<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
___________.
Commission File Number: 000-22697
AT HOME CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0408542
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
425 BROADWAY STREET
REDWOOD CITY, CA 94063
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 569-5000
Former name, former address, and former year, if changed since last report:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] NO [_]
The number of shares of the Registrant's Common Stock, $0.01 par value,
outstanding as of April 30, 1998: 118,749,245 Shares of Series A Common Stock,
15,400,000 Shares of Series B Common Stock, and 14,877,660 Shares of Series K
Common Stock.
================================================================================
<PAGE>
AT HOME CORPORATION
Table of Contents
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1998
and December 31, 1997........................................... 3
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997................................... 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997................................... 5
Notes to Condensed Consolidated Financial Statements............ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 23
ITEM 2. Changes in Securities and Use of Proceeds....................... 23
ITEM 5. Other Information............................................... 23
ITEM 6. Exhibits and Reports on Form 8-K................................ 24
Signatures...................................................... 24
2
<PAGE>
PART I.
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 20,991 $ 44,213
Short-term cash investments................................... 83,026 76,166
--------- ---------
Total cash, cash equivalents and short-term cash investments.. 104,017 120,379
Accounts receivable........................................... 1,793 1,470
Accounts receivable -- related parties........................ 2,337 672
Other current assets.......................................... 3,516 2,919
--------- ---------
Total current assets............................................ 111,663 125,440
Property, equipment and improvements, net....................... 37,277 33,061
Other assets.................................................... 4,957 2,082
--------- ---------
Total assets.................................................... $ 153,897 $ 160,583
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 4,541 $ 2,409
Accounts payable -- related parties........................... 2,194 2,108
Accrued compensation and related expenses..................... 852 798
Other accrued liabilities..................................... 9,218 8,764
Current portion of capital lease obligations.................. 10,778 9,971
--------- ---------
Total current liabilities....................................... 27,583 24,050
Capital lease obligations, less current portion................. 14,461 15,735
Other long-term liabilities..................................... 1,736 1,736
Commitments and contingencies
Stockholders' equity:
Preferred stock............................................... -- --
Common stock, $0.01 par value:
Authorized shares 230,277,660
Issued and outstanding shares--
118,723,127 in 1998 and 118,603,220 in 1997................ 454,580 370,111
Notes receivable from stockholders............................ (286) (319)
Deferred compensation......................................... (4,144) (4,399)
Accumulated deficit........................................... (340,033) (246,331)
--------- ---------
Total stockholders' equity...................................... 110,117 119,062
--------- ---------
Total liabilities and stockholders' equity...................... $ 153,897 $ 160,583
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues (1)...................................... $ 5,773 $ 806
Costs and expenses (2):
Operating costs............................. 8,615 4,325
Product development and engineering......... 3,573 2,330
Sales and marketing......................... 3,500 2,934
General and administrative.................. 2,874 2,158
Cost of distribution agreements............. 83,320 --
-------- --------
Total costs and expenses.............. 101,882 11,747
-------- --------
Loss from operations.............................. (96,109) (10,941)
Interest income, net.............................. 1,107 40
-------- --------
Net loss.......................................... $(95,002) $(10,901)
======== ========
Basic and diluted net loss per share.............. $(0.85) $(0.11)
======== ========
Basic and diluted shares used in
per share calculations........................... 111,562 97,862
======== ========
- ----------
(1) Revenues from related parties................ $ 1,371 $ 502
======== ========
(2) Depreciation and amortization included
in costs and expenses....................... $ 2,845 $ 1,611
======== ========
See accompanying notes.
</TABLE>
4
<PAGE>
AT HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH (USED IN) OPERATING ACTIVITIES
Net loss............................................. $(95,002) $(10,901)
Adjustments to reconcile net loss to cash used
in operating activities:
Amortization of deferred compensation............ 255 159
Depreciation and amortization.................... 2,590 1,452
Cost of distribution agreement................... 83,320 --
Changes in assets and liabilities:
Accounts receivable............................ (1,988) 278
Other assets................................... (2,172) (1,096)
Accounts payable............................... 2,218 96
Accrued compensation and related expenses...... 54 118
Other accrued liabilities...................... 454 1,582
-------- --------
Cash (used in) operating activities.................. (10,271) (8,312)
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
Purchase of short-term cash investments.............. (20,425) (299)
Sales and maturities of short-term cash investments.. 13,565 5,000
Purchase of property, equipment and improvements,
net of leases...................................... (4,448) (1,343)
-------- --------
Cash (used in) provided by investing activities...... (11,308) 3,358
CASH (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock............... 1,149 95
Payments on capital lease obligations................ (2,825) (783)
Repayment of notes receivable from stockholders...... 33 --
-------- --------
Cash (used in) financing activities.................. (1,643) (688)
-------- --------
Net (decrease) in cash and cash equivalents.......... (23,222) (5,642)
Cash and cash equivalents, beginning of period....... 44,213 9,709
-------- --------
Cash and cash equivalents, end of period............. $ 20,991 $ 4,067
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid........................................ $ 752 $ 134
======== ========
Acquisition of equipment under capital leases........ $ 2,358 $ 3,124
======== ========
Notes receivable from stockholders issued in
connection with exercise of stock options
and restricted stock purchases................... $ --- $ 345
======== ========
See accompanying notes.
</TABLE>
5
<PAGE>
AT HOME CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of At Home Corporation and its wholly owned subsidiary
(collectively, the "Company"). These unaudited condensed consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included in
the accompanying unaudited financial statements. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1998. The interim
financial statements should be read in connection with the financial statements
in the Company's Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission.
Note 2. Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. The computation for the three months ended
March 31, 1997 also gives pro forma effect to the conversion, in connection with
the Company's initial public offering in July 1997, of all outstanding shares of
convertible preferred stock into shares of common stock. The effect of
outstanding stock options, warrants, and common stock subject to repurchase is
excluded form the computation as their inclusion would be anti-dilutive.
The computation of basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net loss.................................... $(95,002) $(10,901)
======== ========
Shares of weighted average common stock..... 111,562 2,610
Pro forma common equivalent shares from
convertible preferred stock............... -- 95,252
-------- --------
Basic and diluted shares used in per share
calculation............................... 111,562 97,862
======== ========
Basic and diluted net
loss per share............................ $ (0.85) $ (0.11)
======== ========
</TABLE>
Note 3. Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes new rules for the reporting and display of comprehensive income
(loss) and its components. The adoption of this Statement had no impact on the
Company's net income or stockholder's equity. FAS 130 requires unrealized gains
and losses on the Company's available-for-sale securities to be included in
other comprehensive loss.
6
<PAGE>
Note 3. Comprehensive Income (Loss) - (continued)
The components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1997
---------- ---------
<S> <C> <C>
Net loss........................ $(95,002) $(10,901)
Unrealized gain on investments.. 1,300 --
-------- --------
Comprehensive loss.............. $(93,702) $(10,901)
======== ========
</TABLE>
Note 4. Stockholders' Equity
Common Stock Warrants Issued to Cable Partners
In October 1997, the Company entered into a contract with Cablevision Systems
Corporation ("Cablevision"), and its parent, CSC Parent Corporation ("CSC
Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc. ("Cox"),
Kleiner Perkins Caufield & Byers and Tele-Communications, Inc. ("TCI") (the
"Cablevision Agreement"). Pursuant to the Cablevision Agreement, Cablevision
entered into a Master Distribution Agreement for the distribution of the
Company's @Home service on substantially the same terms and conditions as TCI,
Comcast and Cox. Although Cablevision is subject to certain exclusivity
obligations that prohibit it from obtaining high-speed (greater than 128
kilobits per second) residential consumer Internet services from any source
other than the Company, Cablevision is under no obligation to upgrade its cable
systems to two-way cable infrastructure and is under no affirmative obligation
to roll out, market, promote or carry any of the Company's services. The
exclusivity obligations in favor of the Company expire in June 2002, and may be
terminated sooner under certain circumstances. These exclusivity obligations
also are subject to exceptions that would permit Cablevision to engage in
certain activities which could compete, directly or indirectly, with the
activities of the Company. In connection with the Cablevision Agreement,
Cablevision was granted warrants to purchase up to 10,946,936 shares of the
Company's Series A Common Stock at an exercise price of $0.50 per share under
certain conditions. A portion of the warrants are not exercisable unless
certain cable systems are transferred by TCI to Cablevision.
In addition, in March 1998, the Company issued performance-based warrants to
Rogers Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd. ("Shaw") to
purchase up to 5,000,000 shares of Series A Common Stock at an exercise price of
$10.50 per share. These warrants will become exercisable when, as and if Rogers
and/or Shaw meet certain performance milestones for homes passed, subscribers
and revenue.
