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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 000-22697
AT HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0408542
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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425 BROADWAY STREET
REDWOOD CITY, CA 94063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 569-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Series A Common Stock
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [X]
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AS OF JANUARY 31, 1999
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Aggregate market value of the voting stock held by
non-affiliates of the Registrant based on the closing bid
price of such stock:...................................... $4,698,327,500
Number of shares of Series A Common Stock outstanding:...... 106,355,301
Number of shares of Series B Common Stock outstanding:...... 15,400,000
Number of shares of Series K Common Stock outstanding:...... 2,609,707
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Unless otherwise stated, information in the originally filed Form 10-K is
presented as of the original filing date, and has not been updated in this
amended filing.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the 1999 annual meeting of
stockholders to be held in May 1999 are incorporated by reference into Part III
of this annual report on Form 10-K/A where indicated.
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AT HOME CORPORATION
1998 ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
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PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 14
Item 3. Legal Proceedings................................... 15
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 15
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PART II
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Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 15
Item 6. Selected Financial Data............................. 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(restated)......................................... 17
Item 8. Financial Statements and Supplementary Data......... 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 40
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PART III
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Item 10. Directors and Executive Officers of the
Registrant................................................ 40
Item 11. Executive Compensation............................. 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 40
Item 13. Certain Relationships and Related Transactions..... 41
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PART IV
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Item 14. Exhibits, Financial Statements, Financial Statement
Schedule and Reports on Form 8-K.......................... 41
SIGNATURES.................................................. 45
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PART I
ITEM 1.
BUSINESS
This annual report contains forward-looking statements relating to future
events or financial results, such as statements indicating that "we believe,"
"we expect" or "we anticipate" that certain events may occur or certain trends
may continue, and similar statements relating to future events or financial
results. These forward-looking statements are subject to material risks and
uncertainties as indicated under the caption "Risk Factors." Actual results
could vary materially as a result of a number of factors including those set
forth in "Risk Factors" and elsewhere in this report.
We are the leading provider of broadband Internet services over the cable
television infrastructure to consumers. By virtue of our relationships with 18
cable companies in North America and Europe, we have access to approximately
58.7 million homes, which includes exclusive access to over 50% of the
households in the United States and Canada. We also provide broadband Internet
services to businesses over both the cable television infrastructure and digital
telecommunications lines.
Our primary offering, the @Home service, allows residential subscribers to
connect their personal computers via cable modems to a high-speed Internet
backbone network developed and managed by us. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial, or HFC, cable at transmission speeds up to 100 times faster than
typical dial-up connections, "always on" connection and rich multimedia
programming through our broadband Internet portal. The technology foundation of
the @Home Experience is our scalable, distributed, intelligent network
architecture (our broadband network), a "parallel Internet" that optimizes
traffic routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing our ability to address performance
bottlenecks before they affect the user experience.
Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. To date, the @Home Experience has
generated greater page views per subscriber than are reported by the leading
narrowband Internet portal companies. Our @Media group works with content
providers to facilitate the creation of rich multimedia broadband content
delivered through the @Home portal and to facilitate online transactions and
services for @Home subscribers. Multimedia content offerings include on-demand
video clips from partners such as Bloomberg and CNN Interactive, on-demand music
and CD previews provided by our Tune-In service and low-latency multiplayer
gaming from SegaSoft. Electronic commerce partners include Amazon.com, the
leading online bookseller, BuyDirect.com, an online software distributor, and
Travelocity, a leading online travel site. Our @Media group also sells
advertising on a cost per thousand impressions, or CPM, basis as well as on a
sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks.
For businesses, our @Work services provide a platform for Internet,
intranet and extranet connectivity solutions and networked business applications
over both cable infrastructure and digital telecommunications lines. In order to
accelerate deployment of the @Work connectivity and hosting solutions into major
U.S. metropolitan areas, we have established strategic relationships with
Teleport Communications Group, the country's largest competitive local exchange
carrier and a subsidiary of AT&T, Northpoint, a provider of digital subscriber
line services to businesses, and Exodus, a provider of Internet hosting and
network management services. By combining our broadband distributed network
architecture with cable, telephone and technology relationships, the @Work
services provide a compelling platform for nationwide delivery of network-based
business applications. We have developed this platform at a low incremental cost
by leveraging our existing broadband network investment. We currently provide
@Work services to nearly 1,700 businesses.
We have entered into distribution arrangements for our @Home service with
16 cable companies in North America whose cable systems pass approximately 57.3
million homes -- Tele-Communications, Inc., Cablevision Systems Corp., Comcast
Corporation, Cox Communications, Inc., Rogers Cablesystems Limited, Shaw
Cablesystems Ltd., Bresnan Communications Company, Century Communications Corp.,
Cogeco
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Cable, Inc., Garden State Cable, Insight Communications, InterMedia Partners IV
L.P., Jones Intercable, Inc., Lenfest Communications Inc., Marcus Cable
Operating Company, L.P. and Midcontinent Cable Co. Some of these distribution
arrangements are subject to the completion of definitive agreements. As of
December 31, 1998, approximately 13.2 million of the homes served by these cable
partners were passed by upgraded two-way HFC cable, and we believe that our
cable partners will complete the upgrade of systems passing a majority of their
homes within four years. In order to shorten time to market for cable operators,
we provide a turnkey solution, which includes not only a technology platform and
a national brand, but also ongoing marketing, customer service, billing and
product development support. As of December, 1998, we had launched the @Home
service through our cable partners in portions of 59 cities and communities in
the United States and Canada and have approximately 331,000 subscribers.
As part of our strategy to expand into international markets, we have
entered into agreements for the distribution of our @Home service by Edon and
Palet Kabelcom in the Netherlands. We have entered into an agreement with Intel
to create a limited partnership whereby Intel will invest $20 million in @Home
Benelux, which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. We have also initiated
distribution programs with leading consumer electronics retailers and computer
manufacturers, including CompUSA, Compaq and Dell, to facilitate the sale of the
@Home service and cable modems compliant with the new DOCSIS cable modem
standard. In addition, we are working with CableLabs and National Digital
Television Center, a subsidiary of TCI, to develop advanced digital set-top
boxes to provide broadband Internet access via television sets and to accelerate
transformation of the Internet into a mass medium.
RECENT EVENTS
Acquisition of Excite, Inc. On January 19, 1999, we agreed to acquire
Excite, Inc. and to issue shares of our Series A common stock, including shares
issuable upon the exercise of Excite options and warrants, valued at
approximately $6.7 billion at the time of the announcement of the acquisition.
Excite is a global Internet media company that attracts approximately 17 million
visitors monthly to its www.excite.com and www.webcrawler.com portal Web sites.
Excite is based in Redwood City, California. Under the merger agreement, we will
issue approximately 1.0419 shares of our Series A common stock in exchange for
each outstanding share of Excite common stock. As a result, assuming no exercise
of Excite or our outstanding options and warrants, former shareholders of Excite
will own approximately 30% of the outstanding shares of our Series A common
stock. The acquisition will be accounted for as a purchase and is expected to
close in the second quarter of 1999. Although our and Excite's boards of
directors have approved the transaction, the acquisition is subject to several
conditions, including approval by both companies' stockholders and the
expiration of applicable waiting periods under certain antitrust laws.
Therefore, there is a risk that the merger may not be consummated, and, even if
the merger is consummated, we will face challenges integrating Excite's business
with ours.
Backbone Capacity Contract with AT&T. On January 5, 1999, we announced that
we had entered an agreement with AT&T to create a nationwide Internet Protocol
network utilizing AT&T's backbone to cost-effectively support broadband services
throughout North America over the next 20 years. This new backbone facility,
which is scheduled to be deployed in mid-1999, represents a 100-fold increase in
our backbone capacity and initially will enable us to support up to five million
broadband users. AT&T will first provide us with 2 OC-48 channels, each with the
capacity to transport 2.5 gigabits per second of data, over a 15,000 mile
optical network. The agreement provides for significant expansion of capacity
that allows us to take advantage of the rapid evolution of data transport
technology.
Accounting Change for Certain Warrants. Following discussions with the
staff of the Securities and Exchange Commission, we will record as intangible
assets and amortize ratably over their remaining lives amounts which were
previously expensed in connection with our Cablevision distribution agreement.
We had recorded non-cash charges to operations of $172.6 million and $74.5
million in the fourth quarter of 1997 and the first quarter of 1998 related to
the agreement. We have reversed these previously expensed amounts and recorded
the entire $247.1 million as intangible assets, which will be amortized ratably
over their remaining lives. We will carry these intangible assets in our
financial statements at the lower of its amortized cost or fair
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value. These adjustments to our financial statements for the year ended December
31, 1997 and for the first three quarters of 1998 resulted in an increase to
assets and stockholders' equity at the end of each of these periods. The
reversal of the previously recorded charges to operations, less the amortization
of the intangible asset, resulted in a decrease to our previously reported net
losses for the fourth quarter of 1997 and the first quarter of 1998 and an
increase in the previously reported net losses for the second and third quarters
of 1998.
Acquisition of Narrative Communications Corp. On December 30, 1998, we
acquired Narrative for approximately 1.3 million shares of Series A common
stock, including shares issuable upon the exercise of outstanding Narrative
options, valued at approximately $93.8 million. Narrative, a market leader in
rich media advertising and direct marketing solutions for the World Wide Web, is
based in Waltham, Massachusetts and has nearly 50 employees. Narrative had a net
loss of approximately $5.7 million on revenues of approximately $202,000 in 1997
and had a net loss of $5.8 million on revenues of approximately $621,000 through
December 30, 1998, the purchase date. The acquisition was accounted for as a
purchase, and approximately $92.4 million of the purchase price was allocated to
goodwill and other intangible assets and will be amortized over the respective
useful lives of those assets, estimated to be 3.5 years. The remainder of the
purchase price, $2.7 million, was charged to operations in the fourth quarter of
1998 as purchased in-process research and development.
Offering of Convertible Subordinated Debentures. On December 28, 1998, we
issued $437.0 million of Convertible Subordinated Debentures in a private
offering within the United States to qualified institutional investors. The
issue price of each $1,000 debenture was $524.64, or 52.464% of principal amount
at maturity, and the effective annual interest rate on the debentures, excluding
amortization of the issuance cost, is approximately 4%. Each debenture is
convertible at the option of the holder at any time prior to maturity into 6.55
shares of our Series A common stock. The debentures mature on December 28, 2018,
and interest on the debentures at the rate of 0.5246% per annum on the principal
amount due at maturity is payable semiannually commencing June 28, 1999. We
raised approximately $222.4 million of net proceeds from the offering. We intend
to use the net proceeds of the offering for general corporate purposes,
including working capital and capital expenditures, including those associated
with domestic and international expansion and additional backbone capacity. A
portion of the net proceeds also may be used to acquire or invest in
complementary businesses or products or to obtain the right to complementary
technologies.
PRODUCTS AND SERVICES
@Home Service
Our primary offering is the @Home service, a comprehensive broadband
Internet solution that leverages the two-way HFC cable television infrastructure
and our technological and programming capabilities to provide the @Home
Experience, which we believe is the most compelling consumer Internet experience
currently available. By connecting via a cable modem to the @Home broadband
network through the local cable infrastructure, subscribers to the @Home service
can achieve peak data transmission speeds of 2 to 5 megabits per second, which
is over 100 times faster than the peak data transmission speed of a 28.8
kilobits per second dial-up modem. This high bandwidth enables compelling
multimedia applications, broadband advertising, online commerce and multiplayer
games. The @Home service offering also includes standard Internet service
provider functionality, including Web page hosting for subscribers, the ability
to create and manage multiple email accounts and remote access. We also offer
the ability to share Internet access across multiple PCs in the home for an
additional monthly fee. A critical differentiation of the @Home service is that
the two-way cable infrastructure is "always on," providing instantaneous access
to the Internet and eliminating the need for a time consuming dial-up procedure
using the telephone network.
Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. The @Home portal provides the
user with access to an array of multimedia content channels, powerful tools and
Web-based applications designed specifically to take advantage of our broadband
network architecture. We believe that the @Home portal broadens the appeal of
online services beyond technology enthusiasts to the mass market by facilitating
access to broadband content (such as animated graphics, near-CD-quality audio
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and video clips) and stimulating persistent usage with timely, dynamic, highly
sought-after data streams, as well as by simplifying navigation, increasing the
subscriber's knowledge of Internet resources. The @Home portal is organized
around a series of channels, which are defined by both topical subjects (such as
news, technology, sports or popular culture) and audiences (such as children,
game players or shoppers), and which present timely and compelling editorial
content. Through the @Home portal, we generate and direct regular audience
traffic to @Media and content providers' offerings. The @Home portal includes a
variety of tools that allow users to obtain information quickly and easily. For
example, the "How Do I" section, which is one click from the @Home portal,
provides users with a variety of step-by-step solutions to such tasks as making
plane reservations and checking movie schedules. The service also includes a
"Member Services" area where the customer can manage accounts and services via a
simple graphical interface, and personalized user services such as
individualized stock portfolios. We have also recently launched the @Home
Assistant, a proprietary @Home software application, which exploits @Home's
"always-on" connection to provide "out of browser" one-click access to
personalized stock prices, news feeds, local weather, sports scores and dining
information. The @Home Experience also permits @Home subscribers to access
online services, purchase software and engage in multiplayer gaming and
interactive shopping.
The @Home service is currently offered to consumers in the United States
for flat monthly fees generally ranging from $35 to $55, and typically includes
a cable modem provided by the cable partner. Installation of the @Home service
is provided by the cable partner at prices generally ranging from $75 to $175.
Upon installation, each new subscriber's personal computer is configured for the
@Home Experience with @Home client software, which provides access to the @Home
portal as well as other online services, Internet service providers and Web
content. In addition to making the Internet considerably easier to access for
consumers, the @Home client software offers advertisers and content providers a
rich and consistent client environment for delivering multimedia advertising,
content and applications. The @Home client software includes a customized
browser from Netscape and other high-performance and multimedia software
optimized for the @Home Experience. We also provide a customized version of
Microsoft's Internet Explorer, thereby giving subscribers a choice of browsers.
We have also initiated a distribution program with leading consumer electronic
retailers and computer retailers, including CompUSA, Compaq and Dell, to
facilitate the sale of the @Home service and DOCSIS-compliant cable modems.
In an effort to increase the deployment of our @Home service into North
American homes and businesses, we are planning to establish a joint venture with
cable operators, technology suppliers and systems integrators to encourage small
and medium-sized cable operators to offer the @Home service. The venture would
extend our current business model for large cable operators by providing a full
range of services, including financing of cable and network equipment, expanded
customer service, billing systems and service installation, and marketing
support.
We are currently developing the capability to deliver the @Home Experience
to televisions via set-top boxes connected to the cable infrastructure, and
thereby meet the needs of a broader market of non-computer users. According to
IDC, there are approximately 282 million television sets compared to
approximately 66 million personal computers in United States households. In
September 1998, we entered into an agreement with TCI's National Digital
Television Center pursuant to which we agreed to develop software and provide
integration services for TCI's advanced set-top devices that will deliver both
digital television and Internet data services. The agreement contemplates that
we will provide Internet connectivity for these devices, supply email accounts
via geographically dispersed mail servers and provide overall system management
for TCI's email services. We also are working with National Digital Television
Center on the overall software integration related to TCI's advanced digital
set-top devices. See "Risk Factors -- We face challenges associated with our
joint development effort with TCI."
@Work Services
For businesses, @Work services provide end-to-end managed connectivity for
Internet, intranet and extranet solutions over the cable infrastructure and
digital telecommunications lines. In addition, @Work is developing a next
generation platform to support networked business applications and other
value-added data networking solutions such as server hosting and electronic
commerce hosting. In order to accelerate
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deployment of @Work's connectivity solutions in metropolitan areas throughout
the United States, we have established a strategic relationship with TCG, the
country's largest CLEC, to provide targeted co-location and local telephone
circuits for infrastructure and subscriber connectivity. We currently offer two
services: @Work Internet and @Work Remote.
@Work Internet. The @Work Internet service delivers dedicated, high-speed,
end-to-end managed Internet connectivity to commercial enterprises over digital
telecommunications lines, HFC cable and digital subscriber lines. The @Work
Internet service offers dedicated access options at peak data transmission
speeds ranging from 56 kilobits per second to 10 megabits per second. These
solutions are priced competitively vis-a-vis existing alternatives. As of
December 31, 1998, the telco-based @Work Internet service was available in 22
metropolitan markets including Boston, Chicago, Denver, Detroit, Los Angeles,
New York, Orange County, Philadelphia, Phoenix, San Diego, San Francisco,
Seattle, Vancouver and Washington, D.C. At December 31, 1998, we were providing
@Work Internet services to nearly 1,700 businesses, a majority of these over
digital telecommunications lines.
In February 1998, we and Cox announced the availability of the @Work
Internet service via Cox's HFC cable infrastructure in Orange County, Phoenix,
and San Diego. Businesses in these markets that are passed by two-way HFC cable
can connect directly to the @Work Internet service. The @Work Internet HFC
service is a shared bandwidth solution that offers peak data transmission speeds
of 2 to 5 megabits per second downstream using the @Home broadband network.
@Work Remote. The @Work Remote Service is our first virtual private
networking solution. This solution provides a secure, high-speed method for
corporations to extend their local area networks to telecommuters and branch
offices via the cable infrastructure. In November 1997, we announced a non-
exclusive agreement with TCI, Cox and Comcast to develop, deploy and market
@Work Remote in areas served by these cable partners. The @Work Remote service
also includes the network equipment and software needed to connect corporate
local area networks securely to the @Home broadband network via high-bandwidth
local telephone circuits. We offer virtual private network capability between
branch offices and corporate headquarters.
Our future @Work service offerings will leverage our existing connectivity
solutions and broadband network architecture to deliver more value-added
services to commercial customers. @Work has introduced and will continue to
introduce enhanced access services that include increased service level options
as well as solutions for companies seeking multiple commercial Internet
connections to provide redundancy and load balancing. We also develop and deploy
hosting services that allow corporate information technology professionals to
outsource certain networking tasks. For example, we introduced a variety of
commercial shared Web site hosting and co-location services in the third quarter
of 1998. To further this goal, we entered into an agreement in March 1998 with
Exodus, a provider of Internet hosting and network management solutions, to
develop and deploy @Work-branded shared server hosting solutions. These hosting
solutions will also serve as a platform for outsourced network-based, commercial
applications and related management services. In addition, by designing each of
our regional data centers to include high-availability, high-performance servers
and mass storage, we believe that we will have the ability to deliver and
facilitate next-generation client-server and distributed-object networked
business applications. See "Risk Factors -- We must respond to rapid
technological change."
@Media Services and Technologies
Our @Media group has established the @Home portal as the leading broadband
Internet portal, providing a gateway to compelling multimedia and electronic
commerce offerings on the Internet. To date, the @Home Experience has generated
greater page views per subscriber than are reported by the leading narrowband
Internet portal companies. The @Media group works with content providers to
facilitate the creation of rich multimedia broadband content delivered through
the @Home portal and to facilitate online transactions and services for our
subscribers.
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We believe that growth in our subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing efforts,
we have developed a variety of compelling programming services delivered through
the @Home portal in order to drive incremental subscriber revenue and
penetration. In addition to receiving advertising fees, the @Media programming
services provide a variety of other revenue sources, including fees related to
content partnering arrangements. Examples of @Media programming services
include:
Real-Time News and Entertainment Services. Continuously-updated
headlines delivered in the News, Sports and Finance @Home channels, and
video clips presenting top stories, sports highlights and movie previews.
Current @Media partners include Bloomberg and CNN Interactive.
Interactive Shopping. Evaluate and purchase goods via an interactive
multimedia shopping experience. Current @Media partners include Amazon.com,
AutoConnect, N2K, PC Connection, QVC, Realtor.com, Reel.Com and
Travelocity. In addition, we have partnered with BuyDirect.com to enable
@Home users to purchase and download software titles at speeds
substantially faster and with greater reliability than a typical dial-up
modem.
High-Speed Multiplayer Gaming. Download and play popular Internet
games against other online players, delivered via the @Home Games channel.
By combining high speed with very low latency, the @Home broadband network
provides an excellent environment for high-quality game play. We have
already co-located game servers on our network backbone and are offering
multiplayer online games to @Home subscribers from SegaSoft.
Digital Audio Services. Near-CD-quality audio on various music, talk
and event channels (including jazz, rock and 24-hour sports talk) via our
Tune-In service. Users can simultaneously listen to the Tune-In service and
browse the Internet. Current @Media partners include Bloomberg Radio, CNET
Radio, Net Radio, SportsLine and Spinner.com.
Digital Photography. @Media has established a relationship with Intel
to utilize our high bandwidth to create an online photography resource
center. The resulting service, Making Pictures, enables users to share
their photographs and learn more about the industry migration to digital
photography.
Enhanced Search and Directory Services. Leading search and directory
services integrated into the @Home portal. Current @Media partners include
Inktomi Corporation, a leading provider of search solutions, and Looksmart
International Limited, a leading provider of directory services.
The @Media group offers a series of technologies to assist advertisers and
content providers in delivering compelling multimedia advertising and premium
services, including replication and co-location. Replication enables our content
partners to place copies of their content and applications locally on the @Home
broadband network, thereby reducing the possibility of Internet bottlenecks at
the interconnect points. Co-location allows content providers to co-locate their
content servers directly on the @Home broadband network. Content providers can
then serve their content to @Home subscribers without traversing the congested
Internet. For example, CNN and Bloomberg videos are replicated into each of our
regional data centers. Also, multiplayer game servers are co-located to enable
low-latency online gaming.
The @Media group sells advertising through several formats including
banners, half-banners, and the "B*box," a broadband audio/video advertising
space. With the B*box, advertisers are not constrained by the Web banner
paradigm and can broaden their creative presentation using video clips, audio
and animation. Advertisers have the ability to enhance their message by using
multimedia tools and technologies such as Enliven, Flash, Quicktime Video, Real
Audio and Shockwave. We derive advertising revenue on a CPM basis as well as on
a sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks. Advertisers have reported response rates (click-throughs)
substantially greater than they currently experience with traditional Web banner
advertisements. Advertisers' ability to present more compelling messages to
online users has resulted in advertising rates greater than those charged for
banner advertising on the Web.
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In addition to revenue derived from advertisements, we have established
relationships with certain of our interactive shopping and gaming partners
whereby we participate in the revenues or profits for certain transactions on
the @Home portal. We also allow certain of our content partners to sponsor
certain content channels for a fee.
THE @HOME BROADBAND NETWORK
We designed the @Home broadband network on the premise that sustainable,
high-performance Internet access requires a new, scalable architecture to
alleviate Internet bottlenecks and to enable true end-to-end network management
capabilities. Residential subscribers access the network primarily through
high-speed cable modems, which attach to their personal computers via a standard
Ethernet connection, while businesses can also connect through
telecommunications networks. The four key principles of our network strategy are
moving data closer to the user, end-to-end network management, "always-on"
service and scalability.
