powers
incident to the ownership of such stock, with full power of substitution or
revocation.
ARTICLE IV
CAPITAL STOCK
Section 4.1 Stock Certificates.
-------------------
Each stockholder of the Corporation shall be entitled to a certificate
certifying the class and number of shares represented thereby and in such form,
not inconsistent with the law of the State of Delaware or the Certificate of
Incorporation of the Corporation, as the Board of Directors may from time to
time prescribe.
The certificates of stock shall be signed by the Chairman of the Board, if
there be one, or the President and by the Secretary or the Treasurer, and sealed
with the seal of the Corporation. Such seal may be a facsimile, engraved or
printed. Where any certificate is manually signed by a transfer agent or by a
registrar, the signatures of any officers upon such certificate may be
facsimiles, engraved or printed. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such before the certificate is issued, it
may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar had not ceased to be such at the time of its issue.
Section 4.2 Transfer of Shares.
-------------------
13
<PAGE>
(a) Shares of the capital stock of the Corporation may be transferred on
the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
(b) The person in whose name shares of stock stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes, and the Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
Section 4.3 Fixing Record Date.
-------------------
Subject to the provisions of the Certificate of Incorporation, in order
that the Corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date: (1) in the case of determination of stockholders entitled to
vote at any meeting of stockholders or adjournment thereof, shall, unless
otherwise required by law, not be more than sixty nor less than ten days before
the date of such meeting; (2) in the case of determination of stockholders
entitled to express consent to corporate action in writing without a meeting,
shall not be more than ten days from the date upon which the resolution fixing
the record date is adopted by the Board of Directors; and (3) in the case of any
other action, shall not be more than sixty days prior to such other action. If
no record date is fixed: (1) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business
14
<PAGE>
on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held; (2) the record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action of the Board of Directors is required by law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation in accordance with applicable law, or, if
prior action by the Board of Directors is required by law, shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action; and (3) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
-----------------
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 4.4 Lost Certificates.
------------------
The Board of Directors or any transfer agent of the Corporation may direct
a new certificate or certificates representing stock of the Corporation to be
issued in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
15
<PAGE>
Section 4.5 Transfer Agent and Registrar.
-----------------------------
The Board of Directors may appoint one or more transfer agents and one or
more registrars, and may require all certificates for shares to bear the manual
or facsimile signature or signatures of any of them.
Section 4.6 Regulations.
------------
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE V
GENERAL PROVISIONS
Section 5.1 Offices.
--------
The Corporation shall maintain a registered office in the State of Delaware
as required by law. The Corporation may also have offices in such other places,
either within or without the State of Delaware, as the Board of Directors may
from time to time designate or as the business of the Corporation may require.
Section 5.2 Corporate Seal.
---------------
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".
Section 5.3 Fiscal Year.
------------
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
Section 5.4 Notices and Waivers Thereof.
----------------------------
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these Bylaws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable or facsimile transmission, addressed to such address as appears on the
books of the Corporation. Any notice given by telegram, cable or facsimile
transmission
16
<PAGE>
shall be deemed to have been given when it shall have been transmitted and any
notice given by mail shall be deemed to have been given three business days
after it shall have been deposited in the United States mail with postage
thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these Bylaws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 5.5 Definitions.
------------
".Com Committee" has the meaning given in Section B(6) of Article V
--------------
of the Certificate of Incorporation.
"Board Action" has the meaning given in Section B(1) of Article V of
------------
the Certificate of Incorporation.
"Entire Board" has the meaning given in Section B(8) of Article V of
------------
the Certificate of Incorporation.
"Person" shall mean any individual, corporation, partnership, 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.
"Related Party Transaction" has the meaning given in Section B(3)(b)
-------------------------
of Article V of the Certificate of Incorporation.
"Series B Committee" has the meaning given in Section B(8) of Article
------------------
V of the Certificate of Incorporation.
"Series B Common Stock Directors" has the meaning given in Section
-------------------------------
B(1)(b)(i) of Article IV of the Certificate of Incorporation.
"Special Written Consent" has the meaning given in Section B(1) of
-----------------------
Article V of the Certificate of Incorporation.
17
<PAGE>
"Supermajority Item" has the meaning given in Section B(4) of Article
------------------
V of the Certificate of Incorporation.
"Unanimous Item" has the meaning given in Section B(4) of Article V
--------------
of the Certificate of Incorporation.
"Unanimous Vote" has the meaning given in Section B(4) of Article V
--------------
of the Certificate of Incorporation.
Section 5.6 Amendments.
-----------
Subject to the Certificate of Incorporation and the rights of the holders
of any class or series of preferred stock, these Bylaws may be adopted, amended
or repealed by the Board of Directors or by affirmative vote of the holders of
not less than 66-2/3% of the total voting power of the then outstanding capital
stock of the Corporation entitled to vote thereon.
18
<PAGE>
EXHIBIT 4.04
AT HOME CORPORATION
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
________________________, 1997
<PAGE>
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this "Agreement")
---------
is entered into as of this 1st day of August, 1996, by and among AT HOME
CORPORATION, a Delaware corporation (the "Company" or "@Home"), the Stockholders
------- -----
of the Company set forth on Schedule I attached hereto and certain affiliates of
the Stockholders which are signatories hereto.
RECITALS
--------
WHEREAS, the Company, the KPCB Affiliates and TCI Sub are parties to a
Stockholders Agreement, dated as of August 29, 1995 (the "1995 Stockholders
-----------------
Agreement").
- ---------
WHEREAS, the Company, the KPCB Affiliates, TCI Sub, certain of their
affiliates and certain affiliates of Cox Communications, Inc. and Comcast
Corporation have entered into a Letter Agreement and Term Sheet, dated as of
June 4, 1996, which is being amended as of this date pursuant to Section 11.13
below (the "Term Sheet"), which provides for, among other things, certain
----------
purchases of Company securities by affiliates of Cox Communications, Inc. and
Comcast Corporation and certain additional purchases of Company securities by
TCI Sub and the KPCB Affiliates, certain governance rights and transfer
restrictions among the Stockholders, and certain arrangements among certain
affiliates of the Stockholders regarding the distribution of the @Home Services;
WHEREAS, the Term Sheet contemplated that all or a portion of the
rights and obligations of the parties thereto may be superseded by separate
definitive agreements relating to specific aspects of the transactions and
relationships provided for in the Term Sheet;
WHEREAS, TCI Sub and the KPCB Affiliates desire to enter into this
Agreement in order to amend and restate the 1995 Stockholders Agreement and
affiliates of Cox Communications, Inc. and Comcast Corporation desire to enter
into this Agreement in connection with their purchase and exchange of Company
securities pursuant to the stock purchase and exchange agreement which is being
entered into by the parties as of the date hereof in order to supersede the
provisions relating to the purchase of Company securities set forth in the Term
Sheet (the "Stock Purchase Agreement");
------------------------
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
<PAGE>
ARTICLE 1
DEFINITIONS AND OTHER GENERAL MATTERS
-------------------------------------
1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following meanings:
"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; provided that for
--------
purposes of this Agreement, (i) neither the Company nor any of its Subsidiaries
shall be deemed to be an Affiliate of any member of a Stockholder's Stockholder
Group, and (ii) no member of any Stockholder's Stockholder Group shall be deemed
to be an Affiliate of another Stockholder's Stockholder Group, in each case
solely by reason of any investment in the Company or any rights or obligations
provided for in this Agreement.
"Appraiser" means a nationally recognized investment banking firm that
---------
is not an Affiliate or Associate of the Company or a member of any Stockholder
Group.
"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 The Microsoft Network) and information providers, both
in the United States and internationally (in countries where the Company 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 Company would itself be a creator of content (other than
with respect to content created as part of the Company'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.
"Attributable Shares" means, with respect to any Stockholder Group, a
-------------------
number of shares of Series A Common Stock (determined as if all Rights held by
such Stockholder Group, the exercise, exchange or conversion of which does not
require the payment of any additional consideration, had been exercised,
exchanged or converted) equal to the sum of, without duplication,
-2-
<PAGE>
(i) the number of shares of Series A Common Stock owned directly by
the Parent of such Stockholder Group, and
(ii) in the event that such Parent owns shares of Series A Common
Stock indirectly through one or more unbroken chains of Subsidiaries,
such Parent's indirect equity economic interest in such shares of
Series A Common Stock determined by multiplying (x) the number of
shares of Series A Common Stock held directly by each Stockholder
which is a member of such Stockholder Group together with any shares
of Series A Common Stock issuable to such Stockholder upon the
conversion, exercise or exchange of any Rights (the exercise, exchange
or conversion of which does not require the payment of any additional
consideration), by (y) the percentage equity economic interest of such
Parent in such Stockholder.
A Parent's percentage equity economic interest in such Stockholder
shall be determined by multiplying the percentage equity economic interest in
such Stockholder owned by each Subsidiary which directly owns equity securities
of such Stockholder by the percentage equity economic interest in such
Subsidiary directly owned by the next most proximate Subsidiary which owns
equity securities of such first Subsidiary, and thereafter multiplying the
product thereof by the percentage equity economic interest directly owned by the
next most proximate Subsidiary in such chain of unbroken Subsidiaries to and
including the Subsidiary in which the Parent directly owns the equity economic
interests (and including the Parent's equity economic interest in such
Subsidiary). Such calculations of percentage equity economic interest shall be
based upon such Person's ownership of the outstanding common equity of such
other Person, after giving effect to the exercise, exchange or conversion of all
Rights to acquire common equity securities (the exercise, exchange or conversion
of which does not require the payment of additional consideration) held by all
Persons holding equity securities in such other Person.
"Average Market Price" means, as of any date, the average of the daily
--------------------
closing prices for the Series A Common Stock for the most recent period of
twenty trading days on which such securities trade ending on the trading day
immediately preceding such date, appropriately adjusted to take into account the
actual occurrence, during the period following the first of such twenty trading
days and ending on such date, of any stock dividends, stock splits, reverse
stock splits, recapitalizations and the like. The closing price for each day
shall be the last reported sale price regular way (or if no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices, regular way) on the composite tape, or if the Series A Common Stock is
not quoted on the composite tape, on the principal United States securities
exchange registered under the Exchange Act on which such securities are listed
or admitted to trading or, if the Series A Common Stock is not listed or
admitted to trading on any such exchange, then the closing sale price (or the
average of the quoted closing bid and asked prices if no sale is reported) as
reported by 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
-3-
<PAGE>
as furnished by any member of the National Association of Securities Dealers,
Inc. selected by the Board.
"Board" means the Board of Directors of the Company 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 Company with respect to such
matter; provided, however, that references contained herein to matters
-------- -------
"approved" by the Board shall be deemed to refer to matters which have been
approved by Board Action.
"Board Action" shall have the meaning assigned to such term in the
------------
Charter.
"Business Day" means 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.
"Bylaws" means the Bylaws of the Company, as amended to the date in
------
question.
".Com Agreement" shall have the meaning set forth in the Charter.
--------------
"Cable Parent" means (i) with respect to TCI Sub, TCI Internet
------------
Services, Inc. TCI.NET and TCIC (which entities shall collectively be a single
Cable Parent), (ii) with respect to Comcast Sub, Comcast Cable and Comcast On-
Line (which entities shall collectively be a single Cable Parent), and (iii)
with respect to Cox Sub, CCI. In addition, each Parent shall be entitled to
designate one or more members of such Parent's Stockholder Group to be included
within the Cable Parent of such Parent's Stockholder Group. Any such
additional entities shall execute and deliver to the Company and each other
Parent, an instrument, in form and substance reasonably acceptable to the
Company, agreeing to be bound by the provisions of this 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.
"Cable Parent Exclusivity Provisions" shall have the meaning assigned
-----------------------------------
to such term in the Master Distribution Agreement.
"Cable Partner" means any of TCI Sub, Comcast Sub or Cox Sub, as
-------------
applicable.
"CCI" means Cox Communications, Inc., a Delaware corporation.
---
"CEI" means Cox Enterprises, Inc., a Delaware corporation.
---
"CEO" means the Person which has been duly elected or appointed by the
---
Board in accordance with the Charter and/or the Bylaws, and is then serving as,
the Chief Executive Officer of the Company.
-4-
<PAGE>
"Change of Control of a Stockholder" shall be deemed to have occurred
----------------------------------
at such time as the Parent of a Stockholder ceases to own, directly or
indirectly, securities constituting a majority of the outstanding voting power
and equity interests of such Stockholder, other than pursuant to a transaction
which is a Qualified Spin Off Transaction or a transaction which constitutes a
Control Block Sale.
"Charter" means the Certificate of Incorporation of the Company, as
-------
amended to the date in question.
"Closing" means the consummation of the transactions contemplated by
-------
the Stock Purchase Agreement.
"Comcast" means Comcast Corporation, a Pennsylvania corporation.
-------
"Comcast Cable" means Comcast Cable Communications, Inc., a Delaware
-------------
corporation.
"Comcast On-Line" means Comcast On-Line Communications, Inc., a
---------------
Delaware corporation.
"Comcast Stockholder Group" means Comcast, Comcast Cable, Comcast On-
-------------------------
Line, Comcast Sub and their respective Controlled Affiliates; provided, however,
-------- -------
that following any Qualified Spin Off Transaction and the related assignment
pursuant to Section 11.1 to the Spin Off Parent, such term shall be deemed to
refer, to the extent applicable, to such Spin Off Parent and its Controlled
Affiliates.
"Comcast Sub" means Comcast PC Investments, Inc., a Delaware
-----------
corporation and an indirect wholly owned Subsidiary of Comcast, and any member
of the Comcast Stockholder Group to which Company Securities are transferred
pursuant to a Permitted Transfer.
"Comcast Ultimate Parent" means Comcast.
-----------------------
"Commission" means the Securities and Exchange Commission, or any
----------
other Federal agency at the time administering the Securities Act or the
Exchange Act.
"Common Stock" means any of the Series A Common Stock, the Series B
------------
Common Stock or the Series K Common Stock
"Common Stock Director" means any member of the Board of Directors of
---------------------
the Company who is not elected or appointed solely by the holders of a specified
class or series of Preferred Stock or by the holders of the Series B Common
Stock.
-5-
<PAGE>
"Company Securities" means, without duplication, (i) the shares of
------------------
Series AM Preferred Stock, Series AT Preferred Stock, Series AX Preferred Stock,
Series K Preferred Stock, and Series T Preferred Stock held by the Stockholders
as of the Closing, (ii) shares of Series B Common Stock issuable upon conversion
of shares of Series T Preferred Stock, shares of Series A Common Stock issued or
issuable upon conversion of shares of Series B Common Stock or Series K Common
Stock or upon conversion of shares of Series AM Preferred Stock, Series AT
Preferred Stock or Series AX Preferred Stock or shares of Series K Common Stock
issuable upon conversion of shares of Series K Preferred Stock, (iii) any
Stockholder Additional Securities, and (iv) any Company Securities acquired by a
Stockholder or the other members of its Stockholder Group directly from another
Stockholder Group pursuant to Sections 4.3(c), 4.4(c) or (d), 5.2, 6.1, 6.2, or
6.3 hereof, in each case as such number of Company Securities shall be
appropriately adjusted to give effect to any stock splits, reverse stock splits,
stock dividends, recapitalizations and the like occurring after the Closing.
With respect to any allocation of shares purchasable by any Stockholder Group
which is to be made pro rata based upon such Stockholder Group's ownership of
Company Securities, such allocation shall be made based solely upon the
Stockholder Group in question and all other Stockholder Groups' ownership of (i)
outstanding shares of capital stock of the Company and (ii) shares issuable upon
the exercise, exchange or conversion of any Rights, which exercise, exchange or
conversion does not require the payment of additional consideration.
"Control" (including its correlative meanings "Controlled by" and
-------
"under common Control with") means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract,
management agreement or otherwise.
"Control Block Group" means the members of any Stockholder Group or
-------------------
Stockholder Groups and any other Persons that beneficially own securities of the
Company and that are acting in concert in connection with a Control Block Sale.
"Control Block Offer" means an offer from an Unaffiliated Third Party
-------------------
to acquire from a Stockholder or group of Stockholders (in one transaction or a
series of related transactions) beneficial ownership of an amount of Voting
Stock which, after giving effect to the consummation of such transaction and
including any Voting Stock theretofore beneficially owned by such Unaffiliated
Third Party, would result in such Unaffiliated Third Party beneficially owning
Voting Stock representing a majority of the outstanding voting power of the
Company. For purposes of this definition, a Person shall be deemed to have
acquired Voting Stock representing a majority of the outstanding voting power of
the Company at such time as such Person beneficially owns Voting Stock which,
assuming the holders of such Voting Stock and all other Voting Stock then
outstanding cast the maximum number of votes the holders of such securities are
entitled to cast generally upon matters with respect to which the holders of the
Common Stock, Convertible Preferred Stock and any series of Series Preferred
Stock are then entitled to vote as a single class (assuming where applicable and
without duplication the conversion, exercise or exchange of any issued and
outstanding securities of the Company (including securities of the Company owned
by
-6-
<PAGE>
such Person) which are convertible into or exercisable or exchangeable for
Voting Stock (without the payment of additional consideration in respect of such
conversion, exercise or exchange)), constitute at least a majority of the voting
power of the Company.
"Control Block Sale" means any transaction or a series of related
------------------
transactions involving one or more Stockholders and the other members (if any)
of their respective Stockholder Groups (and any Persons owning Voting Stock who
are acting in concert) and an Unaffiliated Third Party, which, after giving
effect to the consummation of such transaction or series of related transactions
and including any Voting Stock theretofore beneficially owned by such
Unaffiliated Third Party, would result in such Unaffiliated Third Party
acquiring beneficial ownership of Voting Stock representing a majority of the
outstanding voting power of the Company. For purposes of this definition, a
Person shall be deemed to have acquired Voting Stock representing a majority of
the outstanding voting power of the Company at such time as such Person
beneficially owns Voting Stock which, assuming the holders of such Voting Stock
and all other Voting Stock then outstanding cast the maximum number of votes the
holders of such securities are entitled to cast generally upon matters with
respect to which the holders of the Common Stock, Convertible Preferred Stock
and any series of Series Preferred Stock are then entitled to vote as a single
class (assuming where applicable and without duplication the conversion,
exercise or exchange of any issued and outstanding securities of the Company
(including the securities of the Company owned by such Person) which are
convertible into or exercisable or exchangeable for Voting Stock (without the
payment of additional consideration in respect of such conversion, exercise or
exchange)), constitute at least a majority of the voting power of the Company.
"Controlled Affiliate" of any Person shall be any Person which is
--------------------
Controlled by such Person; provided, however, that the Company will not be
-------- -------
deemed to be a Controlled Affiliate of any Parent of a Stockholder or such
Parent's Controlled Affiliates.
"Convertible Preferred Stock" means, collectively, the Series K
---------------------------
Preferred Stock, the Series T Preferred Stock, the Series AM Preferred Stock,
the Series AT Preferred Stock and the Series AX Preferred Stock.
"Cox Stockholder Group" means CCI, Cox Sub and their respective
---------------------
Controlled Affiliates; provided, however, that following any Qualified Spin Off
-------- -------
Transaction and the related assignment pursuant to Section 11.1 to the Spin Off
Parent, such term shall be deemed to refer, to the extent applicable, to such
Spin Off Parent and its Controlled Affiliates.
"Cox Sub" means Cox Teleport Providence, Inc., a Delaware corporation
-------
and an indirect wholly owned Subsidiary of CCI, and any member of the Cox
Stockholder Group to which Company Securities are transferred pursuant to a
Permitted Transfer.
"Cox Ultimate Parent" means CEI.
-------------------
-7-
<PAGE>
"Demand Registration" shall have the meaning assigned to such term in
-------------------
the Registration Rights Agreement.
"Eligible Stockholder" means a Stockholder whose Stockholder Group
--------------------
owns its applicable Eligible Stockholder Amount or, with respect to a
Stockholder whose failure to own such amount has been waived by all other
Stockholders, such Stockholder during the period any such waiver (or any further
waiver) is in effect in accordance with the provisions of Section 2.1(c).
"Eligible Stockholder Amount" means a number of Attributable Shares
---------------------------
equal to (i) with respect to the TCI Stockholder Group, at least 5,807,500
shares of Series A Common Stock, (ii) with respect to the KPCB Stockholder
Group, at least 1,734,708 shares of Series A Common Stock, (iii) with respect to
the Comcast Stockholder Group, at least 1,819,617 shares of Series A Common
Stock and (iv) with respect to the Cox Stockholder Group, at least 1,819,617
shares of Series A Common Stock, in each case (x) after giving effect to the
exercise, exchange or conversion of any Company Securities which are exercisable
or exchangeable for or convertible into, shares of Series A Common Stock
(without the payment of additional consideration in respect of such conversion,
exercise or exchange) and (y) as such numbers of shares are appropriately
adjusted to give effect to any stock splits, reverse stock splits, stock
dividends, recapitalizations and the like occurring after the Closing.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any successor Federal statute, and the rules and regulations of the
Commission promulgated thereunder, as they each may, from time to time, be in
effect.
"Execution Date" means June 4, 1996.
--------------
"Exclusive Stockholder" means a Stockholder whose Cable Parent has
---------------------
complied with at all times since the Execution Date, and remains in compliance
with, the Cable Parent Exclusivity Provisions (without regard to whether the
Restricted Period has ended as to such Cable Parent).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended.
"Incidental Registration" shall have the meaning assigned to such term
-----------------------
in the Registration Rights Agreement.
"Indirect Transfer" means any sale, transfer, assignment, distribution
-----------------
(including distributions upon dissolution or liquidation and distributions to
partners of any Stockholder), hypothecation or other disposition of common stock
or other equity interests of a Stockholder or of any Person of which such
Stockholder is a direct or indirect Controlled Affiliate (other than any sale,
transfer, assignment, distribution or hypothecation of the securities of the
Ultimate
-8-
<PAGE>
Parent of such Stockholder or any direct or indirect owner of securities of such
Ultimate Parent); provided, however, that the grant of any lien, pledge or
-------- -------
security interest in connection with a bona fide financing transaction involving
such Stockholder's Stockholder Group will not, prior to any action taken with
respect to any foreclosure upon or exercise of such security interest,
constitute an Indirect Transfer. Notwithstanding the foregoing, upon any action
being taken by the pledgee or secured party with respect to any such lien,
pledge or security interest with respect to the foreclosure thereunder, the
holder of the Company Securities subject (directly or indirectly) to such lien,
pledge or security interest shall be deemed to have proposed the Transfer of
such Company Securities, which Transfer shall be subject to the terms of this
Agreement.
"Internet Services" shall have the meaning assigned to such term in
-----------------
the Master Distribution Agreement.
"IPO" means an initial public offering of the Series A Common Stock.
---
"KPCB" means KPCB VII Associates, a California partnership.
----
"KPCB Affiliates" means KPCB, Kleiner, Perkins, Caufield & Byers VII
---------------
and KPCB Information Sciences Zaibatsu Fund II, each a California limited
partnership of which KPCB is the general partner, and James Clark.
"KPCB Constituents" means each KPCB Affiliate, any wholly owned
-----------------
Subsidiary of a KPCB Affiliate to which such KPCB Affiliate shall have
transferred its Company Securities in accordance with the terms hereof and any
general or limited partners of such KPCB Affiliate or Subsidiary to whom such
KPCB Affiliate or such Subsidiary shall have transferred such Company Securities
in accordance with the terms hereof.
"KPCB Put Period" means (i) in the case of an exercise of the KPCB Put
---------------
which is not in response to a KPCB Put Triggering Event, the sixty-day period
following the fifth anniversary of the Execution Date or, if the KPCB Put or TCI
Call shall not have been previously exercised, the sixty-day period following
each subsequent anniversary thereof, to and including the ninth anniversary of
the Execution Date or (ii) in the case of an exercise of the KPCB Put in
response to a KPCB Put Triggering Event, the 30 day period ending at the close
of business on the date of such KPCB Put Triggering Event.
"KPCB Put Triggering Event" means the approval by the holders of
-------------------------
shares of the Company's Convertible Preferred Stock, in accordance with Section
C(7)(c) of Article IV of the Charter, of a KPCB Special Voting Matter; provided,
--------
that on the record date for the determination of stockholders entitled to vote
upon such matter and at the time of the meeting at which such matter is voted
upon, the KPCB Constituents collectively hold not less than 80% of the aggregate
amount of the shares of Series K Preferred Stock held by the KPCB Stockholder
Group upon consummation of the Closing (as appropriately adjusted to give effect
to any stock splits, reverse stock splits, stock dividends, recapitalizations
and the like occurring after the Closing) and shall
-9-
<PAGE>
have voted all shares of Series K Preferred Stock held by them "against" (with
any failure to vote or abstention from voting not considered a vote "against")
approval of such transaction. For purposes of this Agreement, the KPCB Put
Triggering Event shall be deemed to occur on the date of the meeting of
stockholders at which any of the foregoing actions is approved.
"KPCB Special Voting Matter" means the matters set forth in Section
--------------------------
C(7)(c)(iii) of Article IV of the Charter.
"KPCB Stockholder Group" means collectively, KPCB, the KPCB Affiliates
----------------------
and the KPCB Constituents.
"LCO Agreement" means the provisions of the LCO Agreement Term Sheet,
-------------
set forth as Exhibit B to the letter agreement dated May ___, 1997, among the
Stockholders and certain of their respective Affiliates and the Company;
provided that if the matters set forth in the LCO Agreement Term Sheet are
- --------
superseded by a form of definitive agreement which is approved in writing by
each of the Cable Parents, such form of definitive agreement will constitute the
LCO Agreement for all purposes hereunder.
"Mandatory Conversion" shall have the meaning assigned to such term in
--------------------
the Charter.
"Master Distribution Agreement" means the provisions of the Master
-----------------------------
Distribution Agreement Term Sheet, set forth as Exhibit A to the letter
agreement dated May ___, 1997, among the Stockholders and certain of their
respective Affiliates and the Company; 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 applicable parties to the Term Sheet, such
definitive agreement will constitute the Master Distribution Agreement for all
purposes hereunder.
"NASDAQ" means the National Association of Securities Dealers, Inc.
------
Automated Quotation System.
"New Capital Stock" means shares of Common Stock, Preferred Stock or
-----------------
other equity securities of the Company which the Company proposes to offer,
issue or sell following the Closing; provided, however, that the following shall
-------- -------
be excluded from the definition of "New Capital Stock", (i) shares of Series B
Common Stock issuable upon conversion of shares of Series T Preferred Stock,
shares of Series A Common Stock issued or issuable upon conversion of shares of
Series B Common Stock, Series K Common Stock or upon conversion of shares of
Series AM Preferred Stock, Series AT Preferred Stock or Series AX Preferred
Stock, or shares of Series K Common Stock issued or issuable upon the conversion
of shares of Series K Preferred Stock, or any other securities issuable upon
conversion or exercise of convertible equity securities of the Company
outstanding as of the Closing; (ii) securities to be issued pursuant to any
public offering by the Company registered with the Commission; (iii) securities
to be issued in accordance with the Charter and/or Bylaws pursuant to any
incentive stock or other plan or agreement of the
-10-
<PAGE>
Company for the benefit of its employees, directors or consultants, including
any securities issuable pursuant to the exercise of any Rights issued pursuant
to such plans or agreements; (iv) securities to be issued by the Company in
connection with an acquisition (including, without limitation, by way of merger,
consolidation or binding share exchange) by the Company of the capital stock,
other equity interests or assets of another Person in a transaction pursuant to
which all or part of the consideration payable in connection with such
acquisition consists of securities of the Company or Rights to acquire
securities of the Company; (v) securities to be issued in exchange for equity
interests in another entity in connection with a joint venture or other business
combination; (vi) securities to be issued upon any exercise or conversion of
Rights the issuance of which was subject to or exempt from the preemptive rights
set forth in Article 8; or (vii) securities issued by the Company in connection
with any stock split, stock dividend, reverse stock split, recapitalization or
the like occurring after the Closing.
"Parent" means, as to the TCI Stockholder Group, TCI; as to the KPCB
------
Stockholder Group, KPCB; as to the Cox Stockholder Group, CCI; and as to the
Comcast Stockholder Group, Comcast, or, in each case any Spin Off Parent of any
of the foregoing following the assignment referred to in Section 11.1 hereof.
"Permitted Disposition" means a Transfer of Company Securities by a
---------------------
party to this Agreement in accordance with the provisions of Section 4.3, 4.4,
4.5, 4.6, 5.2, 6.1, 6.2 or 6.3 of this Agreement.
"Permitted Transfer" means:
------------------
(i) a Transfer of Company Securities by a Stockholder Group to
(x) an Unaffiliated Third Party or (y) one or more other Stockholder
Groups, in either case, in accordance with the provisions of Section
4.3;
(ii) an Indirect Transfer of Company Securities; provided, that
--------
any Indirect Transfer which results in a Change of Control of a
Stockholder shall constitute a Permitted Transfer only if such
Indirect Transfer is made in compliance with the provisions of Section
4.3;
(iii) a Transfer by a Stockholder Group following the first
anniversary of the IPO of all or any portion of the Company Securities
beneficially owned by its Stockholder Group to (x) an Unaffiliated
Third Party pursuant to the exercise of its rights under the
Registration Rights Agreement or in an Exempt Offering or (y) one or
more other Stockholder Groups, in each case in accordance with the
provisions of Section 4.4; provided, however, that in the event TCI
-------- -------
Sub exercises its Special Demand Registration Right pursuant to the
Registration Rights Agreement, each Stockholder Group shall be
entitled to participate in the Demand Registration made thereunder and
thereafter to sell in an Incidental Registration
-11-
<PAGE>
without regard to the requirement that any Transfer resulting
therefrom occur following the first anniversary of the IPO;
(iv) a Transfer of Company Securities by a Stockholder Group to
members of one or more other Stockholder Groups in accordance with the
Deemed Transfer procedure specified in Section 5.2;
(v) a Transfer or Indirect Transfer of Company Securities by
one or more Stockholder Groups to an Unaffiliated Third Party in a
Control Block Sale;
(vi) a Transfer by a Stockholder of all, but not less than all,
of the Company Securities beneficially owned by such Stockholder to
another member of its Stockholder Group;
(vii) in the case of the KPCB Affiliates only, (x) a Transfer of
any or all of the Company Securities beneficially owned by a KPCB
Affiliate or by a KPCB Constituent to any general or limited partner
of such KPCB Affiliate or KPCB Constituent, as the case may be; or if
such general or limited partner is itself a partnership, the
constituent general or limited partners thereof; provided that any
--------
such Transfer is an interim or liquidating distribution to the
partners of such KPCB Affiliate or KPCB Constituent, as the case may
be, in accordance with the terms of its partnership or other
organizational agreements or (y) a Transfer (including by merger or
other business combination of the KPCB VII Founders Fund or a KPCB
Affiliate into or with another Person before or after the date of this
Agreement) of Company Securities to any partnership or limited
liability company (1) of which KPCB is the general partner or managing
member and (2) whose partnership interests or other equity ownership
interests are subject to restrictions upon transfer similar to (and no
less restrictive than) those restrictions imposed upon the partnership
interests of the original transferor KPCB Affiliate; and, provided,
--------
further, that any transfer by James Clark ("Clark") (x) to his estate
-------
by gift, will or intestate succession, (y) to a member of Clark's
immediate family by way of gift or pursuant to a bona fide estate
planning purpose, or (z) to a personal trust for the exclusive benefit
of Clark and/or his immediate family and their descendants, shall also
be deemed a Permitted Transfer; or
(viii) a Transfer or Indirect Transfer of Company Securities in
connection with a Qualified Spin Off Transaction, provided, that (x)
--------
the rights and obligations of the Parent and the applicable members of
its Stockholder Group are assigned to the Spin Off Parent pursuant to
Section 11.1 hereof and (y) the Spin Off Parent becomes a party to
this Agreement pursuant to Section 2.1(e) hereof;
provided, however, that in connection with any Transfers pursuant to clauses
- -------- -------
(i)(y), (iii)(y), (iv), (vi), (vii) and (viii) above, as a condition to such
Transfer each transferee which is not a party to
-12-
<PAGE>
this Agreement shall execute an instrument in form and substance reasonably
satisfactory to the Company and the other Stockholders which are not
Transferring Company Securities, pursuant to which such transferee shall (A)
become a party to this Agreement and subject to the rights and obligations of
its transferor hereunder and (B) agree that if such transferee ceases to be a
member of such Stockholder Group during the period in which Transfers are
restricted by this Agreement, such transferee shall Transfer to the original
Stockholder or another member of the original Stockholder's Stockholder Group,
all Company Securities owned by such transferee immediately prior to the time
such transferee ceases to be a member of such Stockholder Group.
"Permitted Transferee" means any transferee acquiring Company
--------------------
Securities pursuant to a Permitted Transfer which is required to and does become
a party to this Agreement.
"Person" means any individual, corporation, limited liability company,
------
partnership, 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.
"Preferred Stock" means the Preferred Stock of the Company authorized
---------------
for issuance pursuant to the Charter, and shall, unless the context otherwise
requires, include the Series T Preferred Stock, the Series K Preferred Stock,
the Series AM Preferred Stock, the Series AT Preferred Stock and the Series AX
Preferred Stock.
"Promotional Agreement" shall have the meaning set forth in the
---------------------
Charter.
"Public Company" means any Person which has a class or series of its
--------------
equity securities registered under Section 12(b) or 12(g), or which is required
to file reports pursuant to Section 15(d), of the Exchange Act (or any successor
or comparable provisions of the federal securities laws), which class or series
of equity securities are actively traded.
"Qualified Spin Off Transaction" means any transaction or series of
------------------------------
related transactions in which (and after giving effect thereto) (i) a majority
of the outstanding equity interests of a Stockholder are distributed, directly
or indirectly, to the stockholders of its Parent, (ii) any Person or group of
Persons which Controlled the Parent of a Stockholder immediately prior to such
transaction Control such Stockholder (or any successor entity) following such
transaction and (iii) the Persons or group of Persons which Controlled the
Parent of a Stockholder immediately prior to such transaction hold immediately
after such transaction a direct or indirect proportionate equity interest in
such Stockholder of more than 50% of the proportionate equity interest that such
Person or group of Persons held in such Parent on the record date for such
distribution.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement, dated as of the date hereof, between the Company and the
Stockholders.
-13-
<PAGE>
"Related Party Affiliates" shall have the meaning assigned to such
------------------------
term in the Charter.
"Related Party Transaction" shall have the meaning assigned to such
-------------------------
term in the Charter.
"Restricted Business" shall have the meaning assigned to such term in
-------------------
the Master Distribution Agreement.
"Restricted Period" means the period commencing with the Execution
-----------------
Date and terminating upon the first to occur of (w) as to a Cable Parent, the
termination of the Cable Parent Exclusivity Provisions as to such Cable Parent,
(x) the sixth anniversary of the Execution Date and (y) the effectiveness of any
change in law, statute or regulation or the entering of any adverse judicial
decision or injunction or other action, in each case which materially impairs
the enforceability (in accordance with their respective terms) of any of the
"Cable Parent Exclusivity Provisions," "Company Exclusivity Provisions," "MFN
Provisions" or the "Content Tag-Along Right" (each as defined in the Master
Distribution Agreement).
"Rights" means, with respect to any Person, any subscription, option,
------
warrant, right, convertible security or other agreement, instrument or
commitment of any character obligating (contingently or absolutely) such Person
to issue or sell any capital stock or other securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, as they each may, from time to time, be in effect.
"Selected Directors" means collectively, the Series AM Director, the
------------------
Series AX Director and the Series T Directors.
"Series A Common Stock" means the Company's Series A Common Stock, par
---------------------
value $.01 per share.
"Series AM Director" means the director elected to the Board by the
------------------
holders of the Series AM Preferred Stock, voting as a separate class or series
of capital stock, in accordance with the Charter.
"Series AT Directors" means the directors elected to the Board by the
-------------------
holders of the Series AT Preferred Stock, voting as a separate class or series
of capital stock, in accordance with the Charter.
-14-
<PAGE>
"Series AX Director" means the director elected to the Board by the
------------------
holders of the Series AX Preferred Stock, voting as a separate class or series
of capital stock, in accordance with the Charter.
"Series AM Preferred Stock" means the Company's Series AM Convertible
-------------------------
Participating Preferred Stock, par value $.01 per share.
"Series AT Preferred Stock" means the Company's Series AT Convertible
-------------------------
Participating Preferred Stock, par value $.01 per share.
"Series AX Preferred Stock" means the Company's Series AX Convertible
-------------------------
Participating Preferred Stock, par value $.01 per share.
"Series B Common Directors" means those directors elected to the Board
-------------------------
by the holders of the Series B Common Stock, voting as a separate class or
series of capital stock, in accordance with the Charter.
"Series B Common Stock" means the Company's Series B Common Stock, par
---------------------
value $.01 per share.
"Series K Director" means (i) the Series K Preferred Stock Director
-----------------
(as defined in the Charter) prior to the Mandatory Conversion and (ii) following
the Mandatory Conversion, the Series K Common Stock Director (as defined in the
Charter).
"Series K Common Stock" means the Company's Series K Common Stock, par
---------------------
value $.01 per share.
"Series K Preferred Stock" means the Company's Series K Convertible
------------------------
Participating Preferred Stock, par value $.01 per share.
"Series T Directors" means those directors elected to the Board by the
------------------
holders of the Series T Preferred Stock, voting as a separate class or series of
capital stock, in accordance with the Charter.
"Series T Preferred Stock" means the Company's Series T Convertible
------------------------
Participating Preferred Stock, par value $.01 per share.
"Special Demand Registration Right" shall have the meaning assigned to
---------------------------------
such term in the Registration Rights Agreement.
"Special Directors" shall mean (a) the Selected Directors prior to the
-----------------
Mandatory Conversion and (b) following the Mandatory Conversion, the Series B
Common Directors.
-15-
<PAGE>
"Spin Off Parent" means the member of a Stockholder's Stockholder
---------------
Group whose equity securities are distributed to the stockholders of the Parent
of such Stockholder Group in a Qualified Spin Off Transaction. Upon the
assignment to it pursuant to Section 11.1 of this Agreement, such Spin Off
Parent shall succeed to the rights and obligations of its related Parent and
shall become the Parent for all purposes hereunder.
"Stockholder" means each of TCI Sub, Cox Sub, Comcast Sub and the KPCB
-----------
Affiliates, and each other Person who becomes a holder of Company Securities and
a party to this Agreement in accordance with the terms hereof.
"Stockholder Additional Securities" means any New Capital Stock
---------------------------------
acquired by a Stockholder pursuant to the exercise of preemptive rights granted
pursuant to this Agreement.
"Stockholder Designee" means, as applicable, (i) the Series K Director
--------------------
designated and elected by the holders of, as applicable, the Series K Preferred
Stock or the Series K Common Stock, (ii) the Series AM Director designated and
elected by the holders of the Series AM Preferred Stock, (iii) the Series T
Directors designated and elected by the holders of the Series T Preferred Stock,
(iv) the Series AX Director designated and elected by the holders of the Series
AX Preferred Stock and (v) the Series B Common Directors designated and elected
by the holders of the Series B Common Stock.
"Stockholder Group" means, as applicable, the TCI Stockholder Group,
-----------------
the KPCB Stockholder Group, the Cox Stockholder Group or the Comcast Stockholder
Group.
"Subsidiary" when used with respect to any Person, means any other
----------
Person of which an aggregate of 50% or more of the outstanding capital stock or
other securities having ordinary voting power to elect directors, managers,
trustees or other controlling persons, or an equivalent controlling interest
therein, of such Person (irrespective of whether, at the time, capital stock or
other securities of any other class or classes of such entity shall have or
might have voting power by reason of the happening of any contingency) is, and
of which an aggregate of 50% or more of the interests in which are, at the time,
directly or indirectly, owned by such Person and/or one or more Subsidiaries of
such Person.
"Supermajority Vote" shall have the meaning set forth in the Charter.
------------------
"TCI" means Tele-Communications, Inc, a Delaware corporation, or any
---
related Spin Off Parent.
"TCI Sub" means TCI Internet Holdings, Inc., a Colorado corporation
-------
and an indirect wholly owned Subsidiary of TCI and any member of the TCI
Stockholder Group to which Company Securities are Transferred pursuant to a
Permitted Transfer.
-16-
<PAGE>
"TCI Stockholder Group" means TCI, TCI Internet Services, Inc. ("TCI
--------------------- ---
Internet Services"), TCI. NET, Inc. ("TCI.NET"), TCIC, TCI Sub and their
- -----------------
respective Controlled Affiliates; provided, however, that following any
-------- -------
Qualified Spin Off Transaction and the related assignment pursuant to Section
11.1 to the Spin Off Parent, such term shall be deemed to refer, to the extent
applicable, to such Spin Off Parent and its Controlled Affiliates.
"TCI Ultimate Parent" means TCI.
-------------------
"TCIC" means, collectively, TCI Communications, Inc., a Delaware
----
corporation and TCI Cable Investments Inc., a Delaware corporation.
"Transfer" means, when used with respect to any Company Securities,
--------
any sale, transfer, assignment, distribution (including distributions upon
dissolution or liquidation and distributions to partners of any Stockholder),
hypothecation, or other disposition of Company Securities; provided, however,
-------- -------
that the grant of any lien, pledge or security interest, direct or indirect,
upon the Company Securities held by a Stockholder Group in connection with a
bona fide financing transaction involving such Stockholder Group will not, prior
to any action being taken with respect to any foreclosure upon or exercise of
such security interest, constitute a Transfer of Company Securities.
Notwithstanding the foregoing, upon any action being taken by the pledgee or
secured party with respect to any such lien, pledge or security interest with
respect to the foreclosure thereunder, the holder of the Company Securities
subject (directly or indirectly) to such lien, pledge or security interest shall
be deemed to have proposed the Transfer of such Company Securities, which
Transfer shall be subject to the terms of this Agreement.
"Ultimate Parent" means, as applicable, the TCI Ultimate Parent, the
---------------
Comcast Ultimate Parent or the Cox Ultimate Parent.
"Unaffiliated Third Party" means any Person or group of Persons which
------------------------
is not a member of any Stockholder Group.
"Unanimous Vote" shall have the meaning assigned to such term in the
--------------
Charter.
"Voting Stock" means those shares of Common Stock, Preferred Stock or
------------
other securities of the Company then entitled to vote in the election of members
of the Board or otherwise, regardless of whether such securities are Company
Securities or have been otherwise acquired by a Stockholder Group.
1.2 Additional Definitions.
----------------------
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
@Home Preamble
1995 Stockholders Agreement Preamble
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Agents 10.1(a)
Agreement Preamble
Allocation 4.7(b)
Appraisal Report 7.4
Base Homes Passed 5.1
Cable Put 6.3(a)
Cable Put Notice 6.3(a)
Company Preamble
Confidential Information 10.1(a)
Conversion Notice 4.2(c)
Deemed Transfer 5.2
Deemed Transfer Notice 5.2(a)
Designee 4.7(a)
Drag Notice 4.6(a)
Drag-Along Right 4.6(a)
Drag-Along Stockholder 4.6(a)
Dragged Sale 4.6(c)
Dragged Shares 4.6(a)
Dragging Control Block Group 4.6(a)
Exclusive Homes Passed 5.1
Exempt Offering 4.4(a)
Fair Market Value 7.1
Homes Passed 5.1
Initiating Holders 4.4(a)
IPO Election 6.4(a)
IPO Election Notice 6.4(a)
KPCB Put 6.2(a)
KPCB Put Notice 6.2(a)
Minimum Exclusive Homes Passed 5.1
MSN 9.2(b)(i)
Operator 5.1
Operator Territory 5.1
Original Initiating Holder 4.4(a)
Per Share Value 7.3
Piggyback Stockholder 4.4(a)
Post IPO Electing Stockholder 4.4(b)
Post IPO Offered Shares 4.4(a)
Post IPO Sale Notice 4.4(a)
Post IPO Seller 4.4(a)
Post IPO Stockholders 4.4(a)
Prime Rate 6.4(c)
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Proportionate Transferred Shares 5.1
Qualified Tag Stockholder 4.5(a)
Receiving Electing Stockholder 5.2(a)(i)
Receiving Party 10.1(a)
Receiving Stockholders 5.2(a)
Restricted Indirect Transfer 4.3(a)(iii)
Restricted Party 10.1(a)
ROFO Electing Stockholder 4.3(c)(i)
ROFO Notice 4.3(a)(iii)
ROFO Offer Price 4.3(a)(iii)
ROFO Offeror 4.3(a)(iii)
ROFO Shares 4.3(a)(iii)
ROFO Stockholders 4.3(a)(iii)
Sellers 4.7
Selling Holders 6.6(b)
Series B Exchange 4.2(c)
Stock Purchase Agreement Preamble
Tag Notice 4.5(b)
Tag Offerors 4.5(a)
Tag-Along Buyer 4.5(b)
Tag-Along Electing Stockholder 4.5(d)
Tag-Along Offer Period 4.5(b)
Tag-Along Right 4.5(a)
TCI Call 6.1(a)
TCI Call Notice 6.1(a)
Term Sheet Preamble
Third Appraiser 4.7(c)
Total Shares 5.1
Transferring Stockholder 5.2
</TABLE>
1.3 Terms of Interpretation Generally. The definitions in Section
---------------------------------
1.1 and elsewhere in this Agreement shall apply equally to both the singular and
plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The words "include," "includes" and "including" shall be deemed to be followed
by the phrase "without limitation." The words "herein," "hereof," "hereto" and
"hereunder" and words of similar import refer to this Agreement in its entirety
and not to any part hereof unless the context shall otherwise require. All
references herein to Sections shall be deemed references to Sections of this
Agreement unless the context shall otherwise require. Unless the context shall
otherwise require, any references to any agreement or other instrument or
statute or regulation are to it as amended and supplemented from time to time
(and,
-19-
<PAGE>
in the case of a statute or regulation, to any corresponding provisions of
successor statutes or regulations). Any reference in this Agreement to a "day"
or number of "days" (without the explicit qualification of "Business") shall be
interpreted as a reference to a calendar day or number of calendar days. If any
action or notice is to be taken or given on or by a particular calendar day, and
such calendar day is not a Business Day, then such action or notice shall be
deferred until, or may be taken or given on, the next Business Day. The
provisions of Section 1.2 are informational in nature and do not constitute
substantive provisions of this Agreement.
ARTICLE 2
STOCKHOLDER GROUPS
------------------
2.1 Stockholder Groups; Ownership Provisions. (a) All actions and
----------------------------------------
determinations by, and all notices by or to, a Stockholder Group or any member
thereof shall be deemed validly taken or made (in the case of actions or
determinations) or given (in the case of notices) if taken, made or given, as
the case may be, by or to TCI Sub (in the case of the TCI Stockholder Group),
by or to KPCB (in the case of the KPCB Stockholder Group), by or to Cox Sub (in
the case of the Cox Stockholder Group); or by or to Comcast Sub (in the case of
the Comcast Stockholder Group), and shall be binding upon all members of any
such Stockholder Group for all purposes of this Agreement. If any of TCI Sub,
KPCB, Cox Sub or Comcast Sub (or any successor thereto pursuant to this
sentence) is no longer in existence or no longer beneficially owns any Company
Securities, but its Stockholder Group (or a successor or permitted assign
thereof) continues to have rights and/or obligations hereunder, then such
Stockholder shall appoint one such continuing entity as its replacement pursuant
to the immediately preceding sentence; provided, that if no such appointment is
--------
made, such Stockholder's Parent shall be deemed to be such replacement. Each
member of another Stockholder Group may rely upon the notification or advice of
a Stockholder with respect to any matter relating to the members of such
Stockholder's Stockholder Group. To the extent any party to this Agreement is
required to take any action hereunder, it agrees to use its reasonable best
efforts to cause the other members of its Stockholder Group to take such action.