As a result of these transactions, warrants to purchase 10,231,298 shares of
Series A Common Stock at $0.50 per share and 350,000 shares at $10.50 a share
were exercisable as of March 31, 1998. During the three months ended March 31,
1998, the Company recorded a non-cash charge of $83.3 million to operations
based on the fair value of such warrants to purchase 2,705,514 shares of Series
A Common Stock which became exercisable during the period as a result of the
transfer of certain TCI cable systems to Cablevision and the achievement of
certain performance milestones. Such charges are included in "cost of
distribution agreements" in the accompanying condensed consolidated statements
of operations. The remaining warrants will become exercisable if and when
additional TCI homes are transferred to Cablevision and when, as and if certain
performance milestones are achieved by Rogers and/or Shaw.
In May 1998, the Company agreed to issue performance based warrants to Century
Communications Corp. ("Century") to purchase up to 2,600,000 shares of Series A
Common Stock at an exercise price of $10.50 per share. In addition, if Century
enters into a binding agreement to acquire additional homes in the Los Angeles
area during 1998, the Company will issue additional warrants to purchase Series
A Common Stock for such homes at an exercise price of $10.50 per share.
Beginning in March 1999, the warrants may become exercisable when, as and if
Century meets certain annual performance milestones for commercially deploying
the @Home service. In the event such performance milestones are met, the
Company would incur a non-cash charge to operations for the difference between
the fair market value of the Company's Series A Common Stock and the exercise
price of $10.50 per share.
7
<PAGE>
Note 4. Stockholders' Equity - (continued)
Employee Stock Option and Purchase Plans
On May 13, 1998, the stockholders' approved increases of 600,000 and 4,975,000
shares of Series A Common Stock reserved for issuance to participants in the
Employee Stock Purchase Plan and the 1997 Equity Incentive Plan, respectively.
Note 5. Commitments
In September 1997 and March 1998, the Company exercised its build-to-suit
options to require the landlord to build approximately 360,000 square feet of
facilities on adjacent property. The Company also has a separate build-to-suit
option to require the landlord to build a total of approximately 70,000
additional square feet of facilities on adjacent property, subject to certain
conditions. All facilities constructed under the Company's build-to-suit
options will be subject to leases of up to 15 years in length, have base rent
determined in relation to construction costs and will include tenant
improvements paid for by the Company. The build-to-suit options which have been
exercised provide for monthly rental payments, beginning upon the phased
completion of the buildings. Occupancy of the first phase is scheduled during
1999, which will result in rental payments of approximately $320,000 per month.
Additional buildings are scheduled to be occupied in the year 2000 which will
result in additional rental payments of approximately $320,000 per month.
Note 6. Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131") which establishes reporting
standards regarding operating segments, products and services, geographic areas
and major customers. The disclosure required by FAS 131 will first be reflected
in the Company's consolidated financial statements for the year ended December
31, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-Q entitled "Factors That May Affect Future Operating Results", in the
Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC") on March 31, 1998 and in the Company's Final Prospectus for
its initial public offering ("IPO") filed with the SEC on July 11, 1997, which
may cause actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within this Form 10-
Q are identified by words such as "believes", "anticipates", "expects",
"intends", "may", "will" and other similar expressions. However, these words
are not the exclusive means of identifying such statements. In addition, any
statements which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-Q with the SEC.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
SEC, including its Final Prospectus, that attempt to advise interested parties
of the risks and factors that may affect the Company's business.
GENERAL
The Company is a leading provider of Internet services over the cable television
infrastructure and leased digital telecommunications lines 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 Internet backbone network developed and managed by the Company.
This service enables subscribers to receive the "@Home Experience," which
includes Internet service over hybrid fiber co-axial ("HFC") cable, at average
transmission speeds of up to 100 times faster than typical dial-up connections,
"always on" connection, and rich multimedia programming through an intuitive
graphical user interface.
The technology foundation of the @Home Experience is the @Home broadband network
a "parallel Internet" that optimizes traffic routing, improves security and
consistency of service, and facilitates end-to-end network management. The
Company has implemented a nationwide backbone, designed and built its Network
Operations Center with 24 x 7 capabilities, deployed 19 regional data centers
("RDCs"), implemented an integrated customer management system including billing
and customer care support, and developed a customized browser.
The content foundation of the @Home Experience is provided by the Company's
@Media group. @Media's programming services enhance the @Home Experience by
aggregating high-quality and compelling multimedia content from the Internet
into an intuitive graphical user interface. The home page for the @Home
Experience provides the user with access to an array of multimedia content
"Channels," powerful tools and Web-based applications designed specifically to
take advantage of the @Home broadband network. The @Media group also sells
advertising, works with content providers to aggregate content and facilitate
online transactions, and plans to offer premium services. As of March 31, 1998,
the Company had 24 revenue-generating advertisers.
The Company has entered into distribution arrangements for the @Home service
with Tele-Communications, Inc. ("TCI"), Cablevision Systems Corporation
("Cablevision"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc. ("Cox"),
Rogers Cablesystems Limited ("Rogers"), Shaw
9
<PAGE>
Cablesystems Ltd.("Shaw"), Marcus Cable Operating Company, L.P. ("Marcus") and
InterMedia Partners IV L.P. ("InterMedia") (collectively, the "Cable Partners"),
whose cable systems pass approximately 50 million homes in North America. As of
March 31, 1998, approximately 5.7 million of these homes were passed by upgraded
two-way HFC cable, and the Company believes that its Cable Partners will
complete the upgrade of systems passing a majority of their homes within five
years. As of March 31, 1998, the Company had launched its service through its
Cable Partners in portions of 26 cities and communities in the United States and
Canada and had approximately 90,000 cable modem subscribers. In the United
States, the @Home service is sold for a flat monthly fee generally ranging from
$35 to $55, which typically includes the cost of a cable modem. Under the
current Cable Partner arrangements in the United States, the Company receives
35% of both the basic monthly fees and the fees for premium services, and the
Cable Partner retains the entire installation payment. In Canada, the Company
receives a smaller percentage of the monthly subscription fees billed by Rogers
and Shaw because Rogers and Shaw are responsible for various costs that are not
borne by the Company's Cable Partners in the United States, such as the costs of
providing additional customer support, data transport within Canada, and
marketing and programming.
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. In addition, in
February 1998, the Company entered into a Memorandum of Understanding with TCI's
National Digital Television Center ("NDTC"). The Memorandum of Understanding
contemplates that @Home will supply email accounts for up to 11 million advanced
digital set-top devices and will provide connectivity, geographically dispersed
mail servers and overall system management for TCI's email services. @Home also
would work with NDTC on the overall software integration related to TCI's
advanced digital set-top devices. See "Factors That May Affect Future Operating
Results -- Risks Associated with Joint Development Efforts."
For businesses, the Company's @Work services provide end-to-end managed
connectivity for Internet, intranet and extranet solutions over a variety of
transport media including leased digital telecommunications lines. The Company
currently offers two services: @Work Internet, a high-speed Internet
connectivity service for commercial enterprises; and @Work Remote, a Virtual
Private Networking telecommuting solution. To date, @Work Internet has been
primarily deployed via leased telecommunication lines, but is also available via
the HFC infrastructure under an agreement with Cox. The Company receives 100%
of installation and monthly access fees for the @Work Internet services
delivered via leased digital telecommunications lines. As of March 31, 1998,
the Company was receiving revenue from approximately 600 @Work Internet
customers and had agreements with more than 200 additional customers to begin to
install service. Revenues from @Work Remote are not yet significant but are
expected to increase in 1998 as a result of an agreement between the Company,
TCI, Cox and Comcast to develop, market and deploy this service. See "Factors
That May Effect Future Operating Results--Unproven Business: No Assurance of
Profitability."
In order to accelerate deployment of the @Work connectivity solutions into major
U.S. metropolitan areas, the Company established a strategic relationship with
Teleport Communication Group ("TCG"), the country's largest competitive local
exchange carrier ("CLEC"), in April 1997, to provide co-location facilities and
local telecommunication circuits for @Work's infrastructure and subscriber
connectivity. By combining the @Home broadband network with cable, telephone
and technology relationships, @Work provides a foundation for nationwide
delivery of network-based business applications and other value-added data
networking services.
Effective October 2, 1997, the Company entered into a Letter Agreement and Term
Sheet with Cablevision, Comcast, Cox, TCI and Kleiner Perkins Caufield & Byers
(the "Cablevision Agreement"). Pursuant to the Cablevision Agreement,
Cablevision entered into a Master Distribution Agreement for the distribution of
the Company's @Home service on substantially the same terms and conditions as
TCI, Comcast and Cox. Although Cablevision, Comcast, Cox, and TCI (the
"Principal U.S. Cable Partners")
10
<PAGE>
are subject to certain exclusivity obligations that prohibit them from obtaining
high-speed (greater than 128 Kbps) residential consumer Internet services from
any source other than the Company, Cablevision and the other Principal U.S.
Cable Partners are under no obligation to upgrade their cable systems to two-way
cable infrastructure and are under no affirmative obligation to roll out,
market, promote or carry any of the Company's services. The Principal U.S. Cable
Partners' exclusivity obligations in favor of the Company expire on June 4,
2002, and may be terminated sooner under certain circumstances. These
exclusivity obligations also are subject to exceptions that would permit
Cablevision and the other Principal U.S. Cable Partners to engage in certain
activities which could compete, directly or indirectly, with the activities of
the Company.