Moving Data Closer to the User. The @Home broadband network utilizes
caching and replication technologies to move the information that a subscriber
requests close to the subscriber. Local caching reduces backbone network
traffic, enabling the @Home broadband network to overcome a fundamental weakness
of the Internet's duplicative data transfers. For example, when a subscriber
downloads a video clip from a Web site, the user must "pull" data across the
Internet from that Web site to the user's Internet service provider and finally
to the user's computer. If the user's neighbor requests the same video clip from
that Web site, the neighbor must pull the same data across a similar path. In
contrast, our approach would move the video clip over our high-speed backbone
only once in a given geographic area and retain it in a local cache near the
user's home where it could be accessed by every subscriber within that area
without retransmission over the backbone. This more cost-effective approach
simultaneously improves the end user's performance and reduces traffic volume
across the backbone.
End-to-End Network Management. We achieve end-to-end network management
through our proactive network quality, service and performance management
systems. The @Home broadband network provides visibility from our servers (or
content partners' servers) across the backbone and all the way to the
subscriber's home. Because the @Home broadband network is centrally managed, we
can dynamically identify and enhance network quality, service and performance,
or address issues before they affect the user experience.
"Always On" Service. The @Home broadband network is "always on," unlike
switched technologies such as dial-up and ISDN. The user is always connected to
the Internet as long as his or her computer and cable modem are on. This
eliminates the need for a time-consuming connection process, as with a dial-up
service, and changes the way the customer uses the Internet.
Scalability. The @Home service is architected to be scalable to handle
increasing numbers of subscribers without degradation. Although users in the
same service area share high-bandwidth access (much like corporate LANs), which
may limit the effective bandwidth that is available to a given subscriber at a
given time, this shared connection is particularly efficient and well suited to
the sporadic nature of Internet traffic, where browsing tends to consume
bandwidth in discrete bursts intermixed with periods of inactivity. As
subscriber penetration increases, the cable operator has multiple cost-effective
alternatives to increase capacity, including allocating additional 6 MHz
channels for the @Home service or reducing the number of subscribers sharing a
given bandwidth by adding nodes, with each node serving a smaller number of
subscribers over the same fiber-optic infrastructure.
The primary components of the @Home broadband network are our high-speed
private national backbone, regional data centers, regional networks, headends
(including caching servers), network connections and cable modems and the
Network Operations Center.
Private National Backbone. We operate our own private national
backbone, which consists of a network of high-speed asynchronous transfer
mode communications services that we lease to connect our regional data
centers and regional networks with content providers and the Internet.
These services currently operate at a speed of 45 megabits per second and
can be upgraded to 155 megabits per second or higher. This backbone can be
viewed as a high-speed "parallel Internet" that connects via our routers
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<PAGE> 10
to the Internet at multiple network access points with "Tier-One" peering
status, which permits us to exchange Internet traffic with other nationwide
Internet service providers. In January 1999, we announced that we had
entered an agreement with AT&T to create a nationwide Internet Protocol
network utilizing AT&T's backbone to cost-effectively support ubiquitous
broadband services throughout North America over the next 20 years. This
new backbone facility, which is scheduled to be deployed in mid-1999,
represents a 100-fold increase in our backbone capacity and initially will
enable us to support up to five million broadband users.
Regional Data Centers. The regional data centers act as service hubs
for defined geographic areas, such as major metropolitan areas, providing
key services, including email, news groups and chat facilities, to
subscribers, managing network performance proactively, replicating content
and applications, and providing a cost-efficient infrastructure to cache
and multicast data throughout a region and to house local content and
subscribers' Web pages. We use "high availability" servers from Sun
Microsystems, Inc. in our regional data centers for these mission-critical
activities. We have deployed regional data centers in 19 geographic areas
as of December 31, 1998.
Regional Networks. The regional networks consist of network routers
and switches that interconnect our regional data centers and national
backbone to multiple cable headend facilities at speeds of 45 megabits per
second to 155 megabits per second. These networks generally take advantage
of cable operators' fiber optic infrastructures that are normally used to
transport cable television signals from a consolidated master headend
facility to other headends within a region. This approach often allows us
to avoid the high cost of leasing conventional high-speed communication
services from local telephone companies when deploying high-speed
connectivity in a region.
Headends. The cable system headends are connected to each regional
data center through the regional network. In order to move data as close to
the subscriber as possible and to avoid repetitive transmission of the same
data, the headends employ high-performance caching servers that store
frequently accessed content locally, thereby greatly reducing the amount of
data transmission (and corresponding transport costs) in higher layers of
the network. In addition, local caching servers can compile far more
comprehensive usage data than is normally attainable on the Internet, which
can be used for network troubleshooting, tuning performance and tailoring
the @Home service.
Network Connections. The last leg of the network connection is from
the headend to the consumer over a cable operator's HFC cable system.
Multiple fiber optic lines carry the signal from the headend out to cable
nodes in each neighborhood, which in turn connect through traditional
coaxial cable to the home. These fiber optic nodes typically service from
300 to 2,000 homes in a relatively modern cable system. In such a system,
each television channel requires 6 MHz of the 450-750 MHz of total system
capacity. Downstream transmission of the @Home service utilizes a similar
channel. Upstream transmission, however, utilizes a frequency range not
used for traditional broadcast by cable systems. This range is more prone
to interference than downstream channels, which effectively limits the peak
upstream transmission speed.
Cable Modems. In the home, a cable modem connects to the cable
television coaxial wiring and attaches to the user's personal computer via
standard Ethernet connections. While peak data transmission speed of a
cable modem depends on the specific model and can approach 10-27 megabits
per second downstream and 0.7-10 megabits per second upstream, the
performance that subscribers actually experience is often constrained by
the capacity of their personal computers, the capacity of the server being
accessed and the type of network architecture utilized. In addition, in
some markets, we have limited users' upstream bandwidth in order to prevent
user abuse, and we expect to continue to limit upstream bandwidth in
additional portions of our network. The North American cable industry has
adopted DOCSIS to support the delivery of data services utilizing
interoperable cable modems. We believe that this new standard and the
distribution of DOCSIS-compliant modems through computer retailers will
facilitate the growth of the cable modem industry and the availability of
lower cost interoperable cable modems through retail channels. See "Risk
Factors -- The scalability, speed and
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<PAGE> 11
security of our network is unproven" and "-- We depend on two-way cable
modems based upon a new industry standard."
Network Operations Center. We provide end-to-end network management
through our Network Operations Center. The Network Operations Center uses
advanced network management tools and systems to monitor the network
infrastructure on a 24 x 7 basis, enhancing its ability to address
performance bottlenecks before they affect the user experience. From the
Network Operations Center, we can manage the @Home broadband network from
end-to-end, including the backbone, regional data centers, regional
networks, headend facilities, servers and other components of the network
infrastructure to the user's home. See "Risk Factors -- Our dependence on
our network exposes us to a significant risk of system failure."
We also utilize certain key technologies from third parties to build and
manage the @Home broadband network. In particular, we have established strategic
relationships with AT&T for network backbone capacity, Sun Microsystems for high
availability servers, Silicon Graphics for caching servers, Cisco Systems, Inc.
for network routing and switching hardware, Sprint for national switched ATM
backbone services, Objective Systems Integrators, Inc. for network management
software, Tivoli Systems Inc. for systems management software to operate
regional data centers remotely, Oracle Corporation for advanced database
management software, Microsoft and Netscape and for server and browser software,
Inktomi for proxy and caching software and Software.com for efficient mail
delivery. See "Risk Factors -- We must respond to rapid technological change"
and "-- The scalability, speed and security of our network is unproven."
PRODUCT DEVELOPMENT AND ENGINEERING
Our product development and engineering efforts focus on: (1) design and
development of new technologies and products to increase the speed and
efficiency of our broadband network architecture and to facilitate the
development and distribution of high bandwidth content and commercial
value-added applications; (2) adaptation of our network services for use over
non-HFC access technologies, such as digital subscriber line; (3) development of
software tools and enabling platforms for the creation and distribution of
enhanced content optimized for our broadband network; and (4) porting the
appropriate components of the @Home Experience to TV-based Internet devices and
developing software, email support and related services for these devices. See
"Risk Factors -- We face challenges associated with our joint development effort
with TCI."
Our product development and engineering expenses for the years ended
December 31, 1996, 1997 and 1998 were $6.3 million, $12.0 million and $17.0
million.
STRATEGIC DISTRIBUTION RELATIONSHIPS
Strategic Relationships with North American Cable Partners. We have
strategic relationships with 16 cable companies whose systems pass approximately
57.3 million homes in North America. Subject to certain exceptions, TCI,
Comcast, Cablevision and Cox have granted us the exclusive right to offer high-
bandwidth residential consumer Internet services over their cable systems until
June 4, 2002. Rogers and Shaw have agreed to market and promote the @Home
service in Canada on an exclusive basis. Our other cable partners in North
America have entered into agreements to distribute the @Home service on an
exclusive basis through certain of their cable systems. See "Risk Factors -- Our
cable partners are not generally obligated to carry our services, and the
exclusivity obligations that prevent them from carrying competing services are
limited and may be terminated."
Of the 57.3 million homes, approximately 13.2 million were passed by
upgraded two-way HFC cable as of December 31, 1998, and we believe that our
cable partners will complete the upgrade of systems passing a majority of their
homes within four years. Our cable partners have announced and begun to
implement major infrastructure investments in order to deploy two-way HFC cable.
However, certain of our cable partners have limited experience with these
upgrades, and these investments have placed a significant strain on the
financial, managerial, operating and other resources of our cable partners, most
of which are already highly leveraged. Therefore, these infrastructure
investments have been, and we expect will continue to be, subject to change,
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<PAGE> 12
delay or cancellation. Although our commercial success depends on the successful
and timely completion of these infrastructure upgrades, most of our cable
partners are under no obligation to upgrade systems or to introduce, market or
promote our services. See "Risk Factors -- We depend on our cable partners to
upgrade to the two-way cable infrastructure necessary to support our @Home
service; the timing and availability of these upgrades are uncertain" and
"-- Our principal cable partners may dispose of their cable systems, which would
reduce our potential subscriber base."
As of December 31, 1998, we had approximately 331,000 subscribers in the
United States and Canada, including recently acquired Internet subscribers
served by Jones and Cogeco that are being converted to the @Home service. As of
December 31, 1998, our cable partners had launched the @Home service in portions
of the cities and communities set forth in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
CABLE PARTNERS CITIES & COMMUNITIES
- -----------------------------------------------------------------------------
<S> <C> <C>
BRESNAN Bay City, MI
- -----------------------------------------------------------------------------
CABLEVISION Long Island, NY
Norwalk, CT
- -----------------------------------------------------------------------------
COGECO Toronto, ON Windsor, ON
- -----------------------------------------------------------------------------
COMCAST Atlanta, GA Orange County, CA
Baltimore, MD Philadelphia, PA
Charleston, SC Sarasota, FL
Chesterfield, VA Trenton, NJ
Detroit, MI
- -----------------------------------------------------------------------------
COX Hampton Roads, VA Orange County, CA
Hartford, CT Phoenix, AZ
New Orleans, LA Providence, RI
Oklahoma City, OK San Diego, CA
Omaha, NE
- -----------------------------------------------------------------------------
GARDEN STATE Cherry Hill, NJ
- -----------------------------------------------------------------------------
INSIGHT Jeffersonville, IN
- -----------------------------------------------------------------------------
INTERMEDIA Greenville/Spartanburg, SC Nashville, TN
Louisville, KY
- -----------------------------------------------------------------------------
JONES Washington DC Region, VA
- -----------------------------------------------------------------------------
MARCUS Fort Worth, TX
- -----------------------------------------------------------------------------
ROGERS Ottawa, ON Toronto, ON
Southwest Ontario Vancouver, BC
- -----------------------------------------------------------------------------
SHAW Calgary, AB Richmond Hill, ON
Edmonton, AB Saskatoon, SK
Ft. McMurray, AB Victoria, BC
Kelowna, BC Winnipeg, MB
- -----------------------------------------------------------------------------
TCI Arlington Heights, IL Moline, IL
Baton Rouge, LA Pittsburgh, PA
Cedar Rapids, IA Portland, OR
Dallas, TX Rochester, NY
Denver, CO Royal Oak, MI
Des Moines, IA San Francisco Bay Area, CA
East Lansing, MI Seattle, WA
Hartford, CT Spokane, WA
Woodhaven, MI
- -----------------------------------------------------------------------------
</TABLE>
In order to shorten time to market for cable operators, we provide a
turnkey solution, which includes not only a technology platform, but also a
national brand, marketing, customer service and billing. This solution enables
our cable partners to leverage their respective infrastructures to deliver
high-bandwidth interactive data services that represent significant new revenue
opportunities. Our cable partners have the additional opportunity to develop and
receive all the revenues derived from local content distributed locally through
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<PAGE> 13
portions of the @Home broadband network to local subscribers. Our cable partners
bear the cost of upgrading and maintaining their cable systems to provide
high-speed two-way data transmission, installing the @Home service in
subscribers' homes, procuring the cable modems needed to interface with the
@Home broadband network and local marketing efforts. See "Risk
Factors -- Several factors may inhibit the growth of the @Home Service."
Under current arrangements with our U.S. cable partners, we receive 35% of
both the basic monthly fees and the fees for premium services, and they retain
the entire installation payment. In Canada, we receive a smaller percentage of
the monthly subscription fees billed by Rogers, Shaw and Cogeco because Rogers,
Shaw and Cogeco are responsible for various costs that are not borne by our
cable partners in the United States such as the costs of providing additional
customer support, data transport within Canada, and national marketing and
content programming.
In international markets, we anticipate that the subscriber pricing and
revenue or royalty splits with cable system operators will be different from
those that prevail in the United States based on differences in services and
content provided by the international cable system operators, data transport
costs and regulatory environments. To the extent that we offer terms of
distribution and other services to international cable system operators that are
more favorable than those offered to the four principal U.S. cable partners,
these principal U.S. cable partners have the right to obtain such more favorable
terms under a "most favored nation" provision in their distribution agreement
with us.
Strategic Relationships with Cable Partners Outside of North America. On
July 15, 1998, we entered into a Joint Venture Agreement with Edon and MEGA
Limburg Telediensten N.V. and N.V. PNEM Teleservices, together acting under the
trade name Palet Kabelcom (Edon and Palet Kabelcom are each multi-system cable
operators in The Netherlands which together cover approximately twenty percent
(20%) of homes served by cable in The Netherlands), to create a Netherlands
limited liability company known as @Home Benelux B.V. @Home Benelux will deliver
a customized version of our Internet services to residential cable subscribers
in The Netherlands and, later, throughout the Dutch-speaking Benelux
territories. In addition, we have entered into an agreement with Intel to create
a limited partnership whereby Intel will invest $20 million in @Home Benelux,
which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. In connection with the
formation of @Home Benelux, we have agreed to license to @Home Benelux our core
technologies on an exclusive basis in the Dutch-speaking Benelux territories for
a period of seven years commencing on the earlier of June 30, 1999 or the date
we are first entitled to receive revenue from our 1,000th @Home Benelux
subscriber. We will also perform certain management services in connection with
the start-up and ongoing operations of @Home Benelux. Edon and Palet Kabelcom
have each agreed to the exclusive distribution via their cable networks of our
Internet services for a similar time period as the @Home Benelux license. @Home
Benelux will also seek to expand its penetration of homes served by cable in the
Benelux territories by entering into additional exclusive distribution
agreements with other multi-system cable operators. We believe that @Home
Benelux will begin delivery of our services to customers in The Netherlands in
the first quarter of 1999.
Agreement with TCG. We have a Master Communications Services Agreement with
TCG, the largest CLEC in the United States, which provides high-speed fiber
optic telecommunications services to commercial customer sites in metropolitan
centers in the United States. Under its agreement with us, TCG provides
telecommunications facilities management and network services for the local
telecommunications transport requirements of our @Work services. In markets
served by TCG networks, TCG provides us with (1) the ability to co-locate our
equipment within TCG's network distribution facilities and (2) transport access
facilities to and from the co-located equipment, including all services provided
completely on TCG's network and services provided through a combination of TCG's
network and the network of a third-party local exchange carrier. The agreement
provides us with such telecommunications services at rates generally at or below
those of competing carriers, and the ability to co-locate our regional data
centers within TCG's network distribution facilities at favorable rates. Our
access to TCG's fiber optic network and switching infrastructure gives us a
nationwide opportunity in the commercial marketplace, which we believe will
accelerate the deployment of our @Work services into major United States
markets.
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Agreement with Northpoint. In June 1998, we entered into an agreement with
Northpoint, a wholesale data CLEC that provides digital subscriber line access
to small and medium sized businesses, whereby Northpoint provides "local loops"
that represent an additional last-mile transport option for @Work's Internet
access and networking offerings. Northpoint currently offers service in Boston,
Chicago, metropolitan Los Angeles, New York City, San Diego, the San Francisco
Bay Area and Washington D.C. and plans to expand nationally over the next
several years. As part of the agreement, we will receive engineering and
operational support from Northpoint. In addition, we will have input into
Northpoint's launch plans, and the two companies will jointly fund marketing
programs. We believe that favorable access to Northpoint's digital subscriber
line transport services will facilitate @Work's deployment of cost-effective
dedicated commercial Internet access services aimed at small businesses that
historically have relied on dial-up or ISDN access options.
Agreement with Exodus. In March 1998, we entered into an agreement with
Exodus, a provider of Internet hosting and network management services, under
which Exodus will work with us to develop and implement customized,
@Work-branded versions of Exodus' server hosting and network management services
solutions that leverage Exodus facilities and infrastructure. We will market and
sell these solutions in conjunction with @Work's connectivity and value-added
network applications. Additionally, Exodus has committed to market and resell
certain @Work commercial connectivity and value-added application solutions. We
will also work with Exodus to interconnect our respective networks, allowing us
to take advantage of Exodus' series of private and public peering relationships.
We believe that favorable access to these hosting capabilities will accelerate
the development and implementation of @Work's network-based applications and
other services.
EMPLOYEES
As of December 31, 1998, we had 570 employees, excluding temporary
personnel and consultants. Of the total: 96 were employed in networking
engineering; 101 were employed in operations; 166 were employed in customer
support, sales, marketing and related activities; 69 supported the @Work
services; 70 supported the @Media services; 13 supported our international
operations; and 55 were employed in general and administration. None of our
employees is represented by a labor union, and we consider our relations with
our employees to be good. Our ability to achieve our financial and operational
objectives depends in large part upon the continued service of our senior
management and key technical personnel and our continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
qualified personnel in our industry and geographical location in the San
Francisco Bay Area is intense, particularly in software development, network
engineering, cable engineering and product management personnel. See "Risk
Factors -- We face challenges managing our expanded operations and we depend on
key personnel."
ITEM 2. PROPERTIES
We are headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which we occupy under a 12-year lease.
In September 1997 and March 1998, we exercised build-to-suit options requiring
the landlord to build additional facilities of approximately 360,000 square feet
on adjacent property. All facilities constructed under our 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 us. The build-to-suit options that have been exercised to date provide for
monthly rental payments beginning upon the phased completion of the buildings.
Occupancy of the first phase is scheduled to occur during the second half of
1999, and occupancy of the second phase is scheduled to occur early in the year
2000. In addition to our build-to-suit options, in December 1998 we exercised
our right to purchase one land parcel from the landlord. The purchase price of
the exercised option is payable in two installments, one of $278,000, which was
paid in December 1998, and a second installment of $5,288,000, which is due in
the first half of 1999. We also have smaller offices in Waltham, Massachusetts
and Bala Cynwyd, Pennsylvania. The Waltham facility, which we assumed in
connection with our acquisition of Narrative and which consists of approximately
10,000 square feet, houses our new Enliven service. The Bala Cynwyd facility is
a small sales office that supports our cable partners in the eastern United
States and eastern
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<PAGE> 15
Canada. We believe that our existing facilities and the facilities we have the
right to have built will be adequate to accommodate our growth for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not aware of any material legal proceedings at December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market for Registrant's Common Equity. Our Series A Common Stock is traded
on the National Market System of the Nasdaq Stock Market, Inc. under the symbol
ATHM. The following table sets forth the range of the high and low sale prices
by quarter as reported on the Nasdaq National Market since July 11, 1997, the
date our Common Stock commenced trading.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ------- ------
<S> <C> <C>
1997 Third Quarter (commencing July 11, 1997)............... 25 5/16 17
1997 Fourth Quarter......................................... 29 3/8 18 7/16
1998 First Quarter.......................................... 38 1/8 20 1/2
1998 Second Quarter......................................... 57 1/4 29 3/4
1998 Third Quarter.......................................... 54 15/16 23 1/2
1998 Fourth Quarter......................................... 84 3/4 34 1/2
</TABLE>
As of February 5, 1998, the number of stockholders of record was 911. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities. On November 9, 1998, in connection
with our acquisition of Full Force Systems, Inc., we issued 38,190 shares of our
Series A common stock to the shareholders of Full Force in a private transaction
that was exempt from registration under the Securities Act by virtue of Section
4(2) of the Securities Act.
On December 28, 1998, we issued $437 million principal amount of
Convertible Subordinated Debentures due 2018 in a transaction that was exempt
under the Securities Act by virtue of Section 4(2) of the act. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and
Goldman Sachs & Co. acted as initial purchasers and offered the debentures to
qualified institutional investors in the United States in reliance on Rule 144A
under the Securities Act and to institutional accredited investors, as defined
in Rule 501(a)(1), (2), (3) and (7) under the Securities Act. Each $1,000
debenture is convertible into 6.55 shares of our Series A common stock.
On December 30, 1998, in connection with our acquisition of Narrative, we
issued 1,205,333 shares of our Series A common stock to the Narrative
stockholders in a private transaction that was exempt from registration under
the Securities Act by virtue of Section 4(2) of the Securities Act, and we will
issue options to purchase 141,273 shares of our Series A common stock.
Use of Proceeds from Sales of Registered Securities. We commenced our
initial public offering on July 11, 1997 pursuant to a Registration Statement on
Form S-1 (File No. 333-27323). In the offering, we sold an aggregate of
10,350,000 shares of 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 offering was closed on July 16, 1997.
Aggregate proceeds from the offering 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
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<PAGE> 16
Company paid underwriters' discounts and commissions of $7,607,250 and other
expenses of approximately $1,300,000 in connection with the IPO. Our total
expenses in the offering were $8,907,250, and our net proceeds were $99,767,750.