(b) Except as expressly permitted or required by this Agreement,
(i) each Stockholder shall be the record and beneficial owner of the Company
Securities set forth opposite its name on Schedule I, in each case free and
clear of any liens, claims or encumbrances, and (ii) no Stockholder shall enter
into any agreement or arrangement (x) with respect to the exercise of its rights
to designate Stockholder Designees or to request the removal of a Stockholder
Designee pursuant to the Charter or this Agreement or (y) with respect to the
voting by its Stockholder Designees in connection with any of the matters set
forth in SECTION B(4) of Article V of the Charter, other than, with respect to
clauses (x) or (y) of this clause (ii), an agreement or arrangement solely among
Stockholders that are included in the same Stockholder Group.
-20-
<PAGE>
(c) If at any time during the term of this Agreement any
Stockholder Group ceases to own its applicable Eligible Stockholder Amount, the
Stockholder that is a member of the Stockholder Group that ceased to own such
amount, on behalf of its associated Stockholder Group, shall promptly notify the
other Stockholders in writing of such fact and, unless each other Stockholder
shall elect by written notice delivered to such Stockholder to waive such
requirement in respect of such Stockholder Group (which waiver shall be binding
and shall remain applicable to the Stockholder Group that ceased to own such
amount so long as the ownership of Company Securities by such Stockholder Group
does not decrease further (subject in the case of each such further decrease, to
giving another such notice and receiving an additional or further waiver)), such
Stockholder and its Stockholder Group shall cease to be an Eligible Stockholder
and shall (x) cease to have any rights granted to or exercisable by an Eligible
Stockholder pursuant to this Agreement, the Master Distribution Agreement or the
LCO Agreement and (y) remain obligated with respect to the performance of its
obligations hereunder and thereunder. Any subsequent acquisition of securities
of the Company by or through any Person which is or becomes a member of a
Stockholder Group which has ceased to be an Eligible Stockholder shall not
entitle any such Stockholder Group to reinstatement as an Eligible Stockholder.
(d) Each Stockholder covenants and agrees that, (i) in the event
that any Ultimate Parent acquires direct or indirect beneficial ownership of
Voting Stock (other than Company Securities) subsequent to the execution of this
Agreement, which ownership is held in or through any Person which is not a party
to this Agreement, such Ultimate Parent shall cause the Person so acquiring such
Voting Stock to become a party to this Agreement solely for the purpose of
committing to vote all shares of Voting Stock held by such Person and its
Controlled Affiliates in accordance with the terms of this Agreement relating
specifically to voting (and such Person shall execute and deliver an appropriate
instrument reflecting such commitment), and (ii each member of a Stockholder
Group that is not a party to this Agreement may not acquire Company Securities
or Voting Stock unless it becomes a party to this Agreement.
(e) In the event of any Indirect Transfer of Company Securities
resulting from a Qualified Spin Off Transaction, each Parent agrees, as a
condition to such Qualified Spin Off Transaction, to cause the Spin Off Parent
resulting therefrom to become a party to this Agreement. In connection with any
such Qualified Spin Off Transaction, such Parent shall assign all of its rights
and obligations hereunder to such Spin Off Parent and provided that such Parent
has not retained any beneficial ownership in the Company Securities (through the
ownership of the equity securities of the applicable Stockholder or a member of
such Stockholder's Stockholder Group or of such Spin Off Parent), such Parent
shall be released from all of its obligations hereunder; provided, however, that
-------- -------
no such assignment shall release any Parent or Ultimate Parent from their
respective obligations pursuant to the Master Distribution Agreement.
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<PAGE>
ARTICLE 3
CORPORATE GOVERNANCE
--------------------
3.1 Voting Generally. (a) When any action is required to be taken
----------------
by a Stockholder pursuant to this Agreement, the Charter or the Bylaws, such
Stockholder agrees to take all steps reasonably necessary to implement such
action including, without limitation, voting at any meeting of stockholders all
shares of Voting Stock held by such Stockholder in favor of such action, and/or
executing or causing to be executed, as promptly as practicable, a consent in
writing to the taking of such action. Any agreement by a Stockholder to vote
all Voting Stock held by such Stockholder in a certain manner shall be deemed,
in each instance, to include an agreement by such Stockholder to use its
commercially reasonable efforts to take all actions necessary to call, or to
cause the Company and the appropriate officers and directors of the Company to
call, as promptly as practicable, a special or annual meeting of stockholders to
consider such action (and such Stockholder shall thereafter attend any such
annual or special meeting in person or by proxy), or to cause a written consent
to the taking of such action to be circulated among the stockholders of the
Company (and to execute and deliver any such consent to such action). Except as
expressly provided herein, any provision in this Agreement, the Charter or the
Bylaws requiring a Stockholder to cause the Board to take any action shall
require such Stockholder (i) to instruct each of its Stockholder Designees to
vote in favor of such action or to consent in writing to the taking of such
action and (ii) to take such other actions (including without limitation the
removal and replacement of its Stockholder Designees) as may be reasonably
necessary to cause such action to be taken.
(b) Each Stockholder hereby agrees that the Person or Persons
that it designates and/or elects or appoints as a Stockholder Designee shall be
at the time of such designation and election and so long as such Person remains
a Stockholder Designee, an officer, director, employee or partner of a member of
its Stockholder Group. Each Stockholder agrees to fill promptly any vacancy on
the Board resulting from the death, disability, retirement, resignation, or
removal of its Stockholder Designees.
(c) Except as expressly provided herein, each Stockholder shall
be entitled to vote all of its shares of Voting Stock as it shall determine in
its sole discretion, including, but not limited to, for the election of such
Common Stock Directors as it shall determine in its sole discretion.
(d) In the event that the restrictions of Section 203 of the DGCL
become applicable to the Company, each Stockholder agrees to use its reasonable
best efforts to cause its Stockholder Designees to approve, for purposes of
Section 203 of the DGCL, any Transfers or Indirect Transfers of Company
Securities by or to any Stockholder Group (including its affiliates and
associates) which are otherwise Permitted Transfers hereunder.
-22-
<PAGE>
3.2 Election of CEO to the Board. Each Stockholder hereby agrees to
----------------------------
vote all Voting Stock held by such Stockholder to cause the CEO selected in
accordance with the provisions of SECTION B(4)(a)(5) of Article V of the Charter
to be elected to the Board as a Common Stock Director.
3.3 Designation and Election of Series B Common Directors. (a) Upon
-----------------------------------------------------
the Mandatory Conversion, each Stockholder beneficially owning (or having the
right to acquire upon consummation of the conversion thereof) shares of Series B
Common Stock shall vote all such shares of Series B Common Stock in favor of the
election of each of the Selected Directors in office immediately prior to such
Mandatory Conversion (including any Person to be elected or appointed to fill
any vacancy among the Selected Directors resulting from the death, disability,
retirement, resignation, or removal of a Selected Director of a Stockholder
Group, which Stockholder Group was prior to such Mandatory Conversion entitled
to elect such Selected Director, but excluding any Selected Director whose
Stockholder Group has ceased to become entitled to elect such a director, but
who has not resigned or been removed or otherwise ceased to be a director at the
time of such Mandatory Conversion) as Series B Common Directors.
(b) Following the Mandatory Conversion, (i) Comcast Sub shall be
entitled to designate, in its sole discretion, one Series B Common Director so
long as the Comcast Stockholder Group beneficially owns at least 2,500,000
shares of Common Stock (which are Company Securities), (ii) Cox Sub shall be
entitled to designate, in its sole discretion, one Series B Common Director so
long as the Cox Stockholder Group beneficially owns at least 2,500,000 shares of
Common Stock (which are Company Securities) and (iii) TCI Sub shall be entitled
to designate, in its sole discretion: (x) three Series B Common Directors so
long as the TCI Stockholder Group beneficially owns at least 3,850,000 shares of
Series B Common Stock (which are Company Securities); (y) two Series B Common
Directors in the event that the TCI Stockholder Group ceases to beneficially own
at least 3,850,000 shares of Series B Common Stock but owns at least 3,175,000
shares of Series B Common Stock (which are Company Securities); and (z) one
Series B Common Director in the event that the TCI Stockholder Group ceases to
beneficially own at least 3,175,000 shares of Series B Common Stock, but owns at
least 2,500,000 shares of Common Stock (which are Company Securities) (such
number of shares, in each case, as appropriately adjusted to give effect to any
stock splits, reverse stock splits, stock dividends, recapitalizations and the
like occurring after the Closing); provided, however, that in no event shall the
-------- -------
number of Series B Common Directors to be designated by each Stockholder
pursuant to this Section 3.3(b) exceed the number of Stockholder Designees to
which such Stockholder was entitled immediately prior to the Mandatory
Conversion, and the number of Stockholder Designees to which such Stockholder
shall be entitled pursuant to this Section 3.3(b) shall be appropriately
adjusted to reflect such reduction. Each Stockholder shall provide written
notice of its Stockholder Designees to each other Stockholder not less than two
(2) days prior to any meeting of Stockholders of the Company being held for the
purpose of electing Series B Common Directors.
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<PAGE>
(c) So long as the holders of the Series B Common Stock are
entitled to elect Series B Common Directors in accordance with the Charter, each
member of a Stockholder Group beneficially owning shares of Series B Common
Stock shall (i) vote all of its shares of Series B Common Stock at any annual or
special meeting of Stockholders at which Series B Common Directors are to be
elected in favor of, or shall duly consent in writing (in accordance with the
Charter) to, the election of the Stockholder Designees, designated in accordance
with paragraph (b) above and (ii) use its best efforts to take all other
necessary actions (including using its best efforts to cause the Company to call
a special meeting of stockholders), in order to give effect to the provisions of
this Section 3.3. The Company agrees that it will take all actions that are
necessary and within its power in order to give effect to the provisions of this
Section 3.3(c).
3.4 Removal of Special Directors and Series K Director. (a)
--------------------------------------------------
Following the Mandatory Conversion, each Stockholder owning Series B Common
Stock shall vote all of its shares of Series B Common Stock in favor of, or
shall duly consent in writing (in accordance with the Charter) to, the removal
(with or without cause) of any Series B Common Director designated by a
Stockholder pursuant to Section 3.3(b) if (i) the Stockholder who designated
such Series B Common Director requests such removal by notice to the other
Stockholders or (ii) the Stockholder Group of the Stockholder which designated
such Series B Common Director ceases to beneficially own the minimum number of
Company Securities as is required in accordance with Section 3.3(b) hereof in
order to entitle such Stockholder to designate the number of its Stockholder
Designees then serving as its designees on the Board pursuant to Section 3.3(b);
provided, that so long as TCI Sub is entitled to elect more than one Series B
- --------
Common Director, upon any reduction in the number of Stockholder Designees to
which it is entitled, TCI Sub shall be entitled to select the identity of those
of its Series B Common Directors to be removed.
(b) In the event that any Stockholder ceases to be entitled to
designate a Selected Director or Series K Director, as the case may be, or in
the case of TCI Sub, becomes entitled to elect a lesser number of Selected
Directors, such Stockholder shall immediately cause its Stockholder Designee
then serving as a Selected Director or Series K Director to resign from the
Board (or in the case of TCI Sub, cause such of its Stockholder Designees on the
Board to resign). Upon the occurrence of an event described in clause (ii) of
Section 3.4(a) the applicable Stockholder shall immediately use its best efforts
to cause its Series B Common Director in the case of Comcast Sub or Cox Sub, or
an appropriate number of its Series B Common Directors in the case of TCI Sub,
to resign from the Board of Directors. If such Stockholder Designee does not
promptly resign from the Board, each Stockholder owning Series B Common Stock
agrees to vote all such shares in favor of the removal of such Stockholder
Designee. Upon the occurrence of any event decreasing the number of Series B
Common Directors each Stockholder agrees to take such actions, and to use its
best efforts to cause its Stockholder Designees which are members of the Board
to take such actions, as may be necessary in order to effect a permanent
reduction in the number of such Series B Common Directors, including but not
limited to the voting (or execution of a written consent) of all shares of
Voting Stock beneficially owned by it in favor of an amendment to the Charter so
reducing the number of such Series B Common Directors. Upon
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<PAGE>
any such reduction in the total number of Series B Common Directors entitled to
be elected by the Stockholders upon or following the Mandatory Conversion, the
holders of the Series B Common Stock shall then be entitled to elect a total
number of Series B Common Directors equal to the then total authorized number of
Series B Common Directors after giving effect to such reduction.
3.5 Vacancies Among the Series B Common Directors. Following the
---------------------------------------------
Mandatory Conversion, if there shall exist or occur any vacancy among the Series
B Common Directors as a result of death, disability, retirement, resignation,
removal (with or without cause) or otherwise (other than a vacancy caused by the
resignation and/or removal of a Series B Common Director in connection with a
reduction of the total number of Series B Common Directors to be elected by the
holders of the Series B Common Stock), an individual to fill such vacancy shall
be designated by the Stockholder whose Stockholder Designee's death, disability,
retirement, resignation or removal has caused such vacancy to occur. Notice of
such designation shall be given and such individual shall be elected in the
manner provided in Section 3.3(c) above.
3.6 Outside Directors. Following the IPO, the Stockholders agree to
-----------------
take such actions as may be reasonably necessary to cause individuals who will
qualify as Outside Directors (as defined in the Charter) to be elected as Series
A Common Stock Directors (as defined in the Charter) (for so long as the holders
of the Series A Common Stock, voting separately as a class, are entitled to
elect such directors).
3.7 Conflicting Charter and Bylaws. Each Stockholder agrees to vote
------------------------------
all of its shares of Voting Stock entitled to vote, and to take all other
actions necessary, to ensure that the Charter and Bylaws of the Company
facilitate and do not at any time prohibit the actions contemplated by this
Agreement.
3.8 Special Voting Provisions. (a) Each Stockholder agrees that, in
-------------------------
the event that at any time there are less than two Special Directors who have
not been elected by TCI or its Controlled Affiliates, it will use its reasonable
best efforts to cause all of its Stockholder Designees on the Board of Directors
not to vote for or execute a written consent approving the taking of any action
by the Company with respect to (i) any matter identified in SECTION B(4) of
Article V of the Charter as requiring a Supermajority Vote or (ii) following the
IPO any Related Party Transaction, unless in each case, the taking of such
action by the Company is approved by all Special Directors.
(b) In the event that the taking of any action with respect to
the matters set forth in Section C(7)(c) of Article IV of the Charter or SECTION
B(4) of Article V of the Charter requires (in addition to, in the case of
SECTION B(4) of Article V of the Charter, the approval by a Supermajority Vote
or Unanimous Vote of the Special Directors and the Series K Director, as
applicable) the approval of one or more classes or series of the capital stock
of the Company, each Stockholder Group agrees to vote all shares of Voting Stock
owned by such Stockholder Group and entitled to vote thereon in a manner
consistent with the action approved
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by the Board (in the case of Section C(7)(c) of Article IV of the Charter) or
the applicable percentage of the Special Directors and the Series K Director (in
the case of SECTION B(4) of Article V of the Charter).
(c) Notwithstanding anything contained herein to the contrary,
the KPCB Affiliates shall be entitled to vote their shares of Series K Preferred
Stock against any of the KPCB Special Voting Matters.
(d) Each Stockholder Group agrees to vote all shares of Voting
Stock held by it in a manner consistent with the implementation of any unanimous
decision of all of the Special Directors.
3.9 Certain Amendments In Connection with the IPO. Upon the
---------------------------------------------
consummation of the IPO, the parties agree to discuss any amendments to this
Agreement reasonably necessary to reflect the Company's status as a Public
Company.
3.10 .Com Committee. (a) The Company acknowledges and agrees that
--------------
its policy and practices with respect to its willingness to negotiate and enter
into all .Com Agreements and all Promotional Agreements with content providers
that meet the Company's reasonable standards relating to obscene or offensive
material, is one of openness and non-exclusion, regardless of the identity of
such content provider and its relationship with the Company, and that it is in
the best interest of the Company and its stockholders for the Company to enter
into as many such agreements as is practicable. The terms and conditions of
.Com Agreements and Promotional Agreements shall not take into account the
identity of the Affiliates or Associates of such content provider nor shall the
identity of the Affiliates or Associates of any such content provider result in
either the exclusion of such content provider or such content provider gaining
promotion at the expense of others. Therefore, because the Parents and the Cable
Parents each have significant investments in a wide variety of content providers
and do not want such content providers' ability to obtain carriage and promotion
on the @Home Services to be unfairly advantaged or disadvantaged, the parties
have determined that the entering into of .Com and Promotional Agreements shall
not be considered Related Party Transactions regardless of the ownership of such
content provider or its relationship with any Stockholder or such Stockholder's
Related Party Affiliates, but that the entering into of such agreements shall be
governed by the procedure set forth in the Charter.
(b) Except to the extent determined to the contrary by the
unanimous vote (or written consent) of all Special Directors as provided in the
following sentence, each Stockholder agrees that it will use its reasonable best
efforts to cause its Stockholder Designees on the Board to vote against any (i)
amendment, repeal, supplement or other modification of any action or
determination made by the .Com Committee, (ii) removal of any member of the .Com
Committee, (iii) amendment of any of the provisions of the Charter or the Bylaws
with respect to the .Com Committee or (iv) dissolution or termination of the
.Com Committee to the extent such matters are presented to the Board for its
approval, adoption, ratification or confirmation. In the event that the Special
Directors determine, by a unanimous vote (or written consent) to (i)
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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 the Charter or the Bylaws with
respect to the .Com Committee or (iv) dissolve or terminate the .Com Committee,
each Stockholder agrees to use its reasonable best efforts to cause its
Stockholder Designees on the Board to vote in favor of any such unanimous
determination by the Special Directors.
(c) Each Stockholder agrees that (i) immediately upon the
consummation of the transactions contemplated hereby, it will use its reasonable
best efforts to cause its Stockholder Designees on the Board to appoint as the
initial members of the .Com Committee: Thomas A. Jermoluk, L. John Doerr,
William R. Hearst, III and James Barksdale, (ii) upon the appointment of any
successor to the current CEO and such person's election as a director, it will
use it reasonable best efforts to cause its Stockholder Designees to appoint
such successor CEO as a member of the .Com Committee, and (iii) it will use its
reasonable best efforts to cause its Stockholder Designees to appoint any
additional director unanimously selected by the Special Directors as a member of
the .Com Committee. Notwithstanding the foregoing, following the initial
appointment of the members of the .Com Committee pursuant to this Section
3.10(c), nothing herein contained will be deemed to require any Stockholder or
its Stockholder Group to vote its shares of Voting Stock in favor of the
continued election as a director of any incumbent member of the .Com Committee.
ARTICLE 4
TRANSFERS AND CONVERSIONS
-------------------------
4.1 General Restrictions on Transfer. (a) Prior to the earliest to
--------------------------------
occur of (i) the tenth anniversary of the Execution Date, (ii the fifth
anniversary of the termination of the Restricted Period as to any Cable Parent
and (ii the sixth anniversary of the IPO, no Stockholder shall voluntarily or
involuntarily Transfer any Company Securities or make an Indirect Transfer of
Company Securities, except for a Permitted Transfer or a Permitted Disposition;
provided, however, notwithstanding anything to the contrary contained herein,
- -------- -------
that following the IPO, all restrictions upon Transfer set forth in this
Agreement (other than the restrictions relating to the conversion of Company
Securities set forth in Section 4.2) shall terminate and cease to be effective
as to any KPCB Constituents which have received or receive Company Securities
in a Transfer permitted by and in accordance with clause (vii) of the definition
of "Permitted Transfer" and as to Jim Clark. The provisions of this Section 4.1
shall apply to each proposed Permitted Transfer or Permitted Disposition, and no
Stockholder shall consummate any Permitted Transfer or Permitted Disposition in
violation of the provisions of this Agreement. Any purported Transfer of
Company Securities in violation of this Agreement shall be null and void and of
no force or effect, and the Company shall not record any such Transfer on its
stock transfer books.
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(b) During the period that Transfers are restricted pursuant to
Section 4.1(a), and without limiting any other requirements set forth elsewhere
herein, (i) in connection with any Permitted Transfer of any Company Securities
by any party hereto pursuant to clause (i)(y), (iii)(y), (vi), (vii) or (viii)
of the definition of "Permitted Transfer", such party shall (x) have complied
with the conversion requirements set forth in Section 4.2 (to the extent
applicable) prior to such Transfer and (y) give written notice to the Company
and each other Stockholder of such party's intention to effect such Transfer at
least five (5) Business Days prior to such Transfer and (ii) in connection with
any Indirect Transfer, such party shall give written notice at least two (2)
Business Days prior to such Indirect Transfer to the Company and each other
Stockholder. Each such notice shall describe the manner and circumstances of the
proposed Transfer in sufficient detail, and include any other information
required by the provisions of this Agreement applicable to such proposed
Transfer, and in the case of an Indirect Transfer pursuant to clause (ii), shall
include a certification by the transferor that such Transfer does not constitute
a Change of Control of a Stockholder. In addition, in the event requested by
the Company (such requests not to be made more than once per calender year),
each Stockholder agrees to furnish to the Company and each other Stockholder a
certificate of such Stockholder certifying as to the number of Attributable
Shares owned by its Stockholder Group, the members of its Stockholder Group
having a direct or indirect interest in the Company Securities and the ownership
structure of such members of its Stockholder Group, the number and type of
shares of Voting Stock which are not Company Securities held by the members of
its Stockholder Group and such other matters related to its equity interest in
the Company as the Company shall reasonably request.
(c) Each certificate evidencing Company Securities (i)
Transferred to a Permitted Transferee shall bear the restrictive legends set
forth in Section 5(a) and (b) of the Stock Purchase Agreement (unless such
legend may then be removed in accordance with the Registration Rights Agreement)
and (ii held by a party to this Agreement or transferred to a Permitted
Transferee who acquires Company Securities through a Transfer pursuant to
clauses (i)(y), (iii)(y), (iv), (vi), (vii) or (viii) of the definition of
"Permitted Transfer," shall also bear the restrictive legend set forth in
Section 5(c) of the Stock Purchase Agreement.
(d) Notwithstanding anything to the contrary set forth in this
Agreement, provided that a Control Block Group complies with the provisions of
Sections 4.5 and 4.6, a Control Block Sale shall not be subject to the
restrictions set forth in Section 4.1(a), and any Unaffiliated Third Party
purchasing Company Securities in a Control Block Sale shall acquire such
securities free and clear of any obligations, and shall have no rights, under
this Agreement.
4.2 Conversion of the Convertible Preferred Stock, the Series B
-----------------------------------------------------------
Common Stock and the Series K Common Stock.
- ------------------------------------------
(a) Except (i) as otherwise provided in this Section 4.2 and (ii
for any Transfer or Indirect Transfer in connection with a Control Block Sale or
Qualified Spin Off Transaction, no Stockholder shall Transfer any shares of
Convertible Preferred Stock, Series B Common Stock or Series K Common Stock
unless prior to the consummation of such Transfer it
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shall have converted any such shares into shares of Series A Common Stock;
provided, however, that no holder of Series B Common Stock shall convert any
- -------- -------
shares of Series B Common Stock into Series A Common Stock without first
complying with the provisions of clause (c) of this Section.
(b) The provisions of subsection (a) above shall not be
applicable to any Transfer which is a Permitted Transfer in accordance with the
provisions of clauses (i)(y), (iii)(y), (iv), (v), (vi), (vii) or (viii) of the
definition of Permitted Transfer.
(c) Prior to converting any shares of Series B Common Stock which
are Company Securities into shares of Series A Common Stock, any Stockholder
which owns Series B Common Stock shall deliver to the Cable Partners (other than
any Cable Partner which is proposing to convert shares of Series B Common Stock)
a written notice (a "Conversion Notice") of its intention to so convert such
-----------------
shares of Series B Common Stock, which notice shall set forth the number of
shares of Series B Common Stock it intends to convert and shall serve as an
offer by such Stockholder to exchange (the "Series B Exchange") with the
-----------------
remaining Cable Partners such shares of Series B Common Stock proposed to be
converted for an equal number of shares of Series A Common Stock. If any Cable
Partners wish to accept such offer for the Series B Exchange, such Cable
Partners shall deliver written notice of such acceptance to the Stockholder
desiring to convert, within two Business Days of receipt of the Conversion
Notice which notice shall set forth the number of shares of Series A Common
Stock such Cable Partners wish to exchange for shares of Series B Common Stock.
If the Cable Partners electing to participate in the Series B Exchange wish to
exchange in the aggregate a number shares of Series A Common Stock which exceeds
the number of shares of Series B Common Stock offered in the Conversion Notice,
then each Stockholder electing to participate shall be entitled to exchange a
number of shares of Series A Common Stock equal to the product of (x) a
fraction, the numerator of which is the number of shares of Series A Common
Stock (which are Company Securities) offered for exchange by such Cable Partner
and the denominator of which is the number of shares of Series A Common Stock
(which are Company Securities) offered for exchange by all Cable Partners
electing to participate and (y) the number of shares of Series B Common Stock
offered for exchange (in each case, determined on an as converted into Common
Stock basis). In the event that the Cable Partners desiring to make the Series
B Exchange have not accepted such offer as to all shares of Series B Common
Stock so offered for exchange, any remaining Stockholder which is not a Cable
Partner shall be entitled to accept such offer as to any remaining shares of
Series B Common Stock and thereby participate in the Series B Exchange. In the
event any holder of Series K Common Stock so elects to participate, such holder
shall, simultaneously with the Series B Exchange, convert into shares of Series
A Common Stock a number of shares of Series K Common Stock equal to the number
of shares of Series A Common Stock to be so exchanged. Such exchange shall be
consummated in accordance with the provisions of Section 11.9, as if it were a
purchase and sale of Company Securities and as if each Stockholder exchanging
securities were a seller, except that the provisions therein with respect to the
payment and delivery of a purchase price shall not be applicable.
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<PAGE>
(d) Each Stockholder owning shares of Series AM Preferred Stock,
Series AT Preferred Stock or Series AX Preferred Stock may convert such shares
into shares of Series A Common Stock; each Stockholder owning shares of Series K
Preferred Stock may convert such shares into shares of Series K Common Stock;
and each Stockholder owning shares of Series T Preferred Stock may convert such
shares into shares of Series B Common Stock, in each case, at such Stockholder's
option and without the consent of the other Stockholders.
(e) In connection with the consummation of a Control Block Sale,
each Stockholder Group agrees to use its reasonable best efforts to (i) cause
its Stockholder Designees to take such action as may be necessary in order to
and (ii) vote all shares of Voting Stock beneficially owned by it in favor of,
an amendment to the Charter providing that upon consummation of such Control
Block Sale the shares of Series K Preferred Stock would become convertible into
shares of Series A Common Stock (on the same basis as such shares were
convertible into Series K Common Stock) and deleting all provisions of the
Charter relating to the Series K Common Stock. In addition, any Stockholder
Group holding shares of Series K Common Stock agrees to convert any such shares
of Series K Common Stock into shares of Series A Common Stock upon consummation
of such Control Block Sale. Notwithstanding the foregoing provisions of this
subsection (e), in the event that a holder of Series K Preferred Stock or Series
K Common Stock is participating in the Control Block Sale, the amendments to the
Charter referenced above and the conversion of shares of Series K Common Stock
shall not be effected to the extent that the purchaser in such Control Block
Sale has requested in writing that such amendment and/or conversion not be
effected.
4.3 Right of First Offer. (a) Following the earliest to occur of
--------------------
(i) the fifth anniversary of the Execution Date, (ii the first anniversary of
the IPO, and (ii the termination of the Restricted Period as to any Cable
Parent, and provided that it shall have complied with the provisions of this
Section 4.3, a Stockholder Group will be entitled to dispose of all but not less
than all of its equity interest in the Company pursuant to (x) a Transfer of its
Company Securities to an Unaffiliated Third Party or (y) an Indirect Transfer of
such Company Securities to an Unaffiliated Third Party which Indirect Transfer
results in a Change of Control of a Stockholder (a "Restricted Indirect
-------------------
Transfer"); provided, however, that the provisions of this Section 4.3 shall not
-------- -------
be applicable to any Transfer which is to be made in accordance with Section
4.4. In the event that a Stockholder Group desires to Transfer its Company
Securities or enter into a transaction for such a Restricted Indirect Transfer,
the Stockholder of such Stockholder Group shall notify each other Stockholder of
its desire to enter into such a transaction (such notice, a "ROFO Notice"). In
-----------
the case of a ROFO Notice with respect to a Restricted Indirect Transfer, such
notice shall set forth the terms and conditions upon which such Restricted
Indirect Transfer is proposed to be made. Each ROFO Notice shall constitute an
offer by such Stockholder Group (the "ROFO Offeror") to sell all of the Company
------------
Securities held by such Stockholder Group (the "ROFO Shares") to the other
-----------
Stockholders (the "ROFO Stockholders"). Each ROFO Notice shall set forth the
-----------------
type and amount of the ROFO Shares and shall specify the price per share
(determined on an as converted into Series A Common Stock basis) at which such
ROFO Offeror will Transfer such Company Securities (the "ROFO Offer Price"). In
----------------
the event that any ROFO
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Notice contemplates a Restricted Indirect Transfer, the ROFO Offer Price
applicable to the Company Securities to be transferred shall be the Per Share
Value. Unless otherwise agreed by the ROFO Offeror and a ROFO Stockholder
accepting such offer, the price for the ROFO Shares shall be payable in cash.
(b) Simultaneous with the delivery of a ROFO Notice contemplating
an Indirect Transfer, the ROFO Offeror shall deliver to each other Stockholder a
notice identifying an Appraiser who has been retained by the ROFO Offeror to
determine the Per Share Value of the ROFO Shares pursuant to Article 7. Within
ten Business Days after its receipt of the Offeror's notice pursuant to the
preceding sentence, the Stockholder (other than the ROFO Offeror) that, together
with the members of its Stockholder Group, owns the greatest number of shares of
Company Securities (determined on an as converted into Series A Common Stock
basis), shall send a notice to the ROFO Offeror and the other Stockholders
identifying a second Appraiser who shall be retained by the other Stockholders
to conduct such appraisal in accordance with the Appraisal Procedures set forth
in Article 7. In the event that two Stockholders qualify to appoint the second
Appraiser because such Stockholders own an equal number of Company Securities,
such Stockholders shall agree upon and give notice of the identity of the second
Appraiser within such ten Business Day period referred to in the preceding
sentence.
(c) (i) If a ROFO Stockholder desires to accept the offer set
forth in a ROFO Notice as to any part of the ROFO Shares, such ROFO Stockholder
(a "ROFO Electing Stockholder") shall, within ten Business Days of receipt of
-------------------------
such ROFO Notice or, in the event the ROFO Offer Price is to be the Per Share
Value, the tenth Business Day following the determination of the Per Share
Value, notify the ROFO Offeror of its agreement to acquire ROFO Shares and the
number of such shares it agrees to acquire, and deliver a copy of such notice to
each other Stockholder.
(ii) If the ROFO Electing Stockholders elect to acquire, in
the aggregate, all of the ROFO Shares, then the ROFO Electing Stockholders shall
have the right and obligation to acquire, on the applicable closing date and in
accordance with the provisions of Section 11.9, all of the ROFO Shares,
allocated among them as follows (or in such other manner as the ROFO Electing
Stockholders may agree):
(A) the ROFO Shares shall be allocated among the ROFO
Electing Stockholders pro rata (based on the number of Company Securities owned
by such Stockholders' respective Stockholder Groups determined on an as
converted into Series A Common Stock basis) until all of the ROFO Shares have
been allocated or any ROFO Electing Stockholder has been allocated the number of
ROFO Shares that it desires to acquire, as specified in its notice to the ROFO
Offeror, as it may have been amended pursuant to Section 4.3(c)(iii);
(B) if all ROFO Shares are not allocated pursuant to
paragraph (A) or any prior application of this paragraph (B), any ROFO Shares
that were not allocated pursuant to paragraph (A) or any prior application of
this paragraph (B) shall be
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allocated among the ROFO Electing Stockholders (other than any ROFO Electing
Stockholder that has been allocated the number of ROFO Shares that it desires to
acquire, as specified in its notice to the ROFO Offeror, as it may have been
amended pursuant to Section 4.3(c)(iii)) pro rata (based on the number of
Company Securities owned by such Stockholders' respective Stockholder Groups
determined on an as converted into Series A Common Stock basis); and
(C) if all ROFO Shares are not allocated pursuant to
paragraph (A) and any prior application of paragraph (B), any ROFO Shares that
were not allocated pursuant to paragraph (A) and any prior application of
paragraph (B) shall be allocated by continuing to apply paragraph (B) as
required.
(ii) If the ROFO Electing Stockholders desire to acquire, in
the aggregate, less than all of the ROFO Shares, then the ROFO Offeror shall so
notify the ROFO Electing Stockholders and:
(A) each ROFO Electing Stockholder shall have the
right, by written notice sent to the ROFO Offeror (with a copy of such notice to
each other Stockholder) within five days after its receipt of the notice from
the ROFO Offeror pursuant to this Section 4.3(c)(iii) to amend its notice to
increase the number of ROFO Shares that it desires to purchase;
(B) if, after giving effect to any amendment to any
ROFO Electing Stockholder's notice pursuant to this Section 4.3(c)(iii), the
ROFO Electing Stockholders desire to acquire, in the aggregate, all of the ROFO
Shares, then the ROFO Electing Stockholders shall have the right and obligation
to acquire, on the applicable closing date and in accordance with the provisions
of Section 11.9, all the ROFO Shares, allocated among them in accordance with
Section 4.3(c)(ii); and
(C) if, after giving effect to any amendment to any
ROFO Electing Stockholder's notice pursuant to this Section 4.3(c)(iii), the
ROFO Electing Stockholders desire to acquire, in the aggregate, less than all of
the ROFO Shares, then the ROFO Offeror's offer of the ROFO Shares shall be
deemed rejected as of the last day for a ROFO Electing Stockholder to amend its
notice pursuant to this Section 4.3(c)(iii).
(d) If (i) the ROFO Offeror's offer of the ROFO Shares is
rejected as provided in Section 4.3(c)(iii)(C), or (ii the purchase of the ROFO
Shares is not consummated within the period set forth in Section 11.9(c) for any
reason other than a breach by the ROFO Offeror of any of its covenants,
representations or warranties that are a condition to consummation of such
purchase, then the ROFO Offeror shall have the right, at any time during the
sixty-day period beginning on the date that the ROFO Offeror's offer of the ROFO
Shares is deemed rejected or the day following the last day of the period set
forth in Section 11.9(c), as applicable, to enter into a binding agreement to
sell all of the ROFO Shares to a third party, or to enter into a binding
agreement to effect an Indirect Transfer contemplated by the ROFO Notice, as
applicable, in either case on terms and conditions no less favorable in the
aggregate to the ROFO
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Offeror than those set forth in the ROFO Notice, and thereafter (within the
period specified below in this Section 4.3(d)) to sell all of the ROFO Shares to
such third party or effect the Indirect Transfer, as applicable, pursuant to
such agreement. If the ROFO Offeror does not enter into such an agreement during
such sixty-day period, or does not close the sale thereunder within 120 days
from the date the ROFO Offeror's offer of the ROFO Shares is deemed rejected or
the day following the last day of the period set forth in Section 11.9(c), as
applicable (subject to extension for a maximum of 60 additional days to the
extent required to obtain all required governmental, regulatory and other third
party consents and approvals, provided the ROFO Offeror and the third party
purchaser are each using commercially reasonable efforts to obtain such consents
and approvals), the procedure set forth above with respect to the ROFO Notice
shall be repeated with respect to any subsequent proposed Transfer of Company
Securities or proposed Indirect Transfer by the ROFO Offeror.
(e) The ROFO Offeror shall, prior to transferring the ROFO Shares
to the third party purchaser or effecting the Indirect Transfer, as applicable,
convert all shares of Company Securities included in the ROFO Shares to Series A
Common Stock subject, however, in the case of any holder of Series B Common
Stock, to the obligation to offer to make the Series B Exchange in accordance
with Section 4.2(c).
(f) An Unaffiliated Third Party purchaser acquiring shares of
Series A Common Stock in accordance with the foregoing procedures shall acquire
such shares free and clear of any obligations, and shall have no rights, under
this Agreement.
4.4 Right of First Offer Following an IPO. In addition to any
-------------------------------------
Transfer permitted pursuant to Section 4.3 or Section 4.4(f), following the
first anniversary of the IPO, each Stockholder will be entitled to Transfer all
or a portion of the shares of Series A Common Stock owned by its Stockholder
Group pursuant to the exercise of its registration rights granted under the
Registration Rights Agreement or pursuant to an exemption from registration
under the Securities Act; provided that, except as provided in Section 4.4(f),
--------
such Stockholder on behalf of its Stockholder Group shall first have offered to
sell all of the shares of Series A Common Stock it proposes to so Transfer to
the other Stockholders in accordance with the following procedures:
(a) In the event that following the first anniversary of the IPO
(i) a Stockholder (the "Original Initiating Holder") elects to exercise its
--------------------------
demand registration right, (ii) another Stockholder (an "Initiating Holder" and,
-----------------
together with the Original Initiating Holder, the "Initiating Holders") elects
------------------
to exercise its registration rights in connection with such Original Initiating
Holder's demand registration, (iii) a Stockholder (a "Piggyback Stockholder")
---------------------
elects to exercise its piggyback registration rights with respect to a primary
or secondary registration under the Securities Act of equity securities of the
Company (other than any "shelf registration" or registrations on Forms S-8 or S-
4 or a registration initiated pursuant to clause (i) or (ii) above), or (iv) a
Stockholder seeks to sell shares of Series A Common Stock pursuant to Rule 144
of the Securities Act or any similar exemption from registration for sales of
shares into a public market (an "Exempt Offering"), each such Stockholder
---------------
exercising its registration rights or seeking to sell
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shares in an Exempt Offering (each a "Post IPO Seller") shall, simultaneously
---------------
with the delivery of its notice to the Company requesting such registration or
notifying the Company of such Exempt Offering, as applicable, deliver to each
other Stockholder not seeking to sell shares of the Series A Common Stock (the
"Post IPO Stockholders") a notice (a "Post IPO Sale Notice") setting forth the
--------------------- --------------------
number of Company Securities it proposes to register or proposes to sell in an
Exempt Offering, as applicable (the "Post IPO Offered Shares") which notice
-----------------------
shall constitute an offer by such Post IPO Seller to sell the Post IPO Offered
Shares to the Post IPO Stockholders at a price per share payable in cash, equal
to the closing market price of a share of Series A Common Stock (less, in the
case of a registered offer or sale pursuant to Rule 144, an amount per share
equal to the good faith estimated amount of any anticipated underwriting
discounts or commissions or brokerage charges applicable to each share to be
sold) on the following applicable date: (i) in the case of a demand registration
by any Initiating Holder, on the date prior to the date the Original Initiating
Holder notifies the Company of its intention to exercise such demand
registration right, (ii) in the case of a piggyback registration by a Piggyback
Stockholder, on the date prior to the date that such Piggyback Stockholder
notifies the Company of its intention to exercise its piggyback registration
right, or (iii) in the case of an Exempt Offering, on the date prior to the date
such Stockholder notifies the Company of its intention to effect an Exempt
Offering.
(b) If a Post IPO Stockholder desires to accept the offer set
forth in a Post IPO Sale Notice as to any part of the Post IPO Offered Shares,
such Post IPO Stockholder (a "Post IPO Electing Stockholder") shall deliver
-----------------------------
written notice to the Post IPO Seller of its agreement to acquire Post IPO
Offered Shares and the number of such shares it agrees to acquire, and deliver a
copy of such notice to each other Post IPO Stockholder which notice shall be
delivered (i) in the case of a notice responding to a Post IPO Seller's
intention to effect a demand or piggyback registration, within three Business
Days following delivery of such Post IPO Sale Notice or (ii in the case of a
notice responding to a Post IPO Seller's intention to effect an Exempt Offering,
by 4:00 p.m. New York time on the Business Day following delivery of such Post
IPO Sale Notice; provided that if the Post IPO Sale Notice is delivered after
4:00 p.m. New York time, such notice shall be deemed to have been delivered on
the following Business Day.
(c) If the Post IPO Electing Stockholders elect to acquire, in
the aggregate, all of the Post IPO Offered Shares, then the Post IPO Electing
Stockholders shall have the right and obligation to acquire, on the applicable
closing date and in accordance with the provisions of Section 11.9, all the Post
IPO Offered Shares, allocated among them as follows (or in such other manner as
the Post IPO Electing Stockholders may agree):
(i) the Post IPO Offered Shares shall be allocated among the
Post IPO Electing Stockholders pro rata (based on the number of Company
Securities owned by such Stockholders' respective Stockholder Groups determined
on an as converted into Series A Common Stock basis) until all of the Post IPO
Offered Shares have been allocated or any Post IPO Electing Stockholder has been
allocated the number of Post IPO Offered Shares that it desires to
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acquire, as specified in its notice to the Post IPO Seller, as it may have been
amended pursuant to Section 4.4(d);
(ii) if all Post IPO Offered Shares are not allocated
pursuant to paragraph (i) or any prior application of this paragraph (ii), any
Post IPO Offered Shares that were not allocated pursuant to paragraph (i) or any
prior application of this paragraph (ii) shall be allocated among the Post IPO
Electing Stockholders (other than any Post IPO Electing Stockholder that has
been allocated the number of Post IPO Offered Shares that it desires to acquire,
as specified in its notice to the Post IPO Seller, as it may have been amended
pursuant to Section 4.4(d)) pro rata (based on the number of Company Securities
owned by such Stockholders' respective Stockholder Groups determined on an as
converted into Series A Common Stock basis); and
(iii) if all Post IPO Offered Shares are not allocated
pursuant to paragraph (i) and any prior application of paragraph (ii), any Post
IPO Offered Shares that were not allocated pursuant to paragraph (i) and any
prior application of paragraph (ii) shall be allocated by continuing to apply
paragraph (ii) as required.
(d) If the Post IPO Electing Stockholders desire to acquire
pursuant to paragraph (c) above, in the aggregate, less than all of the Post IPO
Offered Shares, then the Post IPO Seller shall so notify the Post IPO Electing
Stockholders and (x) in the case of an Exempt Offering, the Post IPO Seller's
Offer of the Post IPO Offered Shares shall be deemed rejected as of the last day
upon which notice of acceptance of such Post IPO Seller's offer may be delivered
pursuant to Section 4.4(b)(ii) and (y) in the case of all other offers by Post
IPO Sellers, the following procedure shall apply:
(i) each Post IPO Electing Stockholder shall have the
right, by written notice sent to the Post IPO Seller (with a copy of such notice
to each other Stockholder) by 5:00 p.m. New York time on the Business Day
following receipt of such notice from the Post IPO Seller pursuant to this
Section 4.4(d), to amend its notice to increase the number of Post IPO Offered
Shares that it desires to purchase;
(ii) if, after giving effect to any amendment to any Post
IPO Electing Stockholder's notice pursuant to this Section 4.4(d), the Post IPO
Electing Stockholders desire to acquire, in the aggregate, all of the Post IPO
Offered Shares, then the Post IPO Electing Stockholders shall have the right and
obligation to acquire, on the applicable closing date and in accordance with the
provisions of Section 11.9, all of the Post IPO Offered Shares, allocated among
them in accordance with Section 4.4(c); and
(iii) if, after giving effect to any amendment to any Post
IPO Electing Stockholder's notice pursuant to this Section 4.4(d), the Post IPO
Electing Stockholders desire to acquire, in the aggregate, less than all of the
Post IPO Offered Shares, then the Post IPO
<PAGE>
Seller's offer of the Post IPO Offered Shares shall be deemed rejected as of the
last day for a Post IPO Electing Stockholder to amend its notice pursuant to
this Section 4.4(d).
(e) If (i) the Post IPO Seller's offer of the Post IPO Offered
Shares is rejected as provided in Section 4.4(d), or (ii the purchase of the
Post IPO Offered Shares is not consummated within the period set forth in
Section 11.9(c) for any reason other than a breach by the Post IPO Seller of any
of its covenants, representations or warranties that are a condition to
consummation of such purchase, then the Post IPO Seller shall have the right (x)
in the case of a demand registration or piggyback registration, to proceed with
such registration and upon the effectiveness of such registration consummate
such sale without regard to the actual sale price of such Post IPO Offered
Shares, provided that such sale takes place prior to the end of the period
during which the Company is required to keep the applicable registration
statement effective pursuant to the Registration Rights Agreement (y) in the
case of an Exempt Offering, to sell the Post IPO Offered Shares in the Exempt
Offering without regard to the actual sale price of such Post IPO Offered
Shares, provided that such Exempt Offering takes place within five business days
of the date the Post IPO Stockholders fail to accept such offer to purchase. Any
shares sold to an Unaffiliated Third Party in such a registered offering or
Exempt Offering in accordance with the foregoing procedures shall be sold free
and clear of any obligations and without any rights under this Agreement.
(f) In the event that TCI Sub makes the IPO Election and
thereafter elects to exercise its Special Demand Registration Right pursuant to
and in accordance with the terms of the Registration Rights Agreement, then (i)
each Stockholder Group, if it so elects, shall be entitled to participate in and
sell shares pursuant to such Demand Registration, notwithstanding the limitation
set forth in this Section 4.4 that no such registered sales are to take place
prior to the first anniversary of the IPO, (ii) sales of shares in the Demand
Registration pursuant to the Special Demand Registration Right shall not be
subject to the Right of First Offer procedures set forth in this Section 4.4,
and (iii) following the IPO, but without regard to the one year restricted
period set forth in the first sentence of this Section 4.4, a Stockholder may
exercise its Incidental Registration rights and sell such shares in accordance
with the provisions of Section 3 of the Registration Rights Agreement, but
subject to the other limitations set forth in this Section 4.4.
4.5 Tag-Along Rights.
----------------
(a) In the event that any Control Block Group proposes to sell
Company Securities in a transaction that would constitute a Control Block Sale,
the Stockholders which are members of the Control Block Group (the "Tag
---
Offerors") shall be required, as a condition to such sale, to offer to each
- --------
other Stockholder that is an Exclusive Stockholder or an Eligible Stockholder
(such Stockholder, a "Qualified Tag Stockholder") the right to participate in
-------------------------
such Control Block Sale (the "Tag-Along Right") in accordance with the following
---------------
procedures.