In addition, in March 1998, the Company issued performance-based warrants to
Rogers and Shaw to purchase up to 5,000,000 shares of Series A Common Stock at
an exercise price of $10.50 per share. These warrants will become exercisable
when, as and if Rogers and/or Shaw meet certain performance milestones for homes
passed, subscribers and revenue.
As a result of these agreements, warrants to purchase 10,231,298 shares of
Series A Common Stock at $0.50 per share and 350,000 shares at $10.50 a share
were exercisable as of March 31, 1998. During the three months ended March 31,
1998, the Company recorded a non-cash charge of $83.3 million to operations
based on the fair value of such warrants to purchase 2,705,514 shares of Series
A Common Stock which became exercisable during the period as a result of the
transfer of certain TCI cable systems to Cablevision and the achievement of
certain performance milestones. Such charges are included in "cost of
distribution agreements" in the accompanying condensed consolidated statements
of operations. The remaining warrants will become exercisable if and when
additional TCI homes are transferred to Cablevision and when, as and if certain
performance milestones are achieved by Rogers and/or Shaw.
In May 1998, the Company agreed to issue performance based warrants to Century
Communications Corp. ("Century") to purchase up to 2,600,000 shares of Series A
Common Stock at an exercise price of $10.50 per share. In addition, if Century
enters into a binding agreement to acquire additional homes in the Los Angeles
area during 1998, the Company will issue additional warrants to purchase Series
A Common Stock for such homes at an exercise price of $10.50 per share.
Beginning in March 1999, the warrants may become exercisable when, as and if
Century meets certain annual performance milestones for commercially deploying
the @Home service. In the event such performance milestones are met, the
Company would incur a non-cash charge to operations for the difference between
the fair market value of the Company's Series A Common Stock and the exercise
price of $10.50 per share.
To the extent that Cablevision, Rogers, Shaw and/or Century become eligible to
and exercise their warrants, the Company's stockholders would experience
additional dilution. The Company also may issue additional stock, or warrants
to purchase the same, at less than fair market value in connection with its
efforts to expand its distribution of the @Home service to other cable
operators.
As of March 31, 1998, the Company had expended approximately $141.4 million on
capital expenditures and operating costs and expenses to design and build the
@Home broadband network and the corporate infrastructure necessary to support
the roll-out of the @Home and @Work services. The Company currently intends to
increase its capital expenditures as well as its operating and sales and
marketing 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. To the extent that cable
modems are successfully marketed in the future through retail and other mass-
market channels, additional expenditures customary in this channel could be
incurred. As a result, the Company expects to continue to incur additional
substantial net losses for the foreseeable future. The Company has incurred net
losses from operations in each fiscal period since its inception and, as of
March 31, 1998, had an accumulated deficit of $84.1 million (before the $255.9
million of charges recorded in the first quarter of 1998 and the fourth quarter
of 1997 in connection with the distribution agreements), and an accumulated
deficit of $340.0 million, including these charges.
11
<PAGE>
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
REVENUES 1998 CHANGE 1997
-------- ------- ------ -------
Revenues $ 5,773 616% $ 806
======= ======
Revenues. The Company's revenues consist of monthly subscription fees for the
@Home residential service, installation and monthly access fees for @Work
services, fees for advertising, fees from @Media content providers, and fees for
customer support activities for cable system operators, all of which are
recognized during the period in which services are provided. Total revenues for
the three months ended March 31, 1998 totaled $5.8 million, an increase of $5.0
million over revenues of $806,000 for the three months ended March 31, 1997.
Related party revenues as a percentage of total revenues were approximately 24%
and 62% for the three month periods ended March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998, revenues from @Work services in the
United States, initiated late in the first quarter of 1997, and from the @Home
service in Canada, initiated in the second quarter of 1997, contributed
significantly to the Company's total revenues. The @Home residential and @Work
commercial businesses contributed approximately equally to total revenues, while
@Media represented a much smaller percentage.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
COSTS AND EXPENSES 1998 CHANGE 1997
- ------------------ -------- ------- -------
<S> <C> <C> <C>
Operating Costs $ 8,615 99% $ 4,325
Product Development and Engineering 3,573 53% 2,330
Sales and Marketing 3,500 19% 2,934
General and Administrative 2,874 33% 2,158
-------- -------
Total Costs and Expenses Before
Costs of Distribution Agreements 18,562 58% 11,747
Costs of Distribution Agreements 83,320 N/A --
-------- -------
Total Costs and Expenses $101,882 767% $11,747
======== =======
</TABLE>
Total Costs and Expenses. Total costs and expenses, before the non-cash charge
of $83.3 million related to the fair value of common stock warrants issued to
cable system operators in connection with distribution agreements, was $18.6
million for the period ended March 31, 1998 compared to $11.7 million for the
three month period ended March 31, 1997. This year over year increase of $6.8
million was primarily a result of operating costs associated with the expansion
and deployment of the @Home broadband network to support the @Home service
subscriber growth, additional corporate infrastructure investments to support
corporate revenue growth, and the start-up and expansion of @Work services.
Operating costs rose 58% year over year compared to revenue growth of 616%. 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 significantly in each quarter for
the foreseeable future.
Operating Costs. Operating costs are primarily related to providing services to
customers and maintaining the @Home broadband network, which includes the
functional areas of customer and technical support, RDCs, content programming,
and @Home and @Work telecommunications costs. Included in operating costs are
salaries and related expenses for personnel, telecommunication (transport) costs
and the depreciation, amortization and maintenance of capital equipment.
Operating
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costs grew 99% to $8.6 million compared to $4.3 million for the three month
periods ended March 31, 1998 and 1997, respectively. This increase was primarily
a result of: (i) additional transport costs to support @Work customers and the
deployment of the @Home broadband network to additional sites; (ii) maintenance
and depreciation of capital equipment in support of the RDCs and headend
architecture; (iii) back office computer and customer service operations,
especially the expansion of technical support; (iv) development of additional
content programming resources; and (v) operating costs including local
transport, backbone costs and customer premise equipment in support of the
launch of @Work services. During 1998, costs are expected to increase
substantially in absolute dollars as the Company continues to make investments
in network backbone and infrastructure, computer systems to support the growth
in the Company's operations, and increased personnel and transport costs.
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 grew 53% to $3.6 million compared to $2.3 million for the
three month periods ended March 31, 1998 and 1997, respectively. The higher
level of expenses for product development and engineering was attributable
principally to increases in personnel and related expenses incurred primarily in
five areas: the design, testing and deployment of the @Home broadband network;
the development of software tools and enabling platforms for the creation and
distribution of enhanced content; development of technologies to support
advanced digital set-top box applications; applications development specifically
designed to take advantage of the @Home broadband network; and the development
of @Work services. Product development and engineering costs have been expensed
as incurred. During 1998, costs in this area are expected to increase
substantially due in part to the Company embarking on the development of
technologies related to advanced digital set-top box applications and to the
scaling of the Company's network backbone.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
grew 19% to $3.5 million as compared to $2.9 million for the three month periods
ended March 31, 1998 and 1997, respectively. This increase was principally the
result of: the expansion of the @Work sales force and related travel expenses;
continued increases in sales and marketing activities to support the expansion
of regional deployments of the @Home and @Work services; and related marketing
activities to attract additional cable partners, subscribers and corporate
accounts. However, the year over year growth was significantly less than revenue
growth, as the Company begins to benefit from economies of scale and the
leverage of affiliating with its Cable Partners. Costs in this area are expected
to increase significantly throughout 1998 primarily due to continued investments
in the @Work sales organization as well as anticipated personnel and other costs
required to increase the Company's focus on national branding, national
promotions and the initiation of its retail sales efforts.
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 grew 33% to $2.9
million as compared to $2.2 million for the three month periods ended March 31,
1998 and 1997, respectively. This increase was the result of: increased
expenses associated with the Company's international efforts; additions of
personnel to support the operations of the Company and their related costs; and
additional expenses related to activities and requirements of becoming a public
company. During 1998, the Company anticipates that costs in this area will
continue to grow significantly.
Interest Income, Net. Interest income, net, represents interest earned by the
Company on its cash and short-term cash investments, less interest expense on
capital lease obligations. Interest income was $1.6
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million and $156,000 for the three month periods ended March 31, 1998 and 1997,
respectively. This increase was principally due to the increased cash balances
available to invest resulting from the Company's Series C Preferred Stock
financing in April 1997 and the Company's IPO in July 1997. Interest expense for
the three month period ended March 31, 1998 was $474,000 as compared to $116,000
for the same period of 1997. This increase was due primarily to significant
increases in capital lease obligations associated with the Company's leasing of
capital equipment.
Net Loss. The net loss, before the charge for the fair value of common stock
warrants issued to cable system operators in connection with distribution
agreements, was $11.7 million for the three month period ended March 31, 1998,
compared to $10.9 million for the three month period ended March 31, 1997.