Of the net proceeds, $12,345,000 has been used for purchases of property,
equipment and improvements, $9,292,000 has been used for payments on capital
lease obligations, $19,941,000 has been used to fund operating losses and the
remainder has been allocated to general working capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference, and should be read in conjunction with, our Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein. The
selected consolidated statement of operations data presented below for the years
ended December 31 1998, 1997 and 1996, and the selected consolidated balance
sheet data as of December 31, 1998, 1997 and 1996, are derived from our
consolidated financial statements that have been included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues(1)............................................... $ 48,045 $ 7,437 $ 676
Costs and expenses:
Operating costs......................................... 46,965 22,459 6,969
Product development and engineering..................... 17,009 11,984 6,312
Sales and marketing..................................... 18,091 11,863 6,368
General and administrative.............................. 12,429 10,635 6,054
--------- -------- --------
Total costs and expenses before cost and amortization of
distribution agreements and acquisition costs(2)........ 94,494 56,941 25,703
--------- -------- --------
Loss from operations before cost and amortization of
distribution agreements and acquisition costs........... (46,449) (49,504) (25,027)
Interest income, net...................................... 6,413 3,033 514
--------- -------- --------
Loss before cost and amortization of distribution
agreements and acquisition costs........................ (40,036) (46,471) (24,513)
Purchased in-process research and development............. 2,758 -- --
Cost and amortization of distribution agreements.......... 101,385 9,246 --
--------- -------- --------
Net loss.................................................. $(144,179) $(55,717) $(24,513)
========= ======== ========
Pro forma basic and diluted net loss per share............ $ (1.26) $ (0.54) $ (0.26)
========= ======== ========
Pro forma shares used in per share calculation............ 114,240 103,543 96,120
========= ======== ========
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C>
(1) Revenues from related parties......................... $ 10,458 $ 2,948 $ 634
========= ======== ========
(2) Depreciation and amortization included in costs and
expenses................................................ $ 15,029 $ 8,913 $ 1,903
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term cash investments..... $419,289 $120,379 $16,770
Working capital............................................. 390,324 101,390 10,573
Distribution agreements, net of accumulated amortization.... 186,247 163,345 --
Total assets................................................ 780,631 323,928 33,388
Convertible debentures...................................... 229,344 -- --
Capital lease obligations, less current portion and other
long-term liabilities..................................... 14,356 15,735 5,654
Stockholders' equity........................................ 493,866 282,407 18,317
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Restated)
GENERAL
We are the leading provider of broadband Internet services over the cable
television infrastructure to consumers. By virtue of our relationships with 18
cable companies in North America and Europe, we have access to approximately
58.7 million homes, which includes exclusive access to over 50% of the
households in the United States and Canada. We also provide broadband Internet
services to businesses over both the cable television infrastructure and digital
telecommunications lines.
Our primary offering, the @Home service, allows residential subscribers to
connect their personal computers via cable modems to a high-speed Internet
backbone network developed and managed by us. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial, or HFC, cable at transmission speeds up to 100 times faster than
typical dial-up connections, "always on" connection and rich multimedia
programming through our broadband Internet portal. The technology foundation of
the @Home Experience is our scalable, distributed, intelligent network
architecture (our broadband network), a "parallel Internet" that optimizes
traffic routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing our ability to address performance
bottlenecks before they affect the user experience.
Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. To date, the @Home Experience has
generated greater page views per subscriber than are reported by the leading
narrowband Internet portal companies. Our @Media group works with content
providers to facilitate the creation of rich multimedia broadband content
delivered through the @Home portal and to facilitate online transactions and
services for @Home subscribers. Multimedia content offerings include on-demand
video clips from partners such as Bloomberg and CNN Interactive, on-demand music
and CD previews provided by our Tune-In service and low-latency multiplayer
gaming from SegaSoft. Electronic commerce partners include Amazon.com, the
leading online bookseller, BuyDirect.com, an online software distributor, and
Travelocity, a leading online travel site. Our @Media group also sells
advertising on a cost per thousand impressions, or CPM, basis as well as on a
sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks.
For businesses, our @Work services provide a platform for Internet,
intranet and extranet connectivity solutions and networked business applications
over both cable infrastructure and digital telecommunications lines. In order to
accelerate deployment of the @Work connectivity and hosting solutions into major
U.S. metropolitan areas, we have established strategic relationships with
Teleport Communications Group, the country's largest competitive local exchange
carrier and a subsidiary of AT&T, Northpoint, a provider of digital subscriber
line services to businesses, and Exodus, a provider of Internet hosting and
network management services. By combining our broadband distributed network
architecture with cable, telephone and technology relationships, the @Work
services provide a compelling platform for nationwide delivery of network-based
business applications. We have developed this platform at a low incremental cost
by leveraging our existing broadband network investment. We currently provide
@Work services to nearly 1,700 businesses.
We have entered into distribution arrangements for our @Home service with
16 cable companies in North America whose cable systems pass approximately 57.3
million homes -- Tele-Communications, Inc., Cablevision Systems Corp., Comcast
Corporation, Cox Communications, Inc., Rogers Cablesystems Limited, Shaw
Cablesystems Ltd., Bresnan Communications Company, Century Communications Corp.,
Cogeco Cable, Inc., Garden State Cable, Insight Communications, InterMedia
Partners IV L.P., Jones Intercable, Inc., Lenfest Communications Inc., Marcus
Cable Operating Company, L.P. and Midcontinent Cable Co. Some of these
distribution arrangements are subject to the completion of definitive
agreements. As of December 31, 1998, approximately 13.2 million of the homes
served by these cable partners were passed by upgraded two-way HFC cable, and we
believe that our cable partners will complete the upgrade of systems passing a
majority of their homes within four years. In order to shorten time to market
for cable operators, we provide a turnkey solution, which includes not only a
technology platform and a national brand, but also ongoing marketing, customer
service, billing and product development support. As of December 31, 1998, we
17
<PAGE> 18
had launched the @Home service through our cable partners in portions of 59
cities and communities in the United States and Canada and have approximately
331,000 subscribers.
As part of our strategy to expand into international markets, we have
entered into agreements for the distribution of our @Home service by Edon and
Palet Kabelcom in the Netherlands. We have entered into an agreement with Intel
to create a limited partnership whereby Intel will invest $20 million in @Home
Benelux, which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. We have also initiated
distribution programs with leading consumer electronics retailers and computer
manufacturers, including CompUSA, Compaq and Dell, to facilitate the sale of the
@Home service and cable modems compliant with the new DOCSIS cable modem
standard. In addition, we are working with CableLabs and National Digital
Television Center, a subsidiary of TCI, to develop advanced digital set-top
boxes to provide broadband Internet access via television sets and to accelerate
transformation of the Internet into a mass medium.
This annual report contains forward-looking statements relating to future
events or financial results, such as statements indicating that "we believe,"
"we expect" or "we anticipate" that certain events may occur or certain trends
may continue, and similar statements relating to future events or financial
results. These forward-looking statements are subject to material risks and
uncertainties as indicated under the caption "Risk Factors." Actual results
could vary materially as a result of a number of factors including those set
forth in "Risk Factors" and elsewhere in this report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
<TABLE>
<CAPTION>
1998 CHANGE 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $48,045 546% $7,437
======= ======
</TABLE>
Our revenues increased by 546% to $48.0 million for 1998 from $7.4 million
for 1997. The growth in revenues came from an increase in the number of
subscribers to our services. Our revenues consist of monthly subscription fees
for the @Home residential service, installation and monthly access fees for
@Work services, and fees for advertising, content placement and content
development from @Media services. In 1998, approximately 50% of our revenues
came from @Home services, approximately 40% of our revenues came from @Work
services, and approximately 10% of our revenues came from @Media services. Our
@Home subscribers increased 569% to approximately 331,000 at the end of 1998
from approximately 50,000 at the end of 1997. The number of subscribers to our
@Work services increased by 409% to approximately 1,700 at the end of 1998 from
331 at the end of 1997. Revenues generated from our @Media services were evenly
split between advertising revenue and content revenue. Our number of advertisers
at December 31, 1998, 57, was 185% higher than our number of advertisers at
December 31, 1997. Content revenues increased as demand for broadband portal
placement intensified. For 1998, revenues for the @Home service generated from
United States subscribers and Canadian subscribers represented 78% and 22% of
total revenues. We expect subscriber growth rates for the @Home service in the
United States to exceed those in Canada in 1999. Therefore, we expect revenues
generated from United States @Home subscribers will represent a greater portion
of total revenues for the @Home service in 1999. However, subscriber growth is
subject to a number of risks. See "Risk Factors -- Several factors may inhibit
the growth of the @Home service." Revenues from related parties, as a percentage
of total revenues, represented approximately 22% for 1998 and 40% for 1997.
Related-party revenues included development fees for @Work services and set-top
devices and fees for billing and support functions.
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<PAGE> 19
Total Costs and Expenses
<TABLE>
<CAPTION>
1998 CHANGE 1997
-------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating costs............................................. $ 46,965 109% $22,459
Product development and engineering......................... 17,009 42% 11,984
Sales and marketing......................................... 18,091 52% 11,863
General and administrative.................................. 12,429 17% 10,635
-------- -------
Total costs and expenses before cost and amortization of
distribution agreements and acquisition costs.......... 94,494 66% 56,941
Purchased in-process research and development............... 2,758 N/A --
Cost and amortization of distribution agreements............ 101,385 997% 9,246
-------- -------
Total costs and expenses.......................... $198,637 200% $66,187
======== =======
</TABLE>
Total costs and expenses before charges for purchased in-process research
and development and cost and amortization of distribution agreements increased
66% to $94.5 million for 1998 from $56.9 million for 1997. Total expenses after
cost and amortization of the distribution agreements and purchased in-process
research and development associated with the acquisitions of Narrative and Full
Force increased 200% for 1998 to $198.6 million from $66.2 million for 1997. We
believe continued expansion of our operations is critical to the achievement of
our goals, and we anticipate that costs and expenses will continue to increase
in 1999 although at a slower rate than the expected increase in our revenues.
However, our operating results may fluctuate significantly, and revenues could
grow at a slower rate than costs and expenses. See "Risk Factors -- Our
quarterly operating results may fluctuate significantly."
Operating Costs. Operating costs are primarily related to providing
services to customers, maintaining the @Home broadband network, generating
content programming for the @Home portal and deploying the @Home service in
Europe. Operating costs increased 109% to $47.0 million for fiscal 1998 from
$22.5 million for 1997. This increase of $24.5 million in operating costs was
primarily attributable to the following factors in the following proportions:
- approximately 25% to costs of customer service operations to support a
larger subscriber base;
- approximately 20% to telecommunications costs to connect the @Home
broadband network to additional areas;
- approximately 15% to telecommunications costs related to our @Work
business; and,
- approximately 15% to maintenance and depreciation of capital equipment
required for our network.
Operating costs are expected to increase substantially during 1999 as we
continue to make substantial investments in network infrastructure and customer
service operations.
Product Development and Engineering. Product development and engineering
expenses consist primarily of salaries and related expenses for personnel, fees
to outside contractors and consultants and the allocated cost of facilities.
Product development and engineering increased 42% to $17.0 million for fiscal
1998 from $12.0 million for 1997. This increase of $5.0 million in product
development and engineering expenses was primarily attributable to the following
factors in the following proportions:
- approximately 45% to expenditures focused on the continued development of
the @Home backbone to incorporate new telecommunications and server
technologies; and,
- approximately 45% to efforts to incorporate Internet technologies into
advanced digital set-top boxes.
We anticipate that product development and engineering costs will continue to
increase during 1999 due in part to increased technology development efforts
related to our broadband network, including initial design and deployment costs
associated with our AT&T backbone capacity agreement, and advanced digital
set-top boxes.
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<PAGE> 20
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
increased 52% to $18.1 million for 1998 from $11.9 million for 1997. This
increase of $6.2 million in sales and marketing expenses was primarily
attributable to the following factors in the following proportions:
- approximately 40% to additional spending to support the expansion of
@Work services; and,
- approximately 25% to advertising and content partnering arrangements and
regional deployments of the @Home service.
We expect that sales and marketing costs will continue to increase in 1999
primarily due to personnel and other costs related to:
- @Home and @Work subscriber acquisition, including expanded retail
initiatives;
- our efforts to increase advertising and content partnering arrangements;
and
- expanded product offerings, including delivery of the @Home service
through set-top devices.
General and Administrative. General and administrative expenses consist
primarily of administrative and executive personnel costs, fees for professional
services and the costs of computer systems to support our operations. General
and administrative expenses increased by 17% to $12.4 million for 1998 from
$10.6 million for 1997. This increase was caused by hiring additional finance,
human resource and facilities personnel. To support our expected growth, we
anticipate that costs in this area will continue to grow significantly during
1999.
Purchased in-process research and development. In the fourth quarter of
1998, we acquired Narrative for a total purchase consideration of $93.8 million,
and we acquired Full Force for a total purchase consideration of $1.7 million.
In connection with these acquisitions, in the fourth quarter of 1998, we
recorded purchased in-process research and development charges to operations of
approximately $2.7 million for Narrative and $58,000 for Full Force. These
amounts represent an allocation of purchase price to development projects for
the creation of new technologies that will:
- allow our subscribers to use their existing television sets
simultaneously for viewing regular television programming, viewing the
Internet and making telephone calls;
- make Internet advertising more interesting for the viewer; and
- assist advertisers in tracking various advertising metrics.
As of the date that we valued the Narrative technology, we estimated that
13% of the research and development effort had been completed at the date of the
Narrative acquisition and expect the remaining 87% of the research and
development efforts to require approximately 5 months to complete. As of the
date that we valued the Full Force technology, we estimated that 33% of the
research and development effort had been completed at the date of the Full Force
acquisition and expect the remaining 67% of the research and development efforts
to require approximately two months to complete. Although we expect that we will
successfully develop technologies related to the purchased in-process research
and development, substantial additional development of these technologies is
required, and these technologies may not achieve commercial viability. The
efforts required to develop technologies related to the purchased in-process
research and development principally relate to the completion of planning,
designing, prototyping, verification and testing activities required to
establish that products associated with the technologies can be successfully
introduced.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to products
associated with the new technologies, including costs to complete the
development of the technologies and the future revenues that may be earned upon
commercialization of the products. We then discounted these cash flows back to
their net present value.
If we do not successfully deploy commercially-accepted products based on
the acquired in-process technology, our operating results could be adversely
affected in future periods.
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<PAGE> 21
Cost and Amortization of Distribution Agreements. Cost and amortization of
distribution agreements consist primarily of charges and amortization related to
warrants to purchase our common stock issued in connection with distribution
agreements with certain of our cable partners and their future performance in
connection with distributing our services. Cost and amortization of distribution
agreements increased from $9.2 million in 1997 to $101.4 million in 1998,
primarily as a result of the amortization of the cost of the Cablevision
distribution agreement and charges associated with the successful achievement of
certain performance milestones by other cable partners. We will incur
approximately $13.6 million per quarter for amortization of the Cablevision
distribution agreement through the first half of 2002, and this amount would
increase if TCI transfers certain cable systems to Cablevision. In addition,
total cost and amortization of distribution agreements could increase
significantly if our cable partners achieve certain performance milestones.
Interest Income, Net. Interest income, net represents interest and realized
gains earned on our cash and short-term cash investments and available-for-sale
investments less interest expense on debt obligations, including our convertible
subordinated debentures. Interest income, net was $6.4 million for 1998 and $3.0
million for 1997. Interest income for 1998 was $8.4 million compared to $4.2
million for 1997. This increase was principally due to the increased cash
balances available to invest following our Series A common stock offering in
August 1998. Interest expense for 1998 was $2.0 million compared to $1.2 million
for 1997. This increase was due primarily to increases in capital lease
obligations associated with our leasing of capital equipment. We anticipate
interest expense will increase sharply in 1999 due to the interest obligations
of our convertible subordinated debentures.
Income Taxes. Due to operating losses incurred since inception, we did not
record a provision for income taxes in 1998 or 1997. At December 31, 1998, we
had net deferred tax assets of $92.5 million relating principally to tax net
operating loss carryforwards and the temporary difference relating to the cost
and amortization of distribution agreements recorded in 1998 and 1997.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. A valuation allowance has been
recorded for the net deferred tax assets as of December 31, 1998 and 1997, since
we lack an earnings history. Accordingly, we have not recorded any income tax
benefit for net losses incurred for any period from inception through December
31, 1998. See Note 9 of Notes to Consolidated Financial Statements.
Net Loss. Our net loss before the costs and amortization for distribution
agreements and purchased in-process research and development was $40.0 million
for 1998 and $46.5 million for 1997. Our net loss for 1998 of $144.2 million
includes costs and amortization of $101.4 million related to certain
distribution agreements and $2.8 million related to purchased in-process
research and development from our acquisitions of Narrative and Full Force. The
decrease in net loss before the costs and amortization for distribution
agreements and purchased in-process research and development was primarily a
result of additional revenues, partially offset by the additional expenses
attributable to the expansion of our @Home and @Work services. We anticipate
that our net loss, excluding non-cash charges relating to amortization of the
distribution agreement, performance warrants earned by cable operators and
amortization of amounts related to mergers and acquisitions, will continue to
decline during 1999 as revenues grow at a faster rate than expenses. However,
revenues could grow at a slower rate than costs and expenses. See "Risk
Factors -- Our operating results may fluctuate significantly."
If our merger with Excite closes, we expect to record charges for the
amortization of goodwill and other intangible assets in our statement of
operations estimated at approximately $1,700 million annually for four years
from the date of the acquisition. This estimate is based on a preliminary
valuation and is subject to change pending a final analysis of the total
purchase cost and the fair value of the assets acquired and liabilities assumed.
The impact of such changes could be material.
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<PAGE> 22
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
<TABLE>
<CAPTION>
1997 CHANGE 1996
------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $7,437 1,000% $676
====== ====
</TABLE>
Revenues for 1997 equaled $7.4 million, an increase of $6.7 million over
revenues of $676,000 for 1996. Revenues from related parties as a percentage of
total revenues were approximately 40% for 1997 and 94% for 1996. For 1997,
revenues from @Work services in the United States and from the @Home service in
Canada contributed significantly to our total revenues, especially during the
second half of the year.
Total Costs and Expenses
<TABLE>
<CAPTION>
1997 CHANGE 1996
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Costs............................................. $22,459 222% $ 6,969
Product development and engineering......................... 11,984 90% 6,312
Sales and marketing......................................... 11,863 86% 6,368
General and administrative.................................. 10,635 76% 6,054
------- --- -------
Total costs and expenses before cost and amortization of
distribution agreement................................. 56,941 122% 25,703
Cost and amortization of distribution agreements............ 9,246 N/A --
------- --- -------
Total costs and expenses.......................... $66,187 N/A $25,703
======= =======
</TABLE>
Total Costs and Expenses. Total costs and expenses before the cost and
amortization of distribution agreements was $56.9 million for 1997 and $25.7
million for 1996. This increase was primarily a result of:
- operating costs associated with expansion and deployment of the @Home
broadband network to support the @Home service subscriber growth;
- additional corporate infrastructure investments; and
- the start-up of @Work services.
Operating Costs. Operating costs were $22.5 million for 1997 and $7.0
million for 1996. This increase of $15.5 million in operating costs was
primarily attributable to the following factors in the following proportions:
- approximately 25% to ongoing expansion of customer service operations;
- approximately 25% to maintenance and depreciation from capital equipment
used in support of the @Home broadband network and headend architecture;
- approximately 25% to telecommunications costs to support the deployment
of the @Home broadband network to additional sites; and,
- approximately 15% to launch costs for our @Work services.
Product Development and Engineering. Product development and engineering
expenses were $12.0 million for 1997 and $6.3 million for 1996. This increase of
$5.7 million in product development and engineering expenses was primarily
attributable to the following factors in the following proportions:
- approximately 45% to ongoing design, testing and deployment of the @Home
broadband network; and,
- approximately 35% to the initiation of efforts to incorporate Internet
technologies into advanced digital set-top boxes.
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<PAGE> 23
Sales and Marketing. Sales and marketing expenses were $11.9 million for
1997 and $6.4 million for 1996. This increase of $5.5 million in sales and
marketing expenses was primarily attributable to the following factors in the
following proportions:
- approximately 45% to additional spending on sales and marketing
activities to support the expansion of regional deployments of the @Work
services; and,
- approximately 40% to increased spending on sales and marketing activities
to support the expansion of regional deployments of the @Home services.
General and Administrative. General and administrative expenses were $10.6
million for 1997 and $6.1 million for 1996. This increase was the result of:
- additions of personnel to support our operations;
- stock compensation charges resulting from stock options and stock
purchase agreements;
- additional facilities expenditures; and
- additional expenses related to activities and requirements of becoming a
publicly traded company.
Interest Income, Net. Interest income, net represents interest earned by
our cash and short-term cash investments, less interest expense on our debt
obligations. Interest income, net was $3.0 million for 1997 and $514,000 for
1996. Interest income for 1997 was $4.2 million as compared to $693,000 for
1996. This increase was principally due to the increased balances available to
invest resulting from our preferred stock financing in April 1997 and our
initial public offering in July 1997. Interest expense for 1997 was $1.2 million
as compared to $179,000 for 1996. This increase was due primarily to significant
increases in capital lease obligations associated with our leasing of capital
equipment.
Income Taxes. Due to operating losses incurred since inception, we have not
recorded a provision for income taxes in 1997 or 1996.
Net Loss. The net loss before the charge for the cost and amortization of
distribution agreements was $46.5 million for 1997 and $24.5 million for 1996.
The net loss for 1997 of $55.7 million includes amortization of $9.2 million
related to the distribution agreement with Cablevision. The increase in net loss
before the amortization from the agreement with Cablevision was primarily a
result of additional business activities, partially offset by the additional
revenues attributable to the expansion of our @Home and @Work services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of private and public sales of equity and convertible debt
securities and capital equipment leases. At December 31, 1998, our principal
source of liquidity was $419.3 million of cash, cash equivalents and short-term
cash investments, as compared to $120.4 million at December 31, 1997.
In September 1997, we entered into a term loan agreement with Silicon
Valley Bank. The term loan, as amended in October 1998, provides for borrowings
of up to $15.0 million to finance the acquisition of property, equipment and
improvements, and to collateralize letters of credit. At our option, borrowings
under this term loan bear interest either at the Bank's prime rate or at LIBOR
plus 2.5%. As of December 31, 1998, there were no borrowings under this term
loan although there were outstanding letters of credit in the amount of $3.5
million related to real property transactions. Under the term loan, we are
required to meet certain financial covenants. The term loan expires on October
19, 2002.
Net cash used in operating activities for 1998 was $30.2 million. This is
primarily the result of a net loss of $144.2 million, which was reduced by
non-cash items for:
- charges for performance warrants charges earned under distribution
agreements, $49.8 million;
- amortization of the distribution agreements, $51.6 million; and
- depreciation and amortization from operations of $15.0 million.
An $8.1 million increase in accounts receivable occurring in connection with our
growth in revenues also impacted our cash used in operating activities.
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<PAGE> 24
Net cash used in investing activities in 1998 was $54.8 million. This use
of funds was the result of purchases of net short-term investments of $43.1
million and $16.8 million in cash purchases of property, equipment and
improvements as part of our continued expansion in core businesses. Gross
capital expenditures for equipment, software, furniture, leasehold improvements
and fixtures for 1998 was $29.7 million and for 1997 was $26.5 million, of which
$12.9 million in 1998 and $16.5 million in 1997 were financed through capital
leases.
In December 1998, we entered into an agreement with AT&T to create a
nationwide network utilizing AT&T's backbone. Under this agreement, we will pay
AT&T $45 million in each of 1999 and 2000, including payments of $18 million on
August 30, 1999 and $27 million on September 1, 2000. We expect to make
additional disbursements of approximately $5 million per year over the next few
years for backbone capacity, equipment and maintenance fees.
Net cash provided by financing activities for 1998 was $341.5 million. Of
this increase, $130.8 million resulted primarily from the sale of common stock
in 1998 and $222.4 million resulted from the net proceeds from our sale of
convertible debentures in December 1998.
We believe that we have the financial resources needed to meet our
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next 12 months. Thereafter, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. We may not be
able to raise any such capital on terms acceptable to us or at all.
We are headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which we occupy under a 12-year lease.
In September 1997 and March 1998, we exercised build-to-suit options requiring
the landlord to build additional facilities of approximately 360,000 square feet
on adjacent property. All facilities constructed under our 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 us. The build-to-suit options that have been exercised to date provide for
monthly rental payments beginning upon the phased completion of the buildings.