(b) The Tag Offerors shall provide prompt written notice of the
proposed Control Block Sale to each Qualified Tag Stockholder (the "Tag-Along
---------
Notice"). The
- ------
<PAGE>
Tag-Along Notice shall set forth the terms and conditions of the Control Block
Offer, including the name and address of the proposed Unaffiliated Third Party
purchaser (the "Tag-Along Buyer"), the number and type of Company Securities to
---------------
be sold in the Control Block Sale, the amount and type of direct and indirect
consideration to be paid per share to the Control Block Group, the form of
proposed acquisition agreement and all other material terms and conditions of
the proposed transaction. The Tag-Along Notice shall constitute an offer by the
Tag Offerors to each Qualified Tag Stockholder, which offer may be accepted by
the Qualified Tag Stockholders for a period of 20 Business Days following the
date the original Tag-Along Notice is received (the "Tag-Along Offer Period"),
----------------------
to include in the Control Block Sale an amount of Company Securities equal to
(x) the maximum number of Company Securities proposed to be purchased in the
Control Block Sale, multiplied by (y) a fraction, the numerator of which shall
be the number of Company Securities beneficially owned by such Qualified Tag
Stockholder's Stockholder Group and the denominator of which shall be the sum of
(i) the number of Company Securities beneficially owned by the Control Block
Group plus (ii) the number of Company Securities beneficially owned by the
Stockholder Groups of each Tag-Along Electing Stockholder (as defined below), in
each case determined prior to such Control Block Sale and determined on an as
converted into shares of Series A Common Stock basis. The Tag Offerors shall
update such notice by promptly providing each Qualified Tag Stockholder with
notice of any material changes to the information contained therein. Upon
receipt of each such updated notice (i) a Qualified Tag Stockholder who has
elected to exercise its Tag-Along Rights shall have the right to withdraw such
election by written notice delivered to each Tag Offeror within 5 Business Days
of receipt of such updated notice, provided that such Qualified Tag Stockholder,
--------
in its reasonable good faith judgment, has determined that the offer as modified
constitutes a materially adverse change from the terms and conditions of the
offer described in the original Tag-Along Notice or, if applicable, the previous
updated notice and (ii) a Qualified Tag Stockholder who has not yet elected to
exercise its Tag-Along Right may elect to so exercise by written notice
delivered to each Tag Offeror on or before the later of (x) 10 Business Days
following receipt of such updated notice and (y) the expiration of the 20
Business Day acceptance period referred to above in this clause (b).
Notwithstanding the foregoing, in the event that the Tag-Along Notice is updated
following the conclusion of such 20 Business Day acceptance period, a Qualified
Tag Stockholder which has not theretofore elected to exercise its Tag-Along
Right will be entitled to participate in such revised offer only in the event
the terms and conditions of such revised Tag-Along Notice are more favorable to
the sellers of Company Securities than the terms and conditions of the original
Tag-Along Notice or, if applicable, the previous updated notice. The foregoing
calculation with respect to the number of Company Securities which a Qualified
Tag Stockholder may include in the Control Block Sale shall be recalculated each
time another Qualified Tag Stockholder elects to participate or withdraws from
participation in the Control Block Sale following receipt of an updated notice
as provided above. Notice of such recalculated amounts shall be given to each
Stockholder by the Tag Offeror promptly following any such change in
participation by Qualified Tag Stockholders.
(c) (i) If in connection with such Control Block Sale, assets,
properties or other securities, in addition to the Company Securities (or
interest therein), are to be transferred, then prior to submitting a Tag-Along
Notice pursuant to this Section 4.5, the Tag
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<PAGE>
Offerors and the other Stockholders shall cause the total consideration
specified in the Control Block Sale to be allocated between the Company
Securities and such other assets, properties and securities in proportion with
their respective fair market values pursuant to Section 4.7.
(ii) Subject to Section 4.8, the Tag Offerors and the Tag-
Along Electing Stockholders agree to use their respective commercially
reasonable efforts to consummate any such Control Block Sale in a tax-free
transaction or, if not available, the most tax efficient method available.
(d) If any Qualified Tag Stockholder elects to exercise the Tag-
Along Right (a "Tag-Along Electing Stockholder"), such election shall be made by
------------------------------
such Tag-Along Electing Stockholder by written notice to that effect delivered
to each Tag Offeror prior to the expiration of the Tag-Along Offer Period. Such
notice shall (i) state that such Tag-Along Electing Stockholder is exercising
its Tag-Along Right and (ii) set forth the aggregate number of Company
Securities (specifying the number of shares of each series of Common Stock and
Preferred Stock) beneficially owned by its Stockholder Group and the number and
type of Company Securities includable in the Control Block Sale. Promptly
following the delivery of any such notice, such Tag-Along Electing Stockholder's
Stockholder Group shall agree to become a party to or otherwise become bound by
the applicable terms and conditions of the contract, agreement or instrument
pursuant to which the Control Block Group has agreed to consummate such Control
Block Sale, which terms and conditions shall be no less favorable to the Tag-
Along Electing Stockholder's Stockholder Group than the terms and conditions
applicable to the Control Block Group. The Tag-Along Electing Stockholder's
exercise of the Tag-Along Right shall be conditioned upon each member of its
Stockholder Group electing to sell Company Securities pursuant to such Tag-Along
Right becoming a party to such acquisition agreement.
(e) If any Qualified Tag Stockholder fails to exercise the Tag-
Along Right, or otherwise fails to comply with the requirements set forth in
Section 4.5(d), the Control Block Group (including any other Tag-Along Electing
Stockholder) shall have the right to consummate the Control Block Sale in
accordance with the terms and conditions set forth in the Tag-Along Notice (as
updated pursuant to Section 4.5(b)); provided, however, that if the Control
-------- -------
Block Group does not consummate the Control Block Sale within 120 days following
the expiration of the Tag-Along Offer Period, the Control Block Group shall not
consummate any Control Block Sale without repeating the procedures set forth in
this Section 4.5; provided, however, that (x) any amendments, modifications or
-------- -------
waivers of the agreement regarding such Control Block Sale occurring subsequent
to the conclusion of the Tag-Along Offer Period shall not be deemed to require
that such transaction be re-offered to such Qualified Tag Stockholders unless
the effect of such amendment, modification or waiver is to make the terms of
such Control Block Sale more favorable to the members of the Control Block Group
than the terms set forth in the last Tag-Along Notice prior to the conclusion of
the Tag-Along Offer Period and (y) any increase in the market value of the
consideration offered in any such Control Block Sale shall not constitute an
amendment, modification or waiver of any provision of such Control Block Sale
requiring further compliance with the provisions of this Section 4.5.
Notwithstanding the foregoing, if the Control Block Sale is subject to the
receipt of any regulatory approval or
-38-
<PAGE>
expiration of any waiting period, the time period during which such Control
Block Sale may be consummated shall be extended until the expiration of five
Business Days after all such approvals have been received or waiting periods
expired, but in no event shall such time period exceed 180 days following
expiration of such 120 day period referred to above.
(f) Subject to the terms and conditions contained in any
agreement entered into with the Tag-Along Buyer, in the event that any members
of a Tag-Along Electing Stockholder's Stockholder Group seeking to sell Company
Securities pursuant to such Tag-Along Right fail to satisfy any condition to
consummation of such Control Block Sale such that the conditions to the Tag-
Along Buyer's obligation to purchase such shares are not timely satisfied, then
the Company Securities proposed to be sold by the members of such Tag-Along
Electing Stockholder's Stockholder Group shall be excluded from such sale, and
each other member of the Control Block Group (including each other Tag-Along
Electing Stockholder) shall be entitled to substitute Company Securities owned
by them in place of such excluded Company Securities on a pro rata basis (based
on the number of Company Securities owned by such Stockholders' respective
Stockholder Groups determined on an as converted into Series A Common Stock
basis).
4.6 Drag-Along Right.
----------------
(a) If any group of Stockholders composed of TCI Sub and any
other two Stockholders (which may include any Tag-Along Electing Stockholders)
(so long as such Stockholders are Eligible Stockholders and neither of such
Stockholders is a member of the same Stockholder Group as the other such
Stockholder or as TCI Sub) (a "Dragging Control Block Group") proposes to effect
----------------------------
a Control Block Sale, such Control Block Group shall have the right (the "Drag-
-----
Along Right") to require each remaining Stockholder (a "Drag-Along Stockholder")
- ----------- ----------------------
to sell in such transaction an amount of Company Securities beneficially owned
by such Drag-Along Stockholder's Stockholder Group equal to (x) the maximum
number of Company Securities proposed to be purchased in the Control Block Sale
multiplied by (y) a fraction, the numerator of which shall be the number of
Company Securities beneficially owned by such Drag-Along Stockholder's
Stockholder Group and the denominator of which shall be the sum of (i) the
number of Company Securities beneficially owned by the Dragging Control Block
Group plus (ii) the number of Company Securities beneficially owned by the
Stockholder Groups of each Drag-Along Stockholder (as defined below), in each
case determined prior to such Control Block Sale and determined on an as
converted into shares of Series A Common Stock basis (such number of shares
which is the product of the immediately preceding clauses (x) and (y), the
"Dragged Shares"), subject to the provisions of this Section 4.6. If the
--------------
Dragging Control Block Group elects to exercise its right to require the Drag-
Along Stockholders to participate in such a Control Block Sale as provided in
this Section 4.6, then the Dragging Control Block Group shall provide written
notice thereof to each Drag-Along Stockholder (the "Drag-Along Notice"), which
-----------------
notice shall include the amount and type of the direct and indirect
consideration to be paid to the Dragging Control Block Group (which, to the
extent applicable, shall be determined in accordance with the procedures
specified in Section 4.6(b)), the form of acquisition agreement the Dragging
-39-
<PAGE>
Control Block Group is prepared to enter into in connection with such Control
Block Sale and all other material terms thereof.
(b) If in connection with such Control Block Sale assets,
properties or other securities, in addition to the Company Securities (or
interest therein) are to be transferred, then prior to submitting a Drag-Along
Notice pursuant to this Section 4.6, the Dragging Control Block Group and the
other Stockholders shall cause the total consideration specified in the Control
Block Sale to be allocated between the Company Securities and such other assets,
properties and securities in proportion to their respective fair market values
pursuant to Section 4.7.
(c) Each member of a Drag-Along Stockholder's Stockholder Group
shall be required to sell (the "Dragged Sale") the Dragged Shares upon the same
------------
terms and conditions as the Dragging Control Block Group has proposed or agreed
to sell Company Securities to the purchaser in such Control Block Sale.
(d) Subject to the terms of this Agreement, upon delivery to it
of the Drag-Along Notice, each Drag-Along Stockholder and each member of its
Stockholder Group shall agree to become a party to or otherwise become bound by
the applicable terms and conditions of the contract, agreement or instrument
pursuant to which the Dragging Control Block Group has agreed to sell Company
Securities in the Control Block Sale, which terms and conditions shall be no
less favorable to the members of each Drag-Along Stockholder's Stockholder Group
than the terms and conditions applicable to the Dragging Control Block Group.
4.7 Determination of Consideration Payable with Respect to Certain
--------------------------------------------------------------
Tag-Along Rights and Drag-Along Rights. Before submitting a Tag-Along Notice or
- --------------------------------------
a Drag-Along Notice pursuant to Section 4.5 or 4.6, respectively, in response to
a Control Block Offer that contemplates a sale of Company Securities in
conjunction with other assets, properties or securities, the Tag Offerors or the
Dragging Control Block Group, as applicable (each of which shall be referred to
in this Section as the "Sellers") and the other Stockholders shall cause the
-------
total consideration specified in the Control Block Offer to be allocated between
the Company Securities and such other assets, properties or securities in
proportion to their respective fair market values to be determined as follows:
(a) The Sellers shall mutually agree upon a designee (the
"Designee") to execute such group's responsibilities pursuant to this Section
--------
4.7. The Designee shall deliver to each Stockholder which is not a Seller, a
notice stating that the Sellers intend to deliver a Tag-Along Notice or Drag-
Along Notice, as applicable, to which this Section 4.7 applies and identifying
an Appraiser who has been retained by the Designee to allocate the total
consideration specified in the Control Block Offer between the Company
Securities and such other assets, properties or securities pursuant to this
Section 4.7. Within ten Business Days after its receipt of the Designee's notice
pursuant to the preceding sentence, the Qualified Tag Stockholder, in the case
of a Tag-Along Right, or the Stockholder, in the case of a Drag-Along Right
(other than any such Stockholder that is a Seller) that, together with its
Controlled Affiliates, owns the greatest
-40-
<PAGE>
number of shares of Company Securities (determined on an as converted into
Series A Common Stock basis), shall send a notice to the Designee and the other
Stockholders identifying a second Appraiser who shall be retained by the
Designee to determine such allocation or conduct such appraisal, as applicable,
pursuant to this Section 4.7. In the event that two Stockholders qualify to
appoint the second Appraiser because such Stockholders own an equal number of
Company Securities, such Stockholders shall agree upon and give notice of the
identity of the second Appraiser within such ten Business Day period referred to
in the preceding sentence.
(b) The Appraisers shall submit their independent determinations
of the amount of consideration allocable to the Company Securities to be sold in
the Control Block Sale (the "Allocation") (which determination shall be made
----------
giving equal consideration to the amount of consideration allocable to the other
assets, properties or securities to be sold in conjunction with such Control
Block Sale) within thirty days after the date on which the second Appraiser is
retained. If the higher determination does not exceed the lower determination
by an amount in excess of 10% of such lower determination, then the Allocation
shall be the average of the two determinations for purposes of this Section 4.7.
(c) If the higher determination exceeds the lower determination
by an amount in excess of 10% of such lower determination, then such two
Appraisers shall promptly jointly select a third Appraiser (the "Third
-----
Appraiser"), who shall be retained by the Designee to make an allocation or
- ---------
conduct an appraisal pursuant to this Section 4.7. If the first two Appraisers
are unable to agree on a Third Appraiser within thirty days, any Stockholder may
cause the American Arbitration Association of New York to appoint such Third
Appraiser. The first two Appraisers shall furnish such Third Appraiser with the
work product used by each of them in determining their respective allocations or
appraisals, as applicable. The Third Appraiser shall submit its determination of
the Allocation (which determination shall be made giving equal consideration to
the amount of consideration allocable to the other assets to be sold in
conjunction with such Control Block Sale) within thirty days after the date on
which the Third Appraiser is retained. If a Third Appraiser is retained, the
Allocation or the fair market value for purposes of Section 4.7 shall be equal
to the average of the two closest determinations; provided, however, that if the
-------- -------
difference between the highest and middle determinations is no more than 105%
and no less than 95% of the difference between the middle and lowest
determinations, the Allocation for purposes of this Section 4.7 shall be equal
to such middle determination.
(d) All fees and expenses of any Appraiser retained pursuant to
this Section 4.7 shall be paid by the Sellers, in proportion to their pro rata
portion of the Company Securities to be sold in the Control Block Sale
(determined on an as converted into Series A Common Stock basis).
(e) In allocating the total consideration specified in the
Control Block Offer between the Company Securities and such other assets,
properties and securities, each Appraiser retained pursuant to this Section 4.7
shall use valuation techniques then prevailing in the relevant industry and
assume that the fair market value of the applicable asset is the price at
-41-
<PAGE>
which the asset would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and each having reasonable
knowledge of all relevant facts.
4.8 Allocation of Consideration. Each item of consideration payable
---------------------------
to the sellers of Company Securities in a transaction subject to Sections 4.5 or
4.6 shall be allocated in proportion to the number of Company Securities (as
determined on an as-converted into Series A Common Stock basis) sold by each
such seller (subject to adjustment in accordance with the second sentence of
Section 11.9(d)).
ARTICLE 5
DEEMED TRANSFER
---------------
5.1 Definitions. For purposes of this Article 5, the following
-----------
capitalized terms shall have the following meanings.
"Base Homes Passed" means the number of Homes Passed of the applicable
-----------------
Cable Parent and its Controlled Affiliates as of the Execution Date as set forth
on Schedule II.
"Exclusive Homes Passed" means as of the date of determination, the
----------------------
sum of (A) the number of Homes Passed in cable systems of such Cable Parent or
its Controlled Affiliates which are subject to the Cable Parent Exclusivity
Provisions or which are subject to any agreement requiring that the Operator (or
any other entity of which such Operator is a Controlled Affiliate) thereof
operate such cable system in accordance with such Cable Parent Exclusivity
Provisions during the Restricted Period and (B) any Homes Passed of such Cable
Parent or its Controlled Affiliate located in an Operator Territory (or portion
thereof) which has been released from the Cable Parent Exclusivity Provisions or
which is then entitled to be released from such provisions pursuant to the terms
of any LCO Agreement, other than any such release pursuant to the Master
Distribution Agreement resulting from the sale or transfer by the applicable
Cable Parent of cable systems in the applicable Operator Territory.
Notwithstanding the foregoing, the number of Exclusive Homes Passed of a Cable
Parent which is effecting an exchange of one or more cable systems shall be
calculated on the basis of netting the Exclusive Homes Passed relating to cable
systems transferred in such exchange against Homes Passed relating to cable
systems acquired in such exchange as of the completion of all exchanges and
transfers of cable systems related to such exchange, provided that Homes Passed
to be acquired in any such exchange shall not be included in the calculation of
Exclusive Homes Passed (x) if such Homes Passed are not acquired within 24
calendar months of the first transfer included in such exchange or (y) to the
extent such Homes Passed are not subject to the Cable Parent Exclusivity
Provisions within 180 days after the completion of such exchange.
-42-
<PAGE>
"Homes Passed" means the number of residential homes that can be
------------
connected to a cable distribution system (provided, that each residential unit
in a multiple dwelling unit shall be counted as one Home Passed).
"Minimum Exclusive Homes Passed" means a number of Homes Passed which
------------------------------
is equal to 80% of the Base Homes Passed.
"Operator" means the Person which owns and operates a cable television
--------
system that agrees to distribute the @Home Services in accordance with the terms
of an LCO Agreement.
"Operator Territory" means the portion of the geographic area covered
------------------
by an LCO Agreement where an Operator is providing cable television service
through such Operator's distribution facilities.
"Proportionate Transferred Shares" means, with respect to any Cable
--------------------------------
Parent which is determined to have made a Deemed Transfer, a number of shares of
Series A Common Stock which is equal to (A) such Stockholder's number of Total
Shares, multiplied by (B) a fraction, the numerator of which is the difference
between the Base Homes Passed and the Exclusive Homes Passed, and the
denominator of which is the Base Homes Passed, less (C) any Total Shares of such
Stockholder which have previously been Proportionate Transferred Shares (whether
such shares were purchased by another Stockholder or released from the
provisions hereof).
"Total Shares" shall mean, with respect to any Stockholder determined
------------
to have made a Deemed Transfer, the number of Company Securities (determined on
an as converted into Series A Common Stock basis) acquired by such Stockholder's
Stockholder Group from the Company pursuant to the Stock Purchase Agreement or
otherwise held by such Stockholder Group on the date of the Closing, together
with all Company Securities purchased pursuant to the exercise of such
Stockholder Group's preemptive rights with respect thereto.
5.2 Deemed Transfer. In the event that at any time during the
---------------
Restricted Period the number of Exclusive Homes Passed of a Cable Parent fails
to equal or exceed such Cable Parent's Minimum Exclusive Homes Passed, then such
Cable Parent shall be deemed to have made a Transfer (the "Deemed Transfer") of
---------------
a number of Company Securities equal to the Proportionate Transferred Shares.
Upon the occurrence of a Deemed Transfer, the Cable Parent of such Stockholder
shall be required to cause such Stockholder (the "Transferring Stockholder") to
------------------------
offer to sell to the other Stockholders (on a pro rata basis, based on the
number of Company Securities owned by such other Stockholders' respective
Stockholder Groups determined on an as converted into Series A Common Stock
basis) a number of shares equal to the Proportionate Transferred Shares in
accordance with the procedure set forth below. Nothing herein contained
(including but not limited to, the failure of such Transferring Stockholder to
own an amount of Company Securities sufficient to meet its obligation to sell
the Proportionate Transferred Shares to the other Stockholders hereunder) shall
be deemed to diminish or modify each Transferring Stockholder's obligations
hereunder.
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<PAGE>
(a) A Transferring Stockholder required to sell the Proportionate
Transferred Shares shall deliver to the other Stockholders a notice (a "Deemed
------
Transfer Notice") which shall constitute such Stockholder's offer to Transfer
- ---------------
the Proportionate Transferred Shares to the other Stockholders (the "Receiving
---------
Stockholders") at a price per share of Series A Common Stock, payable in cash,
- ------------
equal to (i) if such offer occurs prior to the IPO, the Per Share Value thereof
determined in accordance with clause (d) hereof or (ii) if such offer occurs
subsequent to the IPO, the Average Market Price thereof as of the date of the
occurrence of such Deemed Transfer.
(i) If a Receiving Stockholder desires to accept the offer set
forth in a Deemed Transfer Notice as to any part of the Proportionate
Transferred Shares, such Receiving Stockholder (a "Receiving Electing
------------------
Stockholder") shall, within ten Business Days of receipt of such Deemed Transfer
- -----------
Notice, notify the Transferring Stockholder of its acceptance of such offer to
acquire Proportionate Transferred Shares and the number of such shares it
desires to acquire, and deliver a copy of such notice to each other Stockholder.
(ii) If the Receiving Electing Stockholders desire to acquire, in
the aggregate, all of the Proportionate Transferred Shares, then the Receiving
Electing Stockholders shall have the right and obligation to acquire, on the
applicable closing date and in accordance with the provisions of Section 11.9,
all of the Proportionate Transferred Shares, allocated among them as follows (or
in such other manner as the Receiving Electing Stockholders may agree):
(A) the Proportionate Transferred Shares shall be allocated
among the Receiving Electing Stockholders pro rata (based on the number of
Company Securities owned by such Receiving Electing Stockholders' respective
Stockholder Groups determined on an as converted into Series A Common Stock
basis) until all of the Proportionate Transferred Shares have been allocated or
each Receiving Electing Stockholder has been allocated the number of
Proportionate Transferred Shares that it desires to acquire, as specified in its
notice to the Receiving Stockholder, as it may have been amended pursuant to
Section 5.2(a)(iii);
(B) if all Proportionate Transferred Shares are not
allocated pursuant to paragraph (A) or any prior application of this paragraph
(B), any Proportionate Transferred Shares that were not allocated pursuant to
paragraph (A) or any prior application of this paragraph (B) shall be allocated
among the Receiving Electing Stockholders (other than any Receiving Electing
Stockholder that has been allocated the number of Proportionate Transferred
Shares that it desires to acquire, as specified in its notice to the
Transferring Stockholder, as it may have been amended pursuant to Section
5.2(a)(iii)) pro rata (based on the number of Company Securities owned by such
Stockholders' respective Stockholder Groups determined on an as converted into
Series A Common Stock basis); and
(C) if all Proportionate Transferred Shares are not
allocated pursuant to paragraph (A) and any prior application of paragraph (B),
any Proportionate
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<PAGE>
Transferred Shares that were not allocated pursuant to paragraph (A) and any
prior application of paragraph (B) shall be allocated by continuing to apply
paragraph (B) as required.
(iii) If the Receiving Electing Stockholders desire to acquire,
in the aggregate, less than all of the Proportionate Transferred Shares, then
the Transferring Stockholder shall so notify the Receiving Electing Stockholders
and:
(A) each Receiving Electing Stockholder shall have the
right, by written notice sent to the Transferring Stockholder (with a copy of
such notice to each other Stockholder) within five days after its receipt of the
notice from the Transferring Stockholder pursuant to this Section 5.2(a)(iii) to
amend its notice to increase the number of Proportionate Transferred Shares that
it desires to purchase;
(B) if, after giving effect to any amendment to any
Receiving Electing Stockholder's notice pursuant to this Section 5.2(a)(iii),
the Receiving Electing Stockholders desire to acquire, in the aggregate, all of
the Proportionate Transferred Shares, then the Receiving Electing Stockholders
shall have the right and obligation to acquire, on the applicable closing date
and in accordance with the provisions of Section 11.9, all of the Proportionate
Transferred Shares, allocated among them in accordance with Section 5.2(a)(ii);
and
(C) if, after giving effect to any amendment to any
Receiving Electing Stockholder's notice pursuant to this Section 5.2(a)(iii),
the Receiving Electing Stockholders desire to acquire, in the aggregate, less
than all of the Proportionate Transferred Shares, then (x) the Receiving
Electing Stockholders shall have the right and obligation to acquire, on the
applicable closing date and in accordance with the provisions of Section 11.9,
all of the Proportionate Transferred Shares which they have elected to acquire,
allocated among them in accordance with Section 5.2(a)(ii) and (y) the
Proportionate Transferred Shares which are not purchased by the Receiving
Stockholders pursuant to this Section 5.2 shall thereafter cease to be
Proportionate Transferred Shares for this and any subsequent Deemed Transfer.
(b) If the purchase of any of the Proportionate Transferred Shares is
not consummated within the period set forth in Section 11.9(c) for any reason
other than a breach by the Transferring Stockholder of any of its covenants,
representations or warranties that are a condition to consummation of such
purchase, then such Proportionate Transferred Shares shall thereafter cease to
be Proportionate Transferred Shares for this and any subsequent Deemed Transfer.
(c) The procedure with respect to the Deemed Transfer Notice shall be
repeated at any time during the Restricted Period that the number of Exclusive
Homes Passed of a Cable Parent falls below such Cable Parent's Base Homes Passed
such that the number of Proportionate Transferred Shares of such Cable Parent's
Stockholder Group is equal to or greater than 1% of the number of Total Shares
of such Stockholder's Stockholder Group; provided, that any such Proportionate
--------
Transferred Shares which are not then required to be offered to the
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Receiving Stockholders as a result of this clause (c) shall be cumulated until
such time as such accumulated number of Proportionate Transferred Shares equals
or exceeds such 1% minimum threshold or the Transferring Stockholder is
otherwise required to offer shares in a Deemed Transfer.
(d) If the Deemed Transfer occurs prior to the IPO, then the
Deemed Transfer Notice shall identify an Appraiser who has been retained by the
Transferring Stockholder to conduct an appraisal of the Company for purposes of
determining the Per Share Value of the Proportionate Transferred Shares,
pursuant to this Section 5.2(d). Within ten Business Days after its receipt of
such a Deemed Transfer Notice, the Stockholder (other than the Transferring
Stockholder) that, together with the members of its Stockholder Group, owns the
greatest number of shares of Company Securities (determined on an as converted
into Series A Common Stock basis), shall send a notice to the Transferring
Stockholder and the other Stockholders identifying a second Appraiser who shall
be retained by the Transferring Stockholder to conduct such appraisal in
accordance with the Appraisal Procedures set forth in Article 7. In the event
that two Stockholders qualify to appoint the second Appraiser because such
Stockholders own an equal number of Company Securities, such Stockholders shall
agree upon and give notice of the identity of the second Appraiser within such
ten Business Day period referred to in the preceding sentence, and if such
Stockholders cannot agree upon the identity of such second appraiser, such
appraiser shall, upon application of either such Stockholder, be selected by the
American Arbitration Association of New York.
ARTICLE 6
PUT/CALL PROVISIONS
-------------------
6.1 TCI Call.
--------
(a) TCI Sub shall have the right (the "TCI Call"), exercisable
--------
by the delivery of written notice thereof (the "TCI Call Notice") to KPCB and to
---------------
the other Stockholders at any time during the sixty-day period following the
fifth anniversary of the Execution Date or, if not previously exercised, during
the sixty-day period following each subsequent anniversary thereof, to and
including the ninth anniversary of the Execution Date, to require all of the
KPCB Constituents to sell to TCI Sub (or its designee), at the Per Share Value
thereof (determined in accordance with Section 6.6 as of the date of the TCI
Call Notice), all, but not less than all, of the Company Securities beneficially
owned by the KPCB Constituents. The remaining Eligible Stockholders (other than
any Cable Partner exercising the Cable Put in connection with the applicable TCI
Call Notice) shall have the right (but not the obligation) to participate with
TCI Sub (on a pro rata basis, based on the number of Company Securities owned by
each purchasing Stockholder's Stockholder Group determined on an as converted
into Series A Common Stock basis) in the purchase of shares pursuant to the TCI
Call by delivery of written notice to such
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effect to TCI Sub and to the other Stockholders during the twenty (20) day
period following delivery of the TCI Call Notice, as applicable.
(b) Upon exercise of the TCI Call, the KPCB Constituents shall be
obligated to sell to TCI Sub (or its designee) and to any Eligible Stockholders
exercising their right to participate with TCI Sub in the TCI Call, on the
applicable closing date and in accordance with the provisions of Section 11.9,
all Company Securities beneficially owned by the KPCB Constituents as of the
applicable closing date.
6.2 KPCB Put.
--------
(a) KPCB shall have the right (the "KPCB Put"), exercisable by
--------
the delivery of written notice thereof (the "KPCB Put Notice") to TCI Sub and to
---------------
the other Stockholders at any time during the KPCB Put Period to require TCI Sub
to purchase all, but not less than all, of the Company Securities beneficially
owned by the KPCB Constituents at the Per Share Value thereof determined in
accordance with Section 6.6. The date of determination of such Per Share Value
shall be (x) in the case of an exercise pursuant to clause (i) of the definition
of "KPCB Put Period," as of the date on which the KPCB Put Notice is delivered
to TCI Sub, or (y) in the case of an exercise in response to a KPCB Put
Triggering Event, as of the date on which the KPCB Put Triggering Event occurs.
(b) Subject to TCI Sub's right to make an IPO Election pursuant
to Section 6.4 hereof, upon exercise of the KPCB Put, TCI Sub (or its designee)
shall be obligated to purchase from the KPCB Constituents on the applicable
closing date and in accordance with the provisions of Section 11.9, all Company
Securities beneficially owned by the KPCB Constituents as of the applicable
closing date.
(c) In the event TCI Sub elects to purchase (or to cause its
designee to purchase) shares pursuant to the KPCB Put rather than making an IPO
Election, the remaining Eligible Stockholders (other than any Cable Partner
exercising the Cable Put in connection with the applicable KPCB Put Notice)
shall have the right (but not the obligation) to participate with TCI Sub (on a
pro rata basis, based on the number of Company Securities owned by each
purchasing Stockholder's Stockholder Group determined on an as converted into
Series A Common Stock basis) in the purchase of shares pursuant to the KPCB Put
by delivery of written notice to such effect to TCI Sub and to the other
Stockholders during the twenty (20) day period following delivery of the KPCB
Put Notice; provided, however, that no exercise of such right of participation
-------- -------
shall have the effect of extending any of the periods set forth in this Section
6.2.
(d) The KPCB Put Notice shall (i) state that KPCB is exercising
the KPCB Put and (ii) set forth the aggregate number of and type of Company
Securities beneficially owned by the KPCB Constituents as of the date of the
KPCB Put Notice.
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(e) For purposes of this Section 6.2, the obligation to purchase
Company Securities pursuant to an exercise of the KPCB Put shall be the joint
and several obligation of TCI Sub and any member of the TCI Stockholder Group
acquiring Company Securities from TCI Sub, and except as provided in Section
6.7, no Transfer of Company Securities by TCI Sub to another member of the TCI
Stockholder Group shall relieve TCI Sub of its obligations pursuant to this
Section 6.2 unless specifically consented to in writing by KPCB.
6.3 Cable Put
---------
(a) In connection with the exercise of the TCI Call or the KPCB
Put (other than any exercise of the KPCB Put in connection with a KPCB Put
Triggering Event), Comcast Sub and Cox Sub shall have the right, but not the
obligation (the "Cable Put"), to require TCI Sub to purchase all, but not less
---------
than all, of the Company Securities held by such Cable Partner's Stockholder
Group simultaneously with TCI Sub's purchase of Company Securities from the KPCB
Constituents pursuant to the KPCB Put or the TCI Call at the Per Share Value
thereof determined in accordance with Section 6.6. The date of determination of
such Per Share Value shall be the date of the TCI Call Notice or the KPCB Put
Notice, as applicable. Except as otherwise provided herein, Comcast Sub and Cox
Sub shall have the right to exercise the Cable Put in the manner, upon the same
terms and conditions, and under the circumstances described in Section 6.1 (in
the case of the TCI Call) or Section 6.2 (in the case of the KPCB Put) by giving
written notice to such effect (the "Cable Put Notice") to TCI Sub and to each
----------------
other Stockholder during the ten (10) day period following delivery of the KPCB
Put Notice or the TCI Call Notice, as applicable.
(b) In the event that a Cable Partner exercises its right to
participate with TCI Sub (or its designee) in the purchase of Company Securities
pursuant to the TCI Call or the KPCB Put, such Cable Partner shall also be
obligated to purchase its proportionate interest in any Company Securities which
TCI Sub (or its designee) becomes obligated to purchase from another Cable
Partner pursuant to the Cable Put. The number of Company Securities such Cable
Partner shall be obligated to purchase shall be determined by multiplying the
aggregate number of Company Securities which TCI Sub (or its designee) and any
participating Cable Partner are obligated to purchase pursuant to Section 6.1,
6.2 or 6.3 hereof by a fraction, the numerator of which shall be the number of
Company Securities beneficially owned by such Cable Parent and the denominator
shall be the number of Company Securities beneficially owned by TCI Sub and such
Cable Parent and their respective Stockholder Groups. Any Cable Partner which
elects to exercise the Cable Put shall not be entitled to participate in any
purchase of Company Securities pursuant to the TCI Call or the KPCB Put.
(c) Subject to TCI Sub's right to make an IPO Election pursuant
to Section 6.4 hereof, upon exercise of the Cable Put, TCI Sub (or its designee)
and any Cable Partner electing to participate in such purchase pursuant to
subsection (b) above shall be obligated to purchase from each Cable Partner
exercising the Cable Put (or member of such Cable Partner's Stockholder Group)
on the closing date of the consummation of the TCI Call or the KPCB Put and
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in accordance with the provisions of Section 11.9, all Company Securities
beneficially owned by such Cable Partner (or member of such Cable Partner's
Stockholder Group) as of the applicable closing date.
(d) The Cable Put Notice shall (i) state that the applicable
Cable Partner is exercising the Cable Put and (ii set forth the aggregate number
of and type of Company Securities beneficially owned by such Cable Partner and
the members of such Cable Partner's Stockholder Group as of the date of the
Cable Put Notice.
(e) For purposes of this Section 6.3, the obligation to purchase
Company Securities pursuant to an exercise of the Cable Put shall be the joint
and several obligation of TCI Sub and any member of the TCI Stockholder Group
acquiring Company Securities from TCI Sub, and except as provided in Section
6.7, no Transfer of Company Securities by TCI Sub to a member of the TCI
Stockholder Group shall relieve TCI Sub of its obligations pursuant to this
Section 6.3 unless specifically consented to in writing by the Cable Partner or
Cable Partners exercising the Cable Put. In addition, an election by a Cable
Partner to participate in the purchase of Company Securities pursuant to the TCI
Call, the KPCB Put or the Cable Put shall constitute, as between such Cable
Partner and TCI Sub, such Cable Partner's agreement to acquire pursuant to the
TCI Call, KPCB Put and Cable Put, as applicable, not less than the number of
Company Securities determined pursuant to subsection (b) of this Section 6.3.
6.4 IPO Election.
------------
(a) In the event of the exercise of the KPCB Put and, if
applicable, the Cable Put, TCI Sub shall have the right, exercisable by written
notice (the "IPO Election Notice") to KPCB, the Company, and each other
-------------------
Stockholder delivered not later than 20 Business Days following the
determination of the Per Share Value, to elect (an "IPO Election") to cause the
------------
Company to make an initial public offering of its Series A Common Stock in lieu
of TCI Sub's obligation to purchase Company Securities pursuant to the exercise
of such KPCB Put and, if applicable, the Cable Put or to exercise its Special
Demand Registration Right. Upon making an IPO Election, subject to Section
6.4(c) below, TCI Sub's obligation to purchase the Company Securities pursuant
to the exercise of such KPCB Put and, if applicable, the Cable Put shall be
suspended and shall terminate upon the consummation of an initial public
offering of the Company's Series A Common Stock in accordance with Section
6.4(b) below.
(b) The Company shall as soon as reasonably practicable after the
date on which the IPO Election Notice is given, file with the Commission and use
its best efforts to cause to become effective a registration statement in
respect of the offering and sale under the Securities Act of a number of shares
of Series A Common Stock that, in the opinion of the managing underwriter of any
such offering (or if none, of any nationally recognized investment banking firm
experienced in initial public offerings of securities), is sufficient to create
a bona fide trading market for the Series A Common Stock. In addition, the
Company shall file and use its best efforts to become effective not later than
the second Business Day following the effectiveness
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of such registration statement under the Securities Act, a registration
statement registering the Series A Common Stock under the Exchange Act and
thereafter taking such other steps as may be reasonably necessary to cause such
shares to be listed for trading or quotation on a national securities exchange
or over the counter trading system. Each Stockholder agrees to use its
commercially reasonable efforts to cause the Company to fulfill its obligations
hereunder and shall cooperate in all respects with the preparation and filing of
such registration statement with the Commission and causing such registration
statement to become and remain effective during the time periods specified
herein.
(c) Following TCI Sub's making of an IPO Election, (x) if such
registration of the Series A Common Stock is subsequently abandoned by the
Company before it is declared effective, (y) if a registration statement has not
been filed on or before the 90th day after the date of the IPO Election Notice,
or (z) if such registration statement has been filed, but the IPO has not been
consummated on or before the 183rd day following the date of the IPO Election
Notice, then such IPO Election shall terminate, the KPCB Put Notice and if
applicable, the Cable Put Notice shall be deemed to have been reinstated as of
such date of termination, and TCI Sub and any Cable Partner which had elected to
participate in the KPCB Put and the Cable Put shall thereafter be obligated to
purchase all of the Company Securities beneficially owned (i) by the KPCB
Constituents in accordance with the provisions of Section 6.2 and (ii) by any
Cable Partners (or member of their Stockholder Group) exercising the Cable Put
in accordance with the provisions of Section 6.3; provided, however, that
-------- -------
notwithstanding the provisions of Section 11.9(c)(i) hereof, the minimum period
in which such sale shall be required to be consummated shall be 60 days from the
date such KPCB Put Notice and any Cable Put Notice is deemed reinstated. In the
event a KPCB Put Notice and any Cable Put Notice is deemed reinstated pursuant
to this subsection (c), then in addition to the payment of the aggregate Per
Share Value in respect of such purchase of Company Securities, TCI Sub and any
Cable Partner electing to participate in such purchase shall pay to KPCB and to
any Cable Partners which exercise the Cable Put, interest at the Prime Rate (as
defined below) on the aggregate Per Share Value of the Company Securities to be
purchased pursuant to the KPCB Put and, if applicable, the Cable Put. Such
interest shall accrue from the date of reinstatement of the KPCB Put Notice to
and including the date immediately preceding the date of consummation of such
sale, and shall be payable upon consummation of such sale. The term "Prime
-----
Rate" shall mean a rate per annum equal to the commercial lending rate per annum
- ----
publicly announced from time to time by The Bank of New York as its prime rate
(such rate of interest to change as of the close of business on each date such
prime rate changes).
6.5 Payment of Consideration in Respect of TCI Call, KPCB Put, and
--------------------------------------------------------------
Cable Put.
- ---------
(a) The purchase price for any Company Securities to be purchased
pursuant to the TCI Call, the KPCB Put or the Cable Put shall be payable, at the
option of each purchaser, in cash or in equity securities of (or securities
convertible into or exercisable or exchangeable for), as applicable, TCI, in the
case of TCI Sub, Comcast, in the case of Comcast
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Sub or CCI, in the case of Cox Sub, or any Subsidiary of TCI, Comcast or CCI, as
applicable, which is a Public Company; provided that securities of the same
--------
class or series as the class or series of equity securities to be so issued, or
the class or series of securities which such security is convertible into or
exercisable or exchangeable for, are publicly traded on the Nasdaq National
Market or a national securities exchange at the time of such delivery. Such
equity securities shall be valued at the Average Market Price thereof on the
applicable closing date. The purchase price for such equity securities to be
purchased by a designee of TCI Sub shall be payable only in cash. In the event
that the equity securities to be purchased by a Stockholder pursuant to the TCI
Call, the KPCB Put or the Cable Put include options, warrants or other Rights to
acquire Company Securities which require the payment of additional consideration
in respect of the exercise thereof, the purchase price of such options,
warrants, or other Rights shall equal the Per Share Value thereof, less the
additional consideration payable in respect of the exercise of such option,
warrant or other Right.
(b) In the event that a Stockholder shall elect to pay such
purchase price by delivering equity securities, (i) the parties shall endeavor
to consummate such transaction on a tax-free basis and (ii) such Stockholder
shall cause the issuer of such publicly traded securities to grant to KPCB, for
the benefit of the KPCB Constituents, and to the members of the Stockholder
Group of any Cable Partner exercising the Cable Put and receiving such equity
securities, customary rights with respect to the registration of such securities
under the Securities Act. Such registration rights shall provide the KPCB
Constituents and if applicable, such Cable Partner's Stockholder Group with two
demand registrations, one of which shall be exercisable such that such
registration statement would be effective no later than the tenth day following
the date of delivery of such equity securities and each of which shall be (i) at
the expense of the applicable issuer and (ii) exercisable by the KPCB
Constituents and if applicable, the members of the Stockholder Group of such
Cable Partner, with respect to the registration of not less than 20% of the
aggregate amount of equity securities of such issuer issued to KPCB and, if
applicable, the Stockholder Group of such Cable Partner, in payment of such
purchase price; provided, however, that in lieu of causing such shares to be
-------- -------
registered pursuant to such demand registration, the Stockholder or applicable
issuer which has granted such registration rights shall have the option to
purchase all, but not less than all, of the shares for which registration is
requested, at a price per share equal to the Average Market Price thereof (less
any estimated underwriter or broker discounts or commissions) determined as of
the date of delivery of a demand notice.
6.6 Determination of Fair Market Value and Per Share Value in
---------------------------------------------------------
connection with TCI Call, KPCB Put and Cable Put.
- ------------------------------------------------
(a) The Stockholders electing to sell Company Securities and the
Stockholders electing to purchase Company Securities pursuant to Section 6.1,
6.2 and 6.3, as applicable, shall seek in good faith to agree upon the Fair
Market Value of the Company and the related Per Share Value in accordance with
Section 7.1 promptly following the twenty-day period during which a Cable
Partner may elect to participate in such purchase. If such parties are unable
to agree upon such Fair Market Value and Per Share Value within thirty (30) days
following the
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conclusion of such twenty day period, then such Fair Market Value and Per Share
Value shall be determined as provided in clause (b).
(b) The Stockholders who are selling Company Securities pursuant
to the TCI Call, the KPCB Put or the Cable Put (collectively, the "Selling
-------
Holders"), on the one hand, and TCI Sub on the other hand, shall, within 15 days
- -------
after the expiration of such 30-day period, either (i) jointly select and
appoint an Appraiser or (ii) if the Selling Holders and TCI Sub are unable to
agree upon an Appraiser, each retain an Appraiser, for the purpose of
determining the Fair Market Value of the Company as of the applicable date;
provided, that if either group shall fail to select such an Appraiser within
- --------
such period, the determination of the Fair Market Value of the Company shall be
made by the Appraiser selected by the other group. The Appraiser, or if two
Appraisers are appointed, the Appraisers shall determine the Fair Market Value
of the Company and the related Per Share Value in accordance with the appraisal
procedures set forth in Article 7.
6.7 Termination or Amendment to the TCI Call, the KPCB Put and the
--------------------------------------------------------------
Cable Put. The TCI Call, the KPCB Put and the Cable Put shall terminate upon
- ---------
the first to occur of, (x) the date on which the IPO is consummated, (y) the
termination of this Stockholders Agreement, or (z) the consummation of a Control
Block Sale in which all Qualified Tag Stockholders were offered the opportunity
to participate as to all Company Securities owned by such Qualified Tag
Stockholders; provided, however, that in the event that such Qualified Tag
-------- -------
Stockholders were offered the opportunity to include less than all their Company
Securities in any such Control Block Sale, then the number of shares of Company
Securities which TCI Sub shall be obligated to purchase from (i) the KPCB
Constituents pursuant to an exercise of the KPCB Put upon the exercise of the
KPCB Put at any time following the consummation of such Control Block Sale or
(ii) any Cable Partner (or the members of its Stockholder Group) electing to
exercise the Cable Put pursuant to Section 6.3 hereof following an exercise of
the KPCB Put following such Control Block Sale, will in each case be reduced by
the number of Company Securities which such KPCB Constituents or Cable Partner
(and the members of its Stockholder Group), as the case may be, were offered the
opportunity to include in such Control Block Sale pursuant to Section 4.5
hereof. The TCI Call will be deemed to have terminated upon the consummation of
any Control Block Sale.
6.8 Status of Designee. A designee of TCI Sub acquiring Company
------------------
Securities in any transaction contemplated by Sections 6.1, 6.2 or 6.3 shall
acquire such securities free and clear of any obligations, and shall have no
rights, under this Agreement.
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ARTICLE 7
APPRAISAL PROCEDURES
--------------------
7.1 Fair Market Value. For purposes of an appraisal pursuant to this
-----------------
Article 7 or Section 6.6, the "Fair Market Value" of the Company, as of the
-----------------
applicable date of determination, shall mean the price at which a willing seller
would sell and a willing buyer would buy a comparable business as an ongoing
business in an arm's-length transaction (as a sale of all of the stock of the
business or, if applicable, other equity interests). In determining the Fair
Market Value of the Company, the Stockholders, or in the event an appraisal is
required, each Appraiser, (i) shall assume for purposes of making its
determination that all of the outstanding stock or, if applicable, other equity
interests are to be sold in a single transaction and that the Company is a
Public Company and the Series A Common Stock is publicly traded and widely held,
as if a public offering of the Series A Common Stock had been successfully
consummated, (ii) shall not discount the value of the shares due to any lack of
liquidity in such shares because of any absence of a significant public market
or due to a minority ownership position in the Company represented by such
shares, (iii) shall not add any premium to the value of such shares due to a
majority or control ownership position in the Company represented by such shares
and (iv) shall not give consideration to any restrictions, encumbrances or
contractual rights relating to such shares.
7.2 Appraisal Procedure for Fair Market Value. If there is only one
-----------------------------------------
Appraiser, the Fair Market Value of the Company shall be as determined by such
Appraiser. If there are two Appraisers, then if the higher determination does
not exceed the lower determination by an amount in excess of 10% of such lower
determination, then the Fair Market Value shall be equal to the average of such
two determinations; however, if the higher determination exceeds the lower
determination by an amount in excess of 10% of such lower determination, then
such two Appraisers shall jointly select a third Appraiser within five days
after the date on which the later of such two Appraisal Reports (as defined
below) was delivered, and each shall furnish such third Appraiser with the work
product used by each of such Appraisers in preparing their respective Appraisal
Reports; provided, however, that in the event the first two Appraisers are
-------- -------
unable to agree on a third appraiser within thirty days, any Stockholder may
cause the American Arbitration Association of New York to appoint such third
appraiser. Such third Appraiser shall deliver its Appraisal Report of its good
faith determination of the Fair Market Value of the Company as of the applicable
date within 20 days of such appointment, and in such case the Fair Market Value
shall be equal to the average of the two closest determinations; provided,
--------
however, that if the difference between the highest and middle determinations is
- -------
no more than 105% and no less than 95% of the difference between the middle and
lowest determinations, then the Fair Market Value of the Company shall be equal
to such middle determination.