Including the non-cash charge of $83.3 million, the net loss for the three month
period ended March 31, 1998 was $95.0 million. The increase in net loss for the
quarter of $0.8 million, before the non-cash charge, was primarily a result of
expansion of operations and the initiation of new businesses, such as @Work,
partially offset by the additional revenues from the Company's @Home and @Work
businesses. The Company anticipates that the quarterly net loss, excluding
charges related to the Cablevision Agreement or other potential performance-
based warrant charges, will begin to decline during 1998 as sequential revenues
grow at a faster rate than sequential expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of private and public sales of equity securities and capital
equipment leases. At March 31, 1998, the principal source of liquidity for the
Company was $104.0 million of cash, cash equivalents and short-term cash
investments, as compared to $120.4 million at December 31, 1997. The Company
finances and expects to continue financing a substantial amount of its capital
equipment expenditures from a variety of sources, including direct vendor
leasing programs, third party commercial leasing arrangements and bank
financing.
In September, 1997, the Company entered into a Term Loan Agreement (the "Term
Loan") with Silicon Valley Bank (the "Bank"). The Term Loan provides for
borrowings of up to $8.0 million to finance the acquisition of property,
equipment and improvements, and to collateralize letters of credit. Borrowings
under this Term Loan bear interest at the Bank's prime rate. As of March 31,
1998, there were no borrowings under this Term Loan although there were
outstanding letters of credit in the amount of $1.5 million issued as security
deposits on real estate. Under the Term Loan, the Company is required to meet
certain financial covenants. The Term Loan expires in September 2001.
Net cash used in operating activities for the three months ended March 31, 1998
was $10.3 million primarily as a result of the net loss ($11.7 million) before
the effect of non-cash distribution agreement charges ($83.3 million), partially
offset by depreciation and amortization ($2.6 million). Net cash used in
operating activities for the three months ended March 31, 1997 was $8.3 million,
primarily as a result of net losses.
Net cash used in investing activities for the three months ended March 31, 1998
was $11.3 million, primarily from purchases of short-term cash investments
($20.4 million), partially offset by sales and maturities of short-term cash
investments ($13.6 million) and cash purchases of property, equipment, and
improvements ($4.4 million). Net cash provided by investing activities for the
three months ended March 31, 1997 of $3.4 million was primarily the result of
sales and maturities of short-term cash investments ($5.0 million), partially
offset by cash purchases of property, equipment and improvements ($1.3 million).
Gross capital expenditures for equipment, software, furniture, leasehold
improvements and fixtures for the three months ended March 31, 1998 and 1997,
respectively, were $6.8 million and $4.5
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million, respectively, of which $2.4 million and $3.1 million, respectively,
were financed through capital leases.
Net cash used in financing activities for the three months ended March 31, 1998
was $1.6 million, resulting primarily from payments on capital lease obligations
($2.8 million), partially offset by proceeds from the issuance of common stock
($1.1 million). For the three months ended March 31, 1997, cash used in
financing activities was $0.7 million, resulting primarily from payments on
capital lease obligations ($0.8 million).
The Company believes that it has the financial resources needed to meet its
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next twelve months. Nonetheless,
depending on market conditions, the Company may elect to sell additional equity
or debt securities or obtain additional credit facilities. Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may need or elect, depending on market conditions, 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.
The Company is headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which the Company occupies under a 12-
year lease. Under this lease, the Company is obligated to pay for all tenant
improvements, substantially all of which had been completed as of December 31,
1997. In September 1997 and March 1998, the Company exercised its build-to-suit
options to require the landlord to build approximately 360,000 square feet of
facilities on adjacent property. The Company also has a separate build-to-suit
option to require the landlord to build a total of approximately 70,000
additional square feet of facilities on adjacent property, subject to certain
conditions. All facilities constructed under the Company's build-to-suit
options will be subject to leases of up to 15 years in length, have base rent
determined in relation to construction costs and will include tenant
improvements paid for by the Company. In addition to its build-to-suit options,
the Company has the right to purchase two of the buildings leased from the
landlord consisting of approximately 200,000 total square feet. The Company has
also opened a small sales office in Bala Cynwyd, Pennsylvania to support its
Cable Partners in the eastern United States and eastern Canada. The Company
anticipates that its existing facilities, together with the facilities the
Company has the right to have built, will be adequate to accommodate its future
growth for the foreseeable future.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting standards
regarding operating segments, products and services, geographic areas and major
customers. The disclosure required by FAS 131 will first be reflected in the
consolidated financial statements for the year ended December 31, 1998.
IMPACT OF THE YEAR 2000 ISSUE
The Company continues to review its internal management information systems as
well as third parties' systems in order to assess the possible impact of year
2000 issues on its business. The Company expects the result of this review and
assessment will enable it to develop plans for any necessary changes, including
the testing and implementation of these changes, and to make estimates of the
likely time and costs of any required changes. To the extent that such
modifications need to be made, the Company will endeavor to make them on a
timely basis and does not believe that the cost of such modifications will
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have a material effect on the Company's operating results, due to its relatively
short operating history and small number of installed computer systems.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Unproven Business; No Assurance of Profitability. The Company was incorporated
in March 1995, commenced operations in August 1995, and has incurred net losses
from operations in each fiscal period since its inception. As of March 31,
1998, the Company had an accumulated deficit of $84.1 million (before the $255.9
million of charges recorded in the fourth quarter of 1997 and the first quarter
of 1998 in connection with distribution agreements), and an accumulated deficit
of $340.0 million, including the charge relating to distribution agreements. 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, to support the continued roll-out of
its @Work services 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. The @Home service
has only recently been launched, was only available in portions of 26 geographic
markets as of March 31, 1998 and may not achieve broad consumer or commercial
acceptance. The Company's @Work services have also only recently been launched.
Although approximately 800 organizations have agreed to utilize @Work services
as of March 31, 1998, @Work services may not achieve broad commercial acceptance
and the current rate of deployment for @Work services may not be sustained. The
Company has difficulty predicting whether the pricing models for its Internet
services will prove to be viable, whether demand for its Internet services will
materialize at the prices it expects its Cable Partners to charge (for the @Home
service) or the prices it charges (for @Work services), 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. There can be no assurance that
the Company will ever achieve favorable operating results or profitability.
Subscriber Growth Risks for the @Home Service. As of March 31, 1998, the
Company had approximately 90,000 cable modem subscribers to its @Home service.
The Company's ability to increase the number of subscribers to the @Home service
to achieve its business plans and generate future revenues will be dependent on
a number of factors, many of which are beyond the Company's control. These
factors include, among others: (i) the rate at which the Company's current and
future Cable Partners upgrade their cable infrastructures; (ii) the ability of
the Company and its Cable Partners to coordinate timely and effective marketing
campaigns with the availability of such upgrades; (iii) the success of the Cable
Partners in marketing the @Home service to subscribers in their local cable
areas; (iv) the prices that the Cable Partners set for the @Home service and its
installation; (v) the speed at which the Cable Partners can complete the
installations required to initiate service for new subscribers; and (vi) the
quality of customer and technical support the Company and its Cable Partners
provide. The Company believes subscriber growth has been constrained, and will
continue to be constrained, by the amount of time required to install the @Home
service for each residential consumer. In addition, most of the Company's Cable
Partners are not obligated to upgrade their cable infrastructures or market the
@Home service. Moreover, the @Home service is currently priced at a premium to
many other online services, and large numbers of subscribers may not be willing
to pay a premium for the @Home service. Because of the foregoing factors, among
others, the Company is able to forecast its revenues or the rate at which it
will add new subscribers with only a limited degree of accuracy. The Company
may not be able to increase its subscriber base in accordance with its internal
forecasts or the forecasts of industry analysts or to a level that meets the
expectations of investors. The rate at which subscribers have
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increased during the first quarter of 1998 should not be taken as indicative of
the rate at which subscribers may be expected to increase in the future. In
particular, while the Company has forecast that its number of subscribers could
grow to 350,000 or more by the end of 1998 from approximately 90,000 subscribers
as of March 31, 1998, the Company may not achieve this level of subscriber
growth, particularly given the risks set forth in this "Factors That May Affect
Future Operating Results" section.
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: (i) the timing of the Company's Cable Partners' upgrades
of their cable infrastructures and roll-outs of the @Home service; (ii) the rate
at which customers subscribe to the Company's Internet services and the prices
subscribers pay for such services; (iii) subscriber churn rates; (iv) changes in
the revenue splits between the Company and its Cable Partners; (v) the demand
for Internet advertising; (vi) the effectiveness of the Cable Partners'
marketing and other operations; and (vii) potential competition with Cable
Partners for advertising revenue. Quarterly operating results attributable to
the Company's @Work services are dependent on: (i) the demand for, and level of
acceptance of, the Company's corporate Internet, intranet and extranet
connectivity and telecommuting solutions; (ii) the introduction of, demand for,
and level of acceptance of, the Company's value-added business applications; and
(iii) in part, the timing of the Cable Partners' upgrades of their cable
infrastructures. The Company operates with very little backlog, and quarterly
sales and operating results are difficult to forecast even in the short term. 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. Moreover, the Company's Cable Partners have
complete discretion regarding the pricing of the @Home service in their
territories which could further impact the Company's ability to generate
sufficient revenue. 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.