Occupancy of the first phase is scheduled to occur during the second half of
1999, and occupancy of the second phase is scheduled to occur early in 2000. In
addition to our build-to-suit options, in December 1998 we exercised our right
to purchase one land parcel from the landlord. The purchase price of the
exercised option is payable in two installments, one of $278,000, which was paid
in December 1998, and a second installment of $5,288,000, which is due in the
first half of 1999. We also have smaller offices in Waltham, Massachusetts and
Bala Cynwyd, Pennsylvania. We believe that our existing facilities and the
facilities we have the right to have built will be adequate to accommodate our
growth for the foreseeable future.
DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
Interest Rate Sensitivity.
Short-Term Investments. We had short-term investments of $118.6 million at
December 31, 1998. These short-term investments consist of highly liquid
investments with original maturities at the date of purchase of between three
and twelve months. These investments are subject to interest rate risk and will
fall in value if market interest rates increase. A hypothetical increase in
market interest rates by 10 percent from levels at December 31, 1998 would cause
the fair value of these short-term investments to decline by an immaterial
amount. Because we are not required to sell these investments before maturity,
we have the ability to avoid realizing losses on these investments due to a
sudden change in market interest rates. However, we could choose to sell these
investments before maturity at a loss. Declines in interest rates over time
will, however, reduce our interest income.
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<PAGE> 25
Outstanding Convertible Debt. At December 31, 1998, we had outstanding
long-term convertible debentures of approximately $229.3 million at a fixed
interest rate of 4%. In certain circumstances, we may be required to redeem
these debentures for our Series A common stock or cash. Because the interest
rate on these debentures are fixed, a hypothetical 10 percent decrease in
interest rates would not have a material impact on us. Increases in interest
rates could, however, increase the interest expense associated with future
borrowings by us, if any. We do not hedge against interest rate increases.
Equity Price Risk.
We own 86,000 shares of common stock of Exodus Communications. We purchased
these shares at the time of Exodus' initial public offering in March 1998 at a
price of $15.00 per share. At December 31, 1998, the closing price of Exodus'
common stock was $64.25 per share. We value this investment using the closing
fair market value stated in the Wall Street Journal for the last day of each
month. As a result, we reflect this investment in our balance sheet at December
31, 1998 at its market value of $5.5 million, with the unrealized gains and
losses excluded from earnings and reported in the "Accumulated Other
Comprehensive Income" component of stockholders' equity. We do not hedge against
equity price changes.
Foreign Currency Exchange Rate Risk.
Substantially all of our revenues are realized in U.S. dollars and most of
our revenues are from customers in the United States. Therefore, we do not
believe we face significant direct foreign currency exchange rate risk. We do
not hedge against foreign currency exchange rate changes.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components. Additionally, 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. We adopted these Statements in 1998. Adoption of these Statements did
not have a material impact on our consolidated financial position, results of
operations or cash flows.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We expect to adopt this Statement effective
January 1, 2000, which will require that we recognize all derivatives on our
balance sheets at fair value. We do not anticipate that the adoption of this
Statement will have a significant effect on our results of operations or
financial position.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We adopted SOP 98-1 effective for the year ended
December 31, 1998. The adoption of SOP 98-1 did not have a material impact on
our consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended December 31, 1999. The adoption of SOP 98-5 is not expected
to have a material impact on our consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
Year 2000 computer issues create certain risks for us, although we believe
that such risks are less significant than those faced by many companies due to
the fact that we commenced operations in 1995. If our internal and network
information systems do not correctly recognize and process date information
beyond the
25
<PAGE> 26
year 1999, there could be an adverse impact on our operations. To address these
Year 2000 issues with our internal and network systems, we have initiated a
program to evaluate our internal and network systems. We and our majority
shareholder, TCI, have initiated a comprehensive program to address Year 2000
readiness in our systems and with our customers' and suppliers' systems. The
program has been designed to gather information regarding the Year 2000
compliance of products and services that we require to deploy our residential
and commercial Internet services. Under the program, assessment and remediation
are proceeding in tandem and are intended to have our critical systems in Year
2000 compliance by June 30, 1999. These activities are intended to encompass all
major categories of systems that we use, including network management, customer
service and business operations. The costs incurred to date related to the
program have not been material. We currently expect that the total cost of our
Year 2000 readiness program will not exceed $750,000 over the next fiscal year.
The total cost estimate does not include potential costs related to any customer
or other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of our Year 2000 readiness needs and is subject to change as the
program proceeds.
As part of the normal course of our operations, we are currently in the
process of transitioning to or implementing new computer software for our
accounting, billing, network management, human resources and other management
information systems. We are assessing and testing these systems for Year 2000
dependencies and will implement changes to such systems if necessary. The
successful implementation of these new systems is crucial to the efficient
operation of our business. We may not be successful implementing new systems in
an efficient and timely manner, and the new systems may not be adequate to
support our operations. Problems with installation or initial operation of the
new systems could cause substantial difficulties in operations planning,
business management and financial reporting, which could have a material adverse
effect on our business. The cost of bringing our new systems into Year 2000
compliance, if necessary, is not expected to have a material effect on our
financial condition or results of operations.
We have also initiated formal communications with many of our significant
suppliers to determine the extent to which we are vulnerable to these suppliers'
failure to remedy their own Year 2000 issues. We have already received
assurances of Year 2000 compliance from a number of those suppliers. Most of the
suppliers have no contractual obligations under existing contracts to provide us
with this information. We are taking steps with respect to new supplier
agreements to seek assurance that the suppliers' products and internal systems
are Year 2000 compliant. Despite these assurances, we may still experience
supplier-related Year 2000 problems.
Although we currently expect that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems or a failure to fully identify all Year 2000 dependencies in
our existing system and in the systems of our suppliers could have material
adverse consequences. Therefore, we are developing, but do not yet have,
contingency plans for continuing operations in the event these problems arise.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this Form 10-K before investing in our common stock. Our business and results
of operations could be seriously harmed by any of the following risks. The
trading price of our common stock could decline due to any of these risks, and
you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS UNPROVEN, AND WE MAY NOT ACHIEVE PROFITABILITY
We were incorporated in March 1995, and we commenced operations in August
1995; we have incurred operating losses in each fiscal period since our
inception. As of December 31, 1998, we had an accumulated deficit of $227.2
million. In addition, we currently intend to increase capital expenditures and
operating expenses in order to expand our network and to market and provide our
services to a growing number of potential subscribers. As a result, we expect to
incur additional net operating losses before cost and
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amortization of distribution agreements and amortization of goodwill and other
intangible assets for at least the next three quarters.
The profit potential of our business model is unproven. Our @Home service
was available only in portions of 59 geographic markets as of December 31, 1998
and may not achieve broad consumer or commercial acceptance. Although
approximately 2,053 organizations have agreed to utilize @Work services as of
December 31, 1998, our @Work services may not achieve broad commercial
acceptance and the current rate of deployment for @Work services may not be
sustained. We have difficulty predicting whether the pricing models for our
Internet services will prove to be viable, whether demand for our Internet
services will materialize at the prices our cable partners charge for the @Home
service or the prices we or our cable partners charge for @Work services, or
whether current or future pricing levels will be sustainable. If such pricing
levels are not achieved or sustained or if our services do not achieve or
sustain broad market acceptance, our business will be significantly harmed. We
may never achieve favorable operating results or profitability.
SEVERAL FACTORS MAY INHIBIT THE GROWTH OF THE @HOME SERVICE
As of December 31, 1998, we had approximately 331,000 cable modem
subscribers, including recently acquired Internet subscribers that are being
converted to the @Home service. Our ability to increase the number of
subscribers to the @Home service to achieve our business plans and generate
future revenues will be dependent on a number of factors, many of which are
beyond our control. For instance, certain cable partners from time to time have
not achieved subscriber levels which we had originally anticipated. These
factors include, among others:
- the rate at which our current and future cable partners upgrade their
cable infrastructures
- our ability and the ability of our cable partners to coordinate timely
and effective marketing campaigns with the availability of cable
infrastructure upgrades
- the success of our cable partners in marketing and installing the @Home
service in their local cable areas
- the prices that our cable partners set for the @Home service and for its
installation
- the speed at which our cable partners can complete the installations
required to initiate service for new subscribers
- the commercial availability of DOCSIS-compliant, self-installable modems
and the success of our roll-out of these products with the @Home service
- the quality of customer and technical support provided by us and our
cable partners
- the quality of content on the @Home service
We believe subscriber growth has been constrained, and will continue to be
constrained, by the cost and the amount of time required to install the @Home
service for each residential consumer. In addition, our growth has been
constrained by the rate at which our cable partners have upgraded their cable
systems, and most of our 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 preceding factors, among others, our actual revenues or the rate
at which we will add new subscribers may differ from our forecasts. We may not
be able to increase our subscriber base in accordance with our internal
forecasts or the forecasts of industry analysts or to a level that meets the
expectations of investors. The rate at which subscribers have increased during
1998 does not necessarily indicate the rate at which subscribers may be expected
to increase in the future. In particular, while we have recently forecast that
our number of subscribers could grow to over 1.1 million by December 31, 1999
from approximately 331,000 subscribers at December 31, 1998, we may not achieve
this level of subscriber growth, particularly given the risks set forth here.
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OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
Our operating results may fluctuate significantly due to a variety of
factors, many of which are outside our control. Factors that may affect our
operating results attributable to our @Home service include:
- the timing of our cable partners' upgrades of their cable infrastructures
and roll-outs of the @Home service
- the rate at which customers subscribe to our Internet services and the
prices subscribers pay for these services
- changes in the revenue splits between us and our cable partners
- the demand for electronic commerce
- the effectiveness of our cable partners' marketing, installation and
other operations
Operating results attributable to our @Work services are dependent on:
- the demand for, and level of acceptance of, our corporate Internet,
intranet and extranet connectivity and telecommuting solutions
- the introduction of, demand for, and level of acceptance of, our
value-added business applications
- in part, the timing of our cable partners' upgrades of their cable
infrastructures
- the effectiveness of our cable partners' marketing and other operations
- competitive pressures, including pricing pressure and the availability of
competing technologies, in the market for business Internet services
- the creditworthiness of our @Work customers
Following discussions with the staff of the Securities and Exchange
Commission, we recently restated our financial statements for the year ended
December 31, 1997 and the first three quarters of 1998 to record as intangible
assets and amortize ratably over their useful lives amounts that were previously
expensed in connection with our Cablevision distribution agreement. Our
operating results have been and will continue to be adversely affected by
significant charges associated with warrants issued to current and potential
cable partners in connection with distribution agreements.
Our quarterly revenues and operating results are difficult to forecast even
in the short term. A significant portion of our 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 our
operating results may be magnified by our inability to adjust spending to
compensate for the shortfall. Moreover, our cable partners have complete
discretion regarding the pricing of the @Home service in their territories,
which could further impact our ability to generate revenue. A shortfall in
actual compared to estimated revenue could significantly harm our business.
THE SCALABILITY, SPEED AND SECURITY OF OUR NETWORK IS UNPROVEN
Due to the limited deployment of our services, the ability of our network
to connect and manage a substantial number of online subscribers at high
transmission speeds is as yet unknown, and we face risks related to our
network's ability to be scaled up to its expected subscriber levels while
maintaining superior performance. The network may be unable to achieve or
maintain a high speed of data transmission, especially as our subscribers
increase. In recent periods, the performance of the network has experienced some
deterioration in certain markets as a result of subscriber abuse of the @Home
service. While we seek to eliminate such abuse by limiting users' upstream
bandwidth, our failure to achieve or maintain high-speed data transmission would
significantly reduce consumer demand for our services. In addition, while we
have 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 our network, may inhibit the acceptance of our Internet
services.
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WE FACE CHALLENGES MANAGING OUR EXPANDED OPERATIONS AND WE DEPEND ON KEY
PERSONNEL
We may not be able to successfully manage any future periods of rapid
growth or expansion, which we expect to place a significant strain on our
managerial, operating, financial and other resources. From time to time, we and
our cable partners have had difficulty managing network operations and expansion
of backbone capacity and providing adequate customer service or efficient
provisioning of new subscribers. A prolonged failure to perform these functions
successfully would significantly inhibit subscriber growth and retention. We are
highly dependent upon the efforts of our senior management team, and our future
performance will depend, in part, upon the ability of senior management to
manage growth effectively. This will require us:
- to implement additional management information systems capabilities
- to further develop our operating, administrative, financial and
accounting systems and controls
- to maintain close coordination among engineering, accounting, finance,
marketing, sales and operations
- to hire and train additional technical and marketing personnel
There is intense competition for senior management, technical and marketing
personnel in the areas of our activities. The loss of the services of any of our
senior management team or the failure to attract and retain additional key
employees could significantly harm our business. We maintain no key-person life
insurance.
WE DEPEND ON TWO-WAY CABLE MODEMS BASED UPON A NEW INDUSTRY STANDARD
Each of our subscribers currently must obtain a cable modem from a cable
partner to access the @Home service. The North American cable industry has
recently adopted a set of interface standards known as DOCSIS for hardware and
software to support the delivery of data services over the cable infrastructure
utilizing interoperable cable modems. We believe that these specifications,
together with our distribution relationships with CompUSA, Compaq and Dell, will
facilitate the growth of the cable modem industry and the availability of lower
cost, interoperable cable modems through retail channels. However, certain of
our cable partners have chosen to delay some deployments of the @Home service
until the widespread commercial availability of DOCSIS-compliant cable modems.
Our subscriber growth could be constrained and our business could be
significantly harmed if our cable partners choose to slow the deployment of the
@Home service further, as a result of the timing of widespread commercial
availability of DOCSIS-compliant cable modems or otherwise. Cable modems that
are DOCSIS-compliant are not expected to be available in significant quantities
until at least the second quarter of 1999. Although multiple vendors are
expected to supply DOCSIS-compliant cable modems and their constituent
components, any cable partner's reliance on a single provider of these modems or
components could cause that cable partner to be unable to generate expected
subscriber growth for the @Home service if the supplier does not provide the
cable partner with a sufficient quantity of DOCSIS-compliant modems.
OUR MARKETS ARE HIGHLY COMPETITIVE
The markets for consumer and business Internet services and online content
are extremely competitive, and we expect that competition will intensify in the
future. Our most direct competitors are other providers of cable-based Internet
services, unaffiliated cable companies, national long-distance and local
exchange carriers, Internet and online service providers, and Internet content
aggregators.
We compete with other cable-based services. Our competitors in the
cable-based services market are those companies that have developed their own
cable-based services and market those services to unaffiliated cable system
operators that are planning to deploy data services. In particular, Time Warner
Inc. and MediaOne Group have deployed high-speed Internet access services over
their existing local HFC cable networks through their cable-based Internet
service, Road Runner, which features a variety of proprietary content from Time
Warner Publications. Time Warner's substantial libraries of multimedia content
could provide Road Runner with a significant competitive advantage. In June
1998, Microsoft and Compaq each invested $212.5 million in Road Runner and
announced that Microsoft will provide software for the Road Runner service and
that Compaq will produce cable-ready personal computers to be used with the
service.
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Time Warner and MediaOne plan to market the Road Runner service through their
own cable systems as well as to other cable system operators nationwide.
Although we do not presently compete directly with the Road Runner service for
subscribers because Road Runner is offered over different cable systems than
those that carry the @Home service, we do compete with the Road Runner service
in seeking to establish distribution arrangements with cable system operators.
Furthermore, if and when our existing cable partners cease to be subject to
their exclusivity obligations, we may compete with Road Runner and potentially
other Internet service providers for distribution over the cable systems of our
cable partners. In addition, other cable system operators, including Adelphia
Communications Corporation, have launched their own cable-based Internet
services that could compete with our services.
We also compete with other high-speed telecommunications technologies. Long
distance inter-exchange carriers, such as AT&T, MCI Worldcom and Sprint have
deployed large-scale Internet access networks and sell connectivity to business
and residential customers. The regional Bell operating companies and other local
exchange carriers have also entered this field and are providing price
competitive services. Many such carriers are offering diversified packages of
telecommunications services, including Internet access, to residential customers
and could bundle these services together, which could put us at a competitive
disadvantage. Many of these competitors are offering or may soon offer
technologies that will compete with some or all of our high-speed data service
offerings. These technologies include integrated services digital network (ISDN)
and asymmetric digital subscriber line (ADSL). In January 1998, technology
companies including Compaq, Intel and Microsoft together with numerous
telecommunications providers announced an initiative to develop a simplified
version of ADSL, referred to as "ADSL Lite," which is intended to reduce the
complexity and expense of installing Internet services based on ADSL. Also, in
October 1998, the International Telecommunications Union adopted an ADSL
standard called G Lite. Widespread commercial acceptance of ADSL technologies
could significantly reduce the potential subscriber base for our Internet
services, which could significantly harm our business.
We compete with other online services. We also compete with Internet
service providers that provide basic Internet access to residential consumers
and businesses, generally using existing telephone network infrastructures.
While not offering the advantages of broadband access, these services are widely
available and inexpensive. In addition, we compete with online service providers
such as America Online, Inc. that provide, over the Internet and on proprietary
online services, content and applications ranging from news and sports to
consumer videoconferencing. These services currently are designed for broad
consumer access over telecommunications-based transmission media, which enables
the provision of data services to the large group of consumers who have personal
computers with modems. America Online and Bell Atlantic have recently entered
into an agreement whereby America Online will offer its Internet services using
Bell Atlantic's advanced digital subscriber line infrastructure. Online service
providers also provide basic Internet connectivity, ease of use and consistency
of environment. In addition to developing their own content or supporting
proprietary third-party content developers, online services often establish
relationships with traditional broadcast and print media outlets to bundle their
content into the service.
We compete with content aggregators and Internet portals. Finally, we
compete with content aggregators and Internet portals that seek to capture
audience flow by providing ease-of-use and offering content that appeals to a
broad audience. Leading companies in this area include America Online, Yahoo!
Inc. and Lycos, Inc. In this market, competition affects existing and potential
relationships with both content providers and subscribers. The principal bases
of competition in attracting content providers include quality of demographics,
audience size, cost-effectiveness of the medium and ability to create
differentiated experiences using aggregator tools. The principal bases of
competition in attracting subscribers include richness and variety of content
and ease of access of the desired content. Many online service providers, such
as America Online, have the advantage of large customer bases, industry
experience, many content partnerships and significant resources.
Many of our competitors have more resources than we do. Many of our
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 we do. These competitors
may be able to undertake more extensive marketing
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campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services or online content than we could. We
may not be able to compete successfully against current or future competitors,
and competitive pressures could significantly harm us. Further, as a strategic
response to changes in the competitive environment, we and our cable partners
may make certain pricing, service or marketing decisions or enter into
acquisitions or new ventures that could significantly harm us.
WE FACE CHALLENGES ASSOCIATED WITH OUR JOINT DEVELOPMENT EFFORT WITH TCI
We were selected by TCI to develop software and provide integration
services for TCI's next generation advanced digital set-top devices. Although we
believe this relationship could enable us to expand our product line and market
the @Home service to a broader audience of consumers who do not regularly use a
personal computer, the agreement does not require that TCI deploy the @Home
service on these set-top devices, and we cannot predict when these set-top
devices will become commercially available. Notwithstanding our agreement with
TCI, we cannot deploy set-top device Internet services over the cable
infrastructure of TCI or our cable partners without their consent.
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:
- the technological and operational challenges of providing and supporting
email and other Internet services to set-top device users
- competition from alternative Internet service providers and deployment
technologies
- the degree to which consumers desire Internet services, including email,
on their televisions
In addition, our cable partners can work with third parties to develop and
deploy set-top devices, and even if they do choose to work with us, our revenue
split on any fees generated from services deployed on these devices may differ
from our revenue split with respect to our current high-speed cable Internet
services.
OUR DEPENDENCE ON OUR NETWORK EXPOSES US TO A SIGNIFICANT RISK OF SYSTEM FAILURE
Our operations are dependent upon our ability to support our 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 our network operations center
or at a number of our regional data centers could cause interruptions in our
services. Additionally, failure of our cable partners or companies from which we
obtain data transport services to provide the data communications capacity we
require, as a result of natural disaster, operational disruption or any other
reason, could cause interruptions in the services we provide. Any damage or
failure that causes interruptions in our operations could significantly harm our
business.
WE MUST RESPOND TO RAPID 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 we
continually improve the performance, features and reliability of our network,
Internet content and consumer and business services, particularly in response to
competitive offerings. We may not be successful in responding quickly, cost
effectively and sufficiently to these developments. There may be a time-limited
market opportunity for our cable-based consumer and business Internet services,
and we may not be successful in achieving widespread acceptance of our services
before competitors offer products and services with speed and performance
similar to or better than our current offerings. In addition, the widespread
adoption of new Internet or telecommuting technologies or standards, cable-based
or otherwise, could require that we make substantial expenditures to modify or
adapt our network, products and services. This could fundamentally affect the
character, viability and frequency of Internet-based advertising and content
services. Finally, new Internet or telecommuting services or enhancements that
we offer may contain design flaws or other defects.
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YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS
If our internal and network information systems do not correctly recognize
and process date information beyond the year 1999, we may not be able to conduct
operations. To address these Year 2000 issues, we and our majority shareholder,
TCI, have initiated a comprehensive program to address Year 2000 readiness in
our systems and with our customers' and suppliers' systems. The program has been
designed to gather information regarding the Year 2000 compliance of products
and services that we require to deploy our residential and commercial Internet
services. Under the program, assessment and remediation are proceeding in
tandem, and we intend to have our critical systems in Year 2000 compliance by
June 30, 1999. These activities encompass all major categories of systems that
we use, including network management, customer service and business operations.
The costs incurred to date related to the program have not been material. We
currently expect that the total cost of our Year 2000 readiness program will not
exceed $750,000 in 1999. The total cost estimate does not include potential
costs related to any customer or other claims or the costs of internal software
or hardware replaced in the normal course of business. The total cost estimate
is based on the current assessment of our Year 2000 readiness needs and is
subject to change as the program proceeds.
As part of our normal course of operations, we are currently in the process
of transitioning to or implementing new computer software for our accounting,
billing, network management, human resources and other management information
systems. We are assessing and testing these systems for Year 2000 compliance and
will implement changes to these systems, if necessary. The successful
implementation of these new systems is crucial to the efficient operation of our
business. However, we may not implement our new systems in an efficient and
timely manner, and the new systems may not be adequate to support our
operations. Problems with installation or initial operation of the new systems
could cause substantial difficulties in operations planning, business management
and financial reporting, which could significantly harm our business, financial
condition and results of operations. The cost of bringing our new systems into
Year 2000 compliance, if necessary, is not expected to have a material effect on
our financial condition or results of operations.
We have also initiated formal communications with many of our significant
suppliers to determine the extent to which we are vulnerable to these suppliers'
failure to remedy their own Year 2000 issues. We have already received
assurances of Year 2000 compliance from a number of those suppliers. Most of the
suppliers have no contractual obligations under existing contracts to provide us
with this information. We are taking steps with respect to new supplier
agreements to seek assurance that the suppliers' products and internal systems
are Year 2000 compliant. Despite these assurances, we may still experience
supplier-related Year 2000 problems.
Although we currently expect that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems or a failure to fully identify all Year 2000 dependencies in
our existing system and in the systems of our suppliers could have material
adverse consequences. Therefore, we are developing, but do not yet have,
contingency plans for continuing operations in the event these problems arise.