7.3 Determination of Per Share Value. Following the determination of
--------------------------------
the Fair Market Value, the Stockholders, or if an appraisal is required, the
Appraisers whose determinations were used in the calculation of the Fair Market
Value, shall determine the number
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of shares of Common Stock outstanding together with any further appropriate
adjustments to the Fair Market Value resulting from such determination. The
number of shares of Common Stock outstanding shall mean a number, as determined
by such Stockholders, or if an appraisal is required, such Appraisers as of the
applicable date, equal to (without duplication) the sum of (x) the number of
shares of Series A Common Stock and Series B Common Stock outstanding, (y) the
number of shares of Series A Common Stock, Series B Common Stock and Series K
Common Stock issuable upon the conversion of the Convertible Preferred Stock and
(z) the number of shares of Series A Common Stock, Series B Common Stock and
Series K Common Stock issuable upon conversion, exercise or exchange of those
Rights the holders of which would derive an economic benefit from conversion,
exercise or exchange of such Rights which exceeds the economic benefit of not
converting, exercising or exchanging such Rights. The "Per Share Value" shall
---------------
mean the quotient obtained by dividing the Fair Market Value of the Company by
the number of shares of Common Stock outstanding or deemed outstanding (less, in
the case of any Rights included pursuant to clause (z) above, the exercise price
thereof); provided that if an appraisal is required and the Appraisers do not
--------
agree on the determinations provided for in this paragraph, the Per Share Value
shall be the average of the quotients so obtained on the basis of the respective
determinations of such firms.
7.4 Delivery of Appraisal Report. Each Appraiser shall deliver a
----------------------------
written report (the "Appraisal Report") to the Company and each Stockholder
----------------
setting forth such Appraiser's good faith determination of the Fair Market Value
of the Company and Per Share Value as of the applicable date. Each Stockholder
shall use its commercially reasonable efforts to cause its designated Appraiser
to deliver its Appraisal Report within 30 days of its selection. If, pursuant
to the immediately preceding paragraph, a third determination is required, each
Stockholder shall use reasonable efforts to cause its designated Appraiser to
promptly take all actions necessary for the joint selection by such two
Appraisers of the third Appraiser and to promptly make available to such third
Appraiser the work product of such other Appraisers relating to its
determination of the Fair Market Value of the Company, and shall also take all
reasonable actions which are necessary in order to cause such third Appraiser to
deliver its Appraisal Report as early as possible and in any event within 20
days after its selection. The Company agrees to cooperate with the Stockholders
and the Appraisers in the determination of the Fair Market Value of the Company.
7.5 Fees and Expenses of Appraisers. All fees and expenses of any
-------------------------------
Appraiser conducting an appraisal in accordance with this Article 7 and retained
on behalf of any Stockholders who are potential sellers of Company Securities
shall be paid by all such potential sellers, in proportion to the number of
Company Securities held by a potential seller and the number of Company
Securities held by all such potential purchasers (determined on an as converted
into Series A Common Stock basis) and all fees and expenses of any Appraiser
conducting an appraisal in accordance with this Article 7 and retained on behalf
of any Stockholders who are potential purchasers of Company Securities shall be
paid by all such potential purchasers, in proportion to the number of Company
Securities held by a potential purchaser and the number of Company Securities
held by all such potential sellers (determined on an as converted into Series A
Common Stock basis).
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If a third Appraiser is retained pursuant to this Article 7, the fees and
expenses of such Appraiser shall be split equally between the group of
Stockholders who are potential sellers of Company Securities and the group of
Stockholders who are potential purchasers of Company Securities, and such fees
and expenses shall be apportioned among the Stockholders in each such group in
proportion to their respective number of Company Securities (determined on an as
converted into Series A Common Stock basis).
7.6 Value Determination is Conclusive. Each determination of Per
---------------------------------
Share Value and Fair Market Value of the Company in accordance with the
provisions of this Article 7 or pursuant to Section 6.6 shall be final, binding
and conclusive.
ARTICLE 8
PREEMPTIVE RIGHTS
-----------------
8.1 Preemptive Rights.
-----------------
(a) If at any time after the Closing, the Company at any time or
from time to time makes any public or non-public offering of New Capital Stock
or any Rights to acquire New Capital Stock, each Eligible Stockholder shall
first be offered the opportunity to acquire from the Company for the same price
and on the same terms as such securities are proposed to be offered to others,
up to the amount of New Capital Stock (or Rights in respect thereof) as is
required to enable it to maintain its proportionate interest in the Company. The
amount of New Capital Stock each Eligible Stockholder shall be entitled to
purchase (or, in the case of Rights, Rights to acquire a number of shares of New
Capital Stock) shall be determined by multiplying (x) the total number of such
offered shares or, in the case of Rights, the total number or such shares
covered by Rights, by (y) a fraction, the numerator of which is the number of
shares of Company Securities (determined on an as converted into Series A Common
Stock basis) held by such Eligible Stockholder, and the denominator of which is
the number of shares of Common Stock then outstanding; provided, however, that
-------- -------
for purposes of determining the number of shares of Common Stock outstanding,
such amount shall include, without duplication, shares of Common Stock issuable
upon the conversion of outstanding shares of Preferred Stock or other
outstanding convertible equity securities of the Company and shares of Common
Stock issuable upon the exercise of outstanding options or warrants to purchase
Common Stock (or other securities of the Company).
(b) Notwithstanding the foregoing, no Person shall be entitled to
any preemptive rights in respect of the issuance of shares of New Capital Stock
issued to satisfy Rights theretofore issued and as to which such Person
theretofore had the opportunity to exercise preemptive rights pursuant to this
Article 8.
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(c) In the event the Company proposes to offer New Capital Stock,
it shall give each Eligible Stockholder written notice of its intention,
describing the type of New Capital Stock to be offered, and the price and other
terms upon which the Company proposes to offer the same. Each Eligible
Stockholder shall have twenty (20) days from the date of receipt of any such
notice to notify the Company in writing that it intends to exercise such
preemptive rights and as to the amount of New Capital Stock such Eligible
Stockholder desires to purchase, up to the maximum amount calculated pursuant to
subsection (a). Such notice shall constitute an agreement of such Eligible
Stockholder to purchase the amount of New Capital Stock so specified upon the
price and other terms set forth in the Company's notice to it.
(d) If any Eligible Stockholder exercises its preemptive right
hereunder, the closing of the purchase of the New Capital Stock with respect to
which such right has been exercised shall take place within 45 calendar days
after the giving of notice of such exercise, which period of time shall be
extended for a maximum of 135 days in order to comply with applicable laws and
regulations. Each of the Company and any Eligible Stockholder which has agreed
to purchase New Capital Stock or Rights agrees to use its commercially
reasonable efforts to secure any regulatory approvals or other consents, and to
comply with any law or regulation necessary in connection with the offer, sale
and purchase of, such New Capital Stock.
(e) In the event any Eligible Stockholder fails to exercise its
preemptive rights provided in this Section 8.1 within said twenty (20) day
period or, if so exercised, such Eligible Stockholder is unable to consummate
such purchase within the time period specified in paragraph (d) above because of
its failure to obtain any required regulatory consent or approval, the Company
shall thereafter be entitled during the period of ninety (90) days following the
conclusion of the applicable period to sell or enter into an agreement (pursuant
to which the sale of New Capital Stock covered thereby shall be consummated, if
at all, within thirty (30) days from the date of said agreement) to sell the New
Capital Stock or Rights not elected to be purchased pursuant to this Section 8.1
or which such electing Eligible Stockholder is unable to purchase because of
such failure to obtain any such consent or approval, at a price and upon terms
no more favorable to the purchasers of such securities than were specified in
the Company's notice to the Eligible Stockholders. Notwithstanding the
foregoing, if such sale is subject to the receipt of any regulatory approval or
expiration of any waiting period, the time period during which such sale may be
consummated shall be extended until the expiration of five Business Days after
all such approvals have been obtained or waiting periods expired, but in no
event shall such time period exceed 180 days from the date of the applicable
agreement with respect to such sale. In the event the Company has not sold the
New Capital Stock or entered into an agreement to sell the New Capital Stock
within said ninety (90) day period (or sold and issued New Capital Stock in
accordance with the foregoing within thirty (30) days from the date of said
agreement (as such period may be extended in the manner described above for a
period not to exceed 180 days from the date of said agreement)), the Company
shall not thereafter offer, issue or sell such New Capital Stock without first
offering such securities to the Eligible Stockholders in the manner provided
above.
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8.2 Termination of Preemptive Rights.
--------------------------------
The rights granted to the Eligible Stockholders pursuant to Section
8.1 shall terminate as to a Stockholder, upon the earlier to occur of (i) such
time as such Stockholder ceases to be an Eligible Stockholder or (ii) the
termination of this Agreement.
ARTICLE 9
REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
9.1 General Representations and Warranties. (i) As of the date
--------------------------------------
hereof, each party hereto and (ii) as of the date a Person executes an
instrument becoming a party to this Agreement, each Person that becomes a party
to this Agreement after the date hereof, hereby makes the following
representations, warranties and covenants to each of the other parties hereto:
(a) Such party has the legal right and requisite power and
authority to make and enter into this Agreement and to perform its obligations
hereunder and to comply with the provisions hereof. The execution, delivery and
performance of this Agreement by such party has been duly authorized by all
necessary action on its part. This Agreement has been duly executed and
delivered by such party and constitutes the valid and binding obligation of such
party enforceable against it in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought.
(b) The execution, delivery and performance of this Agreement by
such party, and the compliance by such party with the provisions hereof, do not
and will not (with or without notice or lapse of time, or both) conflict with,
or result in any violation of, or default under, or give rise to any right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to such party or any of its properties or assets, other than any such
conflicts, violations, defaults, or other effects which, individually or in the
aggregate, do not and will not prevent, restrict or impede such party's
performance of its obligations under and compliance with the provisions of this
Agreement. If such party is an entity or association, the execution, delivery
and performance of this Agreement by such party does not and will not contravene
the charter, bylaws or other organizational documents of such party.
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(c) Other than with respect to the expiration or termination of
any applicable waiting period under the HSR Act in connection with any
conversion of the Convertible Preferred Stock, no consent, approval, order or
authorization of, or registration, declaration or filing with, any governmental
or regulatory authority or any other Person (other than any of the foregoing
which have been obtained and, at the date in question, are then in effect) is
required under existing laws as a condition to the execution, delivery or
performance of this Agreement by such party.
(d) As to a Stockholder which is an original party to this
Agreement, such Stockholder is the owner of the Company Securities set forth on
Schedule I and, with respect to any Person executing an instrument and becoming
a party hereto after the date of this Agreement, such Person owns the Company
Securities specified in such instrument, in each case, free and clear of all
liens, claims or encumbrances except as otherwise provided herein and except for
restrictions on resales under applicable securities laws. No other member of
such party's Stockholder Group and no other Controlled Affiliate of such party's
Ultimate Parent owns beneficially or has the right to acquire (whether such
right is immediately exercisable or exercisable with the passage of time, upon
the occurrence of an event or events or otherwise) any securities of the
Company, directly or indirectly.
(e) Each member of such party's Stockholder Group and each
Ultimate Parent and any Controlled Affiliate thereof, in each case which owns
securities of the Company, is a signatory hereto.
9.2 Restricted Business.
-------------------
(a) Each Cable Parent hereby represents and warrants that except
as set forth on Schedule III attached hereto, since the Execution Date, neither
such Cable Parent nor its Controlled Affiliates has engaged or is currently
engaging in any Restricted Business.
(b) TCI Internet Services hereby represents and warrants that (i)
to its knowledge, the Microsoft Network, L.L.C. ("MSN") is not engaging in a
---
Restricted Business as of the date hereof and (ii TCI acquired beneficial
ownership of a 20% interest in MSN in September 1994, and since that date has
not been notified by MSN of, and has not otherwise acquired actual knowledge of
any change in its percentage ownership of MSN. TCI Sub hereby covenants to
inform the other Stockholders within 30 days of notice to TCI of any material
change in TCI's ownership percentage in MSN.
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ARTICLE 10
CONFIDENTIALITY
---------------
10.1 Confidentiality.
---------------
(a) Maintenance of Confidentiality. Each Ultimate Parent and its
------------------------------
Controlled Affiliates and the Company (each a "Restricted Party"), shall cause
----------------
their respective officers and directors (in their capacity as such) to, and
shall take all reasonable measures to cause their respective employees,
attorneys, accountants, consultants and other agents and advisors (collectively,
and together with their respective officers and directors, "Agents") to, keep
------
secret and maintain in confidence all confidential and proprietary information
and data of the Restricted Parties disclosed to it (in each case, a "Receiving
---------
Party") in connection with the conduct of the Company's business and in
- -----
connection with the transactions contemplated by the Term Sheet (the
"Confidential Information") and shall not, shall cause their respective officers
------------------------
and directors not to, and shall take all reasonable measures to cause their
respective other Agents not to, disclose Confidential Information to any Person
other than the Ultimate Parents, their Controlled Affiliates and their
respective Agents that need to know such Confidential Information, or the
Company. Each Ultimate Parent and its Controlled Affiliates further agrees that
it shall not use the Confidential Information for any purpose other than
monitoring and evaluating its investment, determining and performing its
obligations and exercising its rights under this Agreement and in connection
with the transactions contemplated by the Term Sheet. The Company and each
Ultimate Parent shall take all reasonable measures necessary to prevent any
unauthorized disclosure of the Confidential Information by any of their
respective Controlled Affiliates or any of their respective Agents. The
measures taken by a Restricted Party to protect Confidential Information shall
not be deemed unreasonable if the measures taken are at least as strong as the
measures taken by the disclosing party to protect such Confidential Information.
For purposes of this Section 10.1, Confidential Information may take the form of
documentation, drawings, specifications, software, technical or engineering
data, business information, and other forms, and may be communicated orally, in
writing, by electronic or magnetic media, by visual observation, or by other
means. Such Confidential Information may include, but is not limited to,
information concerning the transactions contemplated by the Term Sheet; the
facilities of the Company, of each Ultimate Parent and its Controlled
Affiliates; the Company's requirements; the Company's network; the identity,
location, characteristics and requirements of the customers of the Company or
the members of the Stockholder Groups; and financial, accounting or marketing
reports, business plans, analyses, forecasts, predictions or projections
relating to the transactions contemplated by the Term Sheet or the business of
the Company or the members of the Stockholder Groups generally. Confidential
Information includes any notes, reports, analyses, studies or other materials,
whether prepared by the Receiving Party or otherwise, that contain or are based
upon Confidential Information delivered or made available pursuant to this
Agreement.
(b) Permitted Disclosures. Nothing contained in this Agreement
---------------------
is intended to restrict any party or its Agents from discussing with any other
party or its Agents the
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Confidential Information disclosed by a party to any other party, except that
information disclosed by a Restricted Party (other than the Company) or its
Agents to the Company that is clearly marked "@Home Eyes Only Confidential
Information" may be disclosed by the Company to other parties and their Agents
only to the extent that such Confidential Information is reasonably required to
be reflected in the capital structure or business plans of the Company. In
addition, nothing herein shall prevent any Restricted Party or its Agents from
using, disclosing, or authorizing the disclosure of Confidential Information it
receives in the course of the business of the Company which:
(i) has been published or is in the public domain, or
which subsequently comes into the public domain, through no fault of the
Receiving Party;
(ii) prior to receipt hereunder (or under that certain
Agreement for Use and Non-Disclosure of Proprietary Information, effective as of
June 1, 1995, among the Company, TCI, CEI, Comcast and Continental Cablevision,
Inc.) was properly within the legitimate possession of the Receiving Party or,
subsequent to receipt hereunder (or under such agreement), is lawfully received
from a third party having rights therein without restriction of the third
party's right to disseminate the Confidential Information and without notice of
any restriction against its further disclosure;
(iii) is independently developed by the Receiving Party
through Persons who have not had, either directly or indirectly, access to or
knowledge of such Confidential Information;
(iv) is disclosed to a third party, without restriction on
further disclosure, with the written approval of the party originally disclosing
such information, provided that such Confidential Information shall cease to be
--------
confidential and proprietary information covered by this Agreement only to the
extent of the disclosure so consented to;
(v) subject to the Receiving Party's compliance with
paragraph (d) below, is required to be produced under order of a court of
competent jurisdiction or other similar requirements of a governmental agency;
provided that such Confidential Information to the extent covered by a
- --------
protective order or its equivalent shall otherwise continue to be Confidential
Information required to be held confidential for purposes of this Agreement; or
(vi) subject to the Receiving Party's compliance with
paragraph (d) below, is required to be disclosed by applicable law or a stock
exchange or association on which such Receiving Party's securities (or those of
its Affiliate) are listed or quoted.
(c) Notwithstanding this Section 10.1, any Ultimate Parent or
its Controlled Affiliate may provide Confidential Information (i) to other
Persons considering the acquisition (whether directly or indirectly) of all or a
portion of the Company Securities owned by such Ultimate Parent's Stockholder
Group pursuant to a Permitted Transfer or a Permitted
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Disposition or (ii) to any financial institution in connection with borrowings
from such financial institution by such Ultimate Parent or any of its Controlled
Affiliates, so long as prior to any such disclosure such other Person or
financial institution executes a confidentiality agreement that provides
protection substantially equivalent to the protection provided each Ultimate
Parent, its Controlled Affiliates and the Company in this Section 10.1.
(d) In the event that any Receiving Party (i) must disclose
Confidential Information in order to comply with applicable law or the
requirements of a stock exchange or association on which such Receiving Party's
securities or those of its Affiliates are listed or quoted or (ii becomes
legally compelled (by oral questions, interrogatories, requests for information
or documents, subpoenas, civil investigative demands or otherwise) to disclose
any Confidential Information, the Receiving Party shall provide the disclosing
party with prompt written notice so that in the case of clause (i), the
disclosing party can work with the Receiving Party to limit the disclosure to
the greatest extent possible consistent with legal obligations, or in the case
of clause (ii), the disclosing party may seek a protective order or other
appropriate remedy or waive compliance with the provisions of this Agreement.
In the case of clause (ii), (A) if the disclosing party is unable to obtain a
protective order or other appropriate remedy at the disclosing party's
reasonable expense, and (B) failing the entry of a protective order or other
appropriate remedy or receipt of a waiver hereunder, the Receiving Party shall
furnish only that portion of the Confidential Information which it is advised by
opinion of its counsel is legally required to be furnished and shall exercise
all commercially reasonable efforts to obtain reliable assurance that
confidential treatment shall be accorded such Confidential Information, it being
understood that such commercially reasonable efforts shall be at the cost and
expense of the disclosing party whose Confidential Information has been sought.
(e) The obligations under this Section 10.1 shall survive for a
period of two (2) years from (i) as to all Ultimate Parents and their respective
Controlled Affiliates and the Company, the termination of this Agreement, (ii)
as to any Ultimate Parent and its Controlled Affiliates, such time as the
Stockholder Group of such Ultimate Parent ceases to own any Company Securities
and (iii) as to the Company only with respect to information received by the
Company from an Ultimate Parent and its Controlled Affiliates whose Stockholder
Group has ceased to own any Company Securities, such time as the Stockholder
Group of such Ultimate Parent ceases to own any Company Securities; provided
--------
that such obligations shall continue indefinitely with respect to any trade
secret or similar information which is proprietary to the Company and provides
the Company with an advantage over its competitors.
(f) All references in this Section 10.1 to the Company shall,
unless the context otherwise requires, be deemed to refer also to each
Subsidiary and Controlled Affiliate of the Company.
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ARTICLE 11
MISCELLANEOUS
-------------
11.1 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of each of the other
parties; provided, however, that (x) this Agreement and the rights, interests
-------- -------
and obligations of a Stockholder may be assigned to any member of its
Stockholder Group in connection with a Transfer of Company Securities (provided,
that no such assignment shall release such Stockholder from its obligations
hereunder unless consented to in writing by all other parties hereto) and (y) in
connection with any Qualified Spin Off Transaction the Parent of the Stockholder
Group involved in such Qualified Spinoff Transaction shall be entitled to assign
the rights and obligations of the applicable Stockholder Group (including such
Parent and any Ultimate Parent) hereunder to the Spin Off Parent which as a
result of such Qualified Spin Off Transaction, becomes the beneficial owner of a
majority of the equity interests and voting power of a Stockholder; provided,
--------
however, that no such assignment shall affect any party's obligations under
- -------
Article 10 hereof or under the Master Distribution Agreement. Any assignment or
delegation in contravention of this Agreement shall be void and shall not
relieve the assigning or delegating party of any obligation hereunder. Subject
to the foregoing provisions of this Section 11.1 this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns.
11.2 Third Parties. Nothing in this Agreement, whether express or
-------------
implied, shall be construed to give any Person, other than the parties hereto,
any legal or equitable right, remedy or claim under or in respect of this
Agreement.
11.3 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, without regard
to the conflicts of law rules of such State.
11.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
11.5 Notices. All notices and other communications required or
-------
permitted to be given by any provision of this Agreement shall be in writing and
mailed (certified or registered mail, postage prepaid, return receipt requested)
or sent by hand or overnight courier, or by facsimile transmission (with
acknowledgment received), charges prepaid and addressed to the intended
recipient as follows, or to such other address or number as may be specified
from time to time by like notice to the parties:
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(a) If to TCI Sub or a member of the TCI Stockholder Group:
------------------------------------------------------
TCI Internet Holdings, Inc.
5750 DTC Parkway
Englewood, CO 80111-3000
Telecopy: (303) 712-5707
Attention: Bruce W. Ravenel
President
with copies to:
Baker & Botts, L.L.P.
599 Lexington Avenue
New York, New York 10022-4834
Telecopy: (212) 705-5125
Attention: Frederick H. McGrath, Esq.
(b) If to the KPCB Affiliates or a member of the KPCB Stockholder
-------------------------------------------------------------
Group:
- -----
Kleiner, Perkins, Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Telecopy: (415) 233-0323
Attention: L. John Doerr
with copies to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Telecopy: (415) 496-4092
Attention: Allen Morgan, Esq.
(c) If to Comcast Sub or a member of the Comcast Stockholder Group:
--------------------------------------------------------------
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Telecopy: (215) 981-7794
Attention: Robert S. Pick
Vice President
with copies to:
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Wolf, Block, Schorr and Solis-Cohen
Packard Building, 7th Floor
15th and Chestnut Streets
Philadelphia, PA 19012
Telecopy: (215) 977-2334
Attention: Jason M. Shargel, Esq.
(d) If to Cox Sub or a member of the Cox Stockholder Group:
------------------------------------------------------
Cox Communications, Inc.
1400 Lake Hearn Drive, NE
Atlanta, GA 30319
Telecopy: (404) 843-6352
Attention: David M. Woodrow
Senior Vice President
with copies to:
Dow Lohnes & Albertson P.L.L.C.
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, D.C. 20036
Telecopy: (202) 776-2222
Attention: Stuart A. Sheldon, Esq.
(e) If to the Company:
-----------------
At Home Corporation
385 Ravendale Drive
Mountain View, CA 94043
Telecopy: (415) 944-8500
Attention: David G. Pine, Esq.
with copies to:
Fenwick & West LLP
Two Palo Alto Square
Suite 800
Palo Alto, CA 94306
Telecopy: (415) 494-1417
Attention: Gordon K. Davidson, Esq.
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Any party may from time to time specify a different address for notices by like
notice to the other parties. All notices and other communications given in
accordance with the provisions of this Agreement shall be deemed to have been
given and received (i) four (4) Business Days after the same are sent by
certified or registered mail, postage prepaid, return receipt requested, (ii)
when delivered by hand or transmitted by facsimile (with acknowledgment received
and, in the case of a facsimile only, a copy of such notice is sent no later
than the next Business Day by a reliable overnight courier service, with
acknowledgment or receipt) or (iii) one (1) Business Day after the same are sent
by a reliable overnight courier service, with acknowledgment of receipt.
11.6 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, portions of such provisions, or
such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
11.7 Headings. The section headings used in this Agreement are for
--------
reference purposes only and shall not affect the meaning or interpretation of
any term or provision of this Agreement.
11.8 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement or otherwise afforded to any party, shall be cumulative and
not alternative.
11.9 Purchases and Sales of Company Securities between Stockholders.
--------------------------------------------------------------
(a) In connection with any purchase and sale of Company
Securities between any members of one Stockholder Group, on the one hand, and
any members of another Stockholder Group, on the other, each seller of Company
Securities shall deliver to each purchaser thereof a certificate, executed by or
on behalf of such seller, in which such seller shall represent and warrant to
such purchaser as of the closing date of such transaction that:
(i) (A) If an entity, such seller is such an entity duly
organized, validly existing, and in good standing under the laws of the state of
its organization and (B) such seller has good title to, and the full power and
authority to sell, transfer and assign to the purchaser all of its right, title
and interest in and to, such Company Securities;
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(ii) there are no consents, approvals or authorizations
required under any law, rule, regulation, agreement or instrument applicable to
the seller (other than such as have previously been obtained and are in full
force and effect as of such closing date) required in order to consummate its
sale of such Company Securities to the purchaser (other than any consents,
approvals or authorizations required to be obtained by the purchaser in
connection with such purchase); and
(iii) immediately after the sale, transfer and assignment
thereof, such purchaser will have good title to such Company Securities free and
clear of all liens, claims or encumbrances (other than any arising pursuant to
this Agreement or under state or federal securities laws or created by the
purchaser or arising by reason of its purchase or ownership of such Company
Securities).
(b) In connection with any purchase and sale of Company
Securities hereunder between any members of one Stockholder Group, on the one
hand, and any members of another Stockholder Group, on the other, each purchaser
of Company Securities shall deliver to each seller thereof a certificate,
executed by or on behalf of such purchaser, in which such purchaser shall
represent and warrant to such seller as of the closing date of such transaction
that:
(i) (A) If an entity, such purchaser is such an entity duly
organized, validly existing, and in good standing under the laws of the state of
its organization and (B) such purchaser has the full power and authority to
purchase, acquire and accept from the seller all of its right, title and
interest in and to such Company Securities;
(ii) there are no consents, approvals or authorizations
required under any law, rule, regulation, agreement or instrument applicable to
such purchaser (other than such as have previously been obtained and are in full
force and effect as of such closing date) required in order to consummate its
purchase of such Company Securities from such seller (other than any consents,
approvals or authorizations required to be obtained by such seller in connection
with such sale).
(c) (i) Unless otherwise provided herein, the closing of the
purchase and sale of such Company Securities shall be held on the fifth Business
Day following satisfaction of all conditions (including any financing condition)
to such closing, but in no event later than 120 days following the date that the
total amount of Company Securities such Person is obligated to purchase is
finally determined; provided, however, that such 120-day period shall be
-------- -------
extended for up to an additional 60 days in order to obtain any consent,
approval, or authorization or any expiration of a waiting period, which consent,
approval, authorization or expiration is a condition to the closing of such
purchase and sale. The obligation of each Stockholder to effect such purchase
and sale shall be conditioned (satisfaction of which may not be waived by any
party thereto without the consent of the other parties thereto) upon the receipt
of any and all consents, approvals or authorizations of any governmental or
regulatory entities or other third parties, and the expiration or termination of
any waiting periods under the HSR Act applicable to the
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consummation of such purchase and sale contemplated. Each Stockholder that is a
party to such transaction shall use its commercially reasonable efforts to cause
the satisfaction of such condition. The obligation of each Stockholder
purchasing Company Securities pursuant to this Section 11.9 shall be several and
not joint and shall not be conditioned upon the consummation by any other
Stockholder purchasing Company Securities hereunder of its purchase of Company
Securities in connection with any sale of Company Securities pursuant to Section
4.3. In the event that a selling Stockholder shall become obligated to
consummate the sale of Company Securities to one or more but not all
Stockholders which have agreed to purchase Company Securities in accordance with
the terms hereof, then such selling Stockholder shall be obligated to consummate
such sale with those purchasing Stockholders who are obligated to close, and as
to any Company Securities remaining following the purchase of the Company
Securities that the purchasing Stockholders had agreed (collectively) to
purchase, each non-defaulting purchasing Stockholders shall, pursuant to written
notice to all other Stockholders delivered not later than 10 days following such
purchase default, have the option to elect to purchase such remaining shares,
which remaining shares shall be allocated among such electing Stockholders on a
pro rata basis or as they may otherwise agree, such purchase to be on the same
terms and conditions as such previous purchase; the closing of such subsequent
purchase to occur not later than 90 days following the conclusion of such 10 day
period. If any shares remain following such purchase, the selling Stockholder
shall be entitled to sell such shares to an Unaffiliated Third Party during the
period of 120 days following the conclusion of such 10 day period, provided that
the terms and conditions of such sale are no more favorable to such Unaffiliated
Third Party than the terms and conditions offered to the purchasing
Stockholders. The foregoing shall not be deemed to limit in any way any rights a
selling Stockholder may have against a defaulting Stockholder.
(d) At the applicable closing, each purchaser of Company
Securities shall deliver to each seller thereof (i) in cash, or by certified
check or wire transfer of immediately available funds to the account specified
by such seller or (ii) in such other form of consideration as may be provided
for herein, an amount equal to the purchase price of the Company Securities to
be purchased by such purchaser from such seller. In the event that the purchase
price for Company Securities is stated in terms of a purchase price per share of
Common Stock but the Company Securities to be purchased consist of shares of
convertible Preferred Stock or options, warrants or other rights to acquire
shares of Common Stock, the purchase price with respect to each such Company
Security shall, (x) in the case of a purchase of shares of Convertible Preferred
Stock, equal the purchase price per share of Common Stock multiplied by the
number of shares of Common Stock then issuable upon the conversion of such
shares of Convertible Preferred Stock, and (y) in the case of any Right to
acquire shares of Common Stock, equal the purchase price per share of Common
Stock less the applicable exercise price of such Right. Concurrently therewith,
each seller shall deliver to each purchaser a stock certificate or certificates
representing the Company Securities to be sold by such seller to such purchaser,
duly endorsed for transfer or accompanied by duly executed stock powers, with
all requisite transfer tax stamps affixed, and such shares shall be free and
clear of all liens, claims and encumbrances (except as otherwise provided herein
and except for restrictions or resales under applicable securities laws) and all
title to, and all rights and privileges of ownership in, all such shares shall
immediately vest in such
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<PAGE>
purchaser. At the applicable closing, each seller shall also deliver to each
purchaser, and each purchaser shall deliver to each seller, the certificates
required pursuant to Sections 11.9(a) and (b), and each seller shall deliver to
each purchaser such other certificates and documents as such purchaser may
reasonably request.
(e) In connection with the allocation of Company Securities
among the Stockholders purchasing such securities in connection with (i) a right
of first offer procedure pursuant to Sections 4.3 or 4.4 or (ii) the exercise of
the TCI Call, the KPCB Put or the Cable Put and the election by Comcast Sub or
Cox Sub to participate with TCI Sub in the purchase of Company Securities
pursuant to the TCI Call, the KPCB Put or the Cable Put, any Rights included in
such Company Securities shall be allocated pro rata (both in respect of the
number of Rights and the exercise price or other price related thereto) among
each Stockholder participating in such purchase, based on the number of Company
Securities held by such participating Stockholder and the number of Company
Securities held by all participating Stockholders (determined on an as converted
into Series A Common Stock basis).
11.10 Entire Agreement. Except as otherwise provided in this
----------------
Agreement, this Agreement contains the entire understanding of the parties with
respect to the subject matter hereof and supersedes all prior agreements and
understandings among the parties with respect to the subject matter hereof,
including without limitation, (i) Article V of the Term Sheet and (ii) the
Stockholders Agreement, dated as of August 29, 1995, among, inter alia, the
----- ----
Company, KPCB, certain KPCB Affiliates, and TCI Internet Services.
11.11 Additional Agreements. Each Stockholder and its Cable Parent
---------------------
agrees to negotiate in good faith with the Company and the other Stockholders
and their respective Cable Parents in connection with the execution and delivery
of a Master Distribution Agreement and a form of LCO Agreement incorporating
therein (and thereby superseding) the applicable provisions set forth in the
letter agreement, dated May 15, 1997, among the Stockholders and certain of
their respective Affiliates and the Company, including the exhibits thereto.
The parties acknowledge and agree that the Term Sheet is hereby terminated and
shall have no further force or effect.
11.12 Termination. This Agreement (other than any provision for
-----------
which a different term is specified) shall terminate on the earliest to occur of
(w) the twenty-fifth anniversary of the Execution Date, (x) such date as there
are no Eligible Stockholders or Exclusive Stockholders, (y) a merger or
consolidation of the Company with or into any other Person and in which the
Company is not the surviving or resulting corporation and (z) there are no
shares of Common Stock or Convertible Preferred Stock issued and outstanding.
11.13 Legends. Any and all certificates evidencing the Company
-------
Securities that are subject to this Agreement shall be endorsed with a
conspicuously noted legend in substantially the following form:
-68-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT
CERTAIN STOCKHOLDERS' AGREEMENT, DATED AS OF JULY __, 1997 AND AS THEREAFTER
AMENDED, AMONG THE COMPANY AND THE OTHER PARTIES THERETO CONTAINING, AMONG OTHER
THINGS, RESTRICTIONS, ON THE SALE, TRANSFER OR OTHER DISPOSITION OF SUCH
SECURITIES AND RESTRICTIONS UPON AND COMMITMENTS TO VOTE ON CERTAIN MATTERS. A
COUNTERPART OF EACH SUCH AGREEMENT HAS BEEN DEPOSITED WITH THE COMPANY AT ITS
PRINCIPAL PLACE OF BUSINESS, AND THE COMPANY SHALL FURNISH A COPY OF EACH SUCH
AGREEMENT TO THE RECORD HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST."
The Company shall make a notation on its stock books regarding the
restrictions on transfer of the Company Securities subject to this Agreement and
will transfer securities on the books of the Company only to the extent not
inconsistent therewith.
11.14 Specific Performance. Without intending to limit the remedies
--------------------
available to any of the parties hereto, each of the parties hereto acknowledges
and agrees that a breach by such party of any provision of Article 2, Article 3,
Article 4, Section 5.2, Article 6, Article 7, Article 8, Article 10 and Section
11.11 of this Agreement will cause the other parties hereto irreparable injury
for which an adequate remedy at law is not available. Therefore, the parties
hereto agree that in the event of any such breach each such party shall be
entitled to an injunction, restraining order or other form of equitable relief
from any court of competent jurisdiction restraining any other party hereto from
committing any breach or threatened breach of, or otherwise specifically to
enforce, any such provision of this Agreement, in addition to any other remedies
that such parties may have at law or in equity.
11.15 Amendments. Any amendment to this Agreement must be in writing
----------
and must be signed by the Company and the member of each Stockholder Group
appointed to take actions on behalf of such Stockholder Group pursuant to
Section 2.1(a) as of the date of such amendment, whereupon such amendment shall
be effective against the Company and each member of all Stockholder Groups.
-69-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Stockholders' Agreement as of the date first above written.
<TABLE>
<S> <C>
AT HOME CORPORATION
By:___________________________________
Name:
Title:
TCI INTERNET HOLDINGS, INC. COX TELEPORT PROVIDENCE, INC.
By:____________________________________ By:___________________________________
Name: Name:
Title: Title:
COMCAST PC INVESTMENTS, INC. KLEINER, PERKINS, CAUFIELD
& BYERS VII
By: KPCB VII Associates, its General
Partner
By:____________________________________ By:___________________________________
Name: Name:
Title: Title:
KPCB INFORMATION SCIENCES
ZAIBATSU FUND II
By: KPCB VII Associates, its
General Partner
By:____________________________________ ______________________________________
Name: James Clark
Title:
</TABLE>
<PAGE>
Each of the following executes this Amended and Restated Stockholders'
Agreement only in its capacity as a Cable Parent:
<TABLE>
<S> <C>
TCI INTERNET SERVICES, INC. TCI COMMUNICATIONS, INC.
By:____________________________________ By:___________________________________
Name: Bruce W. Ravenel Name: Brendan R. Clouston
Title: President and Chief Executive Title: President and Chief Executive
Officer Officer
TCI CABLE INVESTMENTS INC. COMCAST CABLE COMMUNICATIONS, INC.
By:____________________________________ By:___________________________________
Name: Brendan R. Clouston Name: Brian L. Roberts
Title: President Title: Vice Chairman
COX COMMUNICATIONS, INC. COMCAST ON-LINE COMMUNICATIONS, INC.
By:____________________________________ By:___________________________________
Name: David M. Woodrow Name:
Title: Senior Vice President Title:
</TABLE>
<PAGE>
Each of the following executes this Amended and Restated Stockholders'
Agreement only in its capacity as a Parent:
<TABLE>
<S> <C>
TELE-COMMUNICATIONS, INC. COMCAST CORPORATION
By:____________________________________ By:___________________________________
Name: John C. Malone Name: Brian L. Roberts
Title: President and Chief Executive Title: President
Officer
KPCB VII ASSOCIATES COX COMMUNICATIONS, INC.
By:____________________________________ By:___________________________________
Name: L. John Doerr Name: William L. Killen, Jr.
Title: Partner Title: Vice President
</TABLE>
<PAGE>
Each of the following executes this Amended and Restated Stockholders'
Agreement only in its capacity as an Ultimate Parent:
<TABLE>
<S> <C>
TELE-COMMUNICATIONS, INC. COMCAST CORPORATION
By:____________________________________ By:___________________________________
Name: Name:
Title: Title:
COX ENTERPRISES, INC.
By:____________________________________
Name:
Title:
</TABLE>
<PAGE>
SCHEDULE I
----------
@HOME EQUITY
<TABLE>
<CAPTION>
Investor Series T Series K Series AM Series AT Series AX
Preferred Preferred Preferred Preferred Preferred
- -------------------- --------------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
TCI Sub 770,000 1,553,000
KPCB Affiliates 693,883
Comcast Sub 727,865
Cox Sub 727,865
Management Pool
Total Shares 770,000 693,883 727,865 1,553,000 727,865
<CAPTION>
Shares of Con. Common
Pref. Equivalent
--------------- ------------
<S> <C> <C>
TCI Sub 2,323,000 23,230,000
KPCB Affiliates 693,883 6,938,830
Comcast Sub 727,865 7,278,650
Cox Sub 727,865 7,278,650
Total Shares 4,472,613 44,726,130
</TABLE>
<PAGE>
SCHEDULE II
-----------
Base Homes Passed
-----------------
<TABLE>
<CAPTION>
Number of
Base Homes Passed
-----------------
<S> <C>
TCI Cable Parent and Controlled Affiliates 24,000,000
Cox Communications, Inc. and Controlled Affiliates 5,250,000
Comcast Cable Parent and Controlled Affiliates 5,953,890; provided that
--------
upon consummation of
Comcast's acquisition of
the Scripps-Howard cable
systems, such number shall
be increased to 7,210,724
Base Homes Passed
</TABLE>
<PAGE>
SCHEDULE III
------------
Restricted Businesses
---------------------
A. Cox Restricted Businesses
-------------------------
High Speed Internet Access operations in Phoenix, AZ
B. TCI Restricted Businesses
-------------------------
The TCI cable system in East Lansing, Michigan is offering consumer
Internet services on a commercial basis. This system has been providing these
services since April of 1995 and currently has a subscriber count of almost
400; 65% of whom are residential users. The service is priced in two tiers; tier
1 is $44.95 per month on Zenith cable modems and tier 2 is $69.95 on LANcity
cable modems.
C. Comcast Restricted Businesses
-----------------------------
Trials in Philadelphia, PA
Sarasota on-line in Sarasota, Florida
Work at home trial in Northern New Jersey.
Netline Communications, Inc.
(purchased subsequent to June 4, 1996)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1
DEFINITIONS AND OTHER GENERAL MATTERS
1.1 Certain Definitions............................................................. 2
1.2 Additional Definitions.......................................................... 18
1.3 Terms of Interpretation Generally............................................... 19
ARTICLE 2
STOCKHOLDER GROUPS
2.1 Stockholder Groups; Ownership Provisions........................................ 20
ARTICLE 3
CORPORATE GOVERNANCE
3.1 Voting Generally................................................................ 22
3.2 Election of CEO to the Board.................................................... 23
3.3 Designation and Election of Series B Common Directors........................... 23
3.4 Removal of Special Directors and Series K Director.............................. 24
3.5 Vacancies Among the Series B Common Directors................................... 25
3.6 Outside Directors............................................................... 25
3.7 Conflicting Charter and Bylaws.................................................. 25
3.8 Special Voting Provisions....................................................... 25
3.9 Certain Amendments In Connection with the IPO................................... 26
3.10 .Com Committee.................................................................. 26
ARTICLE 4
TRANSFERS AND CONVERSIONS
4.1 General Restrictions on Transfer................................................ 27
4.2 Conversion of the Convertible Preferred Stock, the Series B Common Stock and
the Series K Common Stock....................................................... 28
4.3 Right of First Offer............................................................ 30
4.4 Right of First Offer Following an IPO........................................... 33
4.5 Tag-Along Rights................................................................ 36
4.6 Drag-Along Right................................................................ 39
4.7 Determination of Consideration Payable with Respect to Certain Tag-Along
Rights and Drag-Along Rights.................................................... 40
4.8 Allocation of Consideration..................................................... 41
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
continued
---------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 5
DEEMED TRANSFER
5.1 Definitions..................................................................... 42
5.2 Deemed Transfer................................................................. 43
ARTICLE 6
PUT/CALL PROVISIONS
6.1 TCI Call........................................................................ 46
6.2 KPCB Put........................................................................ 47
6.3 Cable Put....................................................................... 48
6.4 IPO Election.................................................................... 49
6.5 Payment of Consideration in Respect of TCI Call, KPCB Put, and Cable Put........ 50
6.6 Determination of Fair Market Value and Per Share Value in connection with
TCI Call, KPCB Put and Cable Put................................................ 51
6.7 Termination or Amendment to the TCI Call, the KPCB Put and the Cable Put........ 52
6.8 Status of Designee.............................................................. 52
ARTICLE 7
APPRAISAL PROCEDURES
7.1 Fair Market Value............................................................... 52
7.2 Appraisal Procedure for Fair Market Value....................................... 53
7.3 Determination of Per Share Value................................................ 53
7.4 Delivery of Appraisal Report.................................................... 54
7.5 Fees and Expenses of Appraisers................................................. 54
7.6 Value Determination is Conclusive............................................... 54
ARTICLE 8
PREEMPTIVE RIGHTS
8.1 Preemptive Rights............................................................... 55
8.2 Termination of Preemptive Rights................................................ 56
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 9
REPRESENTATIONS, WARRANTIES AND COVENANTS
9.1 General Representations and Warranties.......................................... 57
9.2 Restricted Business............................................................. 58
ARTICLE 10
CONFIDENTIALITY
10.1 Confidentiality................................................................. 58
(a) Maintenance of Confidentiality............................................. 58
(b) Permitted Disclosures...................................................... 59
ARTICLE 11
MISCELLANEOUS
11.1 Successors and Assigns.......................................................... 61
11.2 Third Parties................................................................... 62
11.3 Governing Law................................................................... 62
11.4 Counterparts.................................................................... 62
11.5 Notices......................................................................... 62
11.6 Severability.................................................................... 65
11.7 Headings........................................................................ 65
11.8 Delays or Omissions............................................................. 65
11.9 Purchases and Sales of Company Securities between Stockholders.................. 65
11.10 Entire Agreement................................................................ 68
11.11 Additional Agreements........................................................... 68
11.12 Termination..................................................................... 68
11.13 Amendment to Term Sheet......................................................... 68
11.14 Specific Performance............................................................ 68
</TABLE>
-iii-
<PAGE>
EXHIBIT 5.01
------------
[LETTERHEAD OF FENWICK & WEST LLP]
June 19, 1997
At Home Corporation
425 Broadway Street
Redwood City, CA 94063
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-1
filed by you with the Securities and Exchange Commission (the "Commission") on
May 16, 1997 (Registration No. 333-27323) and Amendment No. 1 to such
Registration Statement to be filed by you with the Commission on or about June
19, 1997 (collectively, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of an aggregate of
9,200,000 shares of your Series A Common Stock (the "Stock").
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed as a part
thereof;
(2) your registration statement on Form 8-A (File Number 0-22697) filed
with the Commission on June 13, 1997;
(3) the prospectus prepared in connection with the Registration Statement;
(4) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your minute
books that you have provided to us;
(5) the stock records that you have provided to us (consisting of a list
of holders of Series A Common Stock as of June 17, 1997, a list of
holders of Preferred Stock as of May 31, 1997 and a list of holders of
options and warrants to purchase your capital stock as of June 17,
1997 that were each prepared by you); and
(6) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the lack
of any undisclosed terminations, modifications, waivers or amendments to any
documents reviewed
<PAGE>
At Home Corporation
June 19, 1997
Page 2
by us and the due execution and delivery of all documents where due execution
and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information obtained from records included in
the documents referred to above. We have made no independent investigation or
other attempt to verify the accuracy of any of such information or to determine
the existence or non-existence of any other factual matters; however, we are not
-------
aware of any facts that would lead us to believe that the opinion expressed
herein is not accurate.
Based upon the foregoing, it is our opinion that the up to 9,200,000 shares
of Stock to be issued and sold by you, when issued and sold in accordance in the
manner referred to in the relevant prospectus associated with the Registration
Statement, will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
This opinion speaks only as of its date and is intended solely for your use
as an exhibit to the Registration Statement for the purpose of the above sale of
Stock and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
By: /s/ Laird H. Simons III
--------------------------
<PAGE>
EXHIBIT 10.06
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
TERM SHEET
----------
BETWEEN AT HOME CORPORATION AND
SHAW CABLESYSTEMS LTD. AND ROGERS CABLESYSTEMS LIMITED
March 18, 1997
INTRODUCTION
A. This term sheet sets out the terms under which the parties have agreed that
Shaw Cablesystems Ltd. ("Shaw") and Rogers Cablesystems Ltd. ("Rogers")
will distribute in Canada under the co-brand name Wave@Home or at their
option jointly exercised by Rogers and Shaw under the brand name @Home, a
high speed residential Internet service which shall be created by At Home
Corporation ("@Home"), Rogers and Shaw and which shall be based on the
Residential Internet Service (the "Service") created and to be provided by
@ Home which includes the @Home division and the @Media division as
described in the Confidential Offering Memorandum (as defined below);
B. The parties acknowledge that Canada offers a unique opportunity which the
parties wish to jointly develop by licensing Rogers and Shaw to create a
service (the "Wave@Home Service") based on the Service and developing a
business relationship that will ensure the success of the Wave@Home Service
in Canada taking into consideration Canada's unique market, geographic and
regulatory characteristics; and
C. Terms commencing with capital letters and not defined in the body of this
Term Sheet or in any schedule shall bear the meaning ascribed to them in
Schedule "A" attached hereto.
1.0 EQUITY INVESTMENT
1.1 PURCHASE OF SHARES AND WARRANTS: Rogers and Shaw shall each purchase
-------------------------------
U.S.$15,000,000 of Series C Convertible Preferred Stock (the "Series C
Shares") of @Home as outlined in the confidential offering memorandum
related to the Series C Shares ("Confidential Offering Memorandum") in
respect of the Series C Shares as amended by a supplementary offering
memorandum providing that each of the Series C Shares shall be convertible
into 20 shares of Series A Common Stock and the purchase price per Series C
Share shall be $200.00. As a result of the purchase of such Series C
Shares, Rogers and Shaw will purchase the warrants as outlined in Schedule
"B" (the "Warrants"). The stock purchase agreement of the Series C Shares
will provide that such shares are transferable to Canadian MSO's who are
sub-distributors of Wave@Home.
1.2 RESTRICTIONS ON THE TRANSFER OF SERIES C SHARES: The parties recognize
-----------------------------------------------
that restrictions on transfer of the Series C Shares and Series A Shares
into which they may be converted and restrictions on exercise of the
Warrants may be required by U.S. securities laws to enable @Home to fulfill
its financing plans as disclosed to Rogers and Shaw. The parties agree to
negotiate the terms of such restrictions in good faith prior to the closing
with a view to facilitating both @ Home's financing plans and Rogers' and
Shaw's marketing and
<PAGE>
distribution plans for the Wave@Home Service, including the entering into
of sub-distribution agreements.