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
Company's Cable Partners 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, most of which are already
highly leveraged. Therefore, these infrastructure investments 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, most of 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, most of the
Cable Partners are not contractually required to achieve any specific roll-out
schedule. 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 services and would have a material adverse
effect on the Company's business, operating results and financial condition.
No Obligation of Principal U.S. Cable Partners to Carry the Company's Services;
Limitations on Their Exclusivity. Although the Company's Principal U.S. Cable
Partners are subject to certain exclusivity obligations that prohibit them from
obtaining high-speed (greater than 128 Kbps) residential consumer
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Internet services from any source other than the Company, such Principal U.S.
Cable Partners are under no affirmative obligation to carry any of the Company's
services. Such exclusivity obligations in favor of the Company expire on June 4,
2002, and may be terminated sooner under certain circumstances. The Principal
U.S. Cable Partners' exclusivity obligations are limited to high-speed
residential Internet services and normally do not extend to various "Excluded
Services" which the Company's Principal U.S. Cable Partners may offer without
the Company. "Excluded Services" include: (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 the
Principal U.S. Cable Partners' 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 such as some types of Internet-
based digital set-top services; (viii) the provision of certain Internet
services that are primarily downstream services where the user cannot send
upstream commands in real-time; (ix) the provision of streaming video services
that include video segments longer than ten minutes in duration; and (x) limited
testing, trials and similar activities of less than six months. By engaging in
the Excluded Services, the Principal U.S. Cable Partners can compete, directly
or indirectly, with the activities of the Company, including the Company's @Work
services.
Control by TCI. TCI controls approximately 72% of the voting power of the
Company as of March 31, 1998. Therefore, TCI has 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. In addition, the Company's Board of Directors,
which is controlled by TCI and certain of the Company's other Principal U.S.
Cable Partners, has the power, subject to directors' fiduciary duties, to change
the terms of distribution for the Company's Internet services to be more
favorable for the Company's Principal U.S. Cable Partners and less favorable for
the Company. See the Company's Registration Statement on Form S-1 (File No.
333-27323), and exhibits thereto, which became effective on July 11, 1997 for
additional information on the rights of TCI and other Principal U.S. Cable
Partners.
Limitations on the Company's Ability to Provide Certain Excluded Services.
Until at least June 4, 2002, the Company has agreed with its Principal U.S.
Cable Partners (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 those Principal U.S. Cable Partners that remain
in compliance with their exclusivity provisions (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 U.S. Cable Partner without its prior
written consent even if such Excluded Service has been integrated with the @Home
service in other areas. No assurance can be given that the Company will have
access to the cable infrastructures of its Principal U.S. Cable Partners for
Excluded Services, and the Company must negotiate a separate agreement with the
Principal U.S. Cable Partners 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 the Company's Principal U.S. Cable Partners in
providing Excluded Services, could have a material adverse effect on the
Company's business, operating results and financial condition.
Potential Disposition of Cable Systems by Principal U.S. Cable Partners. The
Company's agreements with its Principal U.S. Cable Partners do not require that
they maintain a specified number of cable systems, subscribers or homes passed
in order to maintain their control over and equity ownership of the
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Company. Therefore, these Principal U.S. Cable Partners may dispose of a
significant amount of their cable systems without requiring that such cable
systems remain subject to any exclusivity provisions. However, to the extent
that any Principal U.S. Cable Partner disposes of more than 20% of the number of
homes passed in its service areas as of June 4, 1996 (subject to certain
exceptions) without causing such transferred homes to remain exclusive to @Home,
then such Principal U.S. Cable Partner may be required to sell a proportionate
amount of its equity interest in the Company to the other Principal U.S. Cable
Partners at the fair market value thereof. TCI has recently announced the
proposed sale or transfer of certain cable systems and is considering various
plans and proposals that may result in the disposition of other of its cable
systems. Such dispositions may have an adverse effect upon the business,
operating results and financial condition of the Company if the transferred
homes do not remain exclusive to @Home. In addition, in April 1998 Paul Allen
announced that he had entered into an agreement to acquire Marcus. However,
Marcus remains obligated to deploy the @Home service on an exclusive basis in
certain markets.
Unproven Network Scalability, Speed and Security. Due to the limited deployment
of the Company's services, the ability of the @Home broadband 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 @Home
broadband network's ability to be scaled up to its expected subscriber levels
while maintaining superior performance. The @Home broadband network may be
unable to achieve or maintain a high speed of data transmission, especially as
the number of the Company's subscribers grows. 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. In addition, while the Company has
taken steps to prevent users from sharing files via the @Home service and to
protect against "email spamming," public concerns about security, privacy and
reliability of the cable network, or actual problems with the security, privacy
or reliability of the Company's network, may inhibit the acceptance of the
Company's Internet services.
Management of Expanded Operations; Dependence on Key Personnel. The Company may
not be able 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 failure of
the Company or its Cable Partners to provide adequate customer service or
efficient provisioning of new subscribers as the Company's Internet service
offerings scale would have a material adverse affect on subscriber growth and
retention and would materially adversely affect the Company's business,
operating results and financial condition. 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: (i) to implement additional
management information systems capabilities; (ii) to develop further its
operating, administrative, financial and accounting systems and controls; (iii)
to maintain close coordination among engineering, accounting, finance,
marketing, sales and operations; and (iv) 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.
Dependence on Two-Way Cable Modems; New Industry Standard. Each of the
Company's subscribers currently must obtain a cable modem from a cable affiliate
to access the @Home service. The North American cable industry has recently
adopted a set of interface specifications for hardware and software to support
the delivery of data services over the cable infrastructure utilizing
interoperable cable modems. The Company believes that these specifications,
together with its development agreement with Intel
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Corporation relating to "plug and play" modems, will facilitate the growth of
the cable modem industry and the availability of lower cost interoperable cable
modems through retail channels. However, to the extent that any of the Company's
Cable Partners choose to slow the deployment of the @Home service until the
commercial availability of cable modems that are compliant with these new
specifications, the Company's subscriber growth could be constrained and the
Company's business, operating results and financial condition could be
materially adversely affected during the period of such a delay. Cable modems
that are compliant with the cable industry's interface specifications are
currently expected to be commercially available in the fourth quarter of 1998.
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 Internet service providers, national long distance carriers and local
exchange carriers, wireless service providers, online service providers 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 Asymmetric Digital Subscriber
Line ("ADSL"). In January 1998, Compaq Computer Corporation, Intel Corporation,
Microsoft Corporation, other technology companies and numerous telecommunication
providers announced an initiative to develop a simplified version of ADSL,
referred to as "ADSL Lite", that reduces the complexity and expense of
installing Internet services based on ADSL. While commercial tests of this
simplified version of ADSL are not expected until the end of 1998, this
initiative may accelerate the deployment of ADSL services. Widespread
commercial acceptance of ADSL technologies could significantly reduce the
potential subscriber base for the Company's Internet services, which would have
an immediate adverse effect on the Company's business, operating results and
financial conditions.
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.
The Company may not be able to compete successfully against current or future
competitors, and competitive pressures faced by the Company could 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 and its Cable Partners 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.
Risks Associated with Joint Development Efforts. The Company was recently
selected by TCI to develop software and integration services for TCI's next
generation advanced digital set-top devices, which could enable the Company to
expand its product line and market the @Home service to a broader audience of
consumers that do not regularly use a personal computer. Completion of the
transactions contemplated by the Memorandum of Understanding between the Company
and TCI's National Digital Television Center is subject to negotiation of a
definitive agreement and other conditions, and there can be no assurance that
such transactions will be consummated. Moreover, the Company cannot predict
when such set-top devices will become commercially available, and, in addition
to the technological, financial and infrastructure challenges TCI faces in
deploying the new set-top devices, the success of this development effort is
subject to: (i) the technological and operational challenges of providing and
supporting email and other Internet services to set-top device users; (ii)
competition from alternative Internet service providers and deployment
technologies; and (iii) the degree to which consumers desire Internet services,
including email, on their televisions.
20
<PAGE>
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 Company's Cable
Partners or companies from which the Company obtains data transport services 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.
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. The
Company may not 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 the Company may not be successful in achieving widespread
acceptance of its services before competitors offer products and services with
speed and performance similar to the Company's current offerings. In addition,
the widespread adoption of new Internet or telecommuting technologies or
standards, cable-based or otherwise, could require substantial expenditures by
the Company to modify or adapt its network, products and services and could
fundamentally affect the character, viability and frequency of Internet-based
advertising, either of which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, new
Internet or telecommuting services or enhancements offered by the Company may
contain design flaws or other defects that could have a material adverse effect
on the Company's business, operating results and financial condition.