WE FACE CHALLENGES EXPANDING INTERNATIONALLY
A key component of our strategy is expansion into international markets. To
date, we have developed distribution relationships only with United States,
Canadian and Dutch cable system operators. We have extremely limited experience
in developing localized versions of our products and services and in developing
relationships with international cable system operators. We may not be
successful in expanding our product and service offerings into foreign markets.
In addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, there are certain
risks inherent in doing business internationally, such as:
- regulatory requirements (including the regulation of Internet access)
- legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions
- export and import restrictions
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- tariffs and other trade barriers
- difficulties in staffing and managing foreign operations
- longer payment cycles
- problems in collecting accounts receivable
- fluctuations in currency exchange rates
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- potential inability to use European customer information due to new
European governmental regulations
- potential adverse tax consequences
One or more of these factors could significantly harm our international
operations and therefore our business.
OUR BUSINESS MAY BE IMPACTED BY CABLE UNBUNDLING PROPOSALS AND OTHER GOVERNMENT
REGULATION AND LEGAL UNCERTAINTIES
Federal regulation could harm our business. Currently, our services are not
directly subject to regulations of the Federal Communication Commission or any
other federal or state communications regulatory agency. However, changes in the
regulatory environment relating to the Internet market, including regulatory
changes that affect telecommunications costs, limit usage of subscriber-related
information or increase the likelihood or scope of competition from the regional
Bell operating companies or other telecommunications companies, could affect our
pricing or ability to market our services successfully. For example, regulation
of cable television rates may affect the speed at which our cable partners
upgrade their cable systems to carry our services. Similarly, legislation
considered in the last Congress, which would have restricted the use of
subscriber information by interactive computer services for marketing and other
purposes, could adversely affect the marketing of our services as well as our
revenue from advertising.
Local franchise authorities could seek to regulate our services. Many of
our United States cable partners' local cable affiliates have elected to
classify the provision of the @Home service as additional cable services under
their respective local franchise agreements, and to pay franchise fees in
accordance with those agreements. Local franchise authorities may attempt to
subject cable systems to higher or other franchise fees or taxes or otherwise
require cable operators to obtain additional franchises in connection with their
distribution of the @Home service. There are thousands of franchise authorities,
and thus it will be difficult or impossible for us or our cable partners to
operate under a unified set of franchise requirements.
The FCC could require our cable partners to grant our competitors access to
the cable infrastructure. America Online, MindSpring Enterprises, Inc.,
Consumers Union and other parties have requested the FCC to require cable
operators to provide Internet and online service providers with unbundled access
to the cable infrastructure. In the event that the FCC were to require
third-party access to the cable infrastructure, Internet and online service
providers could potentially provide services over the cable infrastructure of
our cable partners that compete with our services. If the FCC or another
governmental agency were to classify our cable partners as common carriers of
Internet services, or if they were to seek such classification as a means of
protecting themselves against liabilities, our rights as the exclusive
residential high-speed Internet service provider over the systems of our United
States cable partners could be lost. In addition, if we or our United States
cable partners were classified as common carriers, these cable partners could be
subject to government-regulated tariff schedules for the amounts they could
charge for our services.
Local agencies may require third party access. The third party access issue
has also been raised in proceedings before local governments. Local governments
must approve the transfer of TCI's cable systems to AT&T in connection with the
AT&T's acquisition of TCI. America Online, U S West and some Internet service
providers have asked local governments to impose a third-party access
requirement on TCI as a
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condition to approving the transfer, and Portland and Multnomah County, Oregon
have imposed such a condition. AT&T and TCI have challenged this action in
Federal District Court. Seattle and King County, Washington, are considering a
similar condition. Other local governments are considering imposing third-party
access requirements on cable operators in franchise renewal proceedings and in
connection with transfers of cable systems between cable operators.
Canadian regulation could affect our business. Rogers and Shaw have
informed us that, due to certain Canadian regulations, they are required to
provide access to their respective networks to third-party Internet service
providers. Although no third party currently uses Rogers' or Shaw's networks for
the purpose of offering Internet services, these Canadian regulations preclude
us from having an exclusive contractual right to access these networks.
Deregulation of telephone companies could enhance their ability to compete
against our service. The FCC also is considering whether to provide the Bell
operating companies and other incumbent local exchange carriers with significant
relief from existing access, resale, unbundling, pricing, and cost recovery
rules and policies, without regard to local access and transport boundaries, in
order to encourage the deployment and operations by these carriers of
high-capacity, packet-switched networks and other advanced telecommunications
facilities and related services, including Internet access services.
Deregulation of telephone company advanced services could enhance the ability of
these companies to compete against the delivery of @Home's services by our cable
partners.
WE COULD FACE LIABILITY FOR DEFAMATORY OR INDECENT CONTENT
It is possible that claims could be made against Internet and online
service providers under both United States and foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their networks. Several
private lawsuits seeking to impose such liability are currently pending. In
addition, legislation has been proposed that imposes liability for or prohibits
the transmission over the Internet of certain types of information. The
imposition upon Internet and online service providers of potential liability for
information carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to this liability. This may require
that we expend substantial resources or discontinue certain service or product
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. Furthermore, certain foreign governments, such as Germany, have enacted
laws and regulations governing content distributed over the Internet that are
more strict than those currently in place in the United States. One or more of
these factors could significantly harm our business.
OUR PRO FORMA ACCOUNTING FOR THE EXCITE MERGER MAY CHANGE
The total estimated purchase price for the Excite merger has been allocated
on a preliminary basis to assets and liabilities based on our best estimates of
their fair values, with the excess costs over the net assets acquired allocated
to goodwill and other intangible assets. This allocation is subject to change
pending a final analysis of the fair values of the assets acquired and
liabilities assumed. The impact of these changes could be material to our future
results of operations.
CERTAIN TRANSACTIONS MAY RESULT IN ADDITIONAL DILUTION TO OUR STOCKHOLDERS
We have entered into agreements with Cablevision, Rogers, Shaw, certain
other cable partners and other business partners pursuant to which we have
issued warrants to purchase a total of 23,619,036 shares of our Series A common
stock. Under these agreements, warrants to purchase 12,386,125 shares of our
Series A common stock at an average price of $2.26 per share were exercisable as
of December 31, 1998. To the extent that Cablevision, Rogers, Shaw, certain
other cable partners or other business partners become eligible to and exercise
their warrants, our stockholders would experience substantial dilution. We also
may issue additional stock, or warrants to purchase stock, at prices less than
fair market value in connection with efforts to expand distribution of the @Home
service.
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OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY
The stock market has from time to time experienced significant price and
volume fluctuations. In addition, the market price of the shares of our Series A
common stock, like the market prices of shares of other Internet companies, has
been and is likely to be highly volatile. Factors such as fluctuations in our
operating results, announcements of technological innovations or new products by
us or our competitors, regulatory actions, market rumors, acquisitions in the
Internet, telecommunications or cable industries and general market conditions
may have a significant effect on the market price of our Series A common stock
and other securities, such as our outstanding debentures, that are convertible
into or exercisable for our Series A common stock.
RISKS RELATED TO OUR RELATIONSHIPS WITH OUR CABLE PARTNERS
WE DEPEND ON OUR CABLE PARTNERS TO UPGRADE TO THE TWO-WAY CABLE INFRASTRUCTURE
NECESSARY TO SUPPORT OUR @HOME SERVICE; THE AVAILABILITY AND TIMING OF THESE
UPGRADES ARE UNCERTAIN
Transmission of the @Home service and certain @Work services over cable
depends on the availability of high-speed two-way HFC cable infrastructure.
However, only a portion of existing cable plant in the United States and in
certain international markets has been upgraded to HFC cable, and even less is
capable of high-speed two-way transmission. Our cable partners have announced
and begun to implement major infrastructure investments in order to deploy
two-way HFC cable. However, certain of our cable partners have limited
experience with these upgrades, and these investments have placed a significant
strain on the financial, managerial, operating and other resources of our cable
partners, most of which are already highly leveraged. Therefore, these
infrastructure investments have been, and we expect will continue to be, subject
to change, delay or cancellation. Although our commercial success depends on the
successful and timely completion of these infrastructure upgrades, most of our
cable partners are under no obligation to upgrade systems or to introduce,
market or promote our services. The failure of our cable partners to complete
these upgrades in a timely and satisfactory manner, or at all, would prevent us
from delivering high-performance Internet services and would significantly harm
our business.
OUR CABLE PARTNERS ARE NOT GENERALLY OBLIGATED TO CARRY OUR SERVICES, AND THE
EXCLUSIVITY OBLIGATIONS THAT PREVENT THEM FROM CARRYING COMPETING SERVICES MAY
BE TERMINATED
Our cable partners are subject to certain exclusivity obligations that
prohibit them from obtaining high-speed (greater than 128 kilobits per second)
residential consumer Internet services from any source other than us. However,
most of our cable partners are under no affirmative obligation to carry any of
our services, and the exclusivity obligations of our principal cable partners,
TCI, Comcast, Cox and Cablevision, expire on June 4, 2002, and may be terminated
sooner under certain circumstances. For example, our principal cable partners
may terminate all their exclusivity obligations upon a change in law that
materially impairs certain of their rights. Also, Comcast or Cox may terminate
all exclusivity obligations of our principal cable partners at any time if there
is a change of control of TCI that results, within one year, in the incumbent
directors of TCI no longer constituting a majority of the TCI board of
directors. AT&T has agreed with TCI not to take intentional actions that would
allow termination of these exclusivity obligations. Either Comcast or Cox, based
on relative subscriber criteria as of June 4, 1999 and as of each anniversary of
that date, has the right to terminate the exclusivity obligations of our
principal cable partners if TCI and its affiliates do not meet certain
subscriber penetration levels for the @Home service. Based upon current
subscriber penetration information available to us, it is uncertain whether TCI
will meet these penetration levels at June 4, 1999 or in the future. If Comcast
or Cox terminates the exclusivity obligations, this could significantly harm our
business and cause an immediate drop in our stock price. Finally, Comcast may
terminate its own exclusivity obligations upon its election after June 4, 1999
if it permits a portion of its equity in us to be repurchased by us at Comcast's
original cost. Comcast has informed us that it has entered into an agreement
with Microsoft Corporation under which Microsoft can require Comcast to
terminate its exclusivity obligations after June 4, 1999. Although Microsoft has
stated in the agreement that it has no present intention to do so, Microsoft may
be more likely than Comcast to terminate Comcast's exclusivity obligations.
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THE EXCLUSIVITY OBLIGATIONS OF OUR CABLE PARTNERS ARE LIMITED
The exclusivity obligations also are subject to exceptions that would
permit our principal cable partners and their affiliates to engage in certain
activities which could compete, directly or indirectly, with our activities. For
example, each of these cable partners and its affiliates is permitted to:
- engage in any business other than the provision of high-speed residential
consumer Internet services, including competing with our @Work operations
- maintain voting equity interests of 10% or less in public companies that
directly compete with our @Home service and related Internet backbone
connectivity services
- acquire an interest in any business that competes with our high-speed
residential consumer Internet services (so long as the competitive
business is not its primary business)
- acquire equity securities of public companies that compete with us,
provided that it does not control (or is not under common control with)
such companies
- operate a competing business in any cable system territory where the
exclusivity obligations have been terminated
OUR CABLE PARTNERS MAY OFFER CERTAIN SERVICES DESPITE THEIR EXCLUSIVITY
OBLIGATIONS
Most of our cable partners' exclusivity obligations are limited to
high-speed residential Internet services and do not extend to various excluded
services that they may offer without us. These excluded services include:
- telephony services
- services that are primarily work-related (such as @Work services)
- residential Internet services that do not use the cable partners' cable
television infrastructures, regardless of data transmission speed
- local Internet services that do not require use of an Internet backbone
outside a single metropolitan area
- services that are utilized primarily to connect students to schools,
colleges or universities
- Internet telephony, Internet video telephony or Internet video
conferencing
- limited Internet services primarily intended for display on a television
such as some types of Internet-based digital set-top services
- certain Internet services that are primarily downstream services where
the user cannot send upstream commands in real-time
- streaming video services that include video segments longer than 10
minutes in duration
In addition, our cable partners can engage in limited testing, trials and
similar activities with respect to businesses subject to their exclusivity
obligations. By engaging in the excluded services, most cable partners can
compete, directly or indirectly, with our activities, including our @Work
services.
WE ARE PROHIBITED FROM OFFERING THE EXCLUDED SERVICES
Until the later of June 4, 2002 or such time as a principal cable partner
is no longer in compliance with its exclusivity obligations, we may not offer
the excluded services described above using a principal cable partner's cable
plant, or to residences in the geographic areas served by its cable systems,
without its consent. These restrictions apply even if we have integrated an
excluded service with the @Home service in another geographic area. In the case
of streaming video transmissions that include video segments longer than 10
minutes in duration, we face increased obligations to our principal cable
partners that remain in compliance with their exclusivity obligations.
Specifically, we have agreed not to allow these video transmissions using
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their cable infrastructure or in the geographic areas served by their cable
systems, without their consent. Therefore, we may never have access to the cable
infrastructures of our principal cable partners for excluded services, and we
must negotiate a separate agreement, including a new revenue split, if
applicable, with each of the principal cable partners for each excluded service
that we seek to provide over their cable infrastructures.
WE ARE CONTROLLED BY TCI
TCI controls approximately 71% of our voting power and has the power to
elect a majority of our board members and to control all matters requiring the
approval of our stockholders. TCI's Series B common stock carries ten votes per
share and gives TCI the right to elect five Series B directors, one of which is
designated by Comcast and one of which is designated by Cox. Currently, four of
our 11 directors are directors, officers or employees of TCI or its affiliates.
As long as TCI owns at least 7,700,000 shares of our Series B common stock and
holds a majority of our voting power, our Board may take action only if approved
by the Board and by a majority of the Series B directors, three of five of which
are designees of TCI. This allows TCI to block actions of our Board, even
through the TCI directors may not then constitute a majority of the Board. In
addition, TCI can expand the Board at any time and fill the vacancies with TCI
designees to control a majority of the Board. Further, we may not take certain
corporate actions without the approval of TCI's Series B directors and in
certain cases the directors designated by Comcast and Cox. Notwithstanding these
provisions, all of our directors owe fiduciary duties to our stockholders. If
and when the merger of AT&T and TCI is complete, AT&T will control TCI and thus
control us. Even if and when we complete the Excite merger, TCI or AT&T will
continue to own more than 50% of our voting power.
WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM, AND COULD BE HARMED BY, AT&T'S
ACQUISITION OF TCI AND TCG
On June 24, 1998, TCI and AT&T announced that AT&T has agreed to acquire
TCI. AT&T and TCI anticipate that their merger, which is subject to regulatory
approval, will be completed in the first quarter of 1999. In addition, in July
1998, AT&T acquired Teleport Communications Group, Inc. While we believe that
AT&T's acquisition of TCI and TCG may benefit us by increasing the rate at which
TCI's cable facilities will be upgraded to the two-way HFC cable necessary to
carry our services, by allowing us to utilize the strength of AT&T's brand in
marketing the @Home service to consumers and by increasing the potential for
cooperation between us and TCG, these benefits may not be realized and AT&T's
TCI acquisition may not be completed. Moreover upon a change of control of TCI
that results within one year in the incumbent directors of TCI no longer
constituting a majority of the TCI board of directors, either Cox or Comcast can
terminate the exclusivity obligations that apply to our principal cable
partners. While AT&T has agreed with TCI not to take intentional actions that
would allow termination of these exclusivity obligations, if AT&T did take these
actions, either Cox or Comcast would have the right to terminate the exclusivity
obligations of all our principal cable partners. This would significantly harm
our business and cause an immediate drop in our stock price.
As discussed above, local franchise authorities could impose an obligation,
in connection with AT&T's acquisition of TCI, that AT&T and TCI allow third
parties to access TCI's cable infrastructure. The imposition of such an
obligation could lessen the anticipated benefits of their merger, and therefore
the benefits we may receive as a result of their merger.
WE MAY FACE ADDITIONAL COMPETITION FROM AT&T
AT&T operates certain businesses that could compete with our services,
notwithstanding any exclusivity obligations that may apply to it if and when its
acquisition of TCI is completed. First, AT&T operates a consumer Internet
service known as AT&T WorldNet. Although AT&T WorldNet is currently a dial-up
service that does not utilize broadband technologies, AT&T may be able to use
non-cable-based data transport mechanisms to offer high-speed residential
Internet services that compete with our @Home service. Second, AT&T owns TCG,
which operates an Internet service for business customers that competes with our
@Work service. Our @Work business depends to a significant extent on our
agreement with TCG for local access telecommunications services. If TCG ceases
to cooperate with us, our @Work business would be harmed. Because our @Work
business is not subject to the cable partners' exclusivity obligations, AT&T or
TCG are
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not limited in their ability to compete with our @Work business. In addition,
AT&T and Time Warner recently announced the formation of a significant strategic
relationship that will include a joint venture to offer AT&T-branded cable
telephony service to residential and small business customers over Time Warner's
existing cable television systems in 33 states. The relationship between AT&T
and Time Warner could ultimately extend to other broadband services, including
cable Internet services, that compete with our @Home service. Therefore, even
once it controls us, AT&T may take actions that benefit TCG, WorldNet or other
services of AT&T or other parties to our detriment.
WE DEPEND ON OUR CABLE PARTNERS FOR DISTRIBUTION; THIS CREATES CONFLICTS OF
INTEREST
Through their cable systems, our cable partners provide the principal
distribution network for our services, and they share the revenue from the @Home
services that are derived from our subscribers. Given our contractual and
business relationships with our cable partners, the interests of our cable
partners may not always coincide with our interests, and conflicts of interest
concerning the split of revenues and other matters exist. Because TCI,
Cablevision, Comcast and Cox all operate cable systems that will be the primary
distributors of the @Home service, situations may arise where their interests
may diverge or appear to diverge from the interests of our other stockholders.
TCI and the other principal cable partners, acting through their Board
designees, have the ability to cause us to take certain actions or prohibit us
from taking certain actions that may be favored by other stockholders or by the
other directors who are not affiliated with our principal cable partners. Our
Board, which is controlled by TCI, has the power, subject to directors'
fiduciary duties, to approve transactions in which our principal cable partners
have an interest, including amending or terminating their distribution agreement
with us or changing the revenue splits in their favor. Under the agreements
under which our U. S. cable partners distribute our services, we receive 35% of
monthly fees and fees for premium services. However, most of these agreements,
including the agreement with our principal cable partners, contain contractual
"most favored nation" provisions, which provide that our principal cable
partners are entitled to distribution arrangements and related services on terms
at least as favorable as those obtained by any other cable system operator.
Therefore, our principal cable partners have the power, subject to their
fiduciary duties, to cause us to approve more favorable distribution
arrangements, including more favorable revenue splits, for one or more
unaffiliated cable operators in order to receive more favorable distribution
arrangements themselves and reduce our share of subscriber fees.
WE DEPEND ON OUR CABLE PARTNERS TO MARKET, DELIVER AND SUPPORT THE @HOME SERVICE
Because subscribers to the @Home service will subscribe through a cable
partner, the cable partner will substantially control the customer relationship
with the subscriber. Each cable partner has complete discretion regarding the
pricing of the @Home service to subscribers in its territories (except for
certain premium services for which we may contract directly with the
subscriber), and a cable partner could use the @Home service as a loss leader in
order to increase demand for other products or services with more attractive
terms. The cable partners do not have any affirmative obligations (other than
the payment of revenue splits to us) with respect to marketing, installing and
maintaining infrastructure for, providing customer service for and billing for
the @Home service. In limited circumstances, such as a cable partner's failure
to upgrade a cable system or roll out the @Home service after it has committed
to do so, we may be entitled to certain cost reimbursements and to be released
from certain of our exclusivity obligations, neither of which may be an
effective remedy for the failure. Our business requires a substantial rollout of
the @Home service, and if a widespread rollout does not occur, our business will
not be viable. Moreover, our cable partners have in the past experienced, and
may in the future experience, delays in installing the @Home service in areas in
which it has been introduced. Our cable partners are expected to provide general
customer service to our subscribers and, under their distribution agreements,
have the option to provide technical support, rather than utilizing our service
and support capabilities. If a cable partner elects to provide technical
support, we must reimburse them for our avoided costs, and we would have little
or no control over the quality of customer service actually provided to
subscribers of the @Home service. If the customer service and support provided
by our cable partners are unsatisfactory to subscribers, consumer demand for the
@Home service will likely diminish.
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OUR CABLE PARTNERS CONTROL THE TERMS OF DISTRIBUTION OF THE @HOME SERVICE
We and our cable partners have entered into agreements providing for the
distribution of the @Home service by our cable partners and their affiliates.
The economic and other terms of these agreements may be less favorable to us
than those that could have been negotiated had we been independent of our
principal cable partners. In addition, the agreements with our principal cable
partners contain provisions that permit a cable partner to change certain
aspects of the distribution of the @Home service without our approval. For
example, a principal cable partner has the option to provide certain customer
service functions that we currently provide and upon which our 35% revenue split
was based. If a principal cable partner elects to provide these services, it is
also entitled to reimbursement of our avoided costs. Similarly, the principal
cable partners have certain rights to remove cable systems from the approved
rollout schedule or to substitute cable systems in place of removed systems.
These rights are contractual in nature and may be exercised by the principal
cable partners in their sole discretion. The exercise by the principal cable
partners of these contractual rights may significantly harm our business. Our
cable partners also control the rollout schedule of the @Home service, and our
principal cable partners hold certain priority rights with respect to this
rollout schedule. This priority could harm us because we may be required to roll
out our services to our principal cable partners before rolling out the services
to other cable system operators, even though the other cable system operators
may be ready to roll out the @Home service sooner or on terms more favorable for
us.
OUR PRINCIPAL CABLE PARTNERS CAN BLOCK ACCESS TO CERTAIN CONTENT AND SERVICES
Each principal cable partner has the right to exclude the promotion of
specified national content providers from the @Home service offered through its
cable systems, subject to an adjustment in the revenue split if the number of
such exclusions exceeds a specified number. In addition, a principal cable
partner has the right to block access to certain content, including streaming
video segments of more than ten minutes in duration, and we are obligated to use
reasonable best efforts to block such access. We are also obligated to use
reasonable best efforts to consult with and involve each of the principal cable
partners in the development of requirements for, design of and introduction of
enhancements, new features and new applications of the @Home service. If
principal cable partners representing a majority of the residential subscribers
who subscribe to the @Home service object to any enhancement, feature or
application, we have agreed not to implement that enhancement, feature or
application in the territories of the objecting cable partners. If any of the
cable partners exercise these rights to block access to certain content or
services in certain territories, we may be required to devote substantial
expenses and resources to provide different content and services in different
territories and to assist them in blocking such access. This could significantly
harm our business.
OUR CABLE PARTNERS MAY COMPETE WITH US FOR ADVERTISING AND PROGRAMMING REVENUE
While we retain 100% of the revenue from our programming of the designated
national area of the @Home service, our principal U.S. cable partners retain
100% of revenue generated from their programming of a designated local area of
the start page of the @Home service. These revenues could include advertising
fees, service fees, content provider charges, transaction fees and promotional
revenue. Accordingly, in exercising their right to program the local area, our
cable partners could place a significant amount of advertising or program
content on the @Home service for which we receive no share of the revenues. For
example, given the national or regional coverage of their operations, any of our
principal cable partners and its affiliates could strike agreements with
advertisers that could effectively result in broad-based advertising campaigns
reaching significant regions of the United States in competition with our
advertising campaigns, generating revenue only for such cable partner and its
affiliates and not for us. In Canada, we share national advertising revenue with
our Canadian cable partners.