1.3 BOARD REPRESENTATION AND OBSERVER STATUS: As part of the closing
----------------------------------------
procedures @Home shall take such actions as are necessary to enable it to
comply with Schedule "C".
2.0 GRANT OF LICENSE AND TERMS OF DISTRIBUTION AGREEMENT
2.1 EXCLUSIVE LICENSE: Subject to the proviso set out below, effective at the
-----------------
closing contemplated by Section 4 @Home hereby grants, solely for Canada,
to:
(A) Rogers, an exclusive license to distribute, market and promote that
portion of the Service which as contemplated in paragraph A above
forms part of the Wave@Home Service in those jurisdictions in which
Rogers is licensed from time to time by the Canadian Radio-television
and Telecommunications Commission (the "CRTC") to operate a cable
distribution undertaking;
(B) Shaw, an exclusive license to distribute, market and promote that
portion of the Service which as contemplated in paragraph A above
forms part of the Wave@Home Service in those jurisdictions in which
Shaw is licensed from time to time by the CRTC to operate a cable
distribution undertaking; and
(C) Rogers and Shaw jointly, an exclusive license to distribute, market
and promote directly or through the grant of sub-licenses, that
portion of the Service which as contemplated in paragraph A above
forms part of the Wave@Home Service in Canada in addition to those
jurisdictions referred to in sub-paragraph 2.1(A) and (B) above.
The licenses referred to above are individually referred to as a "License"
and collectively as the "Licenses". The Licenses shall include the
exclusive, nontransferable (except as permitted by this term sheet) right
and license to use all present and future @Home trade marks, technology,
processes, know-how, documentation and techniques together with all related
Intellectual Property Rights as may be developed, owned, acquired or
licensed by @Home and as may be necessary in providing the Wave@Home
Service in accordance with this term sheet and the right to use such trade
marks with any other trade mark owned by Rogers or Shaw, or their sub-
distributors, including the trade mark "Wave"; all in accordance with
@Home's written trade mark standards and customary licensing guidelines a
copy of which shall be appended to the definitive agreement to be entered
into by the parties as contemplated in paragraph 7.1 below. Provided that,
the exclusivity of the Licenses shall terminate at @Home's option to be
exercised within 90 days of the relevant event (such loss of exclusivity
shall be @Home's sole remedy):
(i) in the case of the License granted to Rogers, if:
1. Rogers fails to reach the number of Homes Passed provided for in
Schedule "D" attached hereto; or
2
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
2. of the number of Homes Passed provided for in Schedule "D" Rogers
has not attained subscribers to the Wave@Home Service equal to the
Penetration Percentage set out in Schedule "D"
by the end of the relevant year set out opposite thereto;
(ii) in the case of the License granted to Shaw, if:
1. Shaw fails to reach the number of Homes Passed provided for in
Schedule "D" attached hereto; or
2. of the number of Homes Passed provided for in Schedule "D" Shaw
has not attained subscribers to the Wave@Home Service equal to the
Penetration Percentage set out in Schedule "D",
by the end of the relevant year set out opposite thereto;
(iii) in the case of the License granted to Rogers and Shaw jointly, as to
the province of Quebec, only, and only in respect to a French
version of that portion of the Service forming part of the Wave@Home
Service, if Rogers and Shaw (directly or through an entity created by
them for this purpose) are unable to enter into a sub-license
agreement with Videotron Ltee by [**] with respect to the distribution
of the Wave@Home Service by Videotron Ltee in those jurisdictions in
which Videotron Ltee is licensed by the CRTC to operate a cable
distribution undertaking. Rogers, Shaw and @Home shall together make
the approach to Videotron Ltee.
The time for performance of Rogers' and/or Shaw's obligations as set out
above, shall be extended day-for-day by (1) to the extent that such failure
is as a result of a failure by @Home to complete its obligations set out in
this term sheet, the number of days of any resulting delay in Rogers'
and/or Shaw's performance of its obligations set out above; or (2) the
number of days Rogers' or Shaw's performance was prevented or delayed by
the occurrence of a Force Majeure event; or (3) a cure period of six (6)
months following notice by @Home to Rogers or Shaw as applicable in the
event of the failure to meet the levels referred to above. In the event of
a loss of the exclusivity of the License, there shall be a three (3) month
transitional period following such loss of exclusivity during which period
@Home shall not use or license any third party to use the trade mark @Home
but may work with other service providers.
2.2 MASTER ROLL-OUT PLAN: Rogers and Shaw shall distribute the Wave@Home
--------------------
Service in accordance with the terms of the Licenses and substantially as
determined by agreement of @Home, Rogers and Shaw in the Master Roll-Out
Plan. The "Master Roll-Out Plan" means the plan of the parties which sets
forth the first commercial deployment date, the upgrade schedule and the
network architecture to enable the launch of the Wave@Home Service by
Rogers and Shaw. @Home, Rogers and Shaw shall prepare the Master Roll-Out
Plan taking into account the particular characteristics of the Canadian
market which in their respective view is relevant to the distribution of
the Wave@Home Service.
3
<PAGE>
2.3 SUB-DISTRIBUTION AGREEMENTS: Any agreement entered into by Rogers or Shaw
---------------------------
(directly or indirectly through an entity controlled by Rogers and Shaw)
with a sub-distributor shall:
(A) be substantially in the standard form of sub-distributor or
affiliation agreement to be approved by the parties hereto and shall
not be altered in any material respect without the prior written
consent of @Home, which consent shall not be unreasonably withheld.
Provided that, such sub-distribution agreements shall be entered into
only with sub-distributors in accordance with sub-distribution
guidelines, which shall be mutually agreed upon by the parties hereto;
(B) provide for such management fees to be paid by such sub-distributor to
Rogers and/or Shaw, as applicable, for establishing and managing the
relationship with such sub-distributor. Such management fee will be
set by the Rogers and Shaw and shall be approved by @Home, acting
reasonably, and shall be sufficient to cover at least Rogers' and
Shaw's costs and investment in connection with such establishment and
management. Rogers and/or Shaw, as applicable, may charge additional
fees to the sub-distributors for additional or incremental services
such as billing or customer support; and
(C) provide that the rights granted to sub-distributors which require
performance by @Home, shall be no greater than the rights granted to
Rogers and Shaw by @Home and that such sub-distributors shall be
subject to performance standards in order to maintain exclusivity.
Rogers and Shaw shall promptly notify @Home of any material breach under
any such sub-distributor or affiliation agreement. Each of Rogers and Shaw
(directly or indirectly through an entity controlled by Rogers and Shaw)
will diligently enforce the provisions of any sub-distributor or
affiliation agreement.
2.4 REGULATORY CONSIDERATIONS: Rogers and Shaw will distribute the Service in
-------------------------
accordance with all applicable laws, ordinances, regulations and policies
of any governmental agency or regulatory authority having jurisdiction.
The parties acknowledge that Rogers and Shaw are required by the CRTC to
provide access to their respective networks to third party Internet Service
providers. @Home shall provide to each of Rogers and Shaw, as applicable,
at @Home's cost, system upgrades such as introduction of source based
routing to enable Rogers and Shaw to provide such access to such third
parties and Rogers and/or Shaw, as applicable, shall pay a reasonable fee
to @Home for the use of any of @Home's technology related to such system
upgrades by Rogers and/or Shaw to enable them to provide such access to
third parties. Nothing in this paragraph is intended to derogate from any
benefit to which @Home is entitled pursuant to the terms hereof nor from
the obligation of Rogers and Shaw to use its commercially reasonable
efforts to distribute, market and promote the Wave@Home Service.
2.5 RECIPROCAL EXCLUSIVITY: During the term of the exclusivity of the
----------------------
respective Licenses, other than the provision of the Wave@Home Service, and
provided that @Home is not in default of its obligation under the Master
Roll-Out Plan, Rogers and Shaw, as applicable,
4
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
shall not market or promote or have a controlling interest in any entry
operating and shall prohibit any sub-distributors from marketing or promoting or
having a controlling interest in any entity operating a Residential Internet
Service (other than dial-up services at speeds not to exceed [**] or such other
higher speed subsequently agreed to with the U.S. Cable Partners). However,
nothing in this paragraph is intended to and does not restrict either Rogers or
Shaw or their sub-distributors from promoting, over an Internet Backbone,
programming and content (such as Yahoo, YTV Canada Inc. and Canoe). Provided
that, the time for performance of @Home's obligation set out in the Master Roll-
Out Plan shall be extended day-for-day by (1) to the extent that such failure is
as a result of a failure by Rogers and/or Shaw to complete its obligations set
out in the Master Roll-Out Plan; the number of days of any resulting delay in
@Home's performance of its obligations set out in this term sheet; or (2) the
number of days @Home's performance was prevented or delayed by the occurrence of
a Force Majeure event; or (3) a cure period of six (6) months following notice
by Rogers and/or Shaw as applicable in the event of the failure by @Home to
perform its obligations under the Master Roll-Out Plan.
2.6 COVENANTS OF ROGERS AND SHAW: Rogers and Shaw, each individually with
----------------------------
respect to its own facilities and systems, and severally with respect to
the obligation to include the same in agreements with sub-distributors,
covenant and agree with @Home that it will:
(A) upgrade and maintain its respective HFC plant to enable it to operate
two-way data transmission services in accordance with the Master Roll-
Out Plan and the Standards and Specifications;
(B) acquire, install and maintain cable modem termination system (also
known as a cable data router) and cable modems necessary to provide
the Wave@Home Service;
(C) provide such telecommunications facilities necessary to connect their
respective subscribers to headends and/or fibre nodes, connect such
headends and/or fibre nodes to @Home's Regional Data Centres ("RDC")
in Canada and to connect these RDC's to the nearest POP on the U.S.
side of the border (the "U.S. POP");
(D) be solely responsible for its customers and will provide in any sub-
distributor agreements that the sub-distributors shall be responsible
for such sub-distributor's customers including responsibility for
billing, installation of the hardware and software required to enable
the customer to receive and use the Wave@Home Service, Tier I Customer
Support and Tier II Technical Support. Provided that Rogers and Shaw
may retain @Home to assist it in providing any of the above services
on terms and at such reasonable fees as the parties shall agree;
(E) allow @Home to co-locate RDC's, proxy servers and related equipment at
such of Rogers' and Shaw's network distribution facilities at no
charge for the use of such space to @Home. Provided that @Home will
use commercially reasonable efforts to optimize space and other
requirements consistent with its practice with its U.S. Cable
Partners;
5
<PAGE>
(F) subject to @Home complying with sub-paragraph 2.7(I) provide necessary
modifications to its billing, subscriber management, and network
management systems to adequately interface with @Home's support and
network management system. @Home shall work with Rogers and Shaw to
help them, to at least the same degree as the level of assistance
given by @Home to its U.S. Cable Partners, to minimize their costs for
the foregoing; and
(G) use commercially reasonable, diligent efforts to distribute, market
and promote the Wave@Home Service, on a local, regional and national
level including promoting the Wave@Home Service to potential sub-
distributors.
2.7 COVENANTS OF @HOME: In order to facilitate the distribution of the
------------------
Wave@Home Service by Rogers, Shaw and the sub-distributors, in accordance
with the Master Roll-out Plan, @Home covenants and agrees with each of
Rogers and Shaw that in addition to the grant of the Licenses, it will, in
Canada, subject to the other terms and conditions herein:
(A) grant access to Shaw, Rogers and the sub-distributors and their
respective subscribers customers or content providers to @Home's
broadband network;
(B) install and maintain IP data routers and proxy servers as mutually
agreed upon;
(C) install and maintain that number of RDCs that the parties mutually
agree is required to maximize the efficient use of Rogers', Shaw's and
the sub-distributors' transport infrastructure but in any event such
number of RDC's shall, together with the proxy servers installed,
deliver the same level of performance as enjoyed by the U.S. Cable
Partners;
(D) provide the software necessary for use by and to enable Rogers',
Shaw's and the sub-distributors' Wave@Home subscribers to receive and
use the Wave@Home Service, including the customized Internet browser,
TCP\IP stack and application plug-ins;
(E) provide all of the telecommunications facilities connecting the U.S.
POP to the @Home Network;
(F) provide Tier III Network Support;
(G) provide such general engineering, operations, marketing and
management, consultation and support to Rogers, Shaw and the sub-
distributors when reasonably requested;
(H) provide training programs to train personnel from or determined by
Rogers and Shaw to enable such persons to then train others, provide
scripts and other materials designed to assist Rogers, Shaw and the
sub-distributors with Tier I Customer Support and Tier II Technical
Support;
(I) provide access to @Home's subscriber management systems and the API's
reasonably necessary to automate the exchange of data from such
systems
6
<PAGE>
to Rogers, Shaw and the sub-distributors (such as IP addresses, log-in
names, computer configuration, etc.) that are necessary for billing
and subscriber management;`
(J) work with Rogers and Shaw to develop network architecture that
minimizes inter-city data transport within Rogers' Shaw's and the sub-
distributors' networks.
In carrying out its obligations @Home shall treat Rogers, Shaw and the sub-
distributors in a manner and with a priority that is equal to that afforded
to its U.S. Cable Partners.
2.8 DUE DILIGENCE AND ACCESS: Following the execution of this term sheet by
------------------------
all parties, the parties shall conduct their respective due diligence
review of the assets, operations and the capital structure, as applicable,
of the other. The parties shall coordinate closely with the officers of
the other all such activities and shall conduct any such inquiries with
appropriate discretion and sensitivity to the relationships of the other;
employees, customers, suppliers and distributors. The parties agree to
hold information obtained in confidence in accordance with the terms of the
confidentiality agreement entered into between each of Shaw and Rogers and
@Home and to use the information so obtained only for the purpose of
evaluating efficacy of the transaction contemplated herein. During this
time the parties and their advisors and representatives shall, subject to
confidentiality obligations to third parties, have access during normal
business hours to such of the other's properties, books, contracts,
documents, records and personnel related to the Service and the ability of
any of the parties to fulfill their respective obligations under this term
sheet and the other may reasonably request. In the event that the
transactions contemplated herein are not completed, the parties shall
return all such information in written form and any copies thereof to its
owner, and destroy all notes, working papers and schedules based on such
confidential information. @Home, Rogers and Shaw shall complete their due
diligence within a reasonable time, which shall not exceed 20 business days
following execution of this term sheet by all parties. In the event that
the results of the due diligence conducted by parties gives rise to the
condition set out under paragraphs 4.1(E), 4.2(E) or 4.3(C), the applicable
party shall be entitled to terminate the arrangements contemplated herein.
2.9 STANDARDS AND SPECIFICATIONS: The parties will comply with mutually agreed
----------------------------
to Specifications and Standards that will include minimum cable plant
performance standards, @Home Network infrastructure standards, and
certification criteria. In particular, Rogers and Shaw will meet certain
minimum requirements for upstream and downstream bandwidth and @Home will
provide for certain minimum caching rates assuming a specified subscriber
level.
2.10 RIGHTS TO PURCHASE FROM @HOME VENDORS: @Home will use reasonable
-------------------------------------
commercial efforts to allow Rogers, Shaw and their sub-distributors to
purchase hardware and software for Wave@Home on an aggregate basis with
@Home and/or the U.S. Cable Partners so that Rogers, Shaw and the sub-
distributors can thereby enjoy advantageous terms and pricing.
7
<PAGE>
2.11 @MEDIA PROGRAMMING RESPONSIBILITIES: The parties envision that the user
-----------------------------------
interface for Wave@Home will feature a Local Area and a National Area as
follows:
(A) Rogers, Shaw or a sub-distributor, as the case may be, will program
the Local Area and all Local Content. Local Content shall consist
solely of content that is intended for a specific geographic area,
such as a city, town, municipality or metropolitan area (a "Geographic
Area") (for example, a local restaurant guide or real estate listing
service). Shaw and Rogers will program the Local Area only with Local
Content; and
(B) Content that is promoted in more than one Geographic Area will be
included in the National Area. Rogers, Shaw and @Home will jointly
program the National Area and all National Content in accordance with
paragraph 2.12 below. Rogers and Shaw and the sub-distributors will
develop relationships with Canadian content partners to provide
National Content and @Home will utilize its relationships with U.S.
content partners for the same purpose.
2.12 PROGRAMMING THE NATIONAL AREA: The following principles shall apply:
-----------------------------
(A) The parties acknowledge the desire to present a distinctly Canadian
service consistent with the spirit of Canadian cultural policy while
balancing the desire to use as much of the content forming part of the
Service as is possible. Accordingly, Rogers and Shaw at their cost
shall be entitled to modify, augment, or replace National Content
programmed by @Home in order to comply with Canadian law, cultural
policies and/or industry requirements or expectations and to ensure
that it is relevant to the Canadian market. Provided that Rogers and
Shaw shall act reasonably and in good faith in order to minimize such
changes. The principles described in this paragraph 2.12(A) shall be
referred to as the "Programming Principles";
(B) Rogers and Shaw at their cost may make editorial changes in the
National Area and in the National Content as either of them determines
is appropriate for the Wave@Home Service, consistent with the
Programming Principles. For example, the parties will frequently
change the lead news story, sports scores, weather conditions and
other editorial content appearing on the news, sports and business
guide pages so that it is oriented toward the Canadian market;
(C) Rogers and Shaw at their cost may supplement or replace third party
content provided by @Home as it determines is appropriate for the
Wave@Home Service consistent with the Programming Principles. For
example, Rogers and Shaw may elect to add TSN to supplement or replace
ESPN. Rogers and Shaw will first use commercially reasonable efforts
to supplement such content provided by @Home by adding additional
third party content of its choice. If this approach is inadequate or
is not practical, Rogers and Shaw may replace such content but will
consult with @Home prior to doing so;
(D) @Home shall develop and maintain the underlying user interface and
page templates for the Wave@Home Service (the "Programming
Structure"). @Home
8
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
will use commercially reasonable efforts to make the Programming
Structure as flexible as possible so that Rogers and Shaw can achieve
the Programming Principles without a need for modifications to the
Programming Structure. A change to a Programming Structure would for
example be replacing a shopping page which features an anchor tenant
and four other vendors with a page modified to feature only the anchor
tenant. If Rogers and Shaw believe that such a modification is
necessary to achieve the Programming Principles, Rogers and Shaw will
request that @Home implement the same, at Rogers' and Shaw's cost.
@Home agrees that it will implement such modifications unless such
modifications would jeopardize the technological integrity of the
overall Programming Structure; in which case, @Home shall endeavour to
recommend reasonable alternatives to achieve the goals or satisfy the
concerns of Rogers and Shaw. Such requests for modifications are
anticipated to be infrequent and normally not necessary to achieve the
Programming Principles;
(E) Except as may be otherwise required by any regulatory authority,
Rogers and Shaw will have the limited right to block the promotion of
any programming forming part of the National Content provided by @Home
which is competitive with any form of programming service owned or
controlled by Rogers or Shaw (e.g.: YTV vs. Nickelodeon) without
reference to the Programming Principles; provided however that Rogers
and Shaw may each block the promotion of only two such programs, in
their respective licensed territories, at any given time; and
(F) @Home will make available to Rogers and Shaw the same content platform
technologies that it makes available to its U.S. Cable Partners,
including multi casting and replication technologies. To the extent
that Rogers and Shaw require content platform technologies (such as
advertising insertion tools) that are not required by the U.S. Cable
Partners, @Home will license such content platform technologies to
Rogers and to Shaw on commercially reasonable terms.
2.13 @MEDIA REVENUE: All revenue derived from the Local Area will be retained
--------------
by Rogers, Shaw or the sub-distributor responsible for programming the
Local Area. All revenue derived from the National Area will be allocated
as follows:
(A) The party responsible for generating the revenue from advertising, a
promotional link, an on-line transaction or other @Media services (the
"Additional Revenue") shall retain [**]% of such Additional Revenue as
a sourcing commission. The remaining Additional Revenue (i.e. [**]% of
the Additional Revenue) will be aggregated on a quarterly basis and
allocated in proportion to the Additional Revenue (less the sourcing
commission) generated by each party in that quarter. However, in no
event shall any party be entitled to less than [**]% nor more than
[**]% of the remaining Additional Revenue; and
(B) Revenue from Premium Services will be allocated on a case by case
basis in proportion to the contributions made by each party. "Premium
Services" are services that require Rogers' and/or Shaw's active
participation in marketing, sales, billing and/or customer support.
9
<PAGE>
The parties shall reassess the above allocations following the third
anniversary of the execution of this term sheet.
2.14 ADVERTISING PRACTICES:
---------------------
(A) Rogers and Shaw shall schedule all advertising content forming part of
the National Area on a non-discriminatory manner and so as to maximize
overall advertising revenue. Rogers and Shaw shall sell advertising
to businesses in Canada for insertion in the Wave@Home Service and
@Home shall sell advertising to businesses in the United States for
insertion in the Wave@Home Service. Rogers and Shaw on the one hand
and @Home on the other shall share leads (for which an appropriate
commission shall be paid) but shall not sell any such advertising to
businesses operating in the other's territory. All sales of
advertising to be inserted in the Wave@Home Service shall be made in
accordance with an advertising rate card for the Wave@Home Service;
and
(B) From time to time Rogers and/or Shaw may bundle advertising on the
Wave@Home Service with other media offerings by entities which it
controls. In such instance, any discount from the applicable rate
card associated with bundling shall be allocated on an equitable
basis.
2.15 RESEARCH & DEVELOPMENT: @Home shall use its commercially reasonable
----------------------
efforts to conduct Canadian based research and development in matters
regarding the Service and the Wave@Home Service.
2.16 BRANDING: The Service will be marketed and distributed by Rogers and Shaw
--------
under the co-brand "Wave@Home" or the brand "@Home". Rogers' and Shaw's
local loop (i.e. the infrastructure required to deliver the Wave@Home
Service to the subscriber from the RDC's) will be referred to as the
"Wave". Rogers and Shaw and the sub-distributor may use a tag line to
identify Wave@Home as a product of Rogers, Shaw or the sub-distributor.
Rogers and Shaw shall grant to @Home a non-exclusive license to use the
appropriate trade marks owned by either of them to market and promote the
Wave@Home Service. Provided that nothing set out in this paragraph shall
give Rogers or Shaw any ownership rights to the trade mark "@Home".
2.17 FEES: The following fees shall apply to the Licenses:
----
(A) Wave@Home will be offered to Rogers' and Shaw's and their sub-
distributors' subscribers at basic subscription rates (which may be
based on a month-to-month or longer term subscriptions), cable modem
rates, and installation rates determined by Rogers, Shaw and their
sub-distributors in their sole discretion. The basic subscription
rate shall include local loop transport fees and Internet Service
provider fees and may be allocated between local loop transport fees
and Internet Service provider fees in any manner that Rogers and Shaw
deem appropriate subject to any applicable legal requirements relating
to the pricing of these services; and
10
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
(B) In consideration of the License granted hereunder and the performance
of @Home's obligations, Rogers and Shaw will pay @Home [**]% (the "Fee
Percentage") of the Wave@Home basic subscription rate revenue,
including any portion allocated to local loop transport (the
"Wave@Home Services Revenue") billed by Rogers, Shaw and its sub-
distributors. The parties acknowledge that the Wave@Home Service
Revenue is presently set out in the High Speed Internet Access Tariff
filed by each of Rogers and Shaw with the CRTC. The tariffs do not
include installation charges, any sales, use, gross receipts, excise,
franchise or other local, provincial and federal taxes, fees or
charges, however designated (excluding taxes on the other party's
income) imposed on or based upon the provision or use of Wave@Home
Services, management fees described in paragraph 2.3(B), @Media
revenue described in paragraph 2.13, or any incremental fees collected
for additional content or programming or the fees charged for the sale
or rental of cable modems, all of which amounts shall in all cases be
excluded from the calculation of the Wave@Home Service Revenue.
Rogers and Shaw will not and the sub-distribution agreements will
provide that the sub-distributors shall not artificially allocate
costs between the Wave@Home Service Revenue and the other fee
categories excluded above in order to lower Rogers' and Shaw's
payments to @Home. All payments under this term sheet will be net 30
days from the calendar month end; and
(C) Rogers, Shaw or any sub-distributor will be entitled to include the
Wave@Home Service in a bundled offer with other products or services
offered by such party or other ("Bundled Offer") and sold to
subscribers at a single discounted price. If Rogers or Shaw wish to
include that Wave@Home in a Bundled Offer such party may request that
@Home agree that the Wave@Home Service Revenue for the purpose of
section 2.17(B) will be equal to the discounted price for the
Wave@Home Service included in the Bundled Offer. The discounted price
will be determined by dividing (i) the price for the Bundled Offer by
(ii) the sum of the standard price for each service included in the
Bundled Offer and multiplying the resulting percentage by the un-
discounted Wave@Home Service Revenue. @Home will act reasonably in
giving its consent and will take into consideration the likely
benefits of the Wave@Home Service being included in the Bundled Offer.
Failing such consent if Rogers or Shaw proceeds with the Bundled
Offer, the Wave@Home Service Revenue will be calculated without
reference to any discount.
All fees or other payments by one party to the other as contemplated herein
shall be reduced by all statutory withholding obligations imposed on such
party including any taxes required to be withheld pursuant to Canadian or
U.S. laws.
2.18 PERFORMANCE BASED INCREASE IN @HOME SERVICE FEES: The fees payable to
------------------------------------------------
@Home shall be increased in the manner set out in Schedule "E" attached
hereto.
2.19 TERM: The initial terms of the Licenses and this term sheet (or the
----
definitive distribution agreement if executed and as such supersedes the
term sheet) will be six years. Rogers and Shaw shall each have the right
to renew this agreement for two additional six year
11
<PAGE>
terms subject to reaching agreement with @Home with respect to the overall
economics of the contractual arrangements for any such renewal period. At
the end of the fifth and eleventh year the parties will review the overall
economics of the contractual arrangements and negotiate in good faith any
amendments sought to the contractual arrangements by any of the parties for
any renewal term.
2.20 TRANSITION PERIOD: If the contractual arrangements set out herein
-----------------
terminate as a result of the:
(A) failure of the parties to reach agreement on the economic terms to
take effect on renewal as contemplated in paragraph 2.19 above, there
will be a twelve month transitional period following such termination
or such shorter period of time as shall be agreed upon by the parties;
and
(B) the breach of one of the parties, and subject to the requirements of
Section 2.1(i), (ii) and (iii), there will be a transition period of
such duration as shall be mutually agreed upon, not to exceed nine
months provided however that the party in breach shall use all its
reasonable commercial efforts to remedy the breach and shall continue
to fulfill its other contractual obligations.
During the transitional periods described above Rogers and Shaw may, but
need not, continue to use the "Wave@Home" co-brand or "@Home" brand, as the
case may be. During the transition period the parties will otherwise be
bound by their obligations set out in this term sheet including the payment
of fees and the exclusivity obligation of the parties (subject to the right
of the parties to prepare to contract with an alternative provider). In
addition during the transition period, the parties will co-operate and work
together in good faith to effect a smooth and orderly transition from the
facilities, networks, technology and services provided by each of the
parties hereunder to the separate facilities, networks, technology and
services required by each of the parties after the end of the transition
period.
3.0 ADDITIONAL VENTURES
3.1 @HOME COMMERCIAL SERVICES: @Home, Rogers and Shaw will negotiate in good
-------------------------
faith until December 31, 1997 with a view to signing a distribution
agreement granting Rogers and Shaw an exclusive license in Canada covering
@Home's commercial services (such as @Work Remote for telecommuters and
@Work Internet access service). Nothing in this paragraph is intended to
prohibit either party from entering into any arrangement with any other
party to provide such commercial services in Canada. However, in the event
that @Home offers a commercial product with another Internet Service
provider, @Home shall not use "@Home" as the product name for such service
and shall use its good faith efforts to disassociate the @Home name or
trade mark with such service. It being agreed that regardless of the
success of the negotiations regarding these @Home commercial services,
nothing herein shall limit the ability of Rogers and Shaw to distribute,
market and promote the Wave@Home Service to any residence in Canada even if
such customer might also work from his or her residence.
12
<PAGE>
4.0 CONDITIONS PRECEDENT TO CLOSING
4.1 The obligation of Rogers to complete the transactions referred to above is
conditional on the following:
(A) the representations and warranties of @Home set out in Part 5 below
shall be true on the closing date as if made at and as of such date;
(B) Obtaining the approval of the board of directors of Rogers on or
before March 17,1997;
(C) No action or proceeding shall be pending or threatened by any person,
company, firm, governmental authority, regulatory body or agency to
enjoin or prohibit the purchase by Rogers or the sale by @Home of the
Series C Shares and the Warrants or the grant of the Licenses to
Rogers;
(D) As part of the closing procedures regarding the transactions
contemplated herein, @Home shall execute and deliver the form of stock
purchase agreement distributed in connection with @Home's Series C
Convertible Preferred Stock offering for the purchase of the Series C
Shares and the Warrants and related documents providing the customary
representations and warranties and covenants generally provided to a
purchaser of shares from an issuer provided that the form of stock
purchase agreement and other definitive documents for the sale and
issuance of the Series C Shares and the Warrants are subject to the
final approval of the Board of Directors of Rogers;
(E) Rogers shall have completed its due diligence to the extent set out in
paragraph 2.8 above and the due diligence shall not have revealed any
fact, matter, omission or misstatement of such a material nature as to
lead a prudent person operating an Internet Service in circumstances
similar to those of Rogers and involved in a transaction such as the
one contemplated herein to conclude in its own best interests, that
the transaction should not be completed; and
(F) Simultaneously with the closing of the transactions set out herein by
Rogers, Shaw shall complete its obligations set out herein.
4.2 The obligation of Shaw to complete the transactions referred to above is
conditional upon:
(A) the representations and warranties of @Home set out in Part 5 below
shall be true on closing date as if made at and as of such date;
(B) Obtaining the approval of the board of directors of Shaw on or before
March 17, 1997;
(C) No action or proceeding shall be pending or threatened by any person,
company, firm, governmental authority, regulatory body or agency to
enjoin or prohibit the
13
<PAGE>
purchase by Shaw or the sale by @Home of the Series C Shares and the
Warrants or the grant of the Licenses to Shaw;
(D) As part of the closing procedures regarding the transactions
contemplated herein, @Home shall execute and deliver the form of stock
purchase agreement distributed in connection with @Home's Series C
Convertible Preferred Stock offering for the purchase of the Series C
shares and the Warrants and related documents providing the customary
representations and warranties and covenants generally provided to a
purchaser of shares from an issuer provided that the form of stock
purchase agreement and other definitive documents for the sale and
issuance of the Series C Shares and the Warrants are subject to the
final approval of the Board of Directors of Shaw;
(E) Shaw shall have completed its due diligence to the extent set out in
paragraph 2.8 above and the due diligence shall not have revealed any
fact, matter, omission or misstatement of such a material nature as to
lead a prudent person operating an Internet Service in circumstances
similar to those of Shaw and involved in a transaction such as the one
contemplated herein to conclude in its own best interests, that the
transaction should not be completed; and
(F) Simultaneously with the closing of the transactions set out herein by
Shaw, Rogers shall complete its obligations set out herein.
4.3 The obligation of @Home to complete the transactions referred to above is
conditional upon:
(A) Obtaining the approval of the board of directors of @Home on or before
March 20, 1997;
(B) No action or proceeding shall be pending or threatened by any person,
company, firm, government authority, regulatory body or agency to
enjoin or prohibit the purchase by Rogers or Shaw or the sale by @Home
of the Series C Shares and the Warrants or the grant of the Licenses
to Rogers and Shaw;
(C) @Home shall have completed its due diligence to the extent set out in
paragraph 2.8 above and the due diligence shall not have revealed any
fact, matter, omission or misstatement of such a material nature as to
lead a prudent person operating an Internet Service in circumstances
similar to those of @Home and involved in a transaction such as the
one contemplated herein to conclude in its own best interests, that
the transaction should not be completed;
(D) the representations and warranties of Rogers and Shaw set out in Part
5 below shall be true on the closing date as if made at and as of such
date;
(E) Simultaneously with the closing of the transactions set out herein by
@Home, Rogers and Shaw shall complete their respective obligations set
out herein; and
14
<PAGE>
(F) As part of the closing procedures regarding the transaction
contemplated herein, Rogers and Shaw shall execute and deliver the
form of stock purchase agreement distributed in connection with
@Home's Series C Convertible Preferred Stock offering for the purchase
of the Series C Shares and Warrants and related documents providing
customary representations and warranties and covenants generally
provided by a purchaser to an issuer of shares, provided that the
definitive documents for the sale and issuance of the Series C Shares
and related documents of the Warrants are subject to final approval of
@Home's Board of Directors prior to the closing.
4.4 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ALL OF THE PARTIES: The
-------------------------------------------------------------
obligations of the parties to complete the transactions contemplated herein
is conditional upon the receipt on or before closing of all necessary
approvals from all regulatory authorities having jurisdiction with respect
to the subject matter hereof.
5.0 REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF @HOME: @Home represents and warrants to
---------------------------------------
each of Rogers and Shaw that:
(A) @Home has the power and authority to enter into this term sheet and to
fully perform its respective obligations hereunder, including the
right to grant the Licenses in Canada on the terms set out in this
term sheet;
(B) @Home is not under any contractual or other legal obligation which
will in any way interfere with the full, prompt and complete
performance of its obligations pursuant to this term sheet; and
(C) The @Home Facilities and the Services (collectively called the "@Home
Property") are and will remain the sole and exclusive property of
@Home and its suppliers (and where the @Home Property is the sole and
exclusive property of @Home's suppliers, @Home has the necessary
license to use such property for the purposes contemplated in this
term sheet). @Home's ownership rights include but are not limited to:
1. Intellectual Property Rights held by @Home in the @Home Property;
and
2. All modifications to and derivative works based upon such
Intellectual Property Rights.
5.2 REPRESENTATIONS AND WARRANTIES OF ROGERS AND SHAW: Each of Rogers and Shaw
-------------------------------------------------
severally represent and warrant to @Home that:
(A) Each of Rogers and Shaw has the power and authority to enter into this
term sheet and to fully perform its respective obligations hereunder;
15
<PAGE>
(B) Neither Rogers nor Shaw is under any contractual or other legal
obligation which will in any way interfere with the full, prompt and
complete performance of its obligations pursuant to this term sheet;
and
(C) Rogers' and Shaw's facilities and all Intellectual Property Rights
therein are and will remain the sole and exclusive property of each of
Rogers and Shaw, as applicable, and their respective suppliers (and
where the Rogers or Shaw Facilities or Intellectual Property Rights
are the sole and exclusive property of Rogers' or Shaw's suppliers,
Rogers or Shaw has the necessary license to use such Facilities or
Intellectual Property Rights for the purposes contemplated in this
term sheet). Rogers' and Shaw's respective ownership rights include
but are not limited to:
1. Intellectual Property Rights held by Rogers or Shaw, as
applicable, in the facilities;
2. All modifications to and derivative works based upon such
Intellectual Property Rights.
6.0 INDEMNITIES
6.1 INDEMNITY OF @HOME: @Home will defend, indemnify and hold harmless each of
------------------
Rogers and Shaw, their respective affiliated companies and partners and
their respective officers, directors, employees and agents from all
liabilities, damages, costs and expenses (including without limitation,
reasonable counsel fees and expenses) incurred in connection with any third
party claim against Rogers or Shaw relating to the use by either Rogers or
Shaw of the Intellectual Property Rights of @Home which results or may
result in the infringement of any Intellectual Property Rights of any third
party.
6.2 INDEMNITY OF ROGERS AND SHAW: Each of Rogers and Shaw severally only agree
----------------------------
that they shall defend, indemnify and hold harmless @Home, its affiliated
companies and partners and their respective officers, directors, employees
and agents from all liabilities, damages, costs and expenses (including
without limitation, reasonable counsel fees and expenses) incurred in
connection with any third party claim against @Home relating to the use by
@Home of the Intellectual Property Rights of either Rogers or Shaw, which
results or may result in the infringement of any Intellectual Property
Rights of any third party.
6.3 CONSEQUENTIAL DAMAGES: NONE OF THE PARTIES HERETO WILL BE LIABLE TO ANY OF
---------------------
THE OTHER PARTIES FOR ANY INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES
(SUCH AS, BUT NOT LIMITED TO, LOSS OF PROFITS OR REVENUE AND DAMAGE TO OR
LOSS OF PERSON PROPERTY), WHETHER ARISING IN CONTRACT, TORT (INCLUDING
NEGLIGENCE) OR OTHERWISE.
7.0 CLOSING PROCEDURES
7.1 BINDING NATURE OF AGREEMENT: The term sheet is binding on the parties.
---------------------------
The parties shall acting in good faith complete and execute all formal
documentation customary in a transaction of this nature, all of which must
be satisfactory to each of Rogers, Shaw and
16
<PAGE>
@Home, acting reasonably, including without limitation, a stock purchase, a
distribution and trade mark licence agreement which shall be consistent
with and reflect the terms of this term sheet and shall contain the usual
covenants, indemnities, warranties and representations with respect to
certain matters affecting @Home, its capital and the Service.
7.2 THE COMPLETION DATE: The transactions contemplated herein shall be
-------------------
completed two business days following the completion of due diligence.
Provided that the parties shall extend the time for completion to enable
the parties to obtain any required approvals.
7.3 STRUCTURES OF THE TRANSACTION: The parties agree that Rogers and Shaw have
-----------------------------
yet to determine the structure of the entity which will conclude the
transactions contemplated herein with @Home. The parties agree to
cooperate with each other to determine and establish the structure entity
which will conclude the transactions contemplated herein in such a manner
so as to enable Rogers and Shaw to minimize the taxes otherwise payable, as
a result of this transaction, by each of them without altering the economic
substance of the transactions to @Home. Rogers and Shaw shall determine
and advise @Home of the proposed structure of the transactions by April 5,
1997. If Rogers and Shaw create a new entity to be owned by them jointly
aimed at exploiting the License referred to in paragraph 2.1(C) or
facilitating the programming of National Content they shall discuss with
@Home its possible equity or warrant participation in such entity.
7.4 ESCROW CLOSING: If it is reasonably determined by a responsible senior
--------------
officer of @Home that the Series C Convertible Preferred Stock offering
proposed by @Home will likely close prior to the date established herein
for completion of due diligence, Rogers and Shaw shall on the date
established pursuant to the stock purchase agreement as the completion
date, purchase the Series C Shares in escrow, by depositing with an escrow
agent, acceptable to all of the parties, an amount equal to the purchase
price for such Series C Shares and the Warrants described in Schedule "B"
and @Home shall deposit with the same escrow agent the corresponding
certificates for the Series C Shares and Warrants, to be released to the
appropriate party upon completion of due diligence and satisfaction of the
conditions precedent or termination of the contractual obligations set out
herein.
7.5 PUBLIC DISCLOSURE: Each of Rogers, Shaw and @Home shall maintain in
-----------------
confidence the matters referred to in this term sheet and shall not make
any public disclosure, except to the extent required by applicable law,
regulation, or policies of any governmental or regulatory authority
(including the TSE and applicable U.S. securities exchanges) of the terms
of this term sheet without the consent of the other, such consent not to be
unreasonably withheld. The parties shall consult with each other regarding
the wording of all press announcements.
7.6 ASSIGNMENT: Except as otherwise provided in this term sheet, (i) each of
----------
Rogers and Shaw may assign their respective rights and obligations, in
whole or in part, under this term sheet to one of their wholly-owned direct
or indirect subsidiaries or to an entity owned jointly by Rogers and Shaw
(whether now existing or created subsequent to the date of this term sheet)
and (ii) @Home may assign its rights and obligations, in whole or
17
<PAGE>
in part, under this term sheet to a wholly owned direct or indirect
Canadian subsidiary created subsequent to the date of this term sheet but,
if such assignment takes place, the assignor shall continue to be liable to
the other parties hereunder for any default in the performance of the
assignee. This term sheet shall not otherwise be assignable by any party
hereto.
7.7 ENUREMENT: The term sheet shall be binding upon and shall enure to the
---------
benefit of and be enforceable by Rogers, Shaw and @Home and their
respective successors and Rogers' and Shaw's permitted assigns.
7.8 NOTICES: Any notice, direction or other instrument required or permitted
-------
to be given or made hereunder shall be in writing and shall be sufficiently
given or made if delivered in person to the address set forth below or if
telecopied or sent by other means of recorded electronic communication
confirmed by delivery as soon as practicable or if dispatched, fees
prepaid, by overnight courier.
Notices to @Home shall be addressed as follows:
At Home Corporation
425 Broadway
Redwood City, CA 94063
Attention: Tom Jermoluk, Chairman and CEO
Fax: 415-944-8500
with a copy to:
David Pine, General Counsel
Fax: 415-944-8500
Notices to Rogers shall be addressed as follows:
Rogers Cablesystems Limited
Suite 6400 Scotia Plaza
40 King Street W
Toronto, Ontario
Attention: Chief Executive Officer
With a copy to: David Miller, Vice-President Law and General Counsel
Fax: 416-864-2395
18
<PAGE>
Notice to Shaw shall be addressed as follows:
Shaw Cablesystems Ltd.
Suite 900, 630 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4L4
Attention: The President
with a copy to:
Margot M. Micallef, Corporate Counsel
Fax: (403) 750-4531
Any notice, direction or other communication so given or made shall be
deemed to have been given or made and to have been received on the day of
delivery, if delivered, or on the day of sending if sent by telecopier or
other means of recorded electronic communications (provided such day of
delivery or sending is a business day and, if not, then on the first
business day thereafter). Either party hereto may change its address for
notice to the other party by notice given in the manner aforesaid.
7.8 GOVERNING LAW: This term sheet and the rights and obligations of the
-------------
parties hereto shall be governed and construed in accordance with the laws
of the Province of Ontario.
7.10 COUNTERPART: This term sheet may be signed in counterparts that together
-----------
shall be deemed to constitute one valid and binding document with effect
from the date the last of the counterpart copies is signed and returned in
accordance with the delivery provisions set out below and delivery of the
counterparts may be effected by means of facsimile transmission.
19
<PAGE>
7.11 TERMINATION: The contractual obligations set out in this term sheet shall
-----------
terminate and be of no further force and effect if the conditions
precedents set out herein are not satisfied or waived on or before June 15,
1997.
AT HOME CORPORATION
PER:
/s/ Thomas A. Jermoluk
- -------------------------------
/s/ David G. Pine
- -------------------------------
ROGERS CABLESYSTEMS LIMITED
PER:
/s/ David Samuel
- -------------------------------
/s/ David Miller
- -------------------------------
SHAW CABLESYSTEMS LTD.
PER:
/s/ Michael D. [ILLEGIBLE]
- -------------------------------
/s/ R.D. [ILLEGIBLE]
- -------------------------------
20
<PAGE>
SCHEDULE A
DEFINITIONS
To the extent not inconsistent with this term sheet, terms with initial capital
letters not defined in the body of the term sheet shall have the meaning set
forth below. All references to "MSO" in the term sheet and these definitions
shall refer to each of Rogers, Shaw, and the sub-distributors, as applicable.
1. Definitions
(a) "@HOME FIRST PAGE" means the first page of the Wave@Home Service
user interface as it appears to subscribers upon the "start up" of the Wave@Home
Service.
(b) "DATA-READY CABLE SYSTEM" means the construction or upgrade of MSO
Facilities to allow distribution of Wave@Home Service in accordance with the
Specifications and Standards.
(c) "FACILITIES" means any and all facilities, equipment, and
technology that is owned, leased or licensed by a party hereto that is necessary
to deliver the Wave@Home Service.
(d) "FORCE MAJEURE" event means any of the following events: (i) the
failure of any equipment or software under the control of a person, firm or
entity not affiliated with such party; (ii) fire, flood, earthquake, or other
natural disaster; (iii) a change in law or governmental regulation; or (iv) any
other cause beyond the reasonable control of such party. In any such case, the
parties' time for performance under the term sheet, to the extent affected by
any of the foregoing, will be correspondingly extended.
(e) "HOMES PASSED" means the number of residential dwelling units that
are or can be connected to the MSO's Data-Ready Cable System. For the purposes
of this paragraph, a residential dwelling unit "can be connected" to the MSO's
Data-Ready Cable System if the residential dwelling unit is located within 250
feet of an upgraded data-ready distribution line. Each residential unit in a
multiple dwelling unit shall be counted as one Home Passed.
(f) "IP" means the Internet Protocols as defined by the document
titled RFC-91, by John Postell of the University of Southern California, dated
1981, or subsequent revisions thereof.
(g) "INTELLECTUAL PROPERTY RIGHTS" means all patent rights, copyright
rights (including, but not limited to, rights in music and audiovisual works and
moral rights), trademark rights, trade secret rights, and any other intellectual
property rights recognized by the law of each applicable jurisdiction.
(h) "INTERNET BACKBONE" means a wireline or wireless network which:
(i) can or does (a) assign IP addresses or manage IP address assignments for
machines or networks
<PAGE>
to which it is connected, (b) accept or deliver IP datagrams from machines or
networks to which it is connected, or (c) maintain IP packet traffic to other
machines or networks; and (ii) provides IP connectivity on a regional, national
or international basis.
(i) "INTERNET SERVICE" means any information, entertainment or
communication service provided over an Internet Backbone regardless of the
method by which it is accessed by the user (i.e. personal computer, set top box,
television, hand held device, etc.).
(j) "LOCAL AREA" shall mean that area (or channel(s)) of the @Home
First Page customarily designated by @Home for programming by an MSO.
(k) "LOCAL CONTENT" means any and all content that may be accessed on-
line by customers through the Local Area.
(l) "NATIONAL AREA" shall mean that area (or channel(s)) of the @Home
First Page other than the Local Area.
(m) "NATIONAL CONTENT" means any and all content that may be accessed
on-line by customers through the National Area.
(n) "RESIDENTIAL INTERNET SERVICE" means an Internet Service that is
sold to residential subscribers; even if such subscribers might also work from
their residences.
(o) "SPECIFICATIONS AND STANDARDS" means, collectively, the
specifications and standards for the MSO Facilities and the @Home Facilities and
the technical requirements for distribution of the Wave@Home Service, as are
mutually agreed to in writing by Rogers, Shaw and @Home.
(p) "TIER I CUSTOMER SUPPORT," "TIER II TECHNICAL SUPPORT," and "TIER
III NETWORK SUPPORT" shall have the meaning set forth in Schedule "A-1" attached
hereto.
(q) "U.S. CABLE PARTNERS" means any of Comcast PC Investments, Inc.,
Cox Teleport Providence, Inc., and TCI Internet Holdings, Inc.
2
<PAGE>
SCHEDULE B
----------
SUMMARY OF TERMS
----------------
WARRANTS TO PURCHASE SERIES C CONVERTIBLE PREFERRED STOCK
Issuer: At Home Corporation, a Delaware corporation (the "Company").
Assumptions: The following terms assume (a) the purchase by each of
Rogers and Shaw of US $15,000,000 of the Company's Series C
Preferred Stock ("Series C Preferred Stock") at $200 per
share in connection with the issuance of the Warrants
described below and (b) that each share of Series C
Preferred Stock shall, as presently constituted, be
convertible into 20 shares of Series A Common Stock of the
Company ("Series A Common Stock") at an effective price of
$10 per share of Series A Common Stock. If Rogers or Shaw
purchases less than $15,000,000 of Series C Preferred Stock
each, the number of shares subject to the Warrants will be
reduced as may be agreed by the parties.