Risks Associated with International Operations. A key component of the
Company's strategy is expansion into international markets. To date, the
Company has entered into distribution agreements with cable system operators in
Canada, and has announced an agreement in principal to form a joint venture to
distribute the @Home service in the Netherlands and Belgium. However, the
Company has extremely limited experience in developing localized versions of its
products and services and there can be no assurances that the Company will be
successful in expanding its service offerings into additional 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:
(i) regulatory requirements (including the regulation of Internet access); (ii)
legal uncertainty regarding liability for information retrieved and replicated
in foreign jurisdictions; (iii) export and import restrictions; (iv) tariffs and
other trade barriers; (v) difficulties in staffing and managing foreign
operations; (vi) longer payment cycles; (vii) problems in collecting accounts
receivable; (viii) political instability; (ix) fluctuations in currency exchange
rates; (x) seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and (xi) potentially adverse tax
consequences, which could adversely affect the success of the Company's future
international operations. One or more of such factors could have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition.
21
<PAGE>
Possible Volatility of Stock 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, has been and 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, market rumors and general market conditions may
have a significant effect on the market price of the Company's Series A Common
Stock.
Dilution from Certain Transactions. The Company has entered into agreements
with Cablevision, Rogers, Shaw and Century pursuant to which the Company has
issues warrants to purchase a total of 20,546,936 shares of Series A Common
Stock. Under these agreements, warrants to purchase 10,231,298 shares of Series
A Common Stock at $0.50 per share and 350,000 shares at $10.50 per share were
exercisable as of March 31, 1998. To the extent that Cablevision, Rogers, Shaw
or Century become eligible to and exercise their warrants, the Company's
stockholders would experience substantial dilution. The Company also may issue
additional stock, or warrants to purchase the same, at less than fair market
value in connection with its efforts to expand its distribution of the @Home
service to other cable operators.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities. In March 1998, the Company issued
performance-based warrants to Rogers and Shaw to purchase up to 5,000,000 shares
of Series A Common Stock at an exercise price of $10.50 per share. These
warrants will become exercisable when, as and if Rogers and/or Shaw meet certain
performance milestones for homes passed, subscribers and revenue. The Rogers
and Shaw warrants were issued in a transaction exempt from regulation under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and/or
Regulation S.
In May 1998, the Company agreed to issue performance based warrants to Century
to purchase up to 2,600,000 shares of Series A Common Stock at an exercise price
of $10.50 per share. In addition, if Century enters into a binding agreement to
acquire additional homes in the Los Angeles area during 1998, the Company will
issue additional warrants to purchase Series A Common Stock for such homes at an
exercise price of $10.50 per share. Beginning in March 1999, the warrants may
become exercisable when, as and if Century meets certain annual performance
milestones for commercially deploying the @Home service. The Century warrants
will be issued in a transaction exempt from regulation under the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof.
Use of Proceeds from Sales of Registered Securities. The Company commenced its
Initial Public Offering ("IPO") on July 11, 1997 pursuant to a Registration
Statement on Form S-1 (File No. 333-27323). In the IPO the Company sold an
aggregate of 10,350,000 shares of its Series A Common Stock (including
1,350,000 shares sold pursuant to the exercise of the Underwriters' over-
allotment option) at an initial price of $10.50 per share. The IPO was closed
on July 16, 1997.
Aggregate proceeds from the IPO were $108,675,000, which included $14,175,000 in
aggregate proceeds due to the exercise of the underwriters' option to purchase
shares to cover over-allotments. The Company paid underwriters' discounts and
commissions of $7,607,250 and other expenses of approximately $1,300,000 in
connection with the IPO. The total expenses paid by the Company in the IPO were
$8,907,250, and the net proceeds to the Company in the IPO were $99,767,750.
The entire amount has been allocated for general corporate purposes, including
working capital requirements of the Company resulting from its growth. None of
the net proceeds of the Offering were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10 percent or more of any class of equity securities of the Company, or
an affiliate of the Company.
ITEM 5. OTHER INFORMATION
On May 5, 1998, the Board of Directors of the Company increased the number of
directors from 11 to 12 and elected Joe Cece, Senior Vice President, Strategic
Planning of Cablevision, to fill the newly created vacancy. Cablevision to fill
the new position.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
See attached exhibit index.
(b) Reports on Form 8-K
-------------------
No such reports were filed during the quarter ended March 31, 1998.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT HOME CORPORATION
(Registrant)
/s/ Kenneth A. Goldman
___________________________
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
/s/ Robert A. Lerner
___________________________
Corporate Controller
and Treasurer
(Principal Accounting Officer)
(Duly Authorized Officer)
May 15, 1998
24
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Title
- -------------- -------------
10.24 Binding Warrant Term Sheet, dated February 24, 1998,
among Registrant, Rogers Communications Inc. and Shaw
Communications Inc.
27.1 Financial Data Schedule
25
<PAGE>
BINDING WARRANT TERM SHEET
February 24, 1998
1. PURPOSE; ISSUANCE OF WARRANTS. At Home Corporation ("@Home"), Rogers
-----------------------------
Cablesystems Limited ("Rogers"), and Shaw Cablesystems Limited ("Shaw") entered
into a Term Sheet as of March 18, 1997 (the "Original Term Sheet") governing the
distribution in Canada of the @Home Service (as defined below). In order to
provide Rogers and Shaw with additional incentives to rapidly deploy the @Home
Service in Canada in accordance with the Term Sheet, @Home will grant Rogers
Communications, Inc. (an affiliated company of Rogers) and Shaw Communications,
Inc. (an affiliated company of Shaw) performance based warrants to purchase in
the aggregate a total 5.0 million shares of @Home's Series A Common Stock at USD
$10.50 per share (the "Warrants"). The Warrants will be allocated to each of
Rogers and Shaw, based on their respective number of homes passed, as follows:
2,900,000 shares to Rogers (58% of the Warrant shares) and 2,100,000 shares to
Shaw (42% of the Warrant shares).
2. DEFINITIONS.
-----------
(a) "@Home Service" means the basic information, communication, entertainment
and other Internet services offered by @Home to residential subscribers through
its cable operators at data rate speeds of greater than 128kbps. The @Home
Service does not include any premium services that may be offered to residential
subscribers at a separate suggested retail price in addition to the @Home
Service.
(b) "@Work Remote Service" means a telecommuting service offered by @Work,
the business focused division of @Home, through its cable operators at data rate
speeds of greater than 128kbps that provides remote LAN access between
businesses or other institutions and their employees.
3. VESTING AND EXERCISABILITY OF THE WARRANTS. The Warrant shares will vest as
------------------------------------------
set forth below. Vested Warrant shares may be exercised at any time during the
term of the Warrants.
(a) 16.7% of the Warrant shares will vest if the Performance Condition (as
defined in Section 4 below) is satisfied on March 31, 1998.
(b) 33.3% of the Warrant shares, less any Warrant shares previously vested,
will vest if the Performance Condition (as defined in Section 4 below) is
satisfied on December 31, 1998.
(c) 66.6% of the Warrant shares, less any Warrant shares previously vested,
will vest if the Performance Condition is satisfied on December 31, 1999.
(d) 100% of the Warrant shares, less any Warrant shares previously vested,
will vest if the Performance Condition is satisfied on December 31 of any of the
years 2000, 2001 or 2002, and, subject to Section 10 below, in the years 2003,
2004, 2005, 2006 or 2007.
4. PERFORMANCE CONDITION. The "Performance Condition" will be considered
---------------------
satisfied on March 31, 1998 or on December 31st for the years 1998 through 2007
(a "Measurement Point") for Rogers or Shaw, respectively, if their @Home
Customers (as defined below) exceed the target customer numbers set forth in
Exhibit A by 10% or more, as follows:
- ---------
-1-
<PAGE>
(a) If the number of @Home Customers as of a Measurement Point exceeds the
target customer number by 20% or more, 100% of the Warrant shares that are
eligible to vest as of that Measurement Point under Section 3 above will vest.
(b) If the number of @Home Customers as of a Measurement Point exceed the
target customer number by 10% (but less than 20%), a proportionate number of the
Warrant shares (calculated on a linear basis) that are eligible to vest as of
that Measurement Point under Section 3 above will vest. For example, if the
target customer number is exceeded by 17%, 70% of the Warrant shares that are
eligible to vest as of that Measurement Point will vest.
(c) If the number of @Home Customers do not exceed the target customer number
as of a Measurement Point by at least 10%, none of the Warrant shares that are
eligible to vest as of that Measurement Point will vest but such Warrant shares
may vest as of a future Measurement Point in accordance with this Warrant Term
Sheet.
5. @HOME CUSTOMER CALCULATION.