WE DEPEND ON TCG FOR LOCAL TELECOMMUNICATIONS SERVICES FOR OUR @WORK SERVICES
We depend on TCG, which is owned by AT&T, to provide local
telecommunications services and co-location within TCG's facilities on favorable
economic terms. This relationship enables us to provide @Work services to an
entire metropolitan area in which TCG has facilities. If we were required to
obtain comparable telecommunications services from local exchange carriers, we
would effectively be limited to providing @Work services to commercial customers
within a ten-mile radius of one of our points of presence. As a result, we would
be required to build multiple points of presence to service an entire
metropolitan area, which would substantially increase our capital costs to enter
new markets and which could make such market
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entry uneconomical. If we were required to pay standard local exchange carrier
rates, the ongoing operating costs for our @Work services would be substantially
higher. The loss of our strategic relationship with TCG would significantly harm
our ability to deploy our @Work services. In addition, TCG has acquired a
provider of Internet-related services to businesses and corporate customers and
will compete directly with the @Work Internet service. To the extent TCG
acquires or enters into strategic relationships with other Internet service
providers, TCG may reduce its support of the @Work services. Although there are
alternative suppliers for TCG's services, it could take a significant period of
time for us to establish similar relationships, and equivalent terms might not
be available.
OUR PRINCIPAL CABLE PARTNERS MAY DISPOSE OF THEIR CABLE SYSTEMS, WHICH WOULD
REDUCE OUR POTENTIAL SUBSCRIBER BASE
Our agreements with our principal 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 equity ownership of us. These principal
cable partners may dispose of a significant amount of their cable systems
without requiring that these cable systems remain subject to any exclusivity
provisions. However, to the extent that any of our principal cable partners
disposes of systems accounting for 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 us, then that principal
cable partner may be required to sell a proportionate amount of its equity
interest in us to our other principal cable partners at fair market value. For
example, TCI has completed the transfer or sale of certain cable systems and has
announced the proposed sale or transfer of additional cable systems and is
considering various plans and proposals that may result in the disposition of
other of its cable systems. Although TCI has informed us that it is attempting
to cause certain of these transferred systems to remain subject to TCI's
exclusivity obligations, these efforts may not be successful. These dispositions
could significantly harm us if the transferred homes do not remain exclusive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to our Consolidated Financial Statements and the Report of the
Independent Auditors appears in Part IV of this Form 10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning our directors required by Item 10 is
incorporated by reference herein to section entitled "Proposal No. 1 -- Election
of Directors" of the proxy statement for our 1999 Annual Meeting of Stockholders
that we will file by April 30, 1999. The information concerning our executive
officers required by Item 10 is incorporated by reference to the section of our
proxy statement entitled "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation" and "Proposal No. 1 -- Election
of Directors" of our proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of our proxy statement.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Transactions" of our proxy statement.
With the exception of the information specifically stated as being
incorporated by reference from our proxy statement in Part III of this Annual
Report on Form 10-K/A, our proxy statement is not to be deemed as filed as part
of this report. The proxy statement will be filed with the Securities and
Exchange Commission by April 30 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. We have filed the following financial statements
with this Form 10-K/A:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 47
Consolidated Balance Sheets at December 31, 1998 and
1997...................................................... 48
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... 49
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. 50
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 51
Notes to Consolidated Financial Statements.................. 52
</TABLE>
(a)(2) Financial Statement Schedules. -- Not applicable.
(a)(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
3.01 Third Amended and Restated Certificate of Incorporation of
Registrant filed August 14, 1996(1)
3.02 Certificate of Amendment of Third Amended and Restated
Certificate of Incorporation of Registrant filed April 11,
1997(1)
3.03 Certificate of Designation of Series C Convertible
Participating Preferred Stock of Registrant filed April 11,
1997(1)
3.04 Form of Certificate of Amendment of the Third Amended and
Restated Certificate of Incorporation of Registrant
effective July 15, 1997(1)
3.05 Form of Second Amended and Restated Bylaws of Registrant
effective July 16, 1997(1)
3.06 Form of Fourth Amended and Restated Certificate of
Incorporation of Registrant filed July 16, 1997(1)
3.07 Certificate of Amendment to Fourth Amended and Restated
Certificate of Incorporation of Registrant filed July 9,
1998(**)
4.01 Third Amended and Restated Registration Rights Agreement,
dated April 11, 1997, among Registrant and the parties
indicated therein(1)
4.02 Letter Agreement relating to Tag-Along/Drag-Along Rights,
dated April 11, 1997, among Registrant and the parties
indicated therein(1)
4.03 Canadian Purchase Letter Agreement, dated April 11, 1997,
among Registrant and the parties indicated therein(1)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
4.04 Form of Amended and Restated Stockholders' Agreement, dated
August 1, 1996, among Registrant and the parties indicated
therein, as amended on May 15, 1997(1)
4.05 Form of certificate of Registrant's Series A common stock(1)
4.06 Narrative Communications Corp. 1998 Equity Incentive Plan,
assumed by Registrant as of December 30, 1998(*)(**)
4.07 Registrant's 1997 Equity Incentive Plan, as amended(*)(2)
4.08 Registrant's 1997 Employee Stock Purchase Plan, as
amended(*)(2)
9.01 Voting Agreement, dated April 11, 1997, among Registrant,
TCI Internet Holdings, Inc., Comcast PC Investments, Inc.,
Cox Teleport Providence, Inc., Rogers Cablesystems Limited
and Shaw Cablesystems Ltd.(1)
10.01 A Stock Purchase Agreement, dated August 29, 1995, among
Registrant, TCI Internet Services, Inc., Kleiner Perkins
Caufield & Byers VII, KPCB VII Founders Fund and KPCB
Information Sciences Zaibatsu Fund II(1)
10.01 B Letter Agreement and Term Sheet, dated as of October 2,
1997, among Registrant, Cablevision Systems Corporation, CSC
Parent Corporation, Comcast Corporation, Cox Enterprises,
Inc., Kleiner Perkins Caufield & Byers and
Tele-Communications, Inc.(3)
10.02 A Letter Agreement, dated May 9, 1996, among Registrant, TCI
Internet Holdings, Inc., Kleiner Perkins Caufield & Byers
VII, KPCB VII Founders Fund and KPCB Information Sciences
Zaibatsu Fund II(1)
10.02 B Warrant Purchase Agreement, dated October 10, 1997, between
Registrant and Cablevision Systems Corporation(3)
10.03 A Stock Purchase and Exchange Agreement, dated August 1, 1996,
among Registrant, TCI Internet Holdings, Inc., Kleiner
Perkins Caufield & Byers VII, KPCB Information Sciences
Zaibatsu Fund II, James Clark, Comcast PC Investments, Inc.,
and Cox Teleport Providence, Inc.(1)
10.03 B Warrant to purchase shares of Series A common stock of
Registrant issued to CSC Parent Corporation as of October
10, 1997(3)
10.04 A Term Sheet, dated June 4, 1996, among Registrant, TCI
Internet Holdings, Inc., Kleiner Perkins Caufield & Byers
VII, KPCB Information Sciences Zaibatsu Fund II, KPCB VII
Founders Fund, Comcast PC Investments, Inc., and Cox
Teleport Providence, Inc.(1)
10.04 B Contingent warrant to purchase shares of Series A common
stock of Registrant issued to CSC Parent Corporation as of
October 10, 1997(3)
10.05 Stock Purchase Agreement, dated April 11, 1997, among
Registrant, Rogers Cablesystems Limited, Shaw Cablesystems
Ltd., Sun Microsystems, Inc., Netscape Communications
Corporation, James Barksdale, Motorola, Inc. and Bay
Networks, Inc.(1)
10.06 Term Sheet, dated March 18, 1997, among Registrant and Shaw
Cablesystems Ltd. and Rogers Cablesystems Limited(1)
10.07 Master Communications Services Agreement, dated April 2,
1997, between Registrant and Teleport Communications Group
Inc.(1)
10.08 Lease, dated October 17, 1996, between Registrant and
Martin/Campus Associated, L.P.(1)
10.09 Form of Indemnification Agreement between Registrant and
each of its directors and executive officers(*)(1)
10.10 Registrant's 1996 Incentive Stock Option Plan(*)(1)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
10.11 Registrant's 1996 Incentive Stock Option Plan No. 2(*)(1)
10.12 Narrative Communications Corp. 1995 Stock Option Plan,
assumed by Registrant as of December 30, 1998(*)(**)
10.13 Description of Registrant's 1998 Executive Incentive
Plan(*)(**)
10.14 Restricted Stock Purchase Agreement, dated July 31, 1996,
between Registrant and Thomas A. Jermoluk for purchase of
Series A common stock(*)(1)
10.15 Restricted Stock Purchase Agreement, dated July 31, 1996,
between Registrant and Thomas A. Jermoluk for purchase of
Series K preferred stock(*)(1)
10.16 Restricted Stock Purchase Agreement, dated July 31, 1996,
between Registrant and William R. Hearst III for purchase of
Series A common stock(*)(1)
10.17 Restricted Stock Purchase Agreement, dated July 29, 1996,
between Registrant and Ken Goldman for purchase of Series A
common stock(*)(1)
10.18 Form of Restricted Stock Purchase Agreement and Promissory
Note between Registrant and other officers for purchase of
Series A common stock(*)(1)
10.19 Employment Letter Agreement, dated July 19, 1996, between
Registrant and Thomas A. Jermoluk(*)(1)
10.20 Letter of Agreement, dated May 15, 1997, among Registrant
and the parties indicated therein, including as exhibits the
Master Distribution Agreement Term Sheet and the Term Sheet
for Form of LCO Agreement(1)
10.21 Build To Suit Lease, dated September 29, 1997, between
Registrant and Martin/ Campus Associates, L.P. (425
Broadway, Redwood City, California)(4)
10.22 Build To Suit Lease, dated September 29, 1997, between
Registrant and Martin/ Campus Associates, L.P., (440
Broadway, Redwood City, California)(4)
10.23 Loan and Security Agreement, dated September 30, 1997,
between Registrant and Silicon Valley Bank(4)
10.24 Binding Warrant Term Sheet, dated February 24, 1998, among
Registrant, Rogers Communications, Inc. and Shaw
Communications, Inc.(5)
10.25 Warrant Purchase Agreement, dated May 5, 1998, between
Registrant and Century Communications Corp.(**)
10.26 Warrant to purchase Series A common stock of Registrant
issued to Century Communications Corp. as of May 5, 1998(**)
10.27 Form of warrant to purchase Series A common stock of
Registrant to be issued to Century Communications Corp.(**)
10.28 Warrant Purchase Agreement, dated June 27, 1998, between
Registrant and Garden State Cablevision L.P.(**)
10.29 Warrant to purchase Series A common stock of Registrant
issued to Garden State Cablevision L.P. as of June 27,
1998(**)
10.30 Warrant Purchase Agreement, dated June 26, 1998, between
Registrant and Jones Intercable Inc.(**)
10.31 Warrant to purchase Series A common stock of Registrant
issued to Jones Intercable Inc. as of June 26, 1998(**)
10.32 Agreement and Plan of Merger, dated December 30, 1998,
between Registrant and Narrative Communications Corp.
(incorporated by reference to Exhibit 2.1 of Registrant's
current report on Form 8-K filed on January 14, 1999 (File
No. 000-22697))
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
10.33 IRU Capacity Agreement, dated December 19, 1998, between
Registrant and AT&T Corp.
10.34 Form of Loan Modification Agreement between Registrant and
Silicon Valley Bank(**)
10.35 Build to Suit Option Agreement, dated October 25, 1996,
between Registrant and Martin/Campus Associates, L.P., and
First Amendment to Build to Suit Option Agreement(**)
10.36 Build to Suit Lease, dated July 14, 1998, between Registrant
and Martin/Campus Associates, L.P. (420 Broadway, Redwood
City, California)(**)
10.37 Form of Build to Suit Lease between Registrant and
Martin/Campus Associates, L.P. (430 Broadway, Redwood City,
California)(**)
10.38 Indenture, dated December 28, 1998, between Registrant and
State Street Bank and Trust Company of California, N.A., as
trustee(***)
10.39 Registration Rights Agreement, dated December 28, 1998,
between Registrant and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan St Goldman and
Sachs & Co.(***)
21.01 Subsidiaries of Registrant(***)
23.01 Consent of Ernst & Young LLP, Independent Auditors
24.01 Power of Attorney executed by each officer and director (**)
27.01 Financial data schedule for year ended December 31, 1998(**)
</TABLE>
- ---------------
* Management contracts or compensatory plans required to be filed as an
exhibit to Form 10-K.
** Previously filed as an exhibit to Registrant's Form 10-K, filed with the
Securities and Exchange Commission on February 19, 1999.
*** Previously filed as an exhibit to Registrant's Form 10-K/A, filed with the
Securities and Exchange Commission on March 31, 1999.
(1) Incorporated by reference to exhibits of the same number to Registrant's
registration statement on Form S-1 declared effective by the Securities and
Exchange Commission on July 11, 1997 (File No. 333-27323).
(2) Incorporated by reference to exhibits of the same number to Registrant's
registration statement on Form S-8 filed with the Securities Exchange
Commission on July 28, 1998 (File No. 333-60037).
(3) Incorporated by reference to exhibits of the same number to Registrant's
current report on Form 8-K filed with the Securities and Exchange Commission
on October 21, 1997 (File No. 000-22697).
(4) Incorporated by reference to exhibits of the same number to Registrant's
quarterly report on Form 10-Q filed with the Securities and Exchange
Commission on November 14, 1997 (File No. 000-22697).
(5) Incorporated by reference to exhibits of the same number to Registrant's
quarterly report on Form 10-Q filed with the Securities and Exchange
Commission on May 15, 1998 (File No. 000-22697), as amended on February 8,
1999.
(b) Reports on Form 8-K.
No such reports were filed in the fourth quarter of 1998.
(c) Exhibits. -- See (a)(3) above.
(d) Financial Statement Schedules. -- Not applicable.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: 4/27/99 AT HOME CORPORATION
By: /s/ KENNETH A. GOLDMAN
------------------------------------
Kenneth A. Goldman
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ THOMAS A. JERMOLUK* President, Chief Executive Officer 4/27/99
- ----------------------------------------------------- and Chairman of the Board
PRINCIPAL FINANCIAL OFFICER:
/s/ KENNETH A. GOLDMAN Senior Vice President and 4/27/99
- ----------------------------------------------------- Chief Financial Officer
Kenneth A. Goldman
CHIEF ACCOUNTING OFFICER:
/s/ ROBERT A. LERNER* Corporate Controller 4/27/99
- -----------------------------------------------------
ADDITIONAL DIRECTORS:
/s/ WILLIAM R. HEARST III* Vice Chairman 4/27/99
- -----------------------------------------------------
Director
- -----------------------------------------------------
C. Michael Armstrong
/s/ L. JOHN DOERR* Director 4/27/99
- -----------------------------------------------------
/s/ LEO J. HINDERY, JR.* Director 4/27/99
- -----------------------------------------------------
/s/ JOHN C. MALONE* Director 4/27/99
- -----------------------------------------------------
Director
- -----------------------------------------------------
John C. Petrillo
/s/ BRIAN L. ROBERTS* Director 4/27/99
- -----------------------------------------------------
/s/ JAMES R. SHAW, JR.* Director 4/27/99
- -----------------------------------------------------
/s/ DAVID M. WOODROW* Director 4/27/99
- -----------------------------------------------------
* By: /s/ KENNETH A. GOLDMAN
-----------------------------------------------
Kenneth A. Goldman
Attorney-in-fact
</TABLE>
45
<PAGE> 46
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
At Home Corporation
We have audited the accompanying consolidated balance sheets of At Home
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
At Home Corporation at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
January 19, 1999
46
<PAGE> 47
AT HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 300,702 $ 44,213
Short-term investments.................................... 118,587 76,166
--------- --------
Total cash, cash equivalents and short-term
investments..................................... 419,289 120,379
Accounts receivable, (net of allowance for doubtful
accounts of $252 in 1998 and none in 1997)............. 6,358 1,470
Accounts receivable -- related parties.................... 4,300 672
Other current assets...................................... 3,381 2,919
--------- --------
Total current assets.............................. 433,328 125,440
Property, equipment and improvements, net................... 49,240 33,061
Distribution agreements, net................................ 186,247 163,345
Intangible assets, net...................................... 93,989 --
Other assets................................................ 17,827 2,082
--------- --------
Total assets...................................... $ 780,631 $323,928
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,100 $ 2,409
Accounts payable -- related parties....................... 3,684 2,108
Accrued compensation and related expenses................. 1,262 798
Accrued transport costs................................... 2,444 1,179
Deferred revenues......................................... 5,164 1,941
Other accrued liabilities................................. 11,305 5,644
Current portion of capital lease obligations.............. 12,045 9,971
--------- --------
Total current liabilities......................... 43,004 24,050
Convertible debentures...................................... 229,344 --
Capital lease obligations, less current portion............. 14,356 15,735
Other liabilities........................................... 61 1,736
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value:
Authorized shares -- 230,277,660 in 1998 and 1997
Issued and outstanding shares -- 123,272,867 in 1998
and 118,603,220
in 1997.............................................. 719,680 370,111
Notes receivable from stockholders........................ (4) (319)
Deferred compensation..................................... (2,880) (4,399)
Accumulated other comprehensive income.................... 4,235 --
Accumulated deficit....................................... (227,165) (82,986)
--------- --------
Total stockholders' equity........................ 493,866 282,407
--------- --------
Total liabilities and stockholders' equity........ $ 780,631 $323,928
========= ========
</TABLE>
See accompanying notes.
47
<PAGE> 48
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Revenues(1)............................................... $ 48,045 $ 7,437 $ 676
Costs and expenses(2):
Operating costs......................................... 46,965 22,459 6,969
Product development and engineering..................... 17,009 11,984 6,312
Sales and marketing..................................... 18,091 11,863 6,368
General and administrative.............................. 12,429 10,635 6,054
Purchased in-process research and development........... 2,758 -- --
Cost and amortization of distribution agreements........ 101,385 9,246 --
--------- -------- --------
Total costs and expenses.................................. 198,637 66,187 25,703
--------- -------- --------
Loss from operations...................................... (150,592) (58,750) (25,027)
Interest income, net...................................... 6,413 3,033 514
--------- -------- --------
Net loss.................................................. $(144,179) $(55,717) $(24,513)
========= ======== ========
Pro forma basic and diluted net loss per share............ $ (1.26) $ (0.54) $ (0.26)
========= ======== ========
Shares used in pro forma basic and diluted per share
calculations............................................ 114,240 103,543 96,120
========= ======== ========
- ---------------
(1) Revenues from related parties......................... $ 10,458 $ 2,948 $ 634
========= ======== ========
(2) Depreciation and amortization included in costs and
expenses.............................................. $ 66,620 $ 18,159 $ 1,903
========= ======== ========
</TABLE>
See accompanying notes.
48
<PAGE> 49
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE OTHER
----------------- ------------------ FROM DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INCOME
------ -------- ------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of preferred stock, less
issuance costs.................... 1,000 $ 9,968 -- $ -- $ -- $ -- $ --
Net loss............................ -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Balances at December 31, 1995....... 1,000 9,968 -- -- -- -- --
Issuance of preferred stock, less
issuance costs.................... 3,522 35,025 -- -- -- -- --
Series A common stock issued under
stock option plans and restricted
stock agreements.................. -- -- 12,402 718 (170) -- --
Repurchases of Series A common
stock............................. -- -- (547) (29) -- -- --
Deferred compensation related to
grant of stock options............ -- -- -- 346 -- (346) --
Amortization of deferred
compensation...................... -- -- -- -- -- 74 --
Net loss............................ -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Comprehensive loss.................. -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Balances at December 31, 1996....... 4,522 44,993 11,855 1,035 (170) (272) --
Issuance of Series C preferred
stock, less issuance costs........ 240 46,339 -- -- -- -- --
Conversion of preferred stock to
common stock...................... (4,762) (91,332) 95,252 91,332 -- -- --
Series A common stock issued in the
initial public offering, less
issuance costs.................... -- -- 10,350 99,768 -- -- --
Series A common stock issued under
stock option plans and restricted
stock agreements.................. -- -- 2,191 527 (234) -- --
Repurchases of Series A common
stock............................. -- -- (1,045) (91) 15 -- --
Repayment of notes receivable....... -- -- -- -- 70 -- --
Warrants issued to purchase Series A
common stock in connection with
distribution agreements........... -- -- -- 172,283 -- -- --
Deferred compensation related to
grant of stock options............ -- -- -- 5,257 -- (5,257) --
Amortization of deferred
compensation...................... -- -- -- -- -- 1,130 --
Net loss............................ -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Comprehensive loss.................. -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Balances at December 31, 1997....... -- -- 118,603 370,111 (319) (4,399) --
Series A common stock issued in the
secondary offering, less issuance
costs............................. -- -- 2,875 125,725 -- -- --
Series A common stock and options
for Series A common stock issued
in acquisitions................... -- -- 1,244 94,953 -- -- --
Series A common stock issued upon
exercise of warrants.............. -- -- 96 -- -- --
Series A common stock issued under
stock option plans and employee
stock purchase plan............... -- -- 650 5,139 -- -- --
Repurchases of Series A common
stock............................. -- -- (195) (36) 12 -- --
Repayment of notes receivable....... -- -- -- -- 303 -- --
Warrants issued to purchase Series A
common stock in connection with
distribution agreements........... -- -- -- 124,287 -- -- --
Amortization of deferred
compensation, net of cancelled
stock options..................... -- -- -- (499) -- 1,519 --
Net loss............................ -- -- -- -- -- -- --
Unrealized gain on investments...... -- -- -- -- -- -- 4,235
------ -------- ------- -------- ----- ------- ------
Comprehensive loss.................. -- -- -- -- -- -- --
------ -------- ------- -------- ----- ------- ------
Balances at December 31, 1998....... -- $ -- 123,273 $719,680 $ (4) $(2,880) $4,235
====== ======== ======= ======== ===== ======= ======
<CAPTION>
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Issuance of preferred stock, less
issuance costs.................... $ -- $ 9,968
Net loss............................ (2,756) (2,756)
--------- ---------
Balances at December 31, 1995....... (2,756) 7,212
Issuance of preferred stock, less
issuance costs.................... -- 35,025
Series A common stock issued under
stock option plans and restricted
stock agreements.................. -- 548
Repurchases of Series A common
stock............................. -- (29)
Deferred compensation related to
grant of stock options............ -- --
Amortization of deferred
compensation...................... -- 74
Net loss............................ (24,513) (24,513)
--------- ---------
Comprehensive loss.................. -- (24,513)
--------- ---------
Balances at December 31, 1996....... (27,269) 18,317
Issuance of Series C preferred
stock, less issuance costs........ -- 46,339
Conversion of preferred stock to
common stock...................... -- --
Series A common stock issued in the
initial public offering, less
issuance costs.................... -- 99,768
Series A common stock issued under
stock option plans and restricted
stock agreements.................. -- 293
Repurchases of Series A common
stock............................. -- (76)
Repayment of notes receivable....... -- 70
Warrants issued to purchase Series A
common stock in connection with
distribution agreements........... -- 172,283
Deferred compensation related to
grant of stock options............ -- --
Amortization of deferred
compensation...................... -- 1,130
Net loss............................ (55,717) (55,717)
--------- ---------
Comprehensive loss.................. -- (55,717)
--------- ---------
Balances at December 31, 1997....... (82,986) 282,407
Series A common stock issued in the
secondary offering, less issuance
costs............................. -- 125,725
Series A common stock and options
for Series A common stock issued
in acquisitions................... -- 94,953
Series A common stock issued upon
exercise of warrants.............. -- --
Series A common stock issued under
stock option plans and employee
stock purchase plan............... -- 5,139
Repurchases of Series A common
stock............................. -- (24)
Repayment of notes receivable....... -- 303
Warrants issued to purchase Series A
common stock in connection with
distribution agreements........... -- 124,287
Amortization of deferred
compensation, net of cancelled
stock options..................... -- 1,020
Net loss............................ (144,179) (144,179)
Unrealized gain on investments...... -- 4,235
--------- ---------
Comprehensive loss.................. -- (139,944)
--------- ---------
Balances at December 31, 1998....... $(227,165) $ 493,866
========= =========
</TABLE>
See accompanying notes.