Exercise Price: The Exercise Price of each Warrant shall equal the original
issue price of the Series C Preferred Stock ($200 per share
of Series C Preferred Stock, which is equivalent to $10 per
share of Series A Common Stock), and shall be appropriately
adjusted to maintain a constant total exercise price in the
event such Warrant becomes exercisable for Series A Common
Stock or some other series or class of the Company's capital
stock.
Purchase Price: The purchase price of each Warrant shall be 0.01% of the
aggregate Exercise Price of such Warrant. Such purchase
price shall be paid in cash at the Closing.
Warrants: Warrant 1: Rogers and Shaw will each be granted such
---------
number of warrants so as to entitle each of Rogers and Shaw
to purchase shares of Series C Preferred Stock convertible
into 650,000 shares of Series A Common Stock ("Warrant 1").
Warrant 2: Rogers and Shaw will each be granted such number
---------
of warrants so as to entitle each of Rogers and Shaw to
purchase shares of Series C Preferred Stock convertible into
80,000 shares of Series A Common Stock ("Warrant 2").
Warrant 3: Rogers and Shaw will each be granted such number
---------
of warrants so as to entitle each of Rogers and Shaw to
purchase shares of Series C Preferred Stock convertible into
270,000 shares of Series A Common Stock ("Warrant 3").
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
The foregoing Warrants, which represent the right to
purchase shares of Series C Preferred Stock that are
convertible into an aggregate of 2,000,000 shares of Series
A Common Stock, are collectively referred to as the
"Warrants." The number of shares of Series A Common Stock
that are issuable upon exercise of a Warrant and conversion
of the Series C Preferred Stock are referred to as "Series A
Common Stock equivalent shares."
Exercisability: Warrant 1: Each Warrant 1 will become exercisable with
---------
respect to that number of Series A Common Stock equivalent
shares equal to the product of [**] Notwithstanding the
foregoing, each Warrant 1 shall become fully exercisable in
any event on the seventh anniversary of issuance thereof.
Warrant 2: Each Warrant 2 shall become exercisable with
---------
respect to [**] Notwithstanding the foregoing, each Warrant
2 will become fully exercisable in any event on the seventh
anniversary of issuance thereof.
Warrant 3: Each Warrant 3 shall become exercisable with
---------
respect to that number of shares equal to the product of
[**] Notwithstanding the foregoing, each Warrant 3 shall
become fully exercisable in any event on the seventh
anniversary of issuance thereof.
Term: Each Warrant will expire sixty days after the seventh
anniversary of issuance of the Warrant.
Transfer Warrants (and underlying Series C Preferred Stock and
Restrictions: Series A Common Stock) will not be transferable until the
earlier of June 4, 2001 or the closing date of the Company's
IPO, subject to
2
<PAGE>
exceptions for transfers to controlled affiliates or
transfers in connection with liquidation of an Investor. If
the IPO has not occurred on or before June 4, 2001, any
transfer by an Investor will be subject to a right of first
offer in favor of the Company or the Company's assignee
until the earlier of June 4, 2006 or the IPO.
Notwithstanding the foregoing two sentences each Warrant 1,
Warrant 2 and Warrant 3 (and the underlying Series C
Preferred Stock or Series A Common Stock) may be transferred
free of such restrictions, subject to compliance with
applicable securities laws, in minimums of 1,000 shares of
Series C Preferred Stock (20,000 shares of Series A Common
Stock), to up to six Additional Canadian MSOs who are
"accredited investors" within the meaning of Regulation D
under the U.S. Securities Act of 1933, as amended.
Transferees will be bound by the transfer restrictions.
Underwriter Lockup: The shares issued directly or indirectly upon exercise of
the Warrants will be subject to an underwriter lockup of up
to one year following the IPO and if transferred to such
Additional Canadian MSO such shares shall be transferred
subject to such lockup.
Registration Shares of Series A Common Stock issued upon conversion of
Rights: Series C Preferred Stock issued upon exercise of the
Warrants by the original holders of the Warrants shall have
the same registration rights provided to the other holders
of Series C Preferred Stock. Such registration rights will
be transferable only to persons acquiring at least 25% of
the number of shares of Series C Preferred Stock originally
issuable upon exercise of the Warrants issued to Rogers or
Shaw, respectively, plus the number of shares of Series C
Preferred Stock purchased by Rogers or Shaw, respectively,
at the closing.
Effect of Conversion
of Series C
Preferred Stock: Upon any conversion of all outstanding shares of
Series C Preferred Stock into shares of Series A Common
Stock, whether as a result of the Company's initial public
offering or otherwise, each Warrant shall thereafter be
exercisable (but shall remain subject o the exercisability
conditions described above) only for shares of Series A
Common Stock as if the then-unexercised portion of such
Warrant were exercised for shares of Series C Preferred
Stock and such shares were immediately converted into Series
A Common Stock at the rate of 20 shares of Series A Common
Stock per share of Series C Preferred Stock.
Regulatory If any Warrant holder or holder of Series C Preferred
Compliance: Stock issued upon exercise of any Warrant, or in the case of
a mandatory conversion of the Series C Preferred Stock, such
holder or the Company, reasonably believes that exercise of
the Warrant or
3
<PAGE>
conversion of such Series C Preferred Stock would be subject
to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
any relevant Canadian antitrust legislation and the rules
and regulations thereunder (the "Antitrust Law") prior to
such exercise or conversion and following such holder's
notice to the Company of such holder's intention to exercise
or convert or the Company's notice to such holder of such a
mandatory conversions, the Company and such holder shall
promptly use commercially reasonable efforts to comply with
any applicable requirements under the Antitrust Law relating
to filing and furnishing of information to the Federal Trade
Commission, the Antitrust Division of the Department of
Justice and Canadian antitrust authorities. Each of the
Company and such holder shall bear and pay any costs or
expenses that it incurs in compliance with this requirement.
Definitions: "Upgraded Homes Passed" means the number of residential
dwelling units that are or can be connected to the MSO's
Data-Ready Cable System (as defined in the term sheet for
distribution of the Wave@Home Service). For purposes of this
paragraph, a residential dwelling unit "can be connected" to
the MSO's Data-Ready Cable System if the residential
dwelling unit is located within 250 feet of an upgraded
data-ready distribution line. Each residential unit in a
multiple dwelling unit shall be counted as one Upgraded Home
Passed.
4
<PAGE>
SCHEDULE A-1
WAVE@HOME CUSTOMER SERVICE TIER DESCRIPTIONS
Tier I Customer Support
- -----------------------
Tier I customer service is the "front line" of the Wave@Home Service. All
customer inquiries initially will be directed to Tier I customer service
representatives ("CSRs").
The tasks listed below are typically provided by Tier I CSRs. However, if the
MSO delegates Tier I service responsibility to @Home, MSO and @Home will review
these tasks to determine whether MSO can perform some of these functions without
the assistance of @Home technical service representatives ("TSRs").
Providing information about the Wave@Home Service.
Determining service eligibility (i.e. correct geographic location and
computer configuration) of potential subscribers.
Providing support for Data and RF technicians during the installation
process at the subscriber's home.
Processing all start, stop and change requests for the Wave@Home Service.
Establishing IP addresses, logins, email, passwords, and related customer
identifications and other records for use by @Home and MSO as permitted by
the Agreement.
Addressing billing and pricing questions.
Responding to all customer problems relating to basic desktop support:
-----
. All desktop hardware and software support will be handled by Tier
I CSRs.
. Such support will be provided via email, phone and on-site
visits.
. By way of example, all known "bugs", operating system
configuration issues, and @Home software installation and upgrade
questions would be handled by Tier I CSRs.
. MSO and @Home anticipate that in excess of 80% of all customer
calls relating to desktop problems will be resolved by Tier I
CSRs without the assistance of Tier II TSRs.
Maintaining trouble ticket status reports and cataloging customer problems
and problem resolutions.
Tier II Technical Support
- -------------------------
Tier II customer service is the advanced diagnostic and problem resolution layer
of the Wave@Home Service and includes the tasks set forth below. Tier II TSRs
are not responsible for answering initial customer inquiries but may from time-
to-time have customer calls transferred to them. The tasks listed below are
typically provided by Tier II TSRs:
<PAGE>
Collecting network information and informing Tier I CSRs of service outages
caused by network problems.
Providing advanced desktop support by assisting Tier I CSRs with
--------
approximately 20% of the customer calls that require additional problem
diagnosis and resolution.
Developing and maintaining an on-line information system for Tier I CSRs.
Tier III Network Support
- ------------------------
Tier III customer service will address Tier II escalations from TSRs relating to
network problems and perform ongoing network monitoring and maintenance. Tier
III technicians will not interact with subscribers directly.
2
<PAGE>
SCHEDULE C
BOARD REPRESENTATIONS:
TCI Internet Holdings, Inc. ("TCI Sub") (on behalf of itself and the "TCI"
Stockholder Group" as defined in the Company's Stockholders' Agreement dated as
of August 1, 1996) will enter into a voting agreement with Rogers and Shaw,
pursuant to which TCI Sub on behalf of the TCI Stockholder Group will agree to
vote any shares of @Home they may own in favour of and use commercially
reasonable best efforts to cause to be elected and maintained in office one
Common Stock Director nominated jointly by Rogers and Shaw, so long as Rogers
and/or Shaw continues to offer the Wave@Home Service on an exclusive basis in
accordance with their distribution agreement with the company and (ii) Rogers
and Shaw collectively beneficially own at least 2,000,000 Series A Common Shares
or that number of Series C Shares which upon conversion will equal at least
2,000,000 Series A Common Shares; and (b) in addition to the shares described in
subparagraph (a) above, any one of the following:
1. 500,000 Series A Common Shares; or
2. That number of Series C Shares which upon conversion will equal at
least 500,000 Series A Common Shares; or
3. That number of Warrants which upon conversion will (immediately or if
converted into Series C Shares upon conversion of those shares) equal
at least 500,000 Series A Common Shares.
The party that continues to hold the exclusive license contemplated in either
paragraph 2.1(A) or 2.1(B) of the term sheet shall have the right to designate
the Board nominee. If both Rogers and Shaw hold both of the exclusive licenses
referred to above, they shall determine their board nominee in such manner as
they may determine.
In addition, so long as Rogers and Shaw have the right to a Board nominee under
the preceding paragraph and both Rogers and Shaw continue to hold the exclusive
licenses referred to above, they shall also have the joint right to designate a
single observer who will have the right to receive notice of an attend and
participate in the discussion in all meetings of the Board of Directors of the
Company.
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
SCHEDULE D
EXCLUSIVITY
1. In order to retain the exclusivity of the license granted to Rogers in
Paragraph 2.1 (A) of the Term Sheet, Rogers shall reach the number of Homes
Passed (HHP) and the Penetration Percentages set out in Table 1 and Table 3.
<TABLE>
<CAPTION>
YEAR TOTAL CABLED % REBUILT HOMES PASSED YE PENETRATION
END HOMES PERCENTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 2,774,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2000 2,816,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2001 2,856,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2002 2,901,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
</TABLE>
TABLE 1: ROGERS HHP AND PENETRATION PERCENTAGE TARGETS
2. In order to retain the exclusivity of the license granted to Shaw in
Paragraph 2.1 (B) of the Term Sheet, Shaw shall reach the number of Homes Passed
and the Penetration Percentages set out in Table 2 and Table 3.
<TABLE>
<CAPTION>
YEAR TOTAL CABLED % REBUILT HOMES PASSED YE PENETRATION
END HOMES PERCENTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 2,029,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2000 2,060,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2001 2,091,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
2002 2,122,000 [**]% [**] [**]%
- -------------------------------------------------------------------------------
</TABLE>
TABLE 2: SHAW HHP AND PENETRATION PERCENTAGE TARGETS
<TABLE>
<CAPTION>
YEAR ROGERS INCREMENTAL YE SHAW INCREMENTAL YE
END HOMES PASSED PENETRATION HOMES PASSED PENETRATION
PERCENTAGE PERCENTAGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 [**] [**]% [**] [**]%
- --------------------------------------------------------------------------------
2000 [**] [**]% [**] [**]%
- --------------------------------------------------------------------------------
2001 [**] [**]% [**] [**]%
- --------------------------------------------------------------------------------
2002 [**] [**]% [**] [**]%
- --------------------------------------------------------------------------------
</TABLE>
TABLE 3: INCREMENTAL HHP AND PENETRATION PERCENTAGE TARGETS
<PAGE>
3. Provided that, in determining if Rogers and/or Shaw, as applicable, has
reached the number of Homes Passed and the Penetration Percentages set out in
Table 3, the following shall apply:
(a) that number of Homes Passed and Penetration Percentages reached by Rogers
in excess of those numbers and percentages set out in Table 1, and reached
by Shaw in excess of those numbers and percentages set out in Table 2,
shall be attributed to the numbers of Homes Passed and Penetration
Percentages for the purpose of determining compliance with Table 3; and
(b) that number of Homes Passed and Penetration Percentages reached by the sub-
distributors or others in Canada (whether or not their relationship with
@Home is direct or indirect) shall be attributed to the number of Homes
Passed and Penetration Percentages set out in Table 3 as if 60% of such
Homes Passed and 60% of such Penetration Percentages reached by such
persons were reached by Rogers and as if 40% of such Homes Passed and 40%
of such Penetration Percentages reached by such persons were reached by
Shaw; and
(c) if after making the calculations set out in sub-paragraph 3 (a) and (b)
above, it is determined that either Rogers or Shaw has satisfied the
performance obligations set out in, the case of Rogers in Tables 1 and 3,
and in the case of Shaw in Tables 2 and 3, but the other has not, that
number of Homes Passed and the Penetration Percentage in excess of the
targets imposed shall be attributed to such of the parties who has failed
to meet the required number of Homes Passed and Penetration Percentages;
and
(d) further, homes which are fully 2way capable or telco return capable will be
included as if such homes were Homes Passed, and any subscriber to the
WAVE@Home Service, whether on 2way cable or telco return, will be counted
as a subscriber to the WAVE@Home Service, for the purpose of calculating
the Penetration Percentages set out in Table 3.
4. The number of Homes Passed above will be adjusted for any system divestiture
by Rogers or Shaw over the course of the term of the term sheet or any renewal
thereof. The % Rebuilt specified in Tables 1 and 2 above will remain constant in
the event of any system divestiture. In the event of a substantial divestiture,
Rogers and Shaw will use all reasonable efforts to appoint such purchaser as a
subdistributor of the WAVE@Home Service in the purchased systems.
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
SCHEDULE E
PERFORMANCE BASED PAYMENTS TO @HOME
(1) The performance based payments to @Home will be based on actual year-over-
year growth in monthly average subscriber penetration in excess of the
year-over-year monthly average subscriber growth contained in the WAVE Base
Case set out below. These performance payments will be calculated
separately for Rogers and Shaw. Subject to the limits in section 3 below,
@Home will receive a one-time payment of $[**] for each WAVE@Home
subscriber above the WAVE Year-Over-Year Target Subscriber growth
contemplated in the WAVE Base Case for the years 2000, 2001 and 2002.
<TABLE>
<CAPTION>
WAVE BASE CASE
- -------------------------------------------------------------------------------
YEAR WAVE MONTHLY AVERAGE WAVE YEAR-OVER-YEAR
PENETRATION ASSUMPTIONS TARGET SUBSCRIBER GROWTH
- -------------------------------------------------------------------------------
<S> <C> <C>
1999 [**]% --
- -------------------------------------------------------------------------------
2000 [**]% [**]%
- -------------------------------------------------------------------------------
2001 [**]% [**]%
- -------------------------------------------------------------------------------
2002 [**]% [**]%
- -------------------------------------------------------------------------------
</TABLE>
(2) Two sample performance payment calculations for the year 2001 are
calculated below for illustrative purposes only.
EXAMPLE 1
Year 2000 actual monthly average WAVE@Home penetration realized [**]%
Year 2001 actual monthly average WAVE@Home penetration realized [**]%
------
.. year-over-year growth in monthly average subscriber penetration [**]%
Year-over-year target growth [**]%
------
.. extra growth for the year 2001 [**]%
# of actual monthly average Homes passed [**]
------
.. extra subscribers for the year 2001 [**]
Payment per extra subscriber [**]
------
.. total performance payment [**]
======
EXAMPLE 2
Year 2000 actual monthly average WAVE@Home penetration realized [**]%
Year 2001 actual monthly average WAVE@Home penetration realized [**]%
------
.. year-over-year growth in monthly average subscriber penetration [**]%
Year-over-year target growth [**]%
------
.. extra growth for the year 2001 [**]%
# of actual monthly average Homes passed [**]
------
.. extra subscribers for the year 2001 [**]
Payment per extra subscriber [**]
------
.. total performance payment [**]
======
<PAGE>
** Confidential treatment has been
requested with respect to certain
information contained in this
document. Confidential portions
have been omitted from the public
filing and have been filed
separately with the Securities
and Exchange Commission.
(3) This performance payment will be subject to each of the following
conditions:
[**]
(4) The performance payment, if any, will be paid by April 30 of the year
following the year in which the performance payment is earned.
(5) Monthly average subscribers will be determined by adding the total number
of subscribers at the end of each month in the relevant year and dividing
the total by 12.
All amounts are in Canadian dollars.
<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: (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
reasonable advance request any
-4-
<PAGE>
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
-5-
<PAGE>
liable for any amount paid by Indemnitee in settlement of any Proceeding that is
not defended by 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
-6-
<PAGE>
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 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.
-7-
<PAGE>
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 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 Indemni-
-8-
<PAGE>
tee 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 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 execu-
-9-
<PAGE>
tion 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.
(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.
-10-
<PAGE>
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.
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 ______________, 1996.
(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
-11-
<PAGE>
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 hereunder.
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 such agreement may be 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 under-
-12-
<PAGE>
standings, 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.
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.
-13-
<PAGE>
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 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 10.20
AT HOME CORPORATION
385 RAVENDALE DRIVE
MOUNTAIN VIEW, CA 94043
May 15, 1997
To: The Persons Signatory hereto
Reference is made to the letter agreement and related Term Sheet, each
dated June 4, 1996 (the "Original Term Sheet"), among certain of the parties
hereto relating to At Home Corporation ("@Home").
As contemplated by the Original Term Sheet, certain of the agreements
contained therein have been superceded by definitive agreements and instruments,
and certain other agreements set forth therein which have not been so superceded
remain as set forth in the Original Term Sheet pending the negotiation and
execution of definitive agreements relating to such matters. In order to confirm
which portions of the Original Term Sheet have been superceded and to amend
certain of the agreements which have not been so superceded, the parties have
determined to amend and restate, effective as of the date hereof, those portions
to the Original Term Sheet which have not been so superceded and remain in
effect. Such remaining provisions of the Original Term Sheet, as so amended and
restated, are attached hereto as Exhibits A and B (collectively, the "Amended
Term Sheet"). The parties hereby confirm their prior agreements to negotiate in
good faith and use their respective reasonable best efforts to execute and
deliver definitive agreements and other instruments implementing the terms set
forth in the Amended Term Sheet. The parties expressly acknowledge and agree
that (i) this letter agreement and the Amended Term Sheet constitute a binding
agreement among them, subject to the terms and conditions set forth in this
letter agreement (other than in the next paragraph below) and in the Amended
Term Sheet, until the definitive agreements incorporating the terms set forth in
the Amended Term Sheet are executed and delivered and (ii) that the Original
Term Sheet, except to the extent amended and restated by the Amended Term Sheet,
has been terminated and superceded in its entirety.
In addition, pursuant to the Amended and Restated Stockholders
Agreement, dated August 1, 1996, the parties have discussed certain changes in
their relationships in order to facilitate @Home's initial public offering. As a
result, the applicable parties agree that in connection with, and conditioned
upon, the closing of the sale of the Series A Common Stock of @Home pursuant to
the underwriting agreement between @Home, Morgan Stanley & Co. Incorporated and
the other underwriters listed therein, the parties will execute appropriate
instruments adopting the amendments to the Stockholders Agreement set forth on
Exhibit C, the parties will vote all shares of capital stock of @Home owned by
them in favor of the
<PAGE>
May 15, 1997
amendments to @Home's Certificate of Incorporation set forth in Exhibit D, and
will cause their respective designees on the Board of Directors of @Home to take
such actions as may be necessary to propose and recommend approval by the
stockholders of such amendments to the Certificate of Incorporation and to
approve the amendment to @Home's Bylaws set forth on Exhibit E, in each case
with such additional changes to Exhibits C, D and E as the parties may mutually
agree, so as to cause such amendments to the Stockholders Agreement and to
@Home's Certificate of Incorporation and Bylaws to become effective in
connection with such initial public offering; provided, that the effectiveness
of such amendments to the Stockholders' Agreement and @Home's Certificate of
Incorporation and Bylaws shall be conditioned on the receipt of an opinion of
Delaware counsel to the Company (who shall be reasonably acceptable to the
parties) as to the enforceability of such amended Stockholders' Agreement and
the validity of such amended Certificate of Incorporation and amended Bylaws in
substantially the form set forth as Exhibit F.
This letter agreement and the Amended Term Sheet attached hereto,
shall be governed by and construed in accordance with the laws of the State of
New York (without regard to its laws pertaining to conflicts of law) applicable
to agreements executed in and to be fully performed entirely in such state.
If the foregoing is acceptable to you, please execute the copy of this
agreement in the space below, at which time this instrument will constitute a
binding agreement among us.
Very truly yours,
AT HOME CORPORATION
By: ____________________________
Name: Thomas Jermoluk
Title: Chairman and President
-2-
<PAGE>
May 15, 1997
ACCEPTED AND AGREED
this 15th day of May, 1997
Each of the following executes this letter agreement only in its
capacity as a stockholder of @Home:
<TABLE>
<S> <C>
TCI INTERNET HOLDINGS, INC. COX @HOME, INC.
By: ______________________________ By: ______________________________
Name: Bruce W. Ravenel Name: David M. Woodrow
Title: President and Chief Executive Officer Title: Vice President
COMCAST PC INVESTMENTS, INC. KLEINER, PERKINS, CAUFIELD
& BYERS VII
By: KPCB VII Associates, its General Partner
By: ______________________________ By: ______________________________
Name: Brian L. Roberts Name: L. John Doerr
Title: President Title: Partner
KPCB VII FOUNDERS FUND KPCB INFORMATION SERVICES
By: KPCB VII Associates, its General Partner ZAIBATSU FUND II
By: KPCB VII Associates, its General Partner
By: ______________________________ By: ______________________________
Name: L. John Doerr Name: L. John Doerr
Title: Partner Title: Partner
</TABLE>
-3-
<PAGE>
May 15, 1997
Each of the following executes this letter agreement only in its
capacity as a Cable Parent (as defined in the Term Sheet):
<TABLE>
<S> <C>
TCI INTERNET SERVICES, INC. TCI COMMUNICATIONS, INC.
By: ______________________________ By: ______________________________
Name: Bruce W. Ravenel Name: Leo J. Hindery, Jr.
Title: President and Chief Executive Officer Title: President and Chief Executive Officer
TCI CABLE INVESTMENTS INC. COMCAST CABLE COMMUNICATIONS, INC.
By: ______________________________ By: ______________________________
Name: Leo J. Hindery, Jr. Name: Brian L. Roberts
Title: President and Chief Executive Officer Title: Vice Chairman
TCI.NET, INC. COX COMMUNICATIONS, INC.
By: ______________________________ By: ______________________________
Name: Bruce W. Ravenel Name: David M. Woodrow
Title: President and Chief Executive Officer Title: Senior Vice President
</TABLE>
-4-
<PAGE>
May 15, 1997
Each of the following executes this letter agreement only in its
capacity as a Parent (as defined in the Term Sheet):
<TABLE>
<S> <C>
TELE-COMMUNICATIONS, INC. COMCAST CORPORATION
By: ______________________________ By: ______________________________
Name: John C. Malone Name: Brian L. Roberts
Title: Chairman and Chief Executive Officer Title: President
COX ENTERPRISES, INC. KLEINER, PERKINS, CAUFIELD
& BYERS
By: ______________________________ By: ______________________________
Name: William L. Killen, Jr. Name: L. John Doerr
Title: Vice President Title: Partner
</TABLE>
-5-
<PAGE>
EXHIBIT A
---------
MASTER DISTRIBUTION AGREEMENT TERM SHEET
----------------------------------------
1. DEFINITIONS AND OTHER GENERAL MATTERS.
(a) Certain Definitions. As used herein, the following terms shall have
-------------------
the following meanings:
"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; provided that for purposes of this MDA
--------
Term Sheet, (i) neither the Company nor any of its Subsidiaries shall be deemed
to be an Affiliate of any member of a Stockholder's Stockholder Group, and (ii)
no member of any Stockholder's Stockholder Group shall be deemed to be an
Affiliate of another Stockholder's Stockholder Group, in each case solely by
reason of any investment in the Company or any rights or obligations provided
for in this MDA Term Sheet or the Stockholders' Agreement.
"Affiliated Operator" means an Operator which is a Cable Parent or a Controlled
-------------------
Affiliate of a Cable Parent.
"@Home" or the "Company" means At Home Corporation, a Delaware corporation.
----- -------
"@Home Facilities" means all equipment (including owned and leased facilities),
----------------
hardware, software and technology to the Point of Demarcation at each Operator
Facility; provided, however, that any software or technology licensed or leased
-------- -------
by @Home to the Operator for use in the Operator Facilities or within the
customer premises of such Operator shall remain the property of @Home.
"@Home First Page" means the home page of the @Home Service as it appears to
----------------
subscribers upon each start up of the @Home Service.
"@Home Network" means the @Home Facilities and the applicable Operator
-------------
Facilities.
"@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 The Microsoft Network) and information providers, both
in the United States and internationally (in countries where the Company 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 Company would itself be a creator of content (other than
with respect to content created as part of the Company'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
<PAGE>
(c) billing and associated support functions.
"@Home Specified Remedy" means the actual costs incurred by @Home in connection
----------------------
with the Network Upgrade, which costs are directly related to @Home's
fulfillment of its obligation to an Affiliated Operator to make the @Home
Services available to the Offered Homes Passed on the Projected Commencement
Date in accordance with the LCO Agreement; provided, however, that @Home shall
-------- -------
at all times be required to mitigate any such damages to the extent reasonably
possible following notice to it by an Affiliated Operator or Cable Parent as to
any delay in making the Offered Homes Passed available by the Projected
Commencement Date in accordance with the LCO Agreement and/or changes to the
Master Roll-Out Schedule or applicable LCO Agreement (including changes of the
Projected Commencement Date) subsequent to the date of adoption of the Master
Roll-Out Schedule or the execution of the LCO Agreement, as applicable.
"Board" means the Board of Directors of the Company 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 Company with respect to such matter.
"Cable Parent" means (i) with respect to TCI Sub, TCI Internet Services, TCI.
------------
NET and TCIC (which entities shall collectively be a single Cable Parent), (ii)
with respect to Comcast Sub, Comcast Cable and Comcast On-Line (which entities
shall collectively be a single Cable Parent), and (iii) with respect to Cox Sub,
CCI.
"Cable Parent Access Blocking Right" means the right of a Cable Parent to block
----------------------------------
access by subscribers in the Operator Territory of such Cable Parent's
Affiliated Operator to certain information providers which are otherwise
accessible over the @Home Service as set forth in Section 15 hereof.
"Cable Parent Exclusion Right" means the right of any Cable Parent to exclude
----------------------------
from presentation in the National Area as presented to the subscribers of such
Cable Parent's Affiliated Operators, promotional activities or presentations
relating to content providers as set forth in Section 14 hereof.
"Cable Partner" means any of TCI Sub, Comcast Sub or Cox Sub, as applicable.
-------------
"Cable System Upgrade" means the construction and upgrade of the Operator
--------------------
Facilities required in order to distribute the @Home Services in accordance with
the Specifications and Standards. A cable system which has been upgraded in
accordance with the Specifications and Standards is hereinafter referred to as
an "Upgraded System."
---------------
"CEI" means Cox Enterprises, Inc., a Delaware corporation.
---
"Charter" means the Certificate of Incorporation of the Company, as amended to
-------
the date in question.
".Com Agreement" means any agreement between @Home (or any Cable Parent or a
--------------
Controlled Affiliate acting in the capacity of a sales agent by and on behalf of
@Home pursuant to a sales agency agreement to be entered into by such Cable
Parent or Controlled Affiliate and @Home, which agreement will, among other
things, specify the terms and conditions upon which such person may act as a
sales agent for @Home, including specification of the terms upon which such
person may enter into a .Com Agreement on @Home's behalf) and a content provider
which provides (i) physical connectivity and access to the @Home Network and
(ii) for compensation, if any, to @Home in accordance with its
-2-
<PAGE>
charges therefor.
"Comcast" means Comcast Corporation, a Pennsylvania corporation.
-------
"Comcast Cable" means Comcast Cable Communications, Inc., a Delaware
-------------
corporation.
"Comcast On-Line" means Comcast On-Line Communications, Inc., a Delaware
---------------
corporation.
"Comcast Stockholder Group" means Comcast, Comcast Cable, Comcast On-Line,
-------------------------
Comcast Sub and their respective Controlled Affiliates; provided, however, that
-------- -------
following any Qualified Spin Off Transaction and the related assignment pursuant
to Section 11.1 of the Stockholders' Agreement to the Spin Off Parent, such term
shall be deemed to refer, to the extent applicable, to such Spin Off Parent and
its Controlled Affiliates.
"Comcast Sub" means Comcast PC Investments, Inc., a Delaware corporation and an
-----------
indirect wholly owned Subsidiary of Comcast, and any member of the Comcast
Stockholder Group to which Company Securities (as defined in the Stockholders'
Agreement) are Transferred (as defined in the Stockholders' Agreement) pursuant
to a Permitted Transfer (as defined in the Stockholders' Agreement).
"Comcast Ultimate Parent" means Comcast.
-----------------------
"Commencement Date" means the date upon which specified Offered Homes Passed are
-----------------
actually made available for distribution of the @Home Services.
"Control" (including its correlative meanings "Controlled by" and "under common
-------
Control with") means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract, management agreement or
otherwise.
"Controlled Affiliate" of any Person shall be any Person which is Controlled by
--------------------
such Person; provided, however, that the Company will not be deemed to be a
-------- -------
Controlled Affiliate of any Parent of a Stockholder or such Parent's Controlled
Affiliates.
"Cost-Plus Basis" means, with respect to the provision of any service, the
---------------
provider's actual cost (which shall include a reasonable allocation of
associated overhead) of providing such service ("Cost"), plus a return on such
----
cost equal to 12% per annum for the period from the date such cost is incurred
to the date of payment.
"Cox Stockholder Group" means CCI, Cox Sub and their respective Controlled
---------------------
Affiliates; provided, however, that following any Qualified Spin Off Transaction
-------- -------
and the related assignment pursuant to Section 11.1 of the Stockholders'
Agreement to the Spin Off Parent, such term shall be deemed to refer, to the
extent applicable, to such Spin Off Parent and its Controlled Affiliates.
"Cox Sub" means Cox @Home, Inc., a Delaware corporation and an indirect wholly
-------
owned Subsidiary of CCI, and any member of the Cox Stockholder Group to which
Company Securities are Transferred pursuant to a Permitted Transfer.
"Cox Ultimate Parent" means CEI.
-------------------
-3-
<PAGE>
"Eligible Stockholder" means a Stockholder whose Stockholder Group owns its
--------------------
applicable Eligible Stockholder Amount (as defined in the Stockholders'
Agreement) or, with respect to a Stockholder whose failure to own such amount
has been waived by all other Stockholders, such Stockholder during the period
any such waiver (or any further waiver) is in effect in accordance with the
provisions of the Stockholders' Agreement.
"Excluded Service" means any Internet Service the provision of which is not a
----------------
Restricted Business; provided, that the term "Excluded Service" shall not
include the creation or aggregation of content.
"Exclusive Stockholder" means a Stockholder whose Cable Parent has complied with
---------------------
at all times since the Execution Date, and remains in compliance with, the Cable
Parent Exclusivity Provisions (without regard to whether the Restricted Period
has ended as to such Cable Parent).
"Execution Date" means June 4, 1996.
--------------
"Homes Passed" means the number of residential homes that can be connected to a
------------
cable distribution system (provided, that each residential unit in a multiple
dwelling unit shall be counted as one Home Passed).
"Internet Backbone" means a network which: (x) can or does (i) assign IP
-----------------
addresses or manage IP address assignments for machines or networks to which it
is connected, (ii) accept or deliver IP datagrams from machines or networks to
which it is connected, or (iii) maintain IP packet traffic to other machines or
networks; and (y) provides IP connectivity on a regional, national or
international basis; provided, however, that such a network which provides
-------- -------
connectivity solely within a single metropolitan area shall not be deemed an
Internet Backbone.
"Internet Backbone Service" means a communications service provided over an
-------------------------
Internet Backbone.
"Internet Service" means a communications service provided over a network which
----------------
can or does (i) assign IP addresses or manage IP address assignments for
machines or networks to which it is connected, (ii) accept or deliver IP
datagrams from machines or networks to which it is connected, or (iii) maintain
IP packet traffic to other machines or networks.
"IP" means the Internet Protocols as defined by the document titled RFC-791, by
-- -------
John Pastell of the University of Southern California, dated 1981, or subsequent
revisions thereof.
"KPCB" means KPCB VII Associates, a California partnership.
----
"KPCB Affiliates" means KPCB, Kleiner, Perkins, Caufield & Byers VII and KPCB
---------------
Information Sciences Zaibatsu Fund II, each a California limited partnership of
which KPCB is the general partner, and James Clark.
"KPCB Constituents" means each KPCB Affiliate, any wholly owned Subsidiary of a
-----------------
KPCB Affiliate to which such KPCB Affiliate shall have transferred securities of
the Company in
-4-
<PAGE>
accordance with the terms hereof and any general or limited partners of such
KPCB Affiliate or Subsidiary to whom such KPCB Affiliate or such Subsidiary
shall have transferred such securities of the Company in accordance with the
terms hereof.
"KPCB Stockholder Group" means collectively, KPCB, the KPCB Affiliates and the
----------------------
KPCB Constituents.
"LCO Agreement" means the agreement between an Operator and the Company relating
-------------
to the distribution of the @Home Service in the Operator Territory and having
terms and conditions substantially in accordance with those set forth in the
Local Cable Operator Agreement Term Sheet, dated the date hereof; provided that
--------
if the matters set forth in such term sheet are superseded by a form of
definitive agreement which is approved in writing by each of the Cable Parents,
such form of definitive agreement will constitute the LCO Agreement for all
purposes hereunder.
"Local Area" shall mean that portion of the @Home First Page programmed by the
----------
Operator, which portion as to an Affiliated Operator, shall consist of one
browser user interface button (the "BUI Button") and 50% of the area of the
----------
@Home First Page (or such lesser portion as such Affiliated Operator shall elect
to program).
"Local Content" means any content offering which is transported primarily on a
-------------
Local Service.
"Local Service" means a communications service connected, directly or
-------------
indirectly, to the Operator's cable system by means that do not use or require
transmission, directly or indirectly, over an Internet Backbone.
"MDA Term Sheet" means this Master Distribution Agreement Term Sheet, as it may
--------------
be amended or supplemented to the date of determination.
"MFN Provisions" means the MFN provisions set forth herein applicable to each
--------------
Exclusive Cable Parent.
"National Area" shall mean the @Home First Page (other than the Local Area) and
-------------
the rest of the @Home web site, including, without limitation, any thematic
pages.
"Network Upgrade" means the construction or upgrade of the @Home Facilities
---------------
necessary to connect to a specific Upgraded System at the Point of Demarcation
in order to provide delivery of the @Home Services, including, but not limited
to, the acquisition of hardware and software required in order to distribute the
@Home Services to such Upgraded System, all in accordance with the
Specifications and Standards. The portion of the @Home Network which has been
so upgraded is referred to herein as the "Upgraded Network Portion."
------------------------
"Non-Pro Rata Roll-Out Budget" means any Roll-Out Budget which fails to
----------------------------
provide an allocation of funds or other resources for the Network Upgrade
reasonably necessary to provide for the roll-out during the applicable planning
period (such planning period to be not greater than
-5-
<PAGE>
12 months) (a "Planning Period") of the @Home Services to a proportionate number
---------------
of the Qualifying Offered Homes Passed proposed by a Cable Parent in such
Planning Period. The determination as to whether such roll-out is proportionate
to such Cable Parent shall be made based upon (i) the relationship that the
Qualifying Offered Homes Passed by such Cable Parent bears to the Qualifying
Offered Homes Passed of all such Cable Parents for such Planning Period and (ii)
the relationship of the projected date for the completion of the applicable
Network Upgrade to the date or dates projected by the applicable Cable Parent
for the availability of the applicable Qualifying Offered Homes Passed during
such Planning Period.
"Offered Homes Passed" means, without duplication, the number of Homes Passed
--------------------
which a Cable Parent proposes to include in the Master Roll-Out Schedule for a
given Planning Period.
"Operator" means the corporation, partnership or other entity which owns and
--------
operates a cable television system that agrees to distribute the @Home Services
in accordance with the terms of an LCO Agreement.
"Operator Facilities" means the cable television system facilities in an
-------------------
Upgraded System owned or leased by an Operator from each Point of Demarcation to
and including the cable modem at the location of each subscriber (whether or not
such cable modem is owned by the Operator); provided, that Operator Facilities
--------
shall not include the ownership of any software or other intellectual property
rights licensed by @Home to such Operator (other than rights related to such
license).
"Operator Territory" means the geographic area where an Operator is providing
------------------
cable television service through the Operator's distribution facilities.
"Parent" means, as to the TCI Stockholder Group, TCI; as to the KPCB Stockholder
------
Group, KPCB; as to the Cox Stockholder Group, CCI; and as to the Comcast
Stockholder Group, Comcast, or, in each case any Spin Off Parent of any of the
foregoing following the assignment referred to in Section 11.1 of the
Stockholders' Agreement.
"Performance Default" shall occur if, as of the indicated date, the High C
-------------------
Performance Ratio exceeds the product of (I) two times (II) the TCI Performance
Ratio. The "High C Performance Ratio" shall be the greater of (i) the amount
------------------------
equal to (x) the aggregate number of Residential Subscribers to the @Home
Service of Comcast Cable and its Controlled Affiliates, divided by (y) the
aggregate number of Homes Passed by Qualifying Systems owned by Comcast Cable
and its Controlled Affiliates and (ii) the amount equal to (a) the aggregate
number of Residential Subscribers to the @Home Service of CCI and its Controlled
Affiliates, divided by (b) the aggregate number of Homes Passed by Qualifying
Systems owned by CCI and its Controlled Affiliates, in each such case as of the
end of the calendar month preceding the date of determination (the Cable Partner
with respect to whom such amount is greater as of the applicable date of
determination being referred to herein as the "High C"). The "TCI Performance
------ ---------------
Ratio" shall be an amount equal to (A) the aggregate number of Residential
- -----
Subscribers to the @Home Service of TCI and its Controlled Affiliates, divided
by (B) the aggregate number of Homes Passed by Qualifying Systems owned by TCI
and its Controlled
-6-
<PAGE>
Affiliates, in each case as of the end of the calendar month preceding the date
of determination.
"Person" means any individual, corporation, limited liability company,
------
partnership, 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.
"Point of Demarcation" means the interface between the Operator Facilities and
--------------------
the @Home Facilities, which interface shall, unless otherwise agreed, be located
on the @Home side of the cable data router (which shall be part of the Operator
Facilities) (or, without limitation, such other equipment which is part of the
Operator Facilities which connects to the @Home Facilities at substantially the
same location at which the cable data router is customarily connected as of the
date hereof) at each applicable cable system head-end or regional head-end.
"Pro Rata Roll-Out Budget" means any Roll-Out Budget which is not a Non-Pro
------------------------
Rata Roll-Out Budget.
"Projected Commencement Date" means the date specified by a Cable Parent in the
---------------------------
Master Roll-Out Schedule as the date by which the Cable Parent proposes to begin
distributing the @Home Service to all or a specified portion of the applicable
cable system.
"Promotional Agreement" means an agreement entered into between a content
---------------------
provider and @Home (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, by the @Home video barker or otherwise) as @Home 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.
"Public Company" means any Person which has a class or series of its equity
--------------
securities registered under Section 12(b) or 12(g), or which 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), which class or series of equity securities are
actively traded.
"Qualifying Offered Homes Passed" means, without duplication, Offered Homes
-------------------------------
Passed located in Qualifying Systems.
"Qualified Spin Off Transaction" means any transaction or series of related
------------------------------
transactions in which (and after giving effect thereto) (i) a majority of the
outstanding equity interests of a Stockholder are distributed, directly or
indirectly, to the stockholders of its Parent, (ii) any Person or group of
Persons which Controlled the Parent of a Stockholder immediately prior to such
transaction Control such Stockholder (or any successor entity) following such
transaction and (iii) the Persons or group of Persons which Controlled the
Parent of a Stockholder immediately prior to such transaction hold immediately
after such transaction a direct or indirect proportionate equity
-7-
<PAGE>
interest in such Stockholder of more than 50% of the proportionate equity
interest that such Person or group of Persons held in such Parent on the record
date for such distribution.
"Qualifying System" means one or more cable television systems owned by a Cable
-----------------
Parent or any of its Controlled Affiliates which are contiguous or clustered in
an area and which system or systems represent in the aggregate not less than
50,000 Homes Passed, or such lesser number as the Board shall hereafter
establish as being the minimum number of Homes Passed by such related cable
systems as is necessary in order to justify, on an economic and resource
allocation basis, a roll-out of the @Home Services solely to such cable systems.
"Residential Subscriber" shall mean a residential subscriber to the @Home
----------------------
Service (i) whose account is 60 days or less past due, (ii) who has been
receiving the @Home Service for at least 60 consecutive days, and (iii) who has
paid for at least one month's @Home Service at standard rates.
"Restricted Period" means the period of time commencing on the Execution Date
-----------------
and terminating upon the first to occur of (w) as to each Cable Parent, the
termination of the Cable Parent Exclusivity Provisions as to such Cable Parent,
(x) the sixth anniversary of the Execution Date, and (y) the effectiveness of
any change in law, statute or regulation or the entering of any adverse judicial
decision or injunction or other action, in each case which materially impairs
the enforceability (in accordance with their respective terms) of any of the
Cable Parent Exclusivity Provisions, @Home Exclusivity Provisions, MFN
Provisions or the Content Tag-Along Right.
"Roll-Out Budget" means that portion of @Home's budget for any applicable
---------------
Planning Period relating to the costs and expenses of the Network Upgrade
committed to by @Home in order to make the @Home Services available for
distribution by the Projected Commencement Dates of those Qualifying Offered
Homes Passed to which @Home is scheduled to commence distribution within such
Planning Period.
"Specifications and Standards" means, collectively, the specifications and
----------------------------
standards for the Operator Facilities and the technical requirements for
distribution of the @Home Services as set forth in Exhibit A attached hereto.
"Spin Off Parent" means the member of a Stockholder's Stockholder Group whose
---------------
equity securities are distributed to the stockholders of the Parent of such
Stockholder Group in a Qualified Spin Off Transaction. Upon the assignment to
it pursuant to Section 11.1 of the Stockholders' Agreement, such Spin Off Parent
shall succeed to the rights and obligations of its related Parent and shall
become the Parent for all purposes hereunder.
"Stockholder" means each of TCI Sub, Cox Sub, Comcast Sub and the KPCB
-----------
Affiliates, and each other Person who becomes a holder of Company Securities and
a party to this Agreement in accordance with the terms hereof.
"Stockholder Group" means, as applicable, the TCI Stockholder Group, the KPCB
-----------------
Stockholder Group, the Cox Stockholder Group or the Comcast Stockholder Group.
-8-
<PAGE>
"Stockholders' Agreement" means the Amended and Restated Stockholders'
-----------------------
Agreement, dated August 1, 1996, among @Home and each Stockholder, Cable Parent,
Parent and Ultimate Parent, as such agreement may be amended to the date of
determination.
"Subsidiary" when used with respect to any Person, means any other Person of
----------
which an aggregate of 50% or more of the outstanding capital stock or other
securities having ordinary voting power to elect directors, managers, trustees
or other controlling persons, or an equivalent controlling interest therein, of
such Person (irrespective of whether, at the time, capital stock or other
securities of any other class or classes of such entity shall have or might have
voting power by reason of the happening of any contingency) is, and of which an
aggregate of 50% or more of the interests in which are, at the time, directly or
indirectly, owned by such Person and/or one or more Subsidiaries of such Person.
"TCI" means Tele-Communications, Inc, a Delaware corporation, or any related
---
Spin Off Parent.
"TCI Change of Control" shall be deemed to have occurred at such time as (i) any
---------------------
Person or a group of Persons acting in concert (including a natural person or
any form of business entity but excluding Bob Magness, John C. Malone, their
respective lineal descendants, any estate or trust for beneficiaries of any of
the foregoing or any stockholder that was a member of the controlling group of
stockholders of TCI as of the Execution Date, and any employee stock purchase or
similar plan) owns an amount of stock representing in excess of 50% of the
voting power of the outstanding common stock of TCI and, (ii) as a result of
achieving such ownership, at any time prior to the first anniversary of
achieving such ownership the Persons who were members of the Board of Directors
of TCI as of the date of achieving such ownership, plus any additional directors
not designated by such Persons or group of Persons described in clause (i) which
are approved by a majority of the directors who were directors as of the date of
achieving such ownership, no longer constitute a majority of the entire Board of
Directors of TCI.
"TCI Stockholder Group" means TCI, TCI Internet Services, Inc. ("TCI Internet
--------------------- ------------
Services"), TCI.NET, Inc. ("TCI.NET"), TCIC, TCI Sub and their respective
- -------- -------
Controlled Affiliates; provided, however, that following any Qualified Spin Off
-------- -------
Transaction and the related assignment pursuant to Section 11.1 of the
Stockholders' Agreement to the Spin Off Parent, such term shall be deemed to
refer, to the extent applicable, to such Spin Off Parent and its Controlled
Affiliates.
"TCI Sub" means TCI Internet Holdings, Inc., a Colorado corporation and an
-------
indirect wholly owned Subsidiary of TCI and any member of the TCI Stockholder
Group to which Company Securities are Transferred pursuant to a Permitted
Transfer.
"TCI Ultimate Parent" means TCI.
-------------------
"TCIC" means, collectively, TCI Communications, Inc., a Delaware corporation and
----
TCI Cable Investments Inc., a Delaware corporation.
"Ultimate Parent" means, as applicable, the TCI Ultimate Parent, the Comcast
---------------
Ultimate Parent or
-9-
<PAGE>
the Cox Ultimate Parent.
"Video Service" means any Internet Service or content provider which distributes
-------------
or provides streaming video transmissions (or other similar, successor or
alternative methods of transmission) which exceed the duration limitation set
forth in the Specifications and Standards.
(b) Additional Definitions.