--------------------------
(a) For purposes of this Warrant Term Sheet, the number of @Home customers
("@Home Customers") as of a Measurement Point will be equal to the sum of (i)
the number of residences that are utilizing the @Home Service ("@Home
Subscribers") in the territory served by Rogers or Shaw, (ii) the number of
@Home Subscribers in the territory served by other Canadian MSOs ("Other
Canadian MSOs") provided that the conditions in Section 5(b) below are
satisfied, and (iii) the number of residences utilizing the @Work Remote Service
in the territory served by Rogers or Shaw ("@Work Remote Seats"). The method
for calculating the number of @Home Subscribers is set forth in Exhibit B. An
---------
@Home Customer includes any @Home Subscriber or @Work Remote Seat that accesses
the @Home Service or @Work Remote Service regardless of the device utilized to
obtain such access (e.g. a personal computer, set top box, television, hand held
device, etc.).
(b) Rogers, Shaw and @Home are currently negotiating with Other Canadian MSOs
to finalize Distribution Agreements pursuant to which such other Canadian MSOs
will market the @Home Service on an exclusive basis within their respective
territories. @Home Subscribers residing in the territories served by such Other
Canadian MSOs will be included in the total number of @Home Customers for
purposes of Section 5(a) above:
(i) As of each Measurement Point through and including December 31, 2003;
and
(ii) As of December 31, 2004 and December 31, 2005 only if in the
applicable year the Weighted Average @Home Penetration for Rogers, Shaw and the
Other Canadian MSOs on such date is at least as equal to the Weighted Average
@Home Penetration for Telecommunications, Inc. ("TCI"), Cox Enterprises, Inc.
("Cox"), Comcast Corporation ("Comcast"), and Cablevision Systems ("CVS")
(collectively, the "U.S. Cable Partners") for each such year. The method for
calculating the Weighted Average @Home Penetration is set forth in Exhibit C.
---------
@Home Subscribers served by Other Canadian MSOs will be allocated (i) on a 50/50
basis between Rogers and Shaw for purposes of determining whether they have met
the vesting conditions set forth in Section 4 of this Warrant Term Sheet, and
(ii) in accordance with Schedule D of the Original Term Sheet for purposes of
determining whether they have met the vesting conditions set forth in Section 8
of this Warrant Term Sheet.
6. CREDIT FOR EXCEEDING TARGET REVENUE. At the option of Rogers or Shaw, the
-----------------------------------
Performance Condition will also be considered to be satisfied on December 31st
for the years 1998 through 2002 for up to 25% of the total Warrant shares that
are eligible to vest as
-2-
<PAGE>
of each of those Measurement Points under Section 3 above if the total revenues
received by @Home from Rogers or Shaw during the preceding year exceed their
respective revenue targets listed in Exhibit A by 10% or more as set forth
below. All payments made by Rogers and Shaw to @Home in connection with the
@Home Service, the @Work Remote Service, @Media, customer and technical support,
development activities, and any other @Home or @Work services or products shall
be considered "revenue" for purposes of this Section 6 so long as such payments
are recognizable as revenue by @Home under generally accepted accounting
principles.
(a) If the revenue received by @Home from Rogers or Shaw exceeds the target
revenue by 20% or more, 25% of the Warrant shares that are eligible to vest for
such party as of that Measurement Point under Section 3 above will vest.
(b) If the revenue received by @Home from Rogers or Shaw exceeds the target
revenue by 10% (but less than 20%), a proportionate number of the Warrant shares
(calculated on a linear basis) described in Section 6(a) above as of that
Measurement Point will vest for such party. For example, if the target revenue
is exceeded by 17%, 17.5% of the Warrant shares described in Section 6(a) above
will vest (i.e. 70% of 25%).
(c) If the revenue received by @Home from Rogers or Shaw does not exceed the
target revenue by at least 10%, none of the Warrant shares described in Section
6(a) above as of that Measurement Point will vest for such party but such
Warrant shares may vest as of a future Measurement Point in accordance with this
Warrant Term Sheet.
In no event will the total number of Warrant shares that vest as of any
Measurement Point for Rogers or Shaw (i) exceed the percentage of the Warrant
shares that are eligible to vest as of that Measurement Point in accordance with
Section 3 above (any such excess vesting will not be carried forward to a
subsequent Measurement Point or otherwise result in any additional vesting
credit); (ii) the total number of Warrant shares that vest in accordance with
this Section 6 exceed 1,250,000, and (iii) the total number of Warrant shares
that vest under this Term Sheet exceed 5,000,000.
7. COMBINED VS. SEPARATE PERFORMANCE. The @Home Customer and revenue targets
---------------------------------
described in Section 4 and Section 5 above for determining vesting of the
Warrant shares will be measured separately for Rogers and Shaw. In the event
that either Rogers or Shaw achieves more than 120% of its @Home Customer target
as of any Measurement Point and the other has not done so, then the @Home
Customers in excess of 120% will be added to the total number of @Home Customers
for the other. However, if either Rogers or Shaw achieves more than 120% of its
revenue target as of any Measurement Point, the revenue in excess of 120% will
not be credited to the other.
8. ADJUSTED PERFORMANCE CONDITIONS
-------------------------------
(a) Notwithstanding any other provision to the contrary in this Warrant Term
Sheet (other than Section 8(d) below), 103,572 Warrant shares for Rogers will
automatically vest on December 31st:
(i) For each of the years 1999 through 2002 so long as Rogers achieves
the number of homes passed and penetration percentages set forth in Schedule D
of the Original Term Sheet in accordance with the provisions and definitions set
forth in that schedule.
(ii) For each of the years 2003 through 2005 so long as Rogers achieves
the number of homes passed and penetration percentages set forth in Exhibit D
---------
hereto in
-3-
<PAGE>
accordance with the provisions and definitions set forth in Schedule D of the
Original Term Sheet.
(b) Notwithstanding any other provision to the contrary in this Warrant Term
Sheet (other than Section 8(d) below), 75,000 Warrant shares for Shaw will
automatically vest on December 31st:
(i) For each of the years 1999 through 2002 so long as Shaw achieves the
number of homes passed and penetration percentages set forth in Schedule D of
the Original Term Sheet in accordance with the provisions and definitions set
forth in that schedule.
(ii) For each of the years 2003 through 2005 so long as Shaw achieves
the number of homes passed and penetration percentages set forth in Exhibit D
---------
hereto in accordance with the provisions and definitions set forth in Schedule D
of the Original Term Sheet.
(c) In the event the conditions set forth in Section 8(a) or 8(b) above are
not satisfied in any year, the number of Warrant shares eligible to vest in such
year will be carried forward and will be eligible to vest in a subsequent year
in accordance with this Section 8. By way of example, if Shaw does not meet the
conditions set forth in Section 8(b) on December 31, 1999 and December 31, 2000,
but meets the conditions on December 31, 2001, a total of 225,000 Warrant shares
(3 x 75,000) will vest on December 31, 2001.
(d) In no event will: (i) the total number of Warrant shares that vest as of
any Measurement Point for Rogers or Shaw exceed the percentage of the Warrant
shares that are eligible to vest as of that Measurement Point in accordance with
Section 3 above (any such excess vesting will not be carried forward to a
subsequent Measurement Point or otherwise result in any additional vesting
credit); (ii) the total number of Warrant shares that vest in accordance with
this Section 8 exceed 1,250,000, and (iii) the total number of Warrant shares
that vest under this Term Sheet exceed 5,000,000.
9. EFFECT OF DISPOSITION OF CABLE SYSTEMS. If either Rogers or Shaw sells a
--------------------------------------
cable system, @Home Customers from that cable system will continue to be
included in the applicable calculations set forth in this Warrant Term Sheet so
long as the acquiror offers the @Home Service in that cable system on an
exclusive basis.
10. EFFECT OF EARLY TERMINATION OF THE ORIGINAL TERM SHEET . Under the
-------------------------------------------------------
Original Term Sheet, the initial term will expire on March 18, 2003 but will be
renewed for two subsequent six year terms unless the parties fail to reach
agreement on the economics and terms for the renewal periods. In the event the
Original Term Sheet is not renewed by March 18, 2003, the following will occur:
(a) Rogers' and Shaw's performance for the year 2003 will be reviewed by
comparing their respective performances for the period from March 1, 2002
through February 28, 2003 against target customer and revenue numbers of 372,175
and $29,641,000 for Rogers and 270,006 and $21,464,000 for Shaw (i.e. in each
case, the sum of 83.3% of the 2002 target numbers and 16.7% of the 2003 target
numbers).
(b) Rogers and Shaw will not be eligible to earn additional vesting under
the Warrants for the years 2004 through 2007.
11. CHANGE IN TARGET CUSTOMER NUMBERS OR TARGET REVENUES. @Home, Rogers and
----------------------------------------------------
Shaw acknowledge that the future direction and development of the high speed
Internet services industry in general, and the future success of @Home and its
cable operators in this
-4-
<PAGE>
market, is difficult to predict. For example, it is difficult to precisely
forecast the rate of growth of this market, the cable operators' future @Home
Customer penetration rates, and the type and price of competitive offerings that
may be introduced. Accordingly, @Home may, in its sole discretion, reduce the
target @Home Customer numbers or target revenue in any year if it determines
that rewarding Rogers and Shaw for their performance in any such year is in the
best interests of @Home. In making such an assessment, @Home may consider such
factors as Rogers' and Shaw's performance as compared to the U.S. cable
operators, @Home's then current penetration goals and other business objectives,
and Rogers' and Shaw's success in inducing other Canadian cable operators to
effectively market and sell the @Home Service and/or @Work Remote Service.