49
<PAGE> 50
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH (USED IN) OPERATING ACTIVITIES
Net loss.................................................... $(144,179) $ (55,717) $(24,513)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................. 14,009 7,783 1,829
Amortization of distribution agreements................... 51,591 9,246 --
Cost of distribution agreements........................... 49,794 -- --
Amortization of deferred compensation..................... 1,020 1,130 74
Charge for purchased in-process research and
development............................................. 2,758 -- --
Changes in assets and liabilities:
Accounts receivable..................................... (8,099) (1,338) (804)
Other assets............................................ (9,143) (2,251) (1,190)
Accounts payable........................................ 5,822 1,089 2,605
Accrued compensation and related expenses............... 322 550 159
Deferred revenues....................................... 3,126 1,853 87
Other accrued liabilities............................... 4,503 6,026 798
Other long-term liabilities............................. (1,736) 61 1,675
--------- --------- --------
Cash (used in) operating activities......................... (30,212) (31,568) (19,280)
CASH (USED IN) INVESTING ACTIVITIES
Purchase of short-term investments.......................... (135,342) (103,030) (8,998)
Sales and maturities of short-term investments.............. 92,922 33,925 2,000
Purchase of property, equipment and improvements............ (16,793) (9,989) (7,320)
Increase in other assets.................................... 4,291 -- --
Business combinations, net of cash acquired................. 144 -- --
--------- --------- --------
Cash (used in) investing activities......................... (54,778) (79,094) (14,318)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures............ 229,344 -- --
Issuance costs of convertible debentures.................... (6,878) -- --
Proceeds from issuance of convertible preferred stock....... -- 46,339 35,025
Proceeds from issuance of common stock, net of
repurchases............................................... 130,828 99,985 519
Proceeds from capital lease financing....................... -- 5,630 1,500
Payments on capital lease obligations....................... (12,118) (6,858) (581)
Repayment of notes receivable from stockholders............. 303 70 --
--------- --------- --------
Cash provided by financing activities....................... 341,479 145,166 36,463
--------- --------- --------
Net increase in cash and cash equivalents................... 256,489 34,504 2,865
Cash and cash equivalents, beginning of period.............. 44,213 9,709 6,844
--------- --------- --------
Cash and cash equivalents, end of period.................... $ 300,702 $ 44,213 $ 9,709
========= ========= ========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................. $ 2,148 $ 1,039 $ 143
========= ========= ========
Acquisition of equipment under capital leases............. $ 12,872 $ 16,527 $ 7,916
========= ========= ========
Financing of other assets................................. $ -- $ 1,572 $ --
========= ========= ========
Notes receivable from stockholders issued in connection
with exercise of stock options and restricted stock
purchases............................................... $ -- $ 234 $ 170
========= ========= ========
Issuance of warrants issued in connection with the
distribution agreement with Cablevision................. $ 74,493 $ 172,283 $ --
========= ========= ========
Acquisitions of Narrative Communications Corporation and
Full Force Systems, Inc.:
Common stock issued and options and warrants exercisable
for common stock assumed.............................. $ 94,953 $ -- $ --
========= ========= ========
Liabilities assumed..................................... $ 2,589 $ -- $ --
========= ========= ========
</TABLE>
See accompanying notes.
50
<PAGE> 51
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
At Home Corporation (the "Company") was incorporated in the state of
Delaware on March 28, 1995. The Company provides Internet services to consumers
and businesses over the cable television infrastructure. As of December 31,
1998, the Company's services were available through cable systems in a limited
number of cities in North America.
DEPENDENCE ON CABLE COMPANIES
The Company has strategic relationships with eighteen cable companies that
provide through their cable systems the principal distribution network for the
Company's services to its subscribers. The Company's cable partners have granted
the Company the exclusive right to offer high-speed residential consumer
Internet services over their cable systems, subject to certain exceptions.
However, these cable partners are under no obligation to carry the Company's
services. In addition, the cable partners' exclusivity obligations in favor of
the Company expire in June 2002, and may be terminated prior to that date under
certain circumstances.
Transmission of data over cable is dependent on the availability of
high-speed two-way hybrid fiber coaxial cable infrastructure. Currently,
significant portions of the cable infrastructure in the United States have not
been upgraded from coaxial cable to hybrid fiber-coaxial cable and, in addition,
are not capable of two-way transmission. Cable system operators have announced
and begun to implement major infrastructure investments in order to deploy
data-over-cable services. However, there can be no assurance that such
infrastructure improvements will be completed.
DEPENDENCE ON KEY TECHNOLOGY SUPPLIERS
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material adverse effect on the Company's financial
condition and results of operations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Certain reclassifications have been made to prior year's financial
statements to conform to current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
51
<PAGE> 52
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of 90 days or less and are stated at amounts that
approximate fair value, based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and the
U.S. Government. The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within 90 days of their
acquisition date.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets consist of purchased technology, acquired workforce and
goodwill related to the acquisitions of Narrative Communications Corp.
("Narrative") and Full Force Systems, Inc. ("Full Force") which were accounted
for as purchases (Note 3). Amortization of intangible assets is provided on the
straight-line basis over the estimated useful lives of the assets, which range
from 3 to 3.5 years. Acquired in-process research and development without
alternative future use is charged to operations when acquired.
The Company records impairment losses on intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount. To date, no such impairment
has occurred.
REVENUE RECOGNITION
Monthly customer subscription revenue is recognized in the period in which
subscription services are provided. The Company also earns revenue from cable
system operators for providing certain support services, such as customer
support, local area content development and pre-commercial deployment fees.
Revenue from cable system operators is recognized as the services are performed.
Through December 31, 1998, the majority of such revenue was derived from cable
system operators that are also stockholders of the Company. Revenues also
include the sale of online advertising based on fixed-fee charter programs,
delivery of impressions on a cost per thousand basis and content partnering
arrangements. Such revenues are recognized over the term of the programs.
ADVERTISING COSTS
All advertising costs are expensed as incurred. Advertising costs, which
are included in sales and marketing expenses, were $1,771,000, $626,000 and
$684,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT SOFTWARE COSTS
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized and amortized over their estimated
useful life.
52
<PAGE> 53
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123").
PRO FORMA NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is effective for fiscal years
ending after December 15, 1997. FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share.
Pro forma basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding, net of shares subject to
repurchase, and also gives effect to the conversion of all outstanding shares of
convertible preferred stock into shares of common stock for the years ended
December 31, 1997 and 1996. Such information is presented in Note 2.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes new
standards for reporting and displaying comprehensive income and its components.
FAS 130 establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses). Comprehensive income
as defined includes all changes in equity (net assets) during a period from
non-owner sources. Such items may include foreign currency translation
adjustments, unrealized gains/losses from investing and hedging activities, and
other transactions. The Company adopted FAS 130 in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") which was adopted by the Company for the period ending December 31, 1998.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. The Company
operates in one business segment, Internet services to consumers and business
over the cable television infrastructure.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. The Company adopted SOP 98-1 effective for the
year ended December 31, 1998. The adoption of SOP 98-1 did not have a material
impact on the Company's consolidated financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of
53
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
start-up activities and organization costs to be expensed as incurred. The
Company is required to adopt SOP 98-5 for the year ended December 31, 1999. The
adoption of SOP 98-5 is not expected to have a material impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company expects to adopt
FAS 133 effective January 1, 2000. FAS 133 will require the Company to recognize
all derivatives on the balance sheet at fair value. The Company does not
anticipate that the adoption of FAS 133 will have a significant effect on its
results of operations or financial position.
2. PRO FORMA NET LOSS PER SHARE
Pro forma basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. The computation for the
periods ended December 31, 1997 and 1996, 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 from the computation as their inclusion would
be anti-dilutive.
The computation of basic and diluted net loss per share is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net loss.......................................... $(144,179) $(55,717) $(24,513)
========= ======== ========
Weighted average shares of common stock
outstanding..................................... 120,054 17,515 4,808
Less: weighted average shares of common stock
subject to repurchase........................... (5,814) (9,224) (3,940)
Pro forma common equivalent shares from
convertible preferred stock..................... -- 95,252 95,252
--------- -------- --------
Shares used in per share calculations............. 114,240 103,543 96,120
========= ======== ========
Basic and diluted net loss per share.............. $ (1.26) $ (0.54) $ (0.26)
========= ======== ========
</TABLE>
3. BUSINESS COMBINATIONS
The Company completed acquisitions of Full Force and Narrative in November
and December 1998, respectively. These acquisitions were each accounted for as a
purchase.
Narrative is a provider of advertising solutions for the Internet. The
purchase consideration was approximately $93,800,000, comprising the issuance of
1,205,333 shares of the Company's Series A common stock with an aggregate fair
value of approximately $84,212,000, the assumption of options to purchase
141,273 shares of the Company's Series A common stock with an aggregate fair
value of approximately $9,169,000, and $419,000 of acquisition costs.
Full Force is a developer of set-top applications for interactive
television. The purchase consideration was approximately $1,672,000, comprising
of the issuance of 38,190 shares of the Company's Series A common stock with an
aggregate fair value of approximately $1,572,000 and $100,000 of acquisition
costs.
54
<PAGE> 55
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<CAPTION>
NARRATIVE FULL FORCE
--------- ----------
<S> <C> <C>
Cash........................................................ $ 77 $ 69
Accounts receivables and other assets....................... 584 60
Property and equipment...................................... 520 5
Purchased technology........................................ 22,900 215
Other identified intangible assets.......................... 1,050 101
Goodwill.................................................... 68,404 1,318
Purchased in-process research and development............... 2,700 58
Liabilities assumed......................................... (2,435) (154)
------- --------
Total purchase consideration...................... $93,800 $ 1,672
======= ========
</TABLE>
The value assigned to purchased in-process technology in these acquisitions
was determined by identifying the research projects for which technological
feasibility had not been achieved and assessing the date of completion of the
research and development effort. The state of completion was determined by
estimating the costs and time incurred to date relative to those costs and time
to be incurred to develop the in-process technology into commercially viable
products. The estimated discounted net cash flows included only net cash flows
resulting from the percentage of research and development efforts complete at
the date of acquisition. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the in-process
technology projects.
To determine the value of purchased technology, the expected future cash
flows of the existing developed technologies were discounted taking into account
the characteristics and applications of the product, the size of existing
markets, growth rates of existing and future markets as well as an evaluation of
past and anticipated product-life cycles.
The following unaudited pro forma summary represents the consolidated
results of operations as if the acquisitions of Narrative and Full Force had
occurred at the beginning of the each year presented and excludes 2,758,000 of
purchased in process research and development charges related to these
acquisitions (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Pro forma revenues.......................................... $ 49,261 $ 8,279
========= ========
Pro forma net loss.......................................... $ 173,810 $(88,285)
========= ========
Pro forma net loss basic and diluted per share.............. $ (1.51) $ (0.76)
========= ========
Number of shares used in pro forma basic and diluted per
share calculation......................................... 115,483 115,483
========= ========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred if the acquisitions had occurred at the
beginning of each year presented and are not intended to be indicative of future
results of operations.
55
<PAGE> 56
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS
The Company has classified all short-term investments as
available-for-sale. Available-for-sale securities are carried at amounts that
approximate fair market value based on quoted market prices. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. Interest on
securities classified as available-for-sale is also included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Corporate bonds and notes................................... $280,429 $ 74,867
Market auction preferred stock.............................. 98,609 21,000
U.S. government obligations................................. 8,760 5,772
Money market instruments.................................... 620 2,789
Certificates of deposit..................................... 9,388 15,004
-------- --------
397,806 119,432
Less: Included in cash and cash equivalents................. 279,219 43,266
-------- --------
Included in short-term investments.......................... $118,587 $ 76,166
======== ========
</TABLE>
Unrealized gains and losses at December 31, 1998 and 1997 and realized
gains and losses for the years then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its consolidated balance
sheets. The cost of securities sold is based on the specific identification
method. All available-for-sale securities at December 31, 1998 have maturity
dates in 1999.
5. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ ESTIMATED
1998 1997 USEFUL LIVES
------- ------- ------------
<S> <C> <C> <C>
Computer equipment and software.................... $56,004 $32,318 3-4 years
Furniture and fixtures............................. 7,271 5,278 5 years
Leasehold improvements............................. 9,628 5,119 Lease term
------- -------
72,903 42,715
Less: accumulated depreciation and amortization.... 23,663 9,654
------- -------
$49,240 $33,061
======= =======
</TABLE>
Equipment and improvements include amounts for assets acquired under
capital leases, principally computer equipment and software and furniture and
fixtures of approximately $40,023,000 and $24,443,000 at December 31, 1998 and
1997, respectively. Accumulated amortization of these assets was approximately
$15,843,000 and $7,339,000 at December 31, 1998 and 1997, respectively.
6. COMMITMENTS
The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2008, and which require the Company
to pay operating costs, including property taxes, insurance and maintenance.
These facility leases generally contain renewal options and provisions adjusting
the lease payments based upon changes in the consumer price index and increases
in real estate taxes and
56
<PAGE> 57
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operating expenses or in fixed increments. Rent expense is reflected on a
straight-line basis over the terms of the leases. The Company also has
obligations under a number of capital equipment leases.
Future minimum lease payments under non-cancelable operating and capital
leases having terms in excess of one year as of December 31, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31,
1999...................................................... $ 5,506 $14,911
2000...................................................... 7,622 9,650
2001...................................................... 7,686 3,563
2002...................................................... 7,136 275
2003...................................................... 7,317 --
Thereafter................................................ 74,284 --
-------- -------
Total minimum lease payments...................... $109,551 28,399
========
Less amounts representing interest.......................... 1,998
-------
Present value of minimum capital lease obligations.......... 26,401
Less current portion........................................ 12,045
-------
Noncurrent portion.......................................... $14,356
=======
</TABLE>
In September 1997 and March 1998, the Company exercised build-to-suit
options requiring the landlord to build additional facilities of approximately
360,000 square feet on adjacent property. 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
that have been exercised to date provide for monthly rental payments beginning
upon the phased completion of the buildings. Occupancy of the first phase is
scheduled to occur during the second half of 1999 and occupancy of the second
phase is scheduled to occur early in the year 2000.
In addition to our build-to-suit options, in December 1998 we exercised our
right to purchase one land parcel from the landlord. The purchase price of the
exercised option is payable in two installments, one of $278,000, which was paid
in December 1998, and a second installment of $5,288,000, which is due in the
first half of 1999.
The Company is also committed to make expenditures for tenant improvements
estimated to be approximately $9,723,000 in 1999.
Facility rent expense amounted to approximately $3,593,000, $1,245,000, and
$600,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
7. CONVERTIBLE DEBENTURES AND TERM LOAN AGREEMENT
CONVERTIBLE DEBENTURES
On December 28, 1998, the Company issued $437,000,000 of Convertible
Subordinated Debentures in a private offering within the United States to
qualified institutional investors. The issue price of each $1,000 debenture was
$524.64 (52.464% of principal amount at maturity), or approximately
$229,300,000. Issuance costs were approximately $6,900,000, resulting in net
proceeds to the Company of approximately $222,400,000. The issuance costs were
recorded as other assets and are being amortized by charges to interest expense
ratably over the term of the debentures. Each debenture is convertible at the
option of the holder at any time prior to maturity, unless redeemed or otherwise
purchased, into 6.55 shares of the Company's Series A common stock. The
debentures mature on December 28, 2018, and interest on the debentures at the
57
<PAGE> 58
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rate of 0.5246% per annum on the principal amount due at maturity, $437,000,000,
is payable semiannually commencing June 28, 1999. The effective annual interest
rate on the debentures, excluding accretion of original issuance discount and
amortization of the issuance costs, is approximately 4%.
TERM LOAN AGREEMENT
The Company has available a $15,000,000 term loan agreement with a bank to
finance the acquisition of property, equipment and improvements, and to
collateralize letters of credit. Borrowings under this term loan bear interest
at the Company's option of the lendor's prime rate or Libor plus 2.5%. Under the
terms of the term loan, the Company is required to meet certain financial
covenants. The term loan expires in October 19, 2002.
As of December 31, 1998, there were no borrowings under this term loan
although there were outstanding letters of credit in the amount of $3,500,000
million issued as security deposits on real property leases.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 11, 1997, the Company completed its Initial Public Stock Offering
("Initial Public Offering") and issued 10,350,000 shares (including 1,350,000
shares issued in connection with the exercise of the underwriters'
over-allotment option) of its common stock to the public at a price of $10.50
per share. The Company received net proceeds of approximately $99,800,000 in
cash. Concurrent with the Initial Public Offering, each share of preferred stock
converted to common stock on a 20-for-1 basis. Shares of Series AT, AX, AM, and
C preferred stock converted into 64,974,600 shares of Series A common stock.
Shares of Series T preferred stock converted into 15,400,000 shares of Series B
common stock. Shares of Series K preferred stock converted into 14,877,660
shares of Series K common stock.
Common stock consists of the following at:
<TABLE>
<CAPTION>
SHARES ISSUED
SHARES AUTHORIZED AND OUTSTANDING
AT DECEMBER 31, AT DECEMBER 31,
-------------------------- --------------------------
SERIES 1998 1997 1998 1997
------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A..................................... 200,000,000 200,000,000 105,263,160 88,325,560
B..................................... 15,400,000 15,400,000 15,400,000 15,400,000
K..................................... 14,877,660 14,877,660 2,609,707 14,877,660
----------- ----------- ----------- -----------
230,277,660 230,277,660 123,272,867 118,603,220
=========== =========== =========== ===========
</TABLE>
The holders of Series A, B and K common stock have one, ten and one vote(s)
per share, respectively. Each share of Series B and K common stock is
convertible into one share of Series A common stock at the option of the
holders.
As of December 31, 1998, one principal cable stockholder controlled
approximately 71% of the voting power of the Company as a result of its
ownership in Series A and Series B common stock.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitation prescribed
by Delaware law, to issue, from time to time, in one or more series, up to
9,650,000 shares of preferred stock, with such designation, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a Board
resolution or resolutions providing for the issue of such series without any
further vote or action by the stockholders. The Board may authorize the issuance
of such preferred stock with voting or conversion rights that could adversely
affect the voting power or other
58
<PAGE> 59
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rights of the holders of common stock. Thus, the issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the
Company. No shares of preferred stock were issued or outstanding at December 31,
1998 or 1997.
STOCK PURCHASE AGREEMENTS
During 1996, the Company entered into stock purchase agreements with
certain employees, officers, directors and consultants under which the Company
issued 7,527,000 shares of Series A common stock at prices ranging from $0.01 to
$0.10 per share, and 50,000 shares of Series K preferred stock at $10.00 per
share. Proceeds from the issuance of the restricted stock were received in the
form of cash or five-year secured promissory notes bearing interest at a rate of
approximately 5.9% per annum. Certain of the agreements provide that the
unvested shares are subject to repurchase by the Company upon termination of
employment at the original price paid for the shares. The shares generally vest
at the rate of 25% after one year and ratably on a monthly basis for three years
thereafter. During the year ended December 31, 1997, the Company repurchased
519,350 shares of common stock pursuant to such agreements. As of December 31,
1998, 1,947,483 shares were subject to repurchase.
Under the terms of an employment agreement with an executive officer, so
long as the officer is employed by the Company, and for 90 days thereafter if
his employment is terminated without cause, to the extent the officer sells any
of his vested common shares during a five-year guarantee period beginning in
July 2000 at an average price less than $5.00 per share, if the Company's stock
is publicly traded, the Company is obligated to pay the officer the difference
between $5.00 per share and the average price for each share sold. At December
31, 1998, the officer owned 2,098,225 shares of Series A common stock. At
December 31, 1998, the officer owned 1,000,000 shares of Series K common stock.
WARRANTS
In October 1996, the Company issued a warrant to its facilities lessor that
gives the lessor the right to purchase 200,000 shares of Series A common stock
for $15.00 per share. The warrant is exercisable for a five-year period
beginning in October 1997. The Company deemed the warrant to have insignificant
fair value at the time of issuance. During the year ended December 31, 1998, the
lessor acquired 158,625 shares under the terms of the warrant.
In April 1997, the Company also issued warrants to purchase 2,000,000
shares of Series C preferred stock at a price of $10.00 per share to certain of
the Series C preferred stock investors that are also cable system operators. The
warrants are exercisable from June 2004 or earlier, subject to certain
performance standards being met by the cable systems operators, as specified in
the agreement. The Company deemed the warrants to have insignificant fair value
at the time of issuance. At December 31, 1998, 1,060,351 warrants were
exercisable.
In July 1997, the Company issued a warrant to Intel Corporation in
connection with a development agreement that gives Intel Corporation the right
to purchase 100,000 shares of Series A common stock for $10.00 per share ("Intel
Warrant 1"). The shares exercisable under Intel Warrant 1 vest 25% on the six
month anniversary of the agreement and the remainder vests monthly for two years
thereafter. The warrant is exercisable through September 2002. In September
1997, the Company, in an amendment to the development agreement, issued a second
warrant ("Intel Warrant 2") that gives Intel Corporation the right to purchase
100,000 shares of Series A common stock for $21.00 per share. The shares
exercisable under Intel Warrant 2 vest on an accelerated basis from September
2004 or earlier, subject to certain performance standards being met by Intel
Corporation, as specified in the amended development agreement. In September
2004, all unvested shares will automatically vest. The Company deemed the
warrants to have insignificant fair value at the time of issuance. At December
31, 1998, 133,333 warrants were exercisable.
59
<PAGE> 60
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
"Agreement"). The Agreement provides that Cablevision will enter 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.