----------------------
Defined Term Section
------------ -------
@Home Exclusivity Provisions 7(a)(iii)
@Home Repurchase Right 6(a)
AAA 1(c)
Additional Benefit 16(c)
ADI 7(a)(ii)
Affected Cable Parent 7(a)(ii)
Affected Party 1(c)
Alternative Arrangement 17(b)
BUI Button 1(a)
Cable Parent Exclusivity Provisions 5(c)
Comcast Non-Exclusive Right 6(a)
Company 1(a)
Competitor Exclusion 14(d)
Consumer Purpose 5(a)
Content Provider Group 14(c)
Content Tag-Along Right 16(e)
Control Acquisition 5(c)(i)
Control Restricted Assets 5(c)(i)
Controlled by 1(a)
Cost 1(a)
Discretionary Access Exclusion 15(a)
Discretionary Exclusion 14(d)
Eligible Cable Parent 8
Enhancement and Addition 13(b)
Exchange Act 1(a)
Exclusion Limit 14(e)
Exclusive Cable Parent 7(a)(i)
Exclusive Territory 7(a)(i)
Exempt Acquisition 5(c)(i)
Exempt Restricted Assets 5(c)(i)
Failure Notice 1(c)
First Determination Date 8
High C 1(a)
High C Performance Ratio 1(a)
HSN 14(d)
-10-
<PAGE>
HSR Act 5(c)(iv)
Internet Work Services 5(a)
Master Roll-Out Schedule 2
MFN 9
Non-Control Acquisition 5(a)
Notifying Party 1(c)
Obligated Party 1(c)
Offer Price 5(c)(iii)
Offeree 16(a)
Offeror 16(a)
Planning Period 1(a)
Restricted Assets 5(c)(i)
Restricted Business 5(a)
Specified Brand 14(c)
Specified Promotions 14(c)
Subject Shares 6(a)
Subject Securities Purchase Price 6(a)
Subsequent Determination Date 8
Supermajority of Affected Cable Parents 7(a)(ii)
TBS 14(c)
TCI Internet Services 1(a)
TCI Performance Ratio 1(a)
TCI.NET 1(a)
Term 5(a)
Triggering Cable Parent 8
Unaffiliated Third Party 9
Upgraded Network Portion 1(a)
Upgraded System 1(a)
(c) Reasonable Commercial Efforts.
-----------------------------
Any reference herein to an obligation to use "all commercially reasonable
efforts," "reasonable commercial efforts" or any similar level of effort shall
mean an obligation to use commercially reasonable efforts, and no difference in
the language expressing any such level of effort shall imply any substantively
different obligation; provided, however, that the term "reasonable best efforts"
-------- -------
as used in Section 7(a), 13(b) and 15 hereof shall be deemed to require a level
of effort on the part of @Home which is significantly greater than the level of
effort required to satisfy its obligations under a standard requiring use of
"commercially reasonable efforts."
The party (the "Obligated Party") that is obligated to utilize "reasonable best
---------------
efforts" with respect to any matter shall immediately notify (the "Failure
-------
Notice") each party (an "Affected Party") to which the Obligated Party is so
- ------ --------------
obligated if the Obligated Party determines that it is not able to accomplish
the matter with respect to which it is obligated to use such reasonable best
efforts. If any Affected Party (the "Notifying Party") notifies the Obligated
---------------
Party in writing that the Notifying Party believes that the Obligated Party has
not used its reasonable best efforts as to any
-11-
<PAGE>
applicable matter, the Obligated Party shall provide a written response to the
Notifying Party and to each other Affected Party within two Business Days (as
defined in the Stockholders' Agreement). Any Affected Party shall be entitled to
initiate binding arbitration with respect to matters related to the obligation
to use reasonable best efforts with CableLabs as the arbitrator. If CableLabs is
unwilling or unable to act as arbitrator, any Affected Party shall be entitled
to submit the matter to arbitration before the American Arbitration Association
("AAA") in accordance with AAA's then applicable rules and procedures. Any
---
arbitration shall be conducted in New York, New York or at such other location
that may be selected by mutual agreement of the Obligated Party and each
Notifying Party as to such matter. The parties shall utilize the most expedited
form of arbitration available with the intent that the matter be resolved within
30 days after submission to the extent practicable. The cost of arbitration
shall be borne by the non-prevailing party (as determined by such arbitrator).
To the extent such arbitration results in a decision that the Obligated Party
has not used its reasonable best efforts and such decision specifies an action
to be taken which would constitute such reasonable best efforts, the Obligated
Party shall thereafter be required to take such action. The prevailing party
shall be entitled to enter a judgment with respect to the arbitrator's
determination (which may provide for money damages and/or other forms of legal
and/or equitable relief) in any court of relevant jurisdiction and all parties
shall be fully bound by the arbitrator's determination. Nothing herein shall
limit the right of any party to seek equitable relief in any court of relevant
jurisdiction.
-12-
<PAGE>
2. CREATION OF MASTER ROLL-OUT SCHEDULE.
In connection with the establishment of @Home's periodic budget and business
plan and the periodic amendments to @Home's Business Plan contemplated hereby,
each Cable Parent shall deliver to @Home a list of Offered Homes Passed (and the
related cable systems) and Projected Commencement Dates for such Offered Homes
Passed. Such list shall include, by separate designation, those Offered Homes
Passed which are Qualifying Offered Homes Passed. Thereafter, the Cable Parents
and @Home shall cooperate in good faith to establish a timetable and schedule in
order to coordinate the Cable System Upgrade plans of each Cable Parent with the
Network Upgrade plans of @Home so as to attempt to make the @Home Services
available to the Offered Homes Passed on or before the applicable Projected
Commencement Date in an efficient and economical manner; provided, however, that
-------- -------
such timetable and schedule shall be determined (i) by giving priority to making
the @Home Services available to those Offered Homes Passed which are Qualifying
Offered Homes Passed, (ii) in accordance with the respective Projected
Commencement Dates relating to such Qualifying Offered Homes Passed and (iii) in
proportion to the respective number of Qualifying Offered Homes Passed of such
Cable Parents. The schedule determined and approved by the Board of @Home in
accordance with the foregoing criteria shall be the "Master Roll-Out Schedule"
------------------------
(together with any modifications and adjustments within the applicable Planning
Period agreed to by @Home and the applicable Cable Parent following the adoption
of the Master Roll-Out Schedule), which shall include, for each Cable Partner,
specific plans related to the cable systems to be upgraded, the number of
Offered Homes Passed and Qualifying Offered Homes Passed therein and the
Proposed Commencement Date therefor, together with such additional information
as the parties may agree. Subject to any subsequent adjustments within the
applicable Planning Period as may be agreed to by the applicable Cable Parent
and @Home, the information set forth therein (x) as to a Cable Parent, shall
constitute its representation to @Home that such Cable Parent reasonably
believes that the applicable Offered Homes Passed will be made available for
distribution of the @Home Services by the applicable Projected Commencement
Dates, and (y) as to @Home, shall constitute @Home's agreement to use
commercially reasonable efforts to cause the @Home Network to be upgraded in
such a way as is necessary in order to cause the @Home Services to be available
for distribution to such Qualifying Offered Homes Passed by the applicable
Projected Commencement Dates.
3. EXECUTION OF LOCAL CABLE OPERATOR DISTRIBUTION AGREEMENTS.
Immediately following the establishment of the Master Roll-Out Schedule for each
Planning Period, each Cable Parent shall cause those of its Affiliated Operators
which own and operate cable systems serving the Offered Homes Passed which have
a Projected Commencement Date during such Planning Period to enter into a LCO
Agreement with @Home. Each such LCO Agreement shall incorporate therein the
relevant matters from the Master Roll-Out Schedule, including but not limited
to, the number of Offered Homes Passed for such Operator Territory and the
related Projected Commencement Dates.
-13-
<PAGE>
4. BUDGETS.
(a) @Home will use commercially reasonable efforts to cause the @Home Services
to be available to all Qualifying Offered Homes Passed of the Cable Parents
having Projected Commencement Dates within such Planning Period and will use
commercially reasonable efforts to comply with the Master Roll-Out Schedule for
such Planning Period.
(b) The adoption of a Non-Pro Rata Roll-Out Budget shall require a
Supermajority Vote (as defined in the Charter). A Stockholder who has been
treated in a non-pro rata manner with respect to a Roll Out Budget and has not
voted in favor of such Non-Pro Rata Roll-Out Budget, shall be entitled to a
written explanation of such treatment from the Chief Executive Officer and each
director who has voted in favor of such Non-Pro Rata Roll-Out Budget.
(c) In the event a Cable Parent believes that any Roll-Out Budget approved by a
majority of the Board constitutes a Non-Pro Rata Roll-Out Budget, such Cable
Parent shall promptly notify the Board of such belief and present evidence of
such claim.
-14-
<PAGE>
5. CABLE PARENT EXCLUSIVITY PROVISIONS.
-15-
<PAGE>
(a) During the Restricted Period, no Cable Parent will, and each Cable Parent
will cause any Person that is or shall become a Controlled Affiliate of such
Cable Parent not to, directly or indirectly (i) conduct or engage in any
Restricted Business (as defined below), (ii) participate (whether by means of a
management, advisory, operating, consulting or similar agreement or arrangement)
in any Restricted Business, or (iii) have any record or beneficial equity
interest, either as a principal, trustee, stockholder, partner, joint venturer
or otherwise, in any Person which so conducts, engages in or participates in,
any Restricted Business. Notwithstanding the foregoing, the provisions of this
Section 5 shall not: (x) prevent the beneficial ownership for investment
purposes of 10% or less of any class of equity securities of any such Person
which is a Public Company; (y) prevent any Exempt Acquisition (as defined
below), the operation of any Exempt Restricted Assets (as defined below) or any
Non-Control Acquisition (as defined below) (in each case, subject to compliance
with the other provisions hereof); and (z) be applicable to any Restricted
Business in which a Cable Parent or its Controlled Affiliate engaged or
participated in, or in which such Cable Parent or Controlled Affiliate
beneficially owns any equity interests, in each case as of the Execution Date;
provided, that the level or scope of such Person's engagement, participation or
- --------
equity ownership is not increased during the Restricted Period other than in
accordance with instruments or agreements which were in effect on the Execution
Date. In addition, the provisions of this Section shall not be applicable with
respect to any Operator Territory to the extent that the Cable Parent
Exclusivity Provisions (as defined below) have been terminated as to such
Operator Territory or following the expiration of the Term (as defined in the
LCO Agreement) of the applicable LCO Agreement; provided, however, that
-------- -------
regardless of any release of an Operator under an LCO Agreement with respect to
a specified Operator Territory, the restrictions set forth in clause (iii) of
the first sentence of this Section 5 (a) shall continue nonetheless to be
applicable to such released Operator for the applicable Restricted Period. For
purposes of this MDA Term Sheet, the term (A) "Non-Control Acquisition" shall
-----------------------
mean any acquisition of beneficial ownership of equity securities of any Person
which are registered under the Exchange Act, if none of such Cable Parent or any
Controlled Affiliate of such Cable Parent shall Control or be under common
Control with such Person, and (B) "Restricted Business" shall mean (1) the
-------------------
provision of a residential Internet Service over the cable television plant or
equipment of any Cable Parent or its Controlled Affiliates at bit rate speeds
greater than 128 kbps whose primary purpose is the provision to consumers of
entertainment, information content, transactional services or e-mail, chat and
news groups or substantially similar services (a "Consumer Purpose"), (2) the
----------------
connection by any Cable Parent or any Controlled Affiliate thereof of its cable
television plant and equipment directly or indirectly to any Internet Backbone
for a Consumer Purpose at bit rate speeds greater than 128 kbps, or (3) the
business of providing or engaging in any Internet Backbone Service, in each of
the above cases of clauses (1), (2) and (3), (x) other than any such service to
be offered by @Home and (y) within the United States of America; provided,
however, that notwithstanding the provisions of clauses (1) and (2) of
subsection (B) above (and regardless whether or not such service or other
activity is otherwise within the definition of the term "Restricted Business"),
"Restricted Business" shall not include: (i) the creation or aggregation of
content; (ii) the provision by any Cable Parent of telephony services (i.e., the
provision of conventional telephone service, including POTS and ISDN) to its
subscribers, provided that any use of or connection to any Internet Service in
connection with the provision of such telephony services shall be (x) pursuant
to a subscriber dial-up of an Internet Service provider and (y) at bit rate
speeds of 128
-16-
<PAGE>
kbps and below; (iii) the provision of services which are primarily work-related
("Internet Work Services"); (iv) the provision of any Internet Services not
----------------------
using a Cable Parent's cable television plant; (v) the provision of any Internet
Service that is a Local Service; (vi) the provision of services which are
primarily utilized to connect students to schools, colleges and universities;
and (vii) the provision of Internet telephony, Internet video telephony, or
Internet video conferencing; (viii) the provision of Internet Services (x) which
are primarily intended for display on a television (provided that any Internet
Service that is displayed on a computer monitor or television that also
functions as a display device for a personal computer shall not be deemed to be
primarily intended for display on a television unless such personal computer is
equipped with a television tuner and such personal computer is functioning as a
television display device through such monitor or television at such time as the
Internet Services are provided) and (y) that provide the user with no more than
limited access to the Internet that is of a type and quality that is
substantially less comprehensive than that offered by a typical Internet service
provider (such as AOL, CompuServe, Netcom or WebTV); (ix) the provision of
primarily downstream Internet Services where the user cannot send commands in
the upstream direction by means of telecommunications connectivity to the source
of such downstream Internet Services in real-time (i.e., with typical latencies
of less than five minutes); or (x) the provision of Video Services. In addition,
notwithstanding the prohibitions set forth in this Section 5(a), each Cable
Parent shall be entitled to engage or participate in limited testing, trials and
similar activities with respect to any Restricted Business so long as (I) such
engagement or participation is solely for testing or trial purposes, (II) such
Cable Parent makes any such service available to a limited number of Homes
Passed (as defined in the Stockholders' Agreement) (which shall not exceed
50,000 in the aggregate), (III) the duration of such testing or trial does not
exceed six months and (IV) the public disclosures made by such Cable Parent
shall not characterize or represent such service as other than a test or trial.
Each Cable Parent agrees that, subject to any applicable confidentiality
obligations, it will advise @Home of its intention to conduct such testing,
trial or other activity, and @Home and each Cable Parent agree to discuss in
good faith arrangements to conduct such testing or trial jointly, provided that
neither party shall be under any obligation to agree to any joint testing
arrangements.
(b) In the event that, during the Restricted Period, any Cable Parent or any of
its Controlled Affiliates desires to enter into or conduct any business in the
United States which would not be a Restricted Business but which requires the
utilization or other implementation of both the cable plant of such Cable Parent
or its Controlled Affiliates and an Internet Backbone Service, then such Cable
Parent or its Controlled Affiliate shall first offer to @Home the opportunity to
provide such Internet Backbone Service in accordance with the provisions of this
Section 5 (b); provided that neither such Cable Parent nor its Controlled
--------
Affiliate shall be obligated to make such offer if the business to be conducted
or entered into would involve obtaining the Internet Backbone Service from a
Person or group of Persons that is offering to provide such service or cause
such service to be provided only in a package with other products or services
that are integral to such other business. Notwithstanding the foregoing proviso,
nothing herein contained shall be deemed to modify any Cable Parent's
obligations pursuant to Section 5 (a). Such offer shall include a specification
of the requirements for such Internet Backbone Service and a good faith estimate
of the most favorable terms and conditions on which such Internet Backbone
Service is available to such Cable Parent or its Controlled Affiliate from third
parties. If @Home
-17-
<PAGE>
proposes to provide such Internet Backbone Service within a reasonable period of
time following such offer, then, the Cable Parent or its Controlled Affiliate
and @Home will negotiate in good faith the terms and conditions under which
@Home would provide such Internet Backbone Service. Unless the terms and
conditions upon which @Home is to provide such service following such
negotiation are less favorable to such Cable Parent or its Controlled Affiliate
than those available from a third party, then such Cable Parent or Controlled
Affiliate shall select @Home to provide such Internet Backbone Service on such
terms and conditions so offered. In consideration of the Cable Parent's
agreement to provide @Home such opportunity to provide such Internet Backbone
Service, @Home agrees that it will not propose to provide such Internet Backbone
Service unless it reasonably believes that it is able to provide the Internet
Backbone Service so requested.
(c)(i) In the event that at any time during the Restricted Period, a Cable
Parent and/or any Person that is or shall become a Controlled Affiliate
such Cable Parent, shall acquire beneficial ownership of at least a
majority of the then outstanding voting power of any Person, which such
Person is not principally engaged in any Restricted Business, but
nonetheless, directly or indirectly, owns, leases or otherwise operates
facilities (the "Exempt Restricted Assets") which, if operated
------------------------
independently, would constitute a Restricted Business (an "Exempt
------
Acquisition"), the provisions of this Section 5 (c) shall be applicable
-----------
such Exempt Restricted Assets. In the event that at any time during the
Restricted Period, a Non-Control Acquisition shall occur and if at any
during the Restricted Period the beneficial ownership of equity security
giving rise thereto shall cease to qualify as a Non-Control Acquisition
any reason, a "Control Acquisition" shall have occurred and then the
-------------------
provisions of this Section 5 (c) shall be applicable to the assets and
business of the Person which is the subject of such Control Acquisition
which, if operated independently would constitute a Restricted Business
(the "Control Restricted Assets," and together with any Exempt Restrict
-------------------------
Assets, the "Restricted Assets").
-----------------
(ii) In the event of any Exempt Acquisition or any Control Acquisition, the
applicable Cable Parent will (and will cause any Person which is or
shall become a Controlled Affiliate of such Cable Parent to) use
reasonable commercial efforts to divest any Restricted Assets so
acquired unless such divestiture would be adverse to the tax structure
of any Exempt Acquisition or Control Acquisition; provided, however,
that such Cable Parent shall be required to use reasonable commercial
efforts to divest such assets within a reasonable period following the
time such divestiture would not be adverse to the tax structure of such
acquisition, in which event all parties would reasonably cooperate to
cause such divesture to be accomplished on a tax-efficient basis. Such
reasonable commercial efforts shall be deemed to include an auction of
such Restricted Assets. Notwithstanding the foregoing, such Cable Parent
will not be required to dispose of such Restricted Assets if it would
not realize the fair market value thereof (it being agreed that the fair
market value thereof will be computed by reference to the overall
acquisition price in the Exempt Acquisition or Control Acquisition). The
provisions of clauses (iii), (iv) and (v) of this Section 5 (c) shall
apply to any such disposition.
(iii) Such Cable Parent shall not, and shall not permit any Person which is or
shall become a
-18
<PAGE>
Controlled Affiliate of such Cable Parent to, sell, transfer
or otherwise dispose of all or any substantial portion of such Restricted
Assets, unless prior to any such sale, transfer or other disposition, such
Cable Parent shall have offered by written notice to sell to @Home (or its
Controlled Affiliate) all or such portion of the Restricted Assets at a
specified price (the "Offer Price") and shall have allowed such offer to
-----------
remain open and available for acceptance for a period of at least 30
calendar days. In the event that such offer is not accepted within such
30-day period, such Cable Parent or such Controlled Affiliate shall be free
to offer such Restricted Assets to any other Person, provided, however,
-------- -------
that such Cable Parent shall not, and shall not permit any Person which is
or shall become a Controlled Affiliate of such Cable Parent to, offer to
sell, transfer or otherwise dispose of such Restricted Assets, and shall
not sell, transfer or otherwise dispose of any of such Restricted Assets,
for a price less than the Offer Price or on terms which are more favorable
to such offeree than the terms on which such Restricted Assets were offered
to @Home, in either case without first complying again with the provisions
of this clause (iii).
(iv) In the event that @Home shall accept any such offer described in clause
(iii), the closing of the purchase of the Restricted Assets shall take
place at the principal office of such Cable Parent on the later of (x) the
fifth business day after the expiration of the 30-day period after the
giving of the notice set forth in clause (iii), and (y) the fifth business
day after the receipt of any required governmental approval or the
expiration or termination of any waiting period, including any waiting
period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act").
-------
(v) The foregoing provisions of this subsection (c) shall be applicable to
successive transfers or other dispositions of all or any portion of the
Restricted Assets by such Cable Parent or any Person which is or shall
become a Controlled Affiliate of such Cable Parent.
The provisions of this section are referred to herein as the "Cable Parent
------------
Exclusivity Provisions." The obligations under the foregoing Cable Parent
- ----------------------
Exclusivity Provisions shall automatically terminate as to the applicable
Operator Territory upon the consummation of the sale or transfer of such cable
television system by a Cable Parent or its Controlled Affiliate to a third party
(other than a third party which is a Cable Parent or a Controlled Affiliate of a
Cable Parent).
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<PAGE>
6. COMCAST NON-EXCLUSIVITY PROVISIONS.
(a) At any time following the third anniversary of the Execution Date, Comcast
Cable, by 90 days advance written notice to each other Stockholder and @Home,
shall have the right ("Comcast Non-Exclusive Right") to terminate the Cable
---------------------------
Parent Exclusivity Provisions as to itself and its Controlled Affiliates;
provided, that in the event that Comcast Cable exercises the Comcast Non-
- --------
Exclusive Right, @Home shall have the right (the "@Home Repurchase Right") to
----------------------
repurchase from the Comcast Stockholder Group the applicable amount of Subject
Shares at the applicable Subject Securities Purchase Price. The term "Subject
-------
Shares" shall mean, with respect to any exercise of the Comcast Non-Exclusive
- ------
Right during the time periods specified below, the applicable percentage set
forth below of the Company Securities (i) originally issued to Comcast Cable at
the closing under the Stock Purchase Agreement (as defined in the Stockholders=
Agreement), together with (ii) any Company Securities purchased by any member of
the Comcast Stockholder Group upon the exercise of their preemptive rights
pursuant to the Stockholders' Agreement, in each case as appropriately adjusted
to take into account any stock splits, stock dividends, reverse splits or
recapitalization occurring after the Execution Date.
PERCENTAGE OF
DATE OF EXERCISE OF COMCAST COMPANY SECURITIES
NON-EXCLUSIVE RIGHT SUBJECT TO REPURCHASE
---------------------------- ---------------------
After third anniversary of 55%
Execution Date until and
including fourth anniversary
thereof
After fourth anniversary of 30%
Execution Date until and
including fifth anniversary
thereof
After fifth anniversary of 10%
Execution Date until and
including sixth anniversary
thereof
The "Subject Securities Purchase Price" shall mean the original purchase
---------------------------------
price paid by the Comcast Stockholder Group to @Home upon the original issuance
of the applicable Subject Shares, as such price may be appropriately adjusted in
the event of any stock split, reverse split, stock dividend or other
reclassification of the capital stock of the Company occurring after the date of
issuance of the applicable Subject Shares; provided, however, that (i) the
-------- -------
purchase price of any Subject Shares issued upon the conversion or exchange of
any other security shall be equal to the purchase price of such other security
plus any amounts payable by the holder thereof in connection with such
conversion or exchange of such security divided by the number of such Subject
Shares issued upon such conversion or exchange, (ii) the purchase price of any
Subject
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<PAGE>
Shares issued upon the exercise of any option, warrant or other right
shall be the exercise price thereof plus any consideration paid in connection
with the acquisition of such option, warrant or other right, (iii) the purchase
price of any Subject Shares which is an option, warrant or other right shall be
the amount of consideration paid in connection with the acquisition of such
option, warrant or other right, and (iv) the purchase price of any Subject
Shares acquired pursuant to any stock dividend shall be the par value of such
security, or if there is no par value, $.01.
(b) The @Home Repurchase Right may only be exercised by @Home in the event that
Comcast Cable exercises the Comcast Non-Exclusive Right; any other termination
of the Cable Parent Exclusivity Provisions shall not entitle @Home to exercise
the @Home Repurchase Right and such other termination of the Cable Parent
Exclusivity Provisions shall automatically terminate the @Home Repurchase Right
as to all Subject Shares held by the Comcast Stockholder Group (except to the
extent that the @Home Repurchase Right has been previously exercised or is then
exercisable as to any of such Subject Shares in connection with the exercise of
the Comcast Non-Exclusive Right). In the event that Comcast elects to
irrevocably terminate its right to exercise the Comcast Non-Exclusive Right at
any time prior to such time as the @Home Repurchase Right has become exercisable
as a result of the exercise of the Comcast Non-Exclusive Right, it shall deliver
an instrument to such effect to @Home whereupon the @Home Repurchase Right and
Comcast's right to exercise the Comcast Non-Exclusive Right shall terminate.
(c) Notwithstanding any other provision contained in this MDA Term Sheet or in
the Stockholders' Agreement, until the earlier to occur of (i) such time as none
of the Subject Shares would be subject to the @Home Repurchase Right in the
event of an exercise of the Comcast Non-Exclusive Right or (ii) such time as
Comcast irrevocably terminates its right to exercise the Comcast Non-Exclusive
Right pursuant to the last sentence of Section 6(b), neither Comcast Sub nor any
member of the Comcast Stockholder Group shall be entitled to Transfer (other
than to another member of the Comcast Stockholder Group that agrees to be bound
by the provisions of this MDA Term Sheet and the Stockholders' Agreement) any
Subject Shares that would be subject to the @Home Repurchase Right were Comcast
Cable to exercise the Comcast Non-Exclusive Right.
(d) Nothing herein shall limit the right of any member of the Comcast
Stockholder Group to sell shares of Series A Common Stock pursuant to Section
4.5 of the Stockholders' Agreement without regard to whether such shares are
Subject Shares, and the @Home Repurchase Right shall terminate as to any such
shares so sold; provided, that in connection with any such sale, Comcast shall
--------
be deemed to have sold first those Company Securities not subject to the @Home
Repurchase Right. After such a sale, the @Home Repurchase Right shall continue
as to any Subject Shares not so sold and the Comcast Non-Exclusive Right shall
remain in effect without modification.
7. @HOME EXCLUSIVITY PROVISIONS.
(a)(i) Notwithstanding anything to the contrary set forth in this MDA Term
Sheet (but subject to the other provisions of this Section 7), until the
later to occur of (x) such time as the
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<PAGE>
applicable Cable Partner ceases to be an Exclusive Stockholder (except
as a result of the event specified in clause (y) below) or (y) in the
event the applicable Cable Partner ceases to be an Exclusive Stockholder
as a direct result of a termination of the Cable Parent Exclusivity
Provisions in connection with a TCI Performance Default, the sixth
anniversary of the Execution Date, but subject to the requirements of
applicable law and the other terms and conditions of this MDA Term Sheet
and the Stockholders' Agreement, @Home agrees that neither it nor its
Controlled Affiliates will (A) offer or provide Internet Services (or
any comparable services with comparable capabilities) at bit rate speeds
of greater than 128 kbps to residences (including, without limitation,
individual dwelling units within a multiple dwelling unit) in the
geographic area served by the cable systems owned by a Cable Parent
whose Stockholder Group includes an Exclusive Stockholder (an "Exclusive
---------
Cable Parent") and its Controlled Affiliates (the "Exclusive Territory")
------------ -------------------
other than through the use of the Operator Facilities of such Exclusive
Cable Parent and its Controlled Affiliates pursuant to, or as otherwise
contemplated by, this MDA Term Sheet, or (B) offer, provide or
distribute any Excluded Service (whether offered, provided or
distributed by @Home or a third party) to residences (including, without
limitation, individual dwelling units within a multiple dwelling unit)
in the Exclusive Territory, or (C) advertise, promote or market, or
carry or otherwise distribute advertising or promotions with respect to,
any such Excluded Service within the Exclusive Territory, in each case
without the prior written consent of such Affiliated Operator of such
Exclusive Cable Parent; provided, however, that subject to @Home's
-------- -------
compliance with the provisions of clauses (B) and (C) above, @Home shall
not incur liability to any Cable Parent or Affiliated Operator in the
event that subscribers in any such Exclusive Territory obtain access to
such Excluded Services by utilizing the capabilities of the @Home
Service. To the extent that any such Cable Parent grants @Home consent
to promote, offer or distribute any Excluded Service in the Operator
Territory of any of its Affiliated Operators, the terms and provisions
upon which such Excluded Service shall be distributed (including the
compensation payable to @Home in respect thereof) shall be as the
parties may agree; provided, however, that the terms and provisions of
-------- -------
@Home's distribution of such Excluded Service (including the
compensation payable to @Home) shall be subject to the MFN.
(ii) @Home and the Cable Parents agree that in addition to the limitations
applicable to @Home set forth in subsection (a)(i) above with respect to
the offer, provision or distribution of Video Services in any Exclusive
Territory, @Home will not initially offer, provide, distribute,
advertise, promote or market any Video Service in any individual Area of
Dominant Influence ("ADI") (as such term is defined by the Federal
Communications Commission) which, as of the date of the initial offering
of Video Services to @Home subscribers located in such ADI, includes an
Exclusive Territory of a Cable Parent, unless it shall have received the
prior written consent of a Supermajority of the Affected Cable Parents;
provided, that (A) @Home will be entitled to seek the foregoing consent
of the applicable Affected Cable Parents as to any ADI on multiple
occasions (notwithstanding any prior refusal of the applicable Affected
Cable Parents at the time of any such prior refusal to give such
consent), (B) no such consent shall be required as to any ADI at any
time when there are no Affected Cable Parents as to such
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<PAGE>
ADI (notwithstanding whether one or more Cable Parents subsequently
becomes an Affected Cable Parent as to such ADI), and (iii) the
effectiveness of any such consent shall not be affected by any
subsequent acquisition or disposition of cable systems by one or more
Cable Parents (or other events affecting the number of cable television
subscribers) in the applicable ADI. The term "Supermajority of Affected
--------------------------
Cable Parents" shall mean those Cable Parents having two-third (66-2/3%)
-------------
of the number of cable television subscribers located in such ADI of all
Cable Parents having an Exclusive Territory within such ADI (each such
Cable Parent, an ("Affected Cable Parent")
---------------------
(iii) For purposes of this Section 7(a), (x) @Home's agreement not to offer,
provide or distribute any Video Service shall require it to use its
reasonable best efforts to block or otherwise impair a user's ability to
connect to any such Video Service through the @Home Service, to provide
notice to the applicable Cable Parent to the extent @Home determines
that subscribers of such Cable Parent are in fact connecting to any such
Video Service and to provide all Cable Parents with any software or
other technology which becomes available to @Home to monitor or block
such usage of Video Service and (y) restrictions set forth in this
Section 7(a) with respect to Excluded Services shall not be applicable
to Internet Work Services which do not offer or make available services
to residences. The provisions of this Section 7(a) are hereinafter
referred to collectively as the "@Home Exclusivity Provisions."
----------------------------
(iv) @Home acknowledges and agrees that each LCO Agreement entered into
following May 15, 1997 will contain a provision in which the applicable
Operator acknowledges and agrees to the existence and enforcement of the
@Home Exclusivity Provisions (including the enforcement of the rights of
any Affected Cable Parent(s) pursuant to clause (ii) above) as to any
ADI(s) containing all or a portion of the applicable Operator Territory,
and agrees that such Operator will not sue or threaten to sue, or seek
or attempt to cause any person to commence or threaten any governmental
or regulatory action or investigation against @Home or any Cable Parent
as a result of or in connection with the enforcement of the @Home
Exclusivity Provisions (including the provisions of such clause (ii)).
(b) The provisions of Section 7(a) shall not be applicable with respect to any
Operator Territory to the extent that the @Home Exclusivity Provisions have
been terminated as to such Operator Territory or following the expiration
of the Term of the applicable LCO Agreement.
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<PAGE>
8. NON-PERFORMANCE OF TCI.
In the event that TCI shall be in Performance Default on June 4, 1999 (the
"First Determination Date"), then the applicable Triggering Cable Parent (as
- -------------------------
defined below), if any, shall, by written notice to @Home, TCI and each other
Cable Parent, delivered within 60 days of the First Determination Date, be
entitled to terminate the Cable Parent Exclusivity Provisions as to all Cable
Parents and their Controlled Affiliates, such termination to be effective as of
the date of such notice. In the event that there is a Performance Default on
the First Determination Date but the applicable Triggering Cable Parent does not
elect to terminate the Cable Parent Exclusivity Provisions within the period
specified above, then following each succeeding anniversary thereafter during
the Restricted Period (each such anniversary, a "Subsequent Determination Date")
-----------------------------
upon which TCI shall be in Performance Default, the applicable Triggering Cable
Parent, if an Eligible Cable Parent, shall have the right, exercisable by
written notice to @Home, TCI and each other Cable Parent, delivered within 60
days of such Subsequent Determination Date to terminate the Cable Parent
Exclusivity Provisions. The term "Triggering Cable Parent" shall mean the High
-----------------------
C as of the applicable date of determination or, if one of Comcast Cable or CCI
(a) is no longer an Eligible Cable Parent or (b) is acquired by TCI, the
remaining Eligible Cable Parent or Cable Parent not acquired by TCI, as the case
may be, between Comcast Cable and CCI. An "Eligible Cable Parent" shall mean
---------------------
any Cable Parent which is a member of a Stockholder Group which includes an
Eligible Stockholder.
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<PAGE>
9. MOST FAVORED NATIONS PROVISIONS.
Each Cable Parent and its Controlled Affiliates will be entitled to "most
favored nation" ("MFN") (a) terms and conditions of carriage with respect to the
---
distribution of the @Home Services or any services provided to an Eligible Cable
Parent pursuant to Section 18(c) below (which distribution or other services for
purposes of this Section 9 shall not include the distribution or promotion of a
content provider's services) and (b) terms and conditions of the Trademark
License Agreement (as defined below), and any Ancillary Services Arrangements
(as defined in the LCO Agreement), in each case, including all direct and
indirect benefits as a result of a transaction with @Home that are no less
favorable than those offered to any other Operator, individually or collectively
from time to time. Such MFN status shall require identical treatment of all
Cable Parents and their respective Controlled Affiliates (without regard to the
size (through volume discounts or otherwise) or identity of such Cable Parent or
its ownership of @Home securities) (x) with respect to the terms of the
distribution arrangements (including the Trademark License Agreement and any
Ancillary Services Arrangements) (other than the duration of any distribution
agreement arising from the provisions of the Term of the LCO Agreement) granted
to any Cable Parent and its Controlled Affiliates and (y) with respect to all of
the terms of such distribution arrangements provided to third party providers
which are not members of a Stockholder Group (an "Unaffiliated Third Party"),
------------------------
other than with respect to (i) whether @Home requires that an unaffiliated
Operator agree to provisions similar to the Cable Parent Exclusivity Provisions
as to the applicable Operator Territory, (ii) the level of commitment related to
the Cable System Upgrade and the remedies of @Home in the event of any failure
to upgrade such systems by the Projected Commencement Date, (iii) percentage
splits granted to Unaffiliated Third Parties in the event the Board of @Home, by
a Required Either E Cable Parent Election (as defined in the LCO Agreement),
elects to increase the percentage split to @Home (in which case the percentage
split to @Home would be so increased with respect to all future periods with
respect to all Operators which are Cable Parents or Controlled Affiliates of a
Cable Parent with respect to any existing LCO Agreement (regardless of the
existing provisions thereof) or any LCO Agreement entered into in the future,
while the LCO Agreements of Unaffiliated Third Parties in effect at the time of
such change would not be so affected), and (iv) the duration of any distribution
agreement. In addition, each Cable Parent and its Controlled Affiliates shall
be entitled to MFN status with respect to the terms of any sales agency
agreement pursuant to which it is authorized to enter into .Com Agreements on
behalf of @Home.
10. CHANGE OF CONTROL OF TCI.
Following the occurrence of a TCI Change of Control, either CCI or Comcast
Cable, so long as it is an Exclusive Stockholder, shall be entitled to elect to
terminate the Restricted Period as to all Cable Parents and their Controlled
Affiliates by giving written notice to such effect to each other Stockholder and
@Home, in which case no Cable Parent or its Controlled Affiliate shall have any
remaining obligations under the Cable Parent Exclusivity Provisions.
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<PAGE>
11. CHANGES IN MASTER ROLL-OUT SCHEDULE.
If a Cable Parent determines that it or one of its Controlled Affiliates will
not be able to fulfill its commitment with respect to the commencement of the
availability of the @Home Services as of the Projected Commencement Date, it
will immediately notify @Home, and, if such notice is given at least 180 days
prior to the applicable Projected Commencement Date, the Cable Parent shall be
entitled to substitute one or more other cable systems having substantially the
same number of Homes Passed as were required to be delivered by such date for
commencement of the @Home Services on that Projected Commencement Date, subject
to the approval of @Home, which will not be unreasonably withheld so long as the
substitute systems have similar characteristics in terms of number of Homes
Passed and will not cause a material increase in @Home's expenses or have a
material adverse impact on @Home's ability to meet its other commitments under
the Master Roll-Out Schedule, in which case such substitute cable systems shall
retain the same roll out priority and Projected Commencement Date as the cable
systems they replaced. For purposes of the foregoing sentence, the substitution
of any cable systems that are not Qualifying Systems will be deemed to have such
an impact unless such cable systems are located in an area included in the
current Master Roll-Out Schedule or in which @Home has already commenced
offering the @Home Services. Any changes to the Master Roll-Out Schedule
pursuant to this paragraph shall be incorporated in the affected LCO Agreements,
and the applicable Cable Parent shall cause the Operator of any such substituted
cable system to enter into an LCO Agreement. Notwithstanding the foregoing,
nothing herein shall limit the right of a Cable Parent or its Affiliated
Operator, at any time prior to the Commencement Date (as defined in the LCO
Agreement), to remove any of its cable systems from the Master Roll-Out Schedule
and/or terminate any existing LCO Agreement in respect thereof, subject to its
obligations set forth in such LCO Agreement (including, but not limited to, the
payment to @Home of the @Home Specified Remedy (as defined in the LCO Agreement)
and the release of @Home from the @Home Exclusivity Provisions with respect to
such Operator Territory).
12. LOCAL CONTENT PROGRAMMING.
Each Operator, as to its cable system, or each Cable Parent, as to one, several
or all cable systems owned by it and its Controlled Affiliates, shall be
entitled to create, author, promote and otherwise engage in the business related
to Local Content offerings. Within the @Home First Page, each Affiliated
Operator shall be allocated the Local Area. Each Affiliated Operator or Cable
Parent, as the case may be, shall be entitled to program its Local Area as it
shall determine in its sole discretion, subject only to the Style Guidelines (as
defined in the LCO Agreement).
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<PAGE>
13. @HOME PROGRAMMING.
(a) @Home shall be entitled to create, author and promote such content provider
offerings as it shall determine, and shall have the right to program the
National Area in its sole discretion, subject to the Cable Parent Exclusion
Right, the Cable Parent Access Blocking Right and the provisions of Sections 7
and 13(b). @Home and each Cable Parent will use commercially reasonable efforts
to cooperate with each other in the creation of the @Home First Page (including
the coordination of the programming of the National Area and each Local Area) so
as to optimize the consumer appeal of the @Home web site.
(b) @Home agrees that it will use its reasonable best efforts to (i) consult
with and involve each of the Cable Parents in the development of requirements
for and design of enhancements to the @Home Service and new features and new
applications proposed to be included in the @Home Service (collectively,
"Enhancement and Addition") and (ii) coordinate closely with each Cable Parent
------------------------
with respect to the introduction of any Enhancement and Addition which would or
could have a significant effect upon the operations or business of the Cable
Parent with respect to its delivery of the @Home Service to its customers,
including, but not limited to, effects upon network transmission operations,
customer service operations or marketing operations. In addition, @Home will
notify each Cable Parent not less than 60 days prior to the proposed date of
introduction of such Enhancement and Addition with respect to such proposed
introduction date and all material details related thereto. In the event that
@Home receives not later than the 30th day preceding such proposed introduction
date, from Cable Parents representing a majority of the aggregate number of
Residential Subscribers of all of the Cable Parents, written notice objecting to
such Enhancement and Addition, @Home shall postpone the introduction of the
Enhancement and Addition in the Operator Territories of the objecting Cable
Parents, and shall thereafter negotiate with all Cable Parents and use its
commercially reasonable efforts to implement such changes as @Home and such
Cable Parents agree are necessary in order to cure such objections. Upon
reaching agreement with Cable Parents representing a majority of the aggregate
number of Residential Subscribers of all of the Cable Parents, @Home shall
thereafter introduce such Enhancements and Addition to the @Home Service.
Notwithstanding the foregoing, the provisions of this Section 13(b) shall be
subject in all respects to the provisions of Section 7(a).
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<PAGE>
14. EXECUTION OF PROMOTIONAL AGREEMENTS AND EXERCISE OF CABLE PARENT EXCLUSION
RIGHT.
(a) Each Promotional Agreement shall provide that such content provider's right
to presentation on the National Area shall be subject to the exercise of the
Cable Parent's Exclusion Right and to @Home=s obligations with respect to the
@Home Exclusivity Provisions. Upon execution of a Promotional Agreement, @Home
shall provide written notice thereof by fax or e-mail to a designated contact
person at each Cable Parent. Such written notice shall include (i) the identity
of the content provider, (ii) a description outlining in reasonable detail the
content to be offered by such provider, (iii) the position in the National Area
to be assigned to such content provider, and (iv) an outline of the other terms
and conditions of such Promotional Agreement. Each Cable Parent will thereafter
have the right to exercise its Cable Parent Exclusion Right with respect to
Specified Promotions as to some or all of its Affiliated Operators distributing
the @Home Service. In order to exercise such right, the Cable Parent shall
deliver reasonable notice of its exercise of the Cable Parent Exclusion Right to
@Home which will become effective within a reasonable period of time after such
notice.
(b) An exercise of the Cable Parent Exclusion Right shall result in (x) the
exclusion from the National Area of any or all Specified Promotions (as defined
below) with respect to a Specified Brand (as designated by the applicable Cable
Parent) and (y) the replacement of such promotions (e.g., replacement of the
excluded "button") by other promotions of the same type (e.g., replacement of an
excluded button with another button) as selected by @Home.
(c) The term "Specified Promotions" shall mean any or all promotions in the
--------------------
National Area relating to the Specified Brand of a content provider (as
designated by the applicable Cable Parent). A "Content Provider Group" shall
----------------------
mean a content provider that has entered into one or more Promotional Agreements
for the purpose of placing Specified Promotions in the National Area with
respect to a number of Specified Brands. The term "Specified Brand" means one or
---------------
more substantially similar brand names utilized by a content provider in
connection with the promotion of its business identified by such brand name(s).
By way of example, Turner Broadcasting System, Inc. ("TBS") and its subsidiaries
---
would be considered a Content Provider Group; WTBS and TNT would be considered
to be two Specified Brands because they represent distinct brand names (albeit
in the same line of business). A Cable Parent electing to exercise its Cable
Parent Exclusion Right with respect to WTBS and TNT would be deemed to have
excluded two Specified Promotions to the extent that it elected to exclude both
WTBS and TNT. Similarly, a Cable Parent electing to exercise its Cable Parent
Exclusion Right with respect to a content provider which elected to use only one
Specified Brand to promote several related sites using substantially similar
brand names (for example, QVC Diamonds, QVC Clothes, QVC Electronics, etc.)
would be deemed to have exercised its exclusion right with respect to one
Specified Brand.
(d) A Cable Parent shall be entitled to exercise its Cable Parent Exclusion
Right from time to time in its sole discretion. In the event that the number of
Specified Brands excluded by a Cable Parent exceeds its Exclusion Limit, then
the Cable Parent Premium Service Revenue Split shall be subject to adjustment as
provided below. The exercise of the Cable Parent Exclusion Right with respect to
a Specified Brand will be counted toward the Exclusion Limit regardless of
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<PAGE>
whether such Cable Parent exercises the exclusion right with respect to some or
all of its Affiliated Operators or with respect to some or all of the Specified
Promotions as to such Specified Brand. For purposes of the determination of
whether or not a Cable Parent has exceeded its Exclusion Limit, there shall not
be included as Specified Brands (i) a single Competitor Exclusion (as defined
below) or (ii) any exclusions which are Discretionary Exclusions (as defined
below). A "Competitor Exclusion" shall mean the exclusion of the Specified
--------------------
Promotion(s) as to a single Specified Brand provider or service which is a
competitor to a content provider or service which is an affiliate of such Cable
Parent; provided, that, if Comcast Cable elects to use its Competitor Exclusion
-------- ----
with respect to Specified Promotions of the Home Shopping Network, Inc. ("HSN"),
---
such exclusion shall be deemed to apply to all electronic retailing businesses
of HSN without regard to brand name. A "Discretionary Exclusion" shall mean a
-----------------------
exclusion based upon (i) such Cable Parent's good faith determination that the
content to be offered constitutes pornographic or other immoral or overly
violent subject matter, (ii) such Cable Parent's reasonable determination that
the content to be offered may adversely impact an Affiliated Operator's
franchise to deliver cable television service and/or the @Home Service or (iii)
such Cable Parent's good faith determination that such promotions may relate to
promotions in respect of any Person providing Video Services.
(e) The "Exclusion Limit" of each Cable Parent shall be three Specified Brands,
---------------
which Specified Brands may be changed by the applicable Cable Parent at any time
upon reasonable advance notice to @Home. In the event a Cable Parent exceeds its
Exclusion Limit, then during the monthly billing period in which such Cable
Parent has exceeded its Exclusion Limit the Premium Service Revenue Split (as
defined in the LCO Agreement) between the Operators that are Controlled
Affiliates of such Cable Parent and @Home shall be adjusted to (x) decrease the
Premium Service Revenue Split to such Operators and (y) increase the Premium
Service Revenue Split to @Home from such Affiliated Operators in accordance with
the following schedule:
-29-
<PAGE>
<TABLE>
<CAPTION>
The Highest Number by Operator's @Home's
which such Cable Parent's Adjusted Adjusted
Exclusion of Specified Premium Premium
Brands Exceeds its Service Service
Exclusion Limit in a Revenue Revenue
billing month Split Split
-------------------------- ----------- ----------
<S> <C> <C>
1 56% 44%
2 51% 49%
3 45% 55%
4 38% 62%
5 29% 71%
6 17% 83%
7 6% 94%
8+ 0% 100%
</TABLE>
In connection with any change to the Premium Service Revenue Splits which has
been approved in accordance with the provisions of the LCO Agreement, the above
revenue splits shall be correspondingly adjusted.
15. EXECUTION OF .COM AGREEMENTS AND EXERCISE OF CABLE PARENT ACCESS BLOCKING
RIGHT.
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<PAGE>
(a) Each .Com Agreement and Promotional Agreement shall provide that the
content provider's right to connectivity over the @Home Service to subscribers
of any Affiliated Operators shall be subject to the exercise of the Cable Parent
Access Blocking Right and to @Home's obligations with respect to the @Home
Exclusivity Provisions. Upon execution of a .Com Agreement, @Home or any Cable
Parent or Controlled Affiliate acting as a sales agent on behalf of @Home, shall
provide written notice thereof by fax or e-mail to a designated contact person
at @Home and each other Cable Parent, as applicable. Such written notice shall
include (i) the identity of the content provider and (ii) a description
outlining in reasonable detail the content to be offered by such provider. Upon
exercise of its Cable Parent Access Blocking Right, such Cable Parent shall
deliver reasonable notice of its exercise of such right to @Home and the other
Cable Parents which will become effective within a reasonable period of time
after such notice. Subject to the other terms of this section, such Cable Parent
shall thereafter have the right to block the access by its subscribers of the
@Home Service to (1) any content offering with respect to which such Cable
Parent would have been entitled to exercise its Cable Parent Exclusion Right as
a Discretionary Exclusion (a "Discretionary Access Exclusion") and (2) any
------------------------------
content provider which is attempting to provide Video Services exceeding the
duration limit set forth in the Specifications and Standards; provided, however,
-------- -------
that the Cable Parent's election to exercise its rights pursuant to this clause
(ii) shall not affect @Home's obligations pursuant to Section 7(a). Subject to
the next sentence, the exercise of the Cable Parent Access Blocking Right shall
be the sole responsibility of the Cable Parent so exercising it (including, but
not limited to, the determination of the technological means to block such
access), and each Cable Parent agrees that its exercise of such blocking right
will be done in such a way that it does not otherwise interfere in any
significant way with the delivery and presentation of the @Home Service. @Home
shall use its reasonable best efforts to assist the Cable Parent in the exercise
of such Cable Parent Access Blocking Right.