12. TERM. The Warrants will expire on March 31, 2008.
----
13. GOVERNING LAW; DISPUTE RESOLUTION. This Warrant Term Sheet will be governed
---------------------------------
by the laws of California excluding its conflicts of law rules. Any claim,
controversy or dispute between the parties relating to this Warrant Term Sheet
(a "Dispute") will be resolved in accordance with the following procedure:
(a) The Chief Executive Officers of each of the parties involved in the
Dispute will first discuss the Dispute and use their good faith efforts to reach
a fair and equitable resolution.
(b) In the event the Chief Executive Officers of the parties involved in the
Dispute are unable to resolve the Dispute, the Board of Directors of @Home will
review the Dispute and use its good faith efforts to reach a fair and equitable
resolution.
(c) In the event the Board of Directors of @Home are unable to resolve the
dispute to the satisfaction of any of the parties involved in the Dispute, the
dissatisfied party may submit the Dispute to a confidential arbitration
proceeding. Such arbitration proceeding will be held in Chicago, Illinois, will
be subject to the rules of the American Arbitration Association ("AAA"), and
will be conducted by a single arbitrator chosen by the AAA. The parties agree
that the decision of the arbitrator will be final and binding upon the parties.
14. BINDING DOCUMENT. This Warrant Term Sheet is binding on the parties
----------------
subject only to the approval of the Board of Directors for each of @Home, Rogers
and Shaw. However, the parties will work together in good faith to prepare the
Warrants described herein, together with such other legal documentation as may
be appropriate, within thirty (30) days of the date that this Warrant Term Sheet
is signed by all of the parties.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Binding Warrant Term Sheet as
of the last date set forth below.
ROGERS COMMUNICATIONS SHAW COMMUNICATIONS
INC. INC.
By: /s/ Edward S. Rogers By: /s/ Jim Shaw
---------------------- -----------------------
Name: Edward S. Rogers Name: Jim Shaw
-------------------- ---------------------
Title: President Title: President & C.O.O.
------------------- --------------------
Date: 2/24/98 Date: 2/26/98
-------------------- ---------------------
AT HOME CORPORATION
By: /s/ Ken Goldman
----------------------
Name: Ken Goldman
--------------------
Title: Sr. VP & CFO
-------------------
Date: 2/24/98
--------------------
-6-
<PAGE>
EXHIBIT A
---------
TARGET CUSTOMER NUMBERS AND TARGET REVENUE
------------------------------------------
-1-
<PAGE>
EXHIBIT B
---------
METHOD FOR CALCULATING
@HOME SUBSCRIBERS
-----------------
The number of @Home Subscribers as of a Measurement Point for Rogers, Shaw or
any Other Canadian MSO shall be calculated as set forth below. The purpose of
this calculation is to take into account Rogers', Shaw's and Other Canadian
MSOs' pricing practices compared to the U.S. cable operators' pricing practices
when assessing the number of @Home Subscribers as of a Measurement Point.
(TOTAL NUMBER OF CONNECTED CUSTOMERS) X (THE PRICE FACTOR)
(a) "Connected Customers" means those residential customers of a cable operator
that (i) are connected to the @Home Service and (ii) generate @Home Subscription
Revenue (as defined below). A residential customer of a cable operator shall be
considered "connected" to the @Home Service as of any Measurement Point if the
cable operator has activated the @Home Service for that customer as of the
applicable Measurement Point. In addition, a residential customer of Rogers,
Shaw or any Other Canadian MSO shall be considered connected to the @Home
Service as of December 31, 1998 if that customer ordered the @Home Service on or
before December 31, 1998 and had the @Home Service activated on or before
January 14, 1999.
(b) The "Price Factor" for Rogers or Shaw will be determined as follows:
(i) If the Average Rate (as defined below) for Rogers or Shaw, as
applicable, is not less than 95% and not more than 105% of the U.S. Average
Rate, the Price Factor will equal one (1); or
(ii) If the Average Rate for Rogers or Shaw, as applicable, is less than
95% or more than 105% of the U.S. Average Rate, the Price Factor will equal the
Average Rate for Rogers or Shaw, as applicable, divided by the U.S. Average
Rate.
(c) The "Average Rate" for a cable operator as of a Measurement Point will be
calculated by dividing (x) the @Home Subscription Revenue (as defined below) for
that cable operator during the month preceding that Measurement Point, by (y)
the average number of Connected Customers for that cable operator during the
same month. The average number of Connected Customers for the applicable month
will be determined by adding the number of Connected Customers on the 1st and
last day of that month and dividing such total by two.
(d) The "U.S. Average Rate" as of a Measurement Point will be calculated by
dividing (x) the sum of the @Home Subscription Revenue for the U.S. Cable
Partners during the month preceding that Measurement Point, by (y) the sum of
the average number of Connected Customers for the U.S. Cable Partners, during
the same month.
(e) "@Home Subscription Revenue" for the month preceding a Measurement Point
shall mean that portion of the charges that are billed by a cable operator
during that month to Connected Customers that are then:
(i) With respect to Rogers, Shaw or any Other Canadian MSO, split with @Home
such that @Home receives at least 19% of such charges. However, in the event
--------
@Home agrees in writing to accept a split of less than 19% on such charges, such
charges shall be considered @Home Subscription Revenue. In addition, all
-1-
<PAGE>
payments made to @Home during the applicable month pursuant to Schedule E of the
Original Term Sheet (entitled "Performance Based Payments to @Home") also will
be included in the calculation of @Home Subscription Revenue for Rogers and
Shaw.
(ii) With respect to the U.S. Cable Partners, split with @Home pursuant to
any revenue allocation formula (currently 65% to the U.S. Cable Partners and 35%
to @Home)
Accordingly, monthly charges for the provisioning of a cable modem will only be
included in Subscription Revenue if such charges meet the requirements of this
Section (e). @Home Subscription Revenue does not include the following:
installation fees; incremental fees for premium services or content; or any
sales, use, gross receipts, excise, franchise or other taxes or fees imposed on
or based upon the provision or use of the @Home Service.
(f) For the purposes of the calculations set forth above, the parties will not
consider currency conversion and instead will treat one U.S. dollar as equal to
one Canadian dollar.
(g) The parties agree to reconsider in good faith the methodology for
calculating the number of @Home Subscribers set forth in this Exhibit B if and
when such methodology no longer provides an accurate comparison of pricing
practices between the U.S. cable operators and Rogers and Shaw or otherwise fail
to reflect then current business practices.
-2-
<PAGE>
EXHIBIT C
---------
METHOD FOR CALCULATING
WEIGHTED AVERAGE @HOME PENETRATION
----------------------------------
The Weighted Average @Home Penetration for Rogers, Shaw, Other Canadian MSOs or
the U.S. Cable Partners will be calculated as set forth below.
(TOTAL NUMBER OF CONNECTED CUSTOMERS) / (TOTAL NUMBER OF HOMES PASSED)
(a) "Homes Passed" means the number of residential dwelling units that are (i)
connected to a Data-Ready Cable System (as defined below), and (ii) eligible to
order a subscription to the @Home Services. A residential dwelling unit will be
considered connected to a Data-Ready Cable System if the residential dwelling
unit is located within 250 feet of an upgraded Data-Ready Cable System
distribution line. A residential dwelling unit in an MDU that meets the two
criteria set forth above shall be counted as one Home Passed.
(b) "Data Ready Cable System" means: (i) in the case of Rogers, Shaw and the
U.S. Cable Partners, a cable system that is capable of transporting data both in
a downstream and upstream direction in accordance with the applicable @Home
specifications (i.e. two-way capable), and (ii) in the case of the Other
Canadian MSOs, a cable system that is capable of at least transporting data in
the downstream direction in accordance with the applicable @Home specifications
(i.e. telco return capable).
-1-
<PAGE>
EXHIBIT D
---------
ADJUSTED PERFORMANCE TARGETS
----------------------------
-1-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,991
<SECURITIES> 83,026
<RECEIVABLES> 4,130
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 111,663
<PP&E> 49,520
<DEPRECIATION> 12,243
<TOTAL-ASSETS> 153,897
<CURRENT-LIABILITIES> 27,583
<BONDS> 14,461
0
0
<COMMON> 454,580
<OTHER-SE> (344,463)
<TOTAL-LIABILITY-AND-EQUITY> 153,897
<SALES> 0
<TOTAL-REVENUES> 5,773
<CGS> 0
<TOTAL-COSTS> 8,615
<OTHER-EXPENSES> 93,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> (95,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (95,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (95,002)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