(b) Each Cable Parent agrees to indemnify and hold @Home and each other
Stockholder harmless from all damages, costs and expenses (including reasonable
legal fees) incurred by @Home or each other Stockholder as a result of any
claims, actions, suits or other proceedings (including investigations related
thereto) of any third party or governmental or regulatory entity (other than a
party to a .Com Agreement or a Promotional Agreement) arising out of or relating
to the exercise by such Cable Parent of the Cable Parent Access Blocking Right
with respect to a Discretionary Access Exclusion.
(c) @Home acknowledges and agrees that each .Com Agreement and each Promotional
Agreement entered into following the Execution Date will contain a provision in
which each content provider acknowledges and agrees to the existence and
exercise of such Cable Parent Access Blocking Right and Cable Parent Exclusion
Right and enforcement of the @Home Exclusivity Provisions, and agrees that such
content provider will not sue or threaten to sue, or seek or attempt to cause
any person to commence or threaten any governmental or regulatory action or
investigation against @Home or any Cable Parent as a result of or in connection
with the exercise of the Cable Parent Access Blocking Right or Cable Parent
Exclusion Right or the enforcement of the @Home Exclusivity Provisions.
31
<PAGE>
16. CONTENT TAG-ALONG RIGHT.
(a) Each Parent agrees that neither it nor any of its Controlled Affiliates
will obtain any Additional Benefit (as defined below) unless it has complied
with the provisions of this section. In the event that any Parent or its
Controlled Affiliate seeks to enter into a transaction with a third party in
which such Parent or Controlled Affiliate may or will receive any Additional
Benefit as a condition of or as a result of such third party's entering into a
transaction with @Home, then such Parent or Controlled Affiliate will provide
written notice to each Cable Parent thereof describing such transaction and the
Additional Benefit to be received by such Parent or Controlled Affiliate. Such
written notice shall also constitute an offer by such Parent (the "Offeror") to
-------
each Cable Parent (each, an "Offeree") to participate in such transaction upon
-------
the same terms and conditions as the Offeror (which, in the event any such
Additional Benefit is of a limited amount or type, shall mean the right to
participate in such transaction pro rata based upon each such accepting
Offeree's ownership of equity securities of @Home and otherwise upon the same
terms and conditions as such Offeror), which offer may be accepted by such
Offeree by written notice to such Offeror, each other Offeree and @Home
delivered to such persons not later than the twentieth business day following
the date of receipt of such notice; provided that the Offeror may require an
earlier response (but not less than five business days following the receipt of
such notice) by so specifying in the written notice to the extent such earlier
response is reasonably necessary.
(b) In the event that it is not reasonably practicable to offer participation
in the Additional Benefit as described above, the Offeror shall promptly make
payments in cash to the Offerees so that the Offeror and Offeree share in the
value of the Additional Benefit pro rata based solely upon their respective
ownership of equity securities of @Home.
(c) In the event that the consideration to be paid (or Additional Benefit to be
received) by any Offeror in connection with such transaction is to consist of
assets, securities or other property or services, then the price at which any
Offeree may accept such offer shall be or, if applicable, the amount of cash
payments by the Offeror, the fair market value of such assets, securities,
property or services, which if the parties are unable to agree, shall be the
appraised value thereof as determined by a mutually agreed upon investment
banking firm. The term "Additional Benefit" shall mean (i) securities or
------------------
options, warrants or rights to acquire securities, (ii) assets or (iii) other
property or benefits of any type, in each case to be received by a Parent or a
Controlled Affiliate thereof in a transaction between such Parent or Controlled
Affiliate and such third party which transaction is conditioned upon or
otherwise contingent upon such third party's entering into such transaction with
@Home and is upon terms and conditions which are less favorable to @Home than
@Home's regular charges or other terms for such services, or is otherwise on
terms which are not arm's-length.
(d) The exercise of any rights by a Cable Parent under this section shall be in
addition to any rights that a Cable Parent may have with respect to the
applicable transaction pursuant to Section 9 of this MDA Term Sheet.
(e) The right to participate set forth in this Section 16 is hereinafter
referred to as the
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<PAGE>
the "Content Tag-Along Right."
-----------------------
17. PARENT UNDERTAKING.
(a) Each of: (i) TCI, as to TCIC, TCI. NET and TCI Internet Services; (ii)
CEI, as to CCI; and (iii) Comcast, as to Comcast Cable, hereby undertakes that,
in the event that such Parent entity acquires control of any cable television
systems which are not Controlled Affiliates of the applicable Cable Parent, such
Parent will cause such cable television systems to comply with the terms of this
agreement, including the Cable Parent Exclusivity Provisions, as if such cable
television systems were parties hereto; provided, that such Parent shall not be
obligated to terminate (other than in accordance with the terms and provisions
of the applicable agreement) the distribution of any residential Internet
Services distributed by such cable system prior to such time as the applicable
agreement expires or otherwise may be terminated by such Parent without the
incurrence of any material liability or additional obligations thereunder.
(b) @Home hereby undertakes that, while the @Home Exclusivity Provisions are in
effect, in the event it provides Internet Services (or any comparable services
with comparable capabilities) at bit rate speeds greater than 128 kbps through
arrangements with an alternate distribution provider (an "Alternative
-----------
Arrangement") to residences in a geographic area in which a Cable Parent or its
- -----------
Controlled Affiliate subsequently acquires a cable television system that is
capable of distributing such services in the geographic area, @Home will use
commercially reasonable efforts (i) to offer such services through such cable
television system when such system is upgraded in accordance with the
Specifications and Standards and scheduled for commencement of service on the
Master Roll-Out Schedule and (ii) to terminate @Home's obligations under such
Alternative Arrangements in such geographic area; provided, that @Home shall not
be obligated to terminate (other than in accordance with the terms and
provisions of the applicable agreement) the distribution of such services under
such Alternative Arrangements in such geographic area prior to such time as the
applicable agreement expires or otherwise may be terminated by @Home (i) without
the incurrence of any material liability or additional obligations thereunder
and (ii) without any material adverse impact on the economics to @Home of
providing such services to residences in the geographic area.
18. OTHER SERVICES.
(a) Any broadband local transport services provided by Operator to @Home as
part of the @Home Facilities, including connectivity to content providers, will
be the subject of a separate agreement between the parties, the terms and
provisions of which (including the compensation payable thereunder to Operator)
shall be mutually agreeable to the parties.
(b) [RESERVED]
(c) To the extent that any Eligible Cable Parent so requests in connection with
such Eligible Cable Parent=s provision to its subscribers of any Excluded
Service, @Home agrees to make available to such Eligible Cable Parent and
its Controlled Affiliates to the extent required to deliver such Excluded
Service to the subscribers of such Eligible Cable Parent (i) use of
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<PAGE>
@Home's Internet Backbone and related network management services (including the
NOC) upon then current market rates and terms (subject to the MFN Provisions),
(ii) use of @Home's provisioning services on a Cost-Plus Basis, and (iii) use of
the @Home Facilities (not including servers) located at the headends of such
Cable Parent's cable television systems on a Cost-Plus Basis that are necessary
or convenient to route any IP traffic related to such Excluded Service. @Home
will determine in good faith the appropriate method for implementing these
services and will consult and cooperate with the applicable Cable Parent in
connection with the foregoing.
(d) @Home agrees that it will keep accurate books and records and will provide
each of the Cable Parents with access to such books and records, upon reasonable
notice and at reasonable times, and shall use reasonable efforts to cooperate
with each Cable Parent in connection with an examination of such books and
records for purposes of determining @Home's Cost and calculating the matters
contemplated by the definition of the term "Cost-Plus Basis".
19. AMENDMENTS TO THIS MDA TERM SHEET.
The provisions of this MDA Term Sheet may not be amended, modified, supplemented
or superceded unless approved in writing by each Stockholder and @Home.
20. SPECIFIC PERFORMANCE.
Without intending to limit the remedies available to any of the parties hereto,
each of @Home and each Cable Parent acknowledges and agrees that a breach by
such party of any provision of Sections 5, 7, 9, 13, 15, 17 and 18 of this MDA
Term Sheet will cause the other parties irreparable injury for which an adequate
remedy at law is not available. Therefore, the parties hereto agree that in the
event of any such breach each such party shall be entitled to an injunction,
restraining order or other form of equitable relief from any court of competent
jurisdiction restraining any other party hereto from committing any breach or
threatened breach of, or otherwise to specifically enforce, any such provision
of this Agreement, in addition to any other remedies that such parties may have
at law or in equity.
21. TERM OF MDA TERM SHEET.
This MDA Term Sheet or any definitive agreement superceding this MDA Term Sheet
shall terminate as to each Cable Parent at the end of the Term of the last to
terminate of the LCO Agreements in effect between @Home and such Cable Parent or
its Controlled Affiliates entered into pursuant to this MDA Term Sheet or any
definitive agreement superceding the provisions of this MDA Term Sheet
(including any extension or renewal thereof).
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<PAGE>
EXHIBIT A
---------
SPECIFICATIONS AND STANDARDS
I. Objective
This document is to provide a baseline criteria for the Cable Parents to
identify qualified systems for submission to the Master Roll-Out Schedule.
II. Specifications and Standards
1. Cable network architecture will be based on Hybrid Fiber Coax; with
fiber optic facilities feeding distribution nodes that revert to
coaxial cable in to the home.
2. Bandwidth allocation for the service will be at least one 6 MHz
channel in the downstream direction.
3. Operator will test and provide performance information as to the
condition of the plant.
4. Operator will provide a minimum rack space configuration of three six
foot racks for cable data router equipment and servers; totaling 180"
to 200" for this launch configuration.
5. Operator will take reasonable steps to protect the headend from fire,
loss of power, deviations in climate requirements and intrusion.
6. The duration limitation for any Internet Service or content provider
which distributes or provides streaming video transmissions (or any
other similar, successor or alternative methods of transmission) shall
be 10 minutes. No Operator will be required to offer or distribute
any such video transmission in excess of such limitation.
<PAGE>
EXHIBIT B
---------
TERM SHEET FOR FORM OF LCO AGREEMENT
------------------------------------
1. DEFINITIONS AND OTHER GENERAL MATTERS
(a) CERTAIN DEFINITIONS:
In addition to any terms defined in the letter agreement to which this
Exhibit B is attached (as well as in Exhibit A thereto) (which terms,
unless otherwise defined in this Exhibit B or the context otherwise
requires, shall have the meanings given to such terms therein), the
following term as used in this Exhibit B shall have the following meaning:
"Master Distribution Agreement" means the provisions of the Master
Distribution Agreement Term Sheet, dated the date hereof, attached as
Exhibit A to the Agreement; provided, that if the matters set forth in such
term sheet are superceded by a form of definitive agreement which is
executed by each of the Cable Parents and @Home, such form of definitive
agreement will constitute the Master Distribution Agreement for all
purposes hereunder.
(b) OTHER DEFINED TERMS:
Defined Term Section
------------ -------
@Work Service Revenues 4(c)
Ancillary Services Arrangements 4(e)
Basic Service Revenue Split 4(c)
Basic Service Revenues 4(c)
Confidential Information 5(b)
Force Majeure Event 5(d)
Monthly Payments 4(c)
Operator Territory 2(a)
Premium Service Revenues 4(c)
Premium Service Revenue Split 4(c)
Revenue Split 4(c)
Roll-Out Schedule 2(a)
Style Guidelines 3(c)
Term 5(f)
Tier I Customer Service Attachment B
Tier II Customer Service Attachment B
Tier III Customer Service Attachment B
Trademark License Agreement 3(b)
(c) REASONABLE COMMERCIAL EFFORTS:
Any reference in this Exhibit B to an obligation to use "all commercially
reasonable efforts", "reasonable commercial efforts" or any similar level
of effort shall mean an obligation to use commercially reasonable efforts,
and no difference in the language expressing any such level of effort shall
imply any substantively different obligation.
<PAGE>
(d) GENERAL MATTERS:
This Exhibit B is intended to set forth the terms and conditions of the
definitive LCO Agreements to be entered into between @Home and the
Affiliated Operators of the Cable Parents pursuant to which such Affiliated
Operators would distribute the @Home Services. These provisions are also
intended to serve as the basis upon which @Home would seek to negotiate
definitive LCO Agreements with Operators which are not Controlled
Affiliates of any Cable Parent. With respect to definitive LCO Agreements
between @Home and such Affiliated Operators, the following provisions are
intended to provide a summary of the terms and conditions of such
definitive LCO Agreements. With respect to definitive LCO Agreements to be
entered into with Operators which are not Controlled Affiliates of any
Cable Parent, however, such terms and conditions are intended to form a
basis upon which @Home may negotiate such definitive agreements, and
therefore, subject to the MFN provisions of the Master Distribution
Agreement (which are currently set forth in Section 9 of the Master
Distribution Agreement Term Sheet), @Home may vary such terms and
conditions granted to such Operators from the terms and conditions set
forth below.
2. ROLL-OUT OF THE @HOME SERVICES
(a) OPERATOR TERRITORY:
Each LCO Agreement entered into by @Home with an Operator will provide that
the @Home Services initially will be made available as and to the extent
provided in the Master Roll-Out Schedule (the relevant portions of which
shall be incorporated into such LCO Agreement (such portion referred to
below as the "Roll-Out Schedule")) in that portion of the geographic
------------------
area covered by the LCO Agreement where Operator is providing cable
television service through Operator's cable television distribution
facilities (the "Operator Territory").
------------------
(B) @HOME ROLL OUT COMMITMENT:
@Home will use commercially reasonable efforts to complete the Network
Upgrade in the Operator Territory containing the Offered Homes Passed
covered by the LCO Agreement on or before the applicable Projected
Commencement Date, in accordance with the applicable provisions of the
Roll-Out Schedule (and thereafter as may be required to make available to
Operator the @Home Services as of such Projected Commencement Date
(including at any additional applicable Point of Demarcation) in connection
with the commencement of the provision of the @Home Services to subscribers
in additional portion(s) of the Operator Territory), in each case subject
to the Operator having completed the Cable System Upgrade in the applicable
portion(s) of the Operator Territory. Subject to the requirements of the
Roll-Out Schedule, @Home and Operator shall negotiate in good faith and use
commercially reasonable efforts to coordinate the timing of the completion
of the Cable System Upgrade and the Network Upgrade in each applicable
portion of the Operator Territory.
(c) FAILURE BY @HOME TO COMPLETE NETWORK UPGRADE:
In the event that @Home does not complete the Network Upgrade in the
Operator Territory on or prior to the date which is 120 days after the
Projected Commencement Date, then, Operator shall have the right to
terminate the Cable Parent Exclusivity Provisions as to the Operator
Territory.
In the event that @Home does not complete the Network Upgrade in the
Operator Territory on or prior to the date which is 180 days after the
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<PAGE>
Projected Commencement Date, then, Operator shall have the right to either
(x) continue the election made above and, at such time as the @Home
Services become available for distribution in such area, distribute the
@Home Services in accordance with the terms of the LCO Agreement (other
than the Cable Parent Exclusivity Provisions as to the Operator Territory)
or (y) terminate the LCO Agreement; provided however, that if Operator
-------- -------
terminates the LCO Agreement and @Home completes the Network Upgrade in the
Operator Territory within the otherwise applicable Term (as defined below)
of such LCO Agreement (assuming for such purposes that such LCO Agreement
had not been terminated), Operator may then elect to reinstate the LCO
Agreement (without, however, giving effect to the Cable Parent Exclusivity
Provisions as to the Operator Territory).
In the event that @Home fails to complete the Network Upgrade as of the
applicable Projected Commencement Date with respect to any portion of the
Operator Territory, then Operator's remedies described above will only be
exercisable with respect to such portion of the Operator Territory, unless
such failure relates to a material portion of the Operator Territory, in
which case such remedies shall apply to the entire Operator Territory.
The availability of the remedies to Operator set forth above with respect
to any failure by @Home to complete any portion of the Network Upgrade as
to any portion of the Operator Territory shall be subject to Operator's
completion of the Cable System Upgrade.
(d) OPERATOR ROLL-OUT COMMITMENT:
Operator will use commercially reasonable efforts to complete the Cable
System Upgrade of the required Operator Facilities in the Operator
Territory no later than the applicable Projected Commencement Date, such
that the number of Homes Passed in the Operator Territory capable of
receiving the @Home Services equals or exceeds the number of Homes Passed
specified in the Roll-Out Schedule for the applicable Planning Period,
subject to @Home having completed the Network Upgrade in the applicable
portions of the Operator Territory. Notwithstanding any other provisions
of this Exhibit B, upon not less than 180 days notice prior to the
Projected Commencement Date, an Operator may terminate or defer the
Projected Commencement Date as to all or any portion of the Operator
Territory without any liability hereunder, in which event (in the case of a
termination or deferral affecting the entire Operator Territory by an
Affiliated Operator) Operator shall have the rights described in the Master
Distribution Agreement (currently set forth in Section 11 of the Master
Distribution Agreement Term Sheet), but subject to the terms and conditions
described therein, to substitute one or more cable systems for those in
the Operator Territory or portion thereof on the Master Roll-Out Schedule
and to require @Home to enter into an LCO Agreement with respect to the
Operator Territory served by such substitute cable systems (in which case
such substitute cable systems shall retain the same roll-out priority and
Projected Commencement Date as the cable systems they replaced). Operator
may not terminate or defer the Projected Commencement Date as to less than
all of the Operator Territory unless the remaining portion of the Operator
Territory (as to which the Projected Commencement Date has not been so
terminated or deferred) represents a substantial portion of the Operator
Territory (in terms of the number of Homes Passed in the Operator
Territory). In the case of any such deferral of the Projected Commencement
Date, Operator=s rights with respect to a failure by @Home to complete the
applicable Network Upgrade shall apply with respect to such deferred
Projected Commencement Date.
-3-
<PAGE>
(e) FAILURE BY OPERATOR TO ROLL-OUT:
Subject to the right to terminate or defer the Projected Commencement Date
set forth in the preceding paragraph, in the event that Operator does not
complete the Cable System Upgrade of the required Operator Facilities on or
prior to the date which is 180 days after the Projected Commencement Date
set forth on the Roll-Out Schedule in any material respect, then (i)
Operator shall be required to pay to @Home, as liquidated damages and not
as a penalty, the @Home Specified Remedy and (ii) @Home shall be entitled
to terminate its obligations under the @Home Exclusivity Provisions with
respect to those portions of the Operator Territory where @Home reasonably
determines, after consultation with Operator, that Operator has ceased to
use commercially reasonable efforts to complete the Cable System Upgrade so
as to comply with the LCO Agreement and the Roll-Out Schedule.
To the extent that any failure by Operator to complete a Cable System
Upgrade results from the failure by Operator to timely obtain any
regulatory or third party consent or approval required on the part of
Operator in order to so complete the Cable System Upgrade or to distribute
the @Home Services in any portion of the Operator Territory, the
obligations of each party under the LCO Agreement shall be suspended until
such time as Operator obtains any such regulatory or third party consent or
approval; provided, that Operator shall continue to use all commercially
reasonable efforts to obtain any such consent or approval; and provided
further, that (i) the obligations of @Home under the @Home Exclusivity
Provisions with respect to any affected portion(s) of the Operator
Territory shall terminate to the extent any such suspension lasts for more
than 180 days after the Projected Commencement Date and (ii) either party
shall be entitled to terminate the LCO Agreement as to the affected
portion(s) of the Operator Territory in the event of any such suspension
that lasts for more than 270 days after the Projected Commencement Date.
(f) EXTENSIONS OF TIME:
The time for a party's performance (including any cure period for a failure
to perform) under the LCO Agreement shall be extended day-for-day by (i) in
the event of a concurrent failure to perform by the other party, the number
of days of any resulting delay in such party's ability to perform or (ii)
the number of days such party's performance was prevented or delayed by the
occurrence of a Force Majeure Event (as defined below).
(g) SOLE REMEDIES:
The remedies described herein will be the sole remedies available to the
parties with respect to a party's failure to meet its obligations under the
LCO Agreement with respect to a failure to complete the Network Upgrade or
the Cable System Upgrade.
(h) TESTING:
As soon as practicable following notification by Operator to @Home that the
Cable System Upgrade has been completed in any designated portion of the
Operator Territory, @Home and Operator shall agree upon a test date for
such Operator Facilities and the applicable @Home Facilities, if any, which
testing shall verify that the applicable Operator Facilities and, if
applicable, @Home Facilities, perform in accordance with the Specifications
and Standards.
-4-
<PAGE>
(i) COMMENCEMENT OF SERVICES:
Following such testing and the agreement of the parties that the applicable
Operator Facilities and @Home Facilities comply with the Specifications and
Standards, @Home shall make the @Home Services available to Operator for
distribution by Operator to subscribers in those portions of the Operator
Territory served by such Operator Facilities, and Operator shall commence
offering and providing the @Home Services to potential subscribers in such
portions of the Operator Territory.
(j) OWNERSHIP AND MAINTENANCE:
As between @Home and Operator, (i) @Home will, at its own expense, provide,
install, maintain, repair, inspect, replace or remove, operate and control
the @Home Facilities necessary to provide the @Home Services to subscribers
in the Operator Territory up to each applicable Point of Demarcation in
accordance with the Specifications and Standards, and (ii) Operator will,
at its own expense, provide, install, maintain, repair, inspect, replace or
remove, operate and control the Operator Facilities necessary to distribute
the @Home Services from each applicable Point of Demarcation to and
including the cable modem at the location of each subscriber in the
Operator Territory in accordance with the Specifications and Standards.
As between Operator and @Home, (i) Operator shall retain full ownership and
operating control of, and will be fully responsible for operating and
maintaining, the Operator Facilities, and (ii) @Home shall retain full
ownership and operating control of, and will be fully responsible for
operating and maintaining, the @Home Facilities. Subject to the foregoing,
@Home will be responsible for the management of the @Home Network,
including but not limited to, the collection of data necessary to provide
for the billing of Premium Service Revenues (as defined below) and
surveillance over the @Home Network regarding hardware or software problems
or failures. Notwithstanding the foregoing and subject to all applicable
laws, (i) all subscriber data shall remain the property of the applicable
Operator and (ii) @Home shall deliver to Operator, on a regular basis, all
subscriber data relating to subscribers of the @Home Services located
within the Operator Territory collected by it in the course of its
management of the @Home Network, subject, however, to the right of @Home to
------- -------
aggregate and categorize such subscriber data (i.e., in a manner which does
not identify specific subscribers) for use in connection with promotional
efforts and @Home Network management.
(k) PERFORMANCE STANDARDS:
Operator shall operate and maintain the Operator Facilities in accordance
with the applicable requirements of the Specifications and Standards.
@Home shall operate and maintain the @Home Facilities so that such
facilities are capable of delivering the @Home Services to Operator for
distribution to subscribers in the Operator Territory in accordance with
the applicable requirements of the Specifications and Standards.
-5-
<PAGE>
3. MARKETING; CUSTOMER SERVICE.
(a) MARKETING:
Operator and @Home will enter into a Joint Marketing Agreement which will
provide, among other things, that (i) to the extent that @Home engages in
any national marketing campaign with respect to the @Home Services, @Home
shall provide marketing support of substantially similar quality and
quantity and on no less favorable terms and conditions to Operator as
provided to operators of similarly situated cable systems, (ii) Operator
will use commercially reasonable efforts to cooperate and participate in
such national marketing efforts, and (iii) Operator may engage in local
marketing efforts with respect to @Home and the @Home Services, and @Home
shall use its commercially reasonable efforts to cooperate and participate
in such efforts.
(b) BRANDING:
The @Home Services will be marketed and provided by @Home and Operator
under the @Home brands pursuant to the form of trademark license agreement
(the "Trademark License Agreement") to be entered into between @Home and
---------------------------
Operator (such brands to be used alone or in conjunction with Operator's
brand), subject to the quality standards and usage guidelines set forth in
such agreement. The @Home brands will be prominently displayed on the
browsers.
(c) HOME PAGE:
@Home will provide Operator with a selection of first screen templates for
use in developing and configuring Operator's local home page and any local
"theme" pages. Operator may customize these templates; provided, that the
home page and any such theme pages comply with the look and feel,
configuration and quality guidelines to be established by @Home to insure a
consistent image and quality standard for the @Home Services to support
national branding of the @Home Services (the "Style Guidelines").
----------------
(d) NATIONAL/LOCAL CONTENT:
With the exception of the Local Area (including the BUI Button), the
content received by a subscriber upon startup of the @Home Services, any
thematic linked pages thereto, the browsers and all related navigation
devices shall be programmed by @Home, and each Operator shall be required
to accept the @Home Services as so programmed (subject, however, to the
Specifications and Standards), including, but not limited to, any
promotional-type content, special hot-links, video barker and the content
and organization of such pages, subject, however, in the case of an
Affiliated Operator only, to the Cable Parent Exclusion Right and the Cable
Parent Access Blocking Right.
(e) CUSTOMER SERVICE:
Operator shall have the exclusive first opportunity to provide all customer
service required in connection with the provision of the @Home Services to
subscribers in the Operator Territory receiving the @Home Services through
the Operator Facilities.
At Operator's election (pursuant to procedures set forth in the definitive
LCO Agreement), Operator may allocate all or part of such customer service
responsibility to @Home, in which case @Home may be entitled to
compensation from Operator as set forth below for the provision of such
services based on standard charges established by the definitive LCO
Agreement (which charges shall be based on @Home's actual cost of providing
such services, plus a return on such actual cost
-6-
<PAGE>
calculated on a Cost-Plus Basis).
4. COMPENSATION AND BILLING.
(a) ALLOCATION OF BILLING RESPONSIBILITY:
Operator shall be responsible for the billing and collection of monthly
subscription fees (including the allocable portion of any charges related
to bundled services) from subscribers to the @Home Services in the Operator
Territory which receive the @Home Services through the Operator Facilities.
Notwithstanding the foregoing, as between @Home and Operator, unless
otherwise agreed, the collection of Premium Service Revenues shall be the
responsibility of the party contracting with the applicable provider of
such services regarding the provision of such services (and, as between
@Home and Operator, such contracting party shall have complete discretion
as to the pricing of such services to subscribers).
(b) PRICING:
Subject to the parenthetical in the last sentence of (a) above, Operator
shall have complete discretion as to the pricing of the @Home Services to
subscribers in the Operator Territory receiving the @Home Services through
the Operator Facilities.
(c) COMPENSATION:
Operator shall make monthly payments (the "Monthly Payments") to @Home in
----------------
respect of each month during the Term in an amount equal to (i) 35% of
aggregate Basic Service Revenues (as defined below) collected by Operator
during such month from the provision of the @Home Services to subscribers
using the Operator Facilities (the "Basic Service Revenue Split") plus (ii)
---------------------------
35% of Premium Service Revenues (as defined below) collected by Operator
during such month with respect to subscribers accessing such services using
the Operator Facilities (to the extent that Operator is responsible for the
collection of such charges). Attachment A sets forth the services @Home
shall provide to the Operator in return for the Basic Service Revenue
Split.
The Basic Service Revenue Split is based on the assumption that Operator
will provide Tier I Customer Service and that @Home will provide Tier II
Customer Service and Tier III Customer Service (as such terms are defined
in Attachment B). To the extent that Operator directs @Home to provide all
or any portion of Tier I Customer Service, @Home will be entitled to
compensation from Operator for the provision of such services on a Cost-
Plus Basis. In the event that Operator elects to perform all or part of
Tier II Customer Service, such Operator will receive a credit against the
amount it would otherwise owe to @Home pursuant to this paragraph
calculated on a Cost-Plus Basis.
@Home shall make payments to Operator on a monthly basis in an amount equal
to 65% of Premium Service Revenues collected by @Home during such month
with respect to subscribers in the Operator Territory accessing such
services using the Operator Facilities (to the extent that @Home is
responsible for the collection of such charges).
The percentage of Premium Service Revenues to which Operator is entitled
pursuant to the preceding three paragraphs is referred to herein as the
"Premium Service Revenue Split." The Premium Service Revenue Split will be
------------------------------
subject to adjustment in accordance with the provisions of the Master
Distribution Agreement currently set forth in the Master Distribution
Agreement Term Sheet under the caption "Execution of Promotional
-7-
<PAGE>
Agreements and Exercise of Cable Parent Exclusion Right."
As used herein, "Basic Service Revenues" means revenues from the @Home
----------------------
Services collected by Operator (other than Premium Service Revenues)
including any amounts received by Operator in respect of the provision of
cable modems to subscribers (other than any such amounts received from the
sale of cable modems to subscribers) but excluding any fees collected for
installation, and "Premium Service Revenues" means the net revenues
------------------------
retained by Operator or @Home, as the case may be (but prior to any
payments to the other pursuant to the Premium Service Revenue Split),
derived from its performance pursuant to .Com Agreements and Promotional
Agreements, including service fees, content provider charges, transaction
fees, subscriber fees, advertising and promotional revenue or other
transaction value (including barter payments or advertising avails), from
the provision of the @Home Services to customers in the Operator Territory
through the use of the Operator Facilities.
Notwithstanding the foregoing, any fees or other amounts received by @Home
which relate to the programming of the National Area, including service
fees, content provider charges, transaction fees, advertising and
promotional revenue or other transaction value (including barter payments
or advertising avails) shall not be included within the definition of
either Basic Service Revenues or Premium Service Revenues, and @Home shall
be entitled to retain all amounts collected by it in respect of such
activities.
The foregoing Basic Service Revenue Split and Premium Service Revenue Split
(collectively the "Revenue Splits") to @Home may be increased by a Required
--------------
Either E Cable Parent Election (but only with respect to all existing LCO
Agreements with an Affiliated Operator and all LCO Agreements to be entered
into with an Affiliated Operator). For purposes of the LCO Agreement, a
"Required Either E Cable Parent Election" shall mean a written election
providing for an increase in either or both of the Revenue Splits to @Home
signed by at least two-thirds (66-2/3%) in number of the Either E Cable
Parents (rounded up to the nearest whole number) (where an AEither E Cable
Parent@ is a Cable Parent whose Stockholder Group contains either an
Eligible Stockholder or an Exclusive Stockholder); provided, that (i) such
election must be signed by a Cable Parent that is a Controlled Affiliate of
TCI to the extent that the TCI Stockholder Group contains an Either E Cable
Parent and (ii) in the event that there are fewer than two Either E Cable
Parents that are not Controlled Affiliates of TCI, such election must be
signed by each Either E Cable Parent.
Notwithstanding the foregoing, any fees or other amounts received by
Operator which relate to the programming of the Local Area or the provision
of a Local Service, including service fees, content provider charges,
transaction fees, advertising and promotional revenue or other transaction
value (including advertising avails and barter payments) shall not be
included within the definition of either Basic Service Revenues or Premium
Service Revenues, and Operator shall be entitled to retain all amounts
collected by it in respect of such activities; provided, that @Home shall
be entitled to compensation on a Cost-Plus Basis for network management
services provided by @Home and any caching and replicating (including, but
not limited to, technical assistance and, if applicable, the lease of
capacity on the @Home Facilities) provided by @Home with respect to such
programming of the Local Area or with respect to such Local Service in
connection with the provision of such Local Service and/or the connection
of such Local Content provider to the @Home Network for such services
requested by Operator.
-8-
<PAGE>
(d) MONTHLY PAYMENT PROCEDURES:
Not later than 30 days following the last day of each month, Operator shall
deliver to @Home a certificate containing Operator's calculation of the
amount of the Monthly Payment due to @Home in respect of such month and the
basis for such calculation, which calculation shall have been certified by
an officer or authorized designee of Operator as true and correct and as
having been made in accordance with the applicable provisions of the LCO
Agreement. Not later than 30 days after the last day of each month
Operator shall deliver to @Home the Monthly Payment in respect of such
month. Operator shall maintain detailed records relating to the number of
subscribers receiving the @Home Services using the Operator Facilities and
the Basic Service Revenues and Premium Service Revenues collected by
Operator, and shall permit @Home access to such records at reasonable times
upon reasonable notice to make copies of such records and to discuss the
calculation of the Monthly Payment with officers and employees of Operator.
Not later than 30 days following the last day of each month, @Home shall
deliver to Operator a certificate containing @Home's calculation of the
amount of the Operator's share of the Premium Service Revenues collected by
@Home in respect of such month and the basis for such calculation, which
calculation shall have been certified by an officer or authorized designee
of @Home as true and correct and as having been made in accordance with the
applicable provisions of the LCO Agreement. Not later than 30 days after
the last day of each month @Home shall deliver to Operator Operator's share
of such Premium Service Revenues in respect of such month. @Home shall
maintain detailed records relating to the calculation of Premium Service
Revenues collected by @Home, and shall permit Operator access to such
records at reasonable times upon reasonable notice to make copies of such
records and to discuss the calculation of the Premium Service Revenues with
officers and employees of @Home. Operator and @Home shall meet in good
faith to resolve any disagreements regarding the calculations of all such
amounts.
(e) ANCILLARY SERVICES:
@Home shall provide Operator with a schedule of its charges related to the
provision by it of ancillary services to Operators, such as customer
support and service, network management, and services provided by @Home in
connection with the provision by Operator of Local Services and (in the
case of an Operator that is a Controlled Affiliate of an Eligible Cable
Parent) Restricted Services, which schedule shall be updated periodically.
The determination of the amount of any charges for such ancillary services
in respect of the provision of Restricted Services shall be subject to the
provisions of the Master Distribution Agreement (currently set forth in
Section 18(c) of the Master Distribution Agreement Term Sheet). With
respect to those services which Operator may elect to purchase, Operator
shall notify @Home of such election and agreement to pay such fees, and
@Home shall as soon as practicable thereafter and as agreed with Operator,
commence providing such services to Operator in accordance with such
schedule of fees. @Home shall bill Operator on a regular basis for such
optional services elected by Operator, and Operator shall remit such
payment promptly to @Home. The arrangements contemplated by the foregoing
paragraph are referred to in this Term Sheet as the "Ancillary Services
------------------
Arrangements." Ancillary Service Arrangements do not include those
------------
services specified in Attachment A that are provided to the Operator in
return for the Basic Service Revenue Split.
<PAGE>
(f) TAXES:
The billing party agrees to pay any sales, use, gross receipts, excise or
other local, state and federal taxes, fees or charges, however designated
(excluding taxes on the other party's income) imposed on or based upon the
provision, sale or use of Basic Services, Premium Services or @Work Service
Revenues, if any; provided, that such amounts will not be included in Basic
Service Revenues, Premium Service Revenues or @Work Service Revenues, but
will be separately stated on each monthly statement to the other party.
5. MISCELLANEOUS.
(a) REGULATORY:
Each party will at its own expense use all commercially reasonable efforts
to obtain all regulatory consents, authorizations and approvals that are
necessary for it to obtain in connection with its execution and performance
of the LCO Agreement and the provision of the @Home Services using the
Operator Facilities in the Operator Territory.
(b) CONFIDENTIALITY:
Each party will, and will cause its respective officers, directors,
employees and advisors to, maintain in confidence all confidential and
proprietary information and data of the other party ("Confidential
------------
Information"), and will not disclose Confidential Information to any other
-----------
person, subject to customary exceptions.
(c) INDEMNIFICATION:
Subject to Section 2(g) with respect to a failure by @Home to complete the
Network Upgrade or by Operator to complete the Cable System Upgrade, each
party shall indemnify the other party against, and hold the other party
harmless from, any claim, demand, loss, damage, liability or expense
(including reasonable attorneys' fees and disbursements) arising out of or
resulting from such party's breach of the LCO Agreement or negligence or
intentional act committed in connection with the transactions contemplated
by the LCO Agreement.
(d) FORCE MAJEURE:
The parties agree that upon the occurrence of events making a party's
timely performance under the LCO Agreement impracticable due to, among
other matters, hardware or software shortages, equipment shortages or
failures (in each case resulting other than from such party's negligence),
or through acts of God or other events beyond its control (a "Force Majeure
-------------
Event"), such party's performance of its obligations hereunder shall be
-----
suspended during such period; provided, that each party shall be obligated
to use commercially reasonable efforts to cure any such failure to perform
as promptly as possible to the extent it relates to its portion of the
@Home Network; and, provided further, that either party shall be entitled
to terminate its obligations as to the affected portions of the Operator
Territory in the event any such failure to perform is not cured in all
material respects so as to permit the commencement or resumption, as the
case may be, of the provision of the @Home Services in the affected portion
of the Operator Territory within 180 days.
<PAGE>
(e) CONDEMNATION:
If all or any portion of the Operator's Facilities are taken or proposed to
be taken for any public or quasi-public purpose by any governmental
authority by the exercise of right of eminent domain or other similar
right, Operator will so notify @Home, and will use commercially reasonable
efforts to reroute or replace the applicable Operator Facilities in the
affected area in accordance with the Specifications and Standards within
180 days of the taking. In the event the affected facilities are not so
rerouted or replaced within such 180 day period, @Home or Operator (but
only to the extent Operator has used commercially reasonable efforts in
accordance with the previous sentence) will be entitled to terminate its
obligations as to the affected portions of the Operator Territory without
further liability or obligation to either party.
(f) TERM:
The term (the "Term") of an LCO Agreement entered into with any Affiliated
----
Operator (including any Operators which have entered into LCO Agreements
prior to the date such Operator becomes a Controlled Affiliate, provided
that such Operator's original LCO Agreement does not specify a longer term)
shall begin on the Commencement Date and shall end on the latest to occur
of (i) the third anniversary of the applicable Commencement Date, (ii) the
earlier to occur of (A) June 4, 2002 and (B) 90 days following the
termination of the Restricted Period as to the Cable Parent of the
applicable Affiliated Operator, and (iii) 90 days following written notice
from the applicable Stockholder that it has ceased to be an Exclusive
Stockholder; provided, that, at any time following the effectiveness of its
exercise of the Comcast Non-Exclusive Right, Comcast Cable, by 90 days
written notice, shall have the right to terminate all LCO Agreements
entered into by it and its Controlled Affiliates (in which case either of
@Home or Comcast Cable shall have the right to extend the Term for an
additional 90 days by written notice to such effect given to the other
party within 30 days following Comcast Cable's notice of its exercise of
its right pursuant to this proviso). Operator shall also have the right to
renew the term of the LCO Agreement for an additional period of three years
by written notice to such effect given to @Home not later than 90 days
prior to the end of the Term.
(g) TERMINATION:
Each party may terminate the LCO Agreement (i) following a material breach
by the other party that has not been cured after 30 days written notice
thereof (other than a breach for which the applicable remedies available to
the non-breaching party are otherwise specified by the LCO Agreement), (ii)
upon the occurrence of events specified herein granting a party the right
to terminate such agreement, or (iii) upon the bankruptcy or insolvency of
the other party.
(h) REPRESENTATIONS:
The LCO Agreement shall contain representations and warranties of the
parties that are customary and appropriate in the context of the
transactions contemplated thereby.
(i) AMENDMENTS:
Subject to the penultimate paragraph of Section 4(c) above, the provisions
of this Term Sheet for Form of LCO Agreement may not be amended, modified,
supplemented or superceded unless approved in writing by each Stockholder
and @Home.
-11-
<PAGE>
ATTACHMENT A TO
LCO AGREEMENT TERM SHEET
@HOME RESPONSIBILITIES
Below is a list of the responsibilities of @Home.
1. NATIONAL BACKBONE AND REGIONAL DATA CENTER ("RDC")
--------------------------------------------------
a.A. Provide interconnection of headends/hubs/OTNs to the RDC. The
expected speed of interconnection will be equal to or greater than 45
Mbps (DS3) speeds or equivalent bandwidth capable of creating the same
user experience.
B.b. Connect RDC with the @Home Internet Backbone.
c.C. Develop the Internet Backbone.
d.D. Provide network management to include elements of the cable plant
including the cable modem. Also included is the integration of the
network management, provisioning, and subscriber management systems.
e.E. Provide technical support for backbone (7x24).
f.F. Provide outage statistics coming from network management including, to
the extent practicable, real time notification to the Operator.
g.G. Provide Quality of Service capability at the backbone level when
available.
2.I. CONNECTIVITY SERVICES
---------------------
a. Provide Internet IP addresses for @Home service users.
b. Interconnect the @Home backbone to the rest of the Internet through a
high speed connection to certain Network Access Points (NAPs). The
speed of the connection is expected to be equal to or greater than 45
Mbps.
c. Provide peering agreements for NAP interconnection.
d. Provide Internet mail (IMAP compatible) and chat service (IRC
compatible).
e. Provide connectivity to other on-line hosting services.
f. Provide dial-up access for traveling subscribers at an additional cost
to the subscriber based on usage above a minimum.
3. SOFTWARE
--------
a. Provide client software to include the following:
* Browsers with free upgrades.
* TCP/IP stack (where needed) that is multicast enabled.
* Application Plug-ins to enhance the surfing experience (i.e.,
AVI, Real Audio, VRML viewer).
-12-
<PAGE>
b. Provide IMAP or POP compatible mail services including an email
server.
c. Provide DNS service.
d. Provide software for caching, replication and proxy servers.
e. Provide single copies of client and server documentation for training
of cable personnel.
f. Provide installation scripts.
g. Provide a customized, broadbanded browser.
4. HARDWARE
--------
a. Provide all hardware required for the @Home broadband service on
@Home's side of each Point of Demarcation.
b. Authorize, where possible, Operator to purchase hardware collectively
with @Home.
c. Provide necessary hardware for interconnection of headends/hubs/OTNs
and the RDC and for the routers that enable connectivity to the
Internet at large, including security.
d. Provide project cutover team for new market launches.
e. Integration of HE cable data router and customer modem into customer
network management and provisioning. Operator will cover the headend
modem costs.
5. CONTENT AND MARKETING
---------------------
a. Provide all funds for national marketing in accordance with the Master
Distribution Agreement and the LCO Agreement.
b. Provide support and tie-ins for local marketing in accordance with the
Master Distribution Agreement and the LCO Agreement.
c. Negotiate all national content agreements.
6. CUSTOMER SERVICE
----------------
a.A. Provide 7x24 technical support for Tier II Customer Service and Tier
III Customer Service.
b. Provide software and documentation for @Home installation (including
guidelines for modem & AO installation).
c. Provide technical support for Operator technicians.
d. Work with Operator to design and specify the interface for billing and
Operator Tier I Customer Service.
-13-
<PAGE>
ATTACHMENT B TO
LCO AGREEMENT TERM SHEET
@HOME CUSTOMER SERVICE TIER DESCRIPTIONS
TIER I CUSTOMER SERVICE
- -----------------------
Tier I Customer Service is the "front line" of the @Home/Operator product
offerings. The responsibility of Tier I Customer Service is to provide
information to the customer, initiation and changes of service, billing
inquiries and some low-level trouble shooting, and frequently asked questions.
Tier I Customer Service will include the following:
. Start, stop and changes of service.
. Determination of service eligibility.
. Product information.
. Provisioning and initial setup script - IP address generation, logins,
email setup, password capturing, etc.
. Service installation and dispatch scheduling and setup.
. Trouble ticket status reporting.
. Initial problem resolution. Tier I Customer Service will include
reasonably simple scripted troubleshooting (based on script provided by
@Home) and cable network related problem diagnosis.
. Billing and pricing questions.
TIER II CUSTOMER SERVICE
- ------------------------
Tier II Customer Service is the diagnostic and problem resolution layer of the
@Home/Operator customer service offering. In this layer, the symptoms of the
problems are understood and recorded, the problem(s) are determined and action
is taken to resolve problem(s). This group will have advanced technical
troubleshooting skills and tools. Support from this group will include:
. Desktop OS support.
. @Home network information.
. @Home delivered software support.
. Problem diagnosis and resolution.
. Build knowledge base and on-line information systems.
. Handle Web and E-mail support.
TIER III CUSTOMER SERVICE
- -------------------------
Tier III Customer Service will provide customer service and network operations
support. This group will handle any call not able to be resolved by Tier II
-14-
<PAGE>
Customer Service. In addition to resolving the more difficult customer
problems, this group will be doing ongoing network monitoring.
-15-
<PAGE>
EXHIBIT 11.01
STATEMENT REGARDING THE COMPUTATION OF
PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER MARCH 31,
31, 1996 1997
----------- -----------
<S> <C> <C>
Computation of pro forma net loss per share:
Net loss.......................................... $ (24,513) $ (10,901)
=========== ===========
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........................ 13,351,327 13,351,327
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 common stock
options granted during the twelve-month period
prior to the Company's proposed initial public
offering (treasury stock method)............... 1,050,891 1,050,891
Common equivalent shares from convertible
preferred stock issued during the twelve-months
prior to the Company's proposed initial public
offering (treasury stock method)............... 20,000,000 20,000,000
----------- -----------
Shares used in computing pro forma net loss per
share.............................................. 110,854,478 110,854,478
=========== ===========
Pro forma net loss per share........................ $ (0.22) $ (0.10)
=========== ===========
</TABLE>
<PAGE>
EXHIBIT 16.01
[LETTERHEAD OF PEAT MARWICK LLP]
June 19, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for At Home Corporation and, under the
date of May 29, 1996, except as to Note 7, which is as of August 1, 1996, we
reported on the financial statements of At Home Corporation as of December 31,
1995 and for the period from March 28, 1995 (inception) to December 31, 1995. In
April, 1997, our appointment as principal accountants was terminated. We have
read At Home Corporation's statements included under "Change in Independent
Auditors" in its Form S-1, as amended on June 19, 1997 and we agree with such
statements, except that we are not in a position to agree or disagree with At
Home Corporation's statement that the change was approved by the Board of
Directors.
/s/ KPMG Peat Marwick LLP
<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 the last paragraph of Note
5 and Note 9, as to which the date is May 12, 1997, in Amendment No. 1 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
June 19, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> MAR-28-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 6,844 9,709
<SECURITIES> 63 7,061
<RECEIVABLES> 0 164
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,156 18,315
<PP&E> 963 16,199
<DEPRECIATION> 42 1,871
<TOTAL-ASSETS> 8,124 33,388
<CURRENT-LIABILITIES> 912 7,742
<BONDS> 0 7,329
0 0
9,968 44,993
<COMMON> 0 1,035
<OTHER-SE> (2,756) (27,711)
<TOTAL-LIABILITY-AND-EQUITY> 8,124 33,388
<SALES> 0 0
<TOTAL-REVENUES> 0 676
<CGS> 0 0
<TOTAL-COSTS> 0 6,969
<OTHER-EXPENSES> 2,886 18,734
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 179
<INCOME-PRETAX> (2,756) (24,513)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,756) (24,513)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,756) (24,513)
<EPS-PRIMARY> (0.03) (0.22)
<EPS-DILUTED> (0.03) (0.22)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,067
<SECURITIES> 2,360
<RECEIVABLES> 81
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,788
<PP&E> 20,666
<DEPRECIATION> 3,323
<TOTAL-ASSETS> 26,878
<CURRENT-LIABILITIES> 11,123
<BONDS> 8,085
0
44,993
<COMMON> 6,212
<OTHER-SE> (43,535)
<TOTAL-LIABILITY-AND-EQUITY> 26,878
<SALES> 0
<TOTAL-REVENUES> 806
<CGS> 0
<TOTAL-COSTS> 4,325
<OTHER-EXPENSES> 7,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> (10,901)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,901)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