The Agreement provides for the issuance to Cablevision and CSC Parent of a
warrant to purchase up to 7,875,784 shares of the Company's Series A Common
Stock at an exercise price of $0.50 per share (the "Warrant"). The Warrant was
immediately exercisable, subject to the receipt of all necessary governmental
consents or approvals. The Agreement provides for the issuance of an additional
warrant to Cablevision and CSC Parent to purchase up to 3,071,152 shares of the
Company's Series A common stock at an exercise price of $0.50 per share under
certain conditions (the "Contingent Warrant"). The Contingent Warrant is not
immediately exercisable and will become exercisable as and to the extent certain
cable television systems are transferred from TCI and its controlled affiliates
to CSC, CSC Parent or their controlled affiliates. During the year ended
December 31, 1997, the Company recorded the fair value of the Warrant,
$172,600,000, as an intangible asset, which is being amortized ratably over 56
months, the remaining term of the exclusivity obligations. During the year ended
December 31, 1998, the Contingent Warrant became exercisable for 2,355,514
shares of common stock. The Company capitalized the fair value of the Contingent
Warrant, $74,500,000, as an intangible asset, which is being amortized ratably
over 51 months, the remaining term of the exclusivity obligations. As of
December 31, 1998 and 1997, accumulated amortization of the cost of the
distribution agreement totaled approximately $60,837,000 and $9,246,000,
respectively.
In February 1998, the Company issued performance-based warrants to Rogers
Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd. ("Shaw") to purchase
up to 2,900,000 and 2,100,000 shares of Series A common stock, respectively, at
an exercise price of $10.50 per share. Warrants to purchase 919,768 shares of
common stock became exercisable when Rogers and Shaw met certain subscriber
performance milestones during the year ended December 31, 1998. The Company
recorded non-cash charges to operations for the fair value of these warrants of
$49,794,000.
In May and June 1998, the Company issued performance based warrants to
certain other cable operators to purchase an aggregate of up to 5,272,100 shares
of Series A common stock, respectively, at an exercise price of $10.50 per
share. As of December 31, 1998 none of these had vested as the performance
milestones had not been met. In the event the performance milestones are met,
the Company will incur non-cash charges to operations in future periods based on
the difference between the then fair market value of the Company's Series A
common stock and the exercise price of $10.50 per share.
STOCK OPTIONS
In January 1996, the Company adopted the 1996 Incentive Stock Option Plan,
and in July 1996, the Company adopted the 1996 Incentive Stock Option Plan No. 2
(collectively, the "1996 Plans"). The 1996 Plans provide for incentive stock
options, as defined by the Internal Revenue Code, to be granted to employees, at
an exercise price not less than 100% of the fair value at the grant date as
determined by the
60
<PAGE> 61
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Board of Directors. The 1996 Plans also provide for nonqualified stock options
to be issued to nonemployee officers, directors and consultants at an exercise
price of not less than 85% of the fair value at the grant date.
The options granted under the 1996 Plans were exercisable immediately upon
issuance and generally have a term of ten years. Upon termination of employment,
unvested shares may be repurchased by the Company at the original purchase
price. Fully vested shares could have been repurchased by the Company at the
higher of the original purchase price or the fair market value of the shares as
determined by the Board of Directors. The repurchase right for vested shares
expired upon the completion of the Initial Public Offering. Stock options
generally vest at the rate of 25% after one year and ratably on a monthly basis
for three years thereafter.
The Company's 1997 Equity Incentive Plan ("1997 Plan") was adopted by the
Board of Directors in May 1997 and approved by the stockholders in July 1997 as
the successor to the 1996 Plans. The 1997 Plan provides for the grant of
incentive stock options, nonqualified stock options, restricted stock awards and
stock bonuses to employees, directors and consultants of the Company. Options
under the 1997 Plan generally vest at the rate of 25% after one year and ratably
on a monthly basis for three years thereafter. The total number of shares of
Series A common stock reserved for issuance under the 1997 Plan is 25,775,000
less the total number of shares issued or issuable to employees, officers,
directors and consultants under restricted stock purchase agreements, the 1996
Plans and shares issued under the 1997 Employee Stock Purchase Plan, discussed
below.
The Company's 1998 Equity Incentive Plan ("1998 Plan"), was adopted by the
Board of Directors in December 1998. The 1998 Plan provides for the grant of
450,000 shares of the Company's common stock and 447,300 options were granted to
existing Narrative employees on December 30, 1998. Options vest under the 1998
Plan vest at the rate of 25% after one year and ratably on a monthly basis for
three years thereafter.
As a result of the Narrative acquisition (Note 3), the Company assumed
options outstanding under the Narrative 1995 Stock Option Plan exercisable for
141,273 shares of the Company's Series A common stock (based on the merger
exchange ratio). These options are included in the following table under options
granted in the year ended December 31, 1998. Options generally vest at the rate
of 25% after one year and ratably on a quarterly basis for three years
thereafter.
A summary of activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year............ 3,058,135 $10.26 223,000 $ 0.06 -- --
Options granted...... 7,647,652 $40.73 5,158,001 $ 6.30 5,296,500 $0.06
Options exercised.... (424,553) $ 7.01 (2,170,586) $ 0.25 (4,875,500) $0.06
Options cancelled.... (267,939) $18.83 (152,280) $ 3.78 (198,000) $0.05
---------- ---------- ----------
Balance at end of
year............... 10,013,295 $33.44 3,058,135 $10.26 223,000 $0.06
========== ========== ==========
Options exercisable
at year-end........ 1,616,393 1,641,885 223,000
========== ========== ==========
</TABLE>
61
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AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED-AVERAGE WEIGHTED WEIGHTED
RANGE REMAINING AVERAGE AVERAGE
OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 - $ 4.00 1,164,716 8.31 $ 2.41 1,140,404 $ 2.38
$ 4.40 - $ 8.00 194,186 8.77 $ 5.79 119,335 $ 5.74
$18.44 - $33.00 2,310,880 9.10 $23.14 334,654 $19.53
$33.13 - $34.44 2,119,612 9.36 $33.91 9,750 $33.89
$37.00 - $46.34 2,663,375 9.74 $38.57 10,250 $41.84
$47.06 - $71.50 1,560,526 9.97 $65.89 2,000 $56.85
---------- ---------
$ 0.05 - $71.50 10,013,295 9.36 $33.44 1,616,393 $ 6.69
========== =========
</TABLE>
At December 31, 1998, outstanding options to purchase 763,224 shares were
vested and 2,258,953 shares of nonvested common stock issued pursuant to
exercises of options were subject to repurchase at the Company's option in the
event of employee terminations.
The Company recorded deferred compensation of $5,257,000 and $346,000
during the years ended December 31, 1997 and 1996, respectively, for the
difference between the exercise or purchase price and the deemed fair value of
certain of the Company's stock options granted and stock issued under stock
purchase agreements. These amounts are being amortized by charges to operations
over the vesting periods of the individual stock options and stock purchase
agreements, which are generally four years. A portion of the shares issued under
certain stock purchase agreements during the year ended December 31, 1996 vested
immediately. As a result the related compensation charge for the vested shares
was recorded in the period in which the shares were issued.
EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan ("ESPP") was established in July of
that year to provide employees with an opportunity to purchase common stock of
the Company through payroll deductions. The Company initially reserved 400,000
shares of common stock for issuance to participants and an additional 600,000
shares were reserved during the year ended December 31, 1998. Under the ESPP,
the Company's employees, subject to certain restrictions, may purchase shares of
common stock at the lesser of 85 percent of the fair market value at either the
beginning of each two-year offering period or the end of each six-month purchase
period within the two-year offering period. In February and July 1998, employees
purchased 117,027 and 114,918 shares, respectively.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and loss per share is
required by Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") for stock-based awards to employees as if the Company had accounted for
such awards using a valuation method permitted under FAS 123.
The value of the Company's stock-based awards to employees in the years
ended December 31, 1996 and 1997, prior to the Initial Public Offering, was
estimated using the minimum value method. Options granted subsequent to the
Initial Public Offering have been valued using the Black-Scholes option pricing
model. Among other things, the Black-Scholes model considers the expected
volatility of the Company's stock price, determined in accordance with FAS 123,
in arriving at an option valuation. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes
62
<PAGE> 63
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
model may differ significantly from assumptions used in calculating the value of
options granted in 1996 and 1997, prior to the Initial Public Offering, under
the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
----------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ------------------------
1998 1997 1996 1998 1997
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Expected life of options.......... 4 years 4 years 4 years 6 months 7 months
Expected volatility............... 1.00 0.71 N/A 1.00 0.72
Risk free interest rate........... 4.69% 6.00% 6.50% 4.50% 5.09%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net loss as reported.............................. $(144,179) $(55,717) $(24,513)
Pro forma net loss................................ $(166,401) $(56,746) $(24,520)
Pro forma basic and diluted net loss per
share -- as reported............................ $ (1.26) $ (0.54) $ (0.26)
Pro forma basic and diluted net loss per
share -- as adjusted............................ $ (1.46) $ (0.55) $ (0.26)
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $28.01, $3.29 and $0.01, respectively. The
weighted-average fair value of ESPP rights granted during the years ended
December 31, 1998 and 1997 was $5.33 and $3.97, respectively.
9. INCOME TAXES
The Company's income tax benefit differs from the income tax benefit
determined by applying the U.S. federal statutory rate to the net loss as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Income tax benefit at U.S. statutory rate........... $(50,463) $(19,501) $(8,334)
Valuation allowance for deferred tax assets......... 50,463 19,501 8,334
-------- -------- -------
Income tax benefit.................................. $ -- $ -- $ --
======== ======== =======
</TABLE>
63
<PAGE> 64
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for federal and state income
taxes at are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 38,394 $ 25,484
Cost and amortization of distribution agreements.......... 45,078 3,767
Accrued costs and expenses................................ 6,054 --
Capitalized start-up costs................................ 2,462 3,357
Other..................................................... 480 1,106
-------- --------
Total gross deferred tax assets............................. 92,468 33,714
Less valuation allowance.................................... (92,468) (33,181)
-------- --------
Deferred tax assets............................... -- 533
-------- --------
Deferred tax liabilities:
Property and equipment.................................... -- 533
-------- --------
Total gross deferred tax liabilities........................ -- 533
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of December 31,
1998 and 1997 has been established to reflect these uncertainties. The valuation
allowance increased by $59,287,000, $22,324,000 and $9,714,000 in 1998, 1997 and
1996, respectively.
At December 31, 1998, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $94,227,000. These carryforwards
will expire beginning in 2010 and 2003 for federal and state purposes,
respectively, if not utilized.
10. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1998, 1997 and 1996, the Company purchased
services of approximately none, $215,000 and $2,726,000, respectively, from
certain stockholders.
The Company entered into an OEM software license agreement under which the
Company paid the vendor none, $2,275,000 and $1,388,000 during the years ended
December 31, 1998, 1997 and 1996, respectively, as nonrefundable license fees,
prepaid support and services. A member of the Company's Board of Directors is
also an executive officer of the vendor.
Related party transactions with principal cable stockholders are described
in Note 1.
11. RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
64
<PAGE> 65
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and trade accounts receivable. The Company
maintains its cash with three domestic financial institutions with high credit
standings. The Company performs periodic evaluations of the relative credit
standing of this institution. The Company conducts business with companies in
various industries throughout the United States. The Company performs ongoing
credit evaluations of its corporate customers and generally does not require
collateral. Reserves are maintained for potential credit losses and such losses
to date have been within management's expectations.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate their
fair value.
Investment securities: The fair values for available-for-sale securities
are based on quoted market prices.
Convertible debentures: The fair values of the Company's convertible
debentures are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows: (in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents..................... $300,702 $300,702 $44,213 $44,213
Short-term cash investments................... 118,587 118,587 76,166 76,166
Accounts receivable........................... 10,658 10,658 2,142 2,142
Accounts payable.............................. 10,784 10,784 4,517 4,517
Convertible debentures........................ 229,344 229,344 -- --
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED)
MERGER AGREEMENT WITH EXCITE, INC.
On January 19, 1999 the Company entered into a merger agreement with
Excite, Inc. ("Excite"), a global Internet media company that offers consumers
and advertisers comprehensive Internet navigation services with extensive
personalization capabilities. Under the terms of the merger agreement, the
Company will issue approximately 54.9 million shares of its Series A common
stock for all of the outstanding common stock of Excite based on an exchange
ratio of approximately 1.041902 shares of the Company's Series A common stock
for each share of Excite's common stock. The Company may issue up to
approximately 15.3 million additional shares of Series A common stock in
connection with the assumption of obligations under Excite's stock option and
employer stock purchase plans and outstanding warrants. The transaction will be
accounted for as a purchase. The Company's preliminary unaudited estimate of the
total purchase consideration is approximately $6,964 million, based on the fair
value at the time of announcement of the merger, of Series A common stock to be
issued and stock option, stock purchase plan and warrant obligations assumed,
plus estimated transaction costs.
65
<PAGE> 66
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The merger has been approved by the boards of directors of At Home and
Excite, but the acquisition is subject to several conditions, including approval
by both companies' stockholders and the expiration of applicable waiting periods
under certain antitrust laws.
The following unaudited pro forma condensed financial information presents
the combined results of operations of the Company and Excite, including the
amortization of goodwill and other intangible assets, as if the merger had
occurred at the beginning of each year presented (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Pro forma revenues........................................ $ 202,150 $ 61,551
=========== ===========
Pro forma net loss........................................ $(1,881,073) $(1,827,974)
=========== ===========
Pro forma basic and diluted net loss per share............ $ (11.12) $ (11.54)
=========== ===========
Number of shares used in basic and diluted pro forma per
share calculation....................................... 169,124 158,427
=========== ===========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the merger occurred at the beginning of
each year presented, and are not intended to be indicative of future results of
operations.
CHANGES IN COMMON SHARES AUTHORIZED
On January 19, 1999, the Company's Board of Directors authorized an
increase in the number of authorized shares of Series A common stock from
200,000,000 to 233,000,000 and a decrease in the number of authorized shares of
Series K common stock from 14,877,660 to 2,609,707, subject to stockholder
approval.
BACKBONE AGREEMENT
The Company entered into a twenty-year agreement with a major
tele-communications company to create a nationwide Internet Protocol network.
This new backbone facility, which is scheduled to be deployed in mid-1999,
initially will enable the Company to support up to five million broadband users.
In connection with this agreement, the Company will make disbursements of
approximately $50,000,000 over each of the next two years for additional
backbone capacity and related equipment. The Company will capitalize these
payments and amortize the amounts by charges to operations over the term of the
agreement.
66
<PAGE> 67
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND STOCK PRICE DATA)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenue..................... $ 5,773 $ 9,220 $ 13,815 $ 19,237
Costs and expenses:
Operating costs................. 8,615 10,098 12,256 15,996
Product development and
engineering.................. 3,573 3,891 4,588 4,957
Sales and marketing............. 3,500 4,356 4,978 5,257
General and administrative...... 2,874 2,925 3,112 3,518
Purchased in-process research
and development.............. -- -- -- 2,758
Cost and amortization of
distribution agreements...... 19,534 13,628 13,628 54,595
------------ ------------ ------------ ------------
Total costs and
expenses.............. 38,096 34,898 38,562 87,081
------------ ------------ ------------ ------------
Loss from operations.............. (32,323) (25,678) (24,747) (67,844)
Interest income, net.............. 1,107 906 1,460 2,940
------------ ------------ ------------ ------------
Net loss.......................... $ (31,216) $ (24,772) $ (23,287) $ (64,904)
============ ============ ============ ============
Pro forma basic and diluted net
loss per share.................. $ (0.28) $ (0.22) $ (0.20) $ (0.56)
============ ============ ============ ============
Price range per share............. $20.50-38.13 $29.75-57.25 $23.50-54.94 $34.50-84.75
</TABLE>
67
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<S> <C> <C>
10.33 IRU Capacity Agreement, dated December 19, 1998, between
Registrant and AT&T Corp.
23.01 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 10.33
Page 1
IRU CAPACITY AGREEMENT
This IRU Capacity Agreement (the "Agreement") is entered into
as of December 19, 1998 (the "Effective Date") between AT&T Corp. ("AT&T"), a
New York corporation with offices at 295 North Maple Avenue, Basking Ridge, New
Jersey 07920, and At Home Corporation ("@Home"), a Delaware corporation with its
principal place of business located at 425 Broadway Street, Redwood City,
California 94063.
BACKGROUND
This Agreement is made with reference to the following facts:
A. AT&T operates a fiber optic communications system (as such system
exists now, and as it is modified from time to time, the "AT&T Network").
B. AT&T desires to provide, and @Home desires to obtain, an
indefeasible right to use optical fibers and dedicated circuit capacity derived
with network electronics and circuit electronics on the AT&T Network.
C. AT&T desires to grant, and @Home desires to obtain, the ability to
upgrade @Home's rights hereunder on the AT&T Network.
D. AT&T desires to provide, and @Home desires to obtain, collocation,
maintenance and other services in connection with the capacity it derives from
the AT&T Network.
TERMS OF AGREEMENT
1 Definitions
1.1 "Accept" shall have the definition set forth in the
section entitled Testing and Acceptance. "Acceptance" shall have the
corresponding meaning.
1.2 "Additional Capacity" shall mean any Capacity aquired by
@Home pursuant to the section entitled Upgrades and Expansion.
1.3 "AT&T POPs" shall mean (a) the AT&T sites identified in
Exhibit E and (ii) such other AT&T sites as the parties may agree from time to
time to be within the scope of the term "AT&T POP."
1.4 "@Home Backbone Network" shall mean, at any date, the
@Home Routes as of that date.
1.5 "Capacity" shall mean the Phase Two Capacity, the Phase
Three Capacity, the Alternate Capacity and the Additional Capacity, including
both (i) the circuit capacity, as measured in terms of OC-3, OC-12, OC-48 or
otherwise and (ii) a portion of the relevant fiber strands necessary to
transport such capacity.
<PAGE> 2
Page 2
1.6 "City Pair" shall mean any of the pairs of cities listed
in Exhibit C or Exhibit D.
1.7 "Consumer Price Index" shall mean the Consumer Price Index
for Urban Wage Earners and Clerical Workers, All Items (1982-84=100), for the
United States as published by the United States Department of Labor, Bureau of
Labor Statistics, or any successor index thereto.
1.8 "@Home Routes" shall mean Routes on which @Home has rights
to use capacity under this Agreement.
1.9 "Four-Port Network Electronics" shall mean four Dense
Wave Division Multiplexing terminal ports in the relevant points of presence
and the proportionate share of the associated optical amplifiers sufficient to
support four OC-48s in all the Phase Three Routes.
1.10 "Indefeasible Right to Use" or "IRU" shall mean the
exclusive, unrestricted, and indefeasible right to use the relevant Capacity
(including equipment, fibers or capacity) for any legal purpose. The granting of
such IRU does not convey title or legal ownership of any fibers or equipment on
the AT&T Network. The IRU shall convey an interest that notwithstanding the
occurrence of a breach by the receiving party of any legal duty or obligation
imposed by any contract, by the law of torts (including simple or gross
negligence, strict liability or willful misconduct), or by federal or state
laws, rules, regulations, orders, standards or ordinances, during the Term, the
granting party shall have no right to revoke or restrict in any manner or to any
degree whatsoever, through injunctive relief or otherwise, the use of the IRU
granted to the receiving party, it being understood and agreed that each such
breach shall be compensable, if at all, by a remedy at law and not at equity.
1.11 "Market Equivalent Capacity" shall mean an amount of
transmission capacity (as measured in channels, wavelengths or other appropriate
measures) equal to (i) with respect to two-fiber configurations, 25% or (ii)
with respect to four-fiber configurations, 12.5% in each case of the total
transmission capacity which it is commercially practical to sustain over two or
four optic fibers so configured, respectively, utilizing equipment at that time
in use in the Relevant Area (as defined below) by at least two of the ten
largest interexchange carriers in the United States. In Routes between two of
the thirty largest metropolitan statistical areas in the United States ("Large
MSAs"), the "Relevant Area" shall be any route in the United States; for Routes
which do not service a Large MSA, the Relevant Area shall mean a route in the
same general geographical area as the Route for which the Market Equivalent
Capacity is to be measured.
1.12 "Material Provision" shall mean any provision of this
Agreement (including, without limitation, payment provisions) the breach of
which by one party is determined by a judicial proceeding or pursuant to the
Section entitled Arbitration to constitute a material adverse effect on the use
and enjoyment by the other party of the benefits of this Agreement.
1.13 "OC-3" shall mean bi-directional OC-3 optical
transmission capacity meeting the specifications set forth in AT&T's Technical
Reference 54018, as revised from time to time. For purposes of this Agreement,
"bi-directional" shall mean that traffic up to the designated capacity can
travel in each direction simultaneously.
<PAGE> 3
Page 3
1.14 "OC-12" shall mean bi-directional OC-12 optical
transmission capacity meeting the specifications set forth in AT&T's Technical
Reference 54077, as revised from time to time.
1.15 "OC-48" shall mean bi-directional OC-48 optical
transmission capacity meeting the specifications set forth in AT&T's Technical
Reference 54078, as revised from time to time.
1.16 "Route" shall mean any route on the AT&T Network between
any two points of presence listed on Exhibits C and D or any other AT&T points
of presence which support OC-48 service.
1.17 "Third Party POPs" shall mean (i) the third party sites
identified in Exhibit G and (ii) such other third party sites as the parties may
agree from time to time to be within the scope of the term "Third Party POP."
1.18 "Service Components" shall mean, with respect to any
Route, the capacity, collocation and interconnection services relating to such
Route to be provided pursuant to this Agreement.
1.19 "Significant Route" shall mean any of the Routes so
designated on Exhibit C or D.
2 Service Components.
2.1 Indefeasible Right to Use. AT&T hereby grants to @Home for
the Term of this Agreement an IRU in the Capacity, as the Capacity may be
increased from time to time pursuant to the terms hereof.
2.2 Collocation and Interconnection. AT&T shall provide @Home
with collocation space along the @Home Backbone Network in (i) the AT&T POPs
under an agreement substantially in the form attached as Exhibit F (Collocation
Agreement). In each AT&T POP, AT&T shall provide @Home with three rack spaces
(as used in this Agreement, "rack space" shall have the meaning set forth in
Exhibit F) and associated collocation and interconnection services, as listed in
Exhibit F, or as hereafter mutually agreed upon. AT&T shall use its best efforts
to make the three rack spaces contiguous. AT&T shall procure on behalf of @Home
one rack space in the Third-Party POPs. As part of the Services provided
hereunder, AT&T will extend its facilities at no cost to @Home to the @Home
designated demarcation point within the Third-Party POPs.
3 Performance Phase.
3.1 Phase One - Interim Services. To assist @Home's transition
to the AT&T Network, during the period from January 1, 1999 through Acceptance
of the Phase Two Services on the applicable Route, AT&T will provide @Home
either with the Phase Two Service Components or with alternate capacity using
Asynchronous Transfer Mode technology ("ATM"), or with a hybrid arrangement
including some portion of the Phase Two Routes combined with ATM. @Home has an
existing ATM service arrangement with Sprint, which arrangement
<PAGE> 4
Page 4
currently is being restructured. @Home will arrange for AT&T to assume @Home's
rights and obligations under the Sprint ATM service arrangement, once it is
restructured (the "Sprint ATM Arrangement") provided that @Home shall remain
liable for, and AT&T shall assume no liability for, termination charges,
shortfall charges, charges for service provided prior to January 1, 1999, and
other charges not directly related to the provision of ATM service under the
Sprint ATM Arrangement from January 1, 1999 forward. AT&T's willingness to
assume the Sprint ATM Arrangement is contingent upon its review and assessment
of the terms. In the event that AT&T incurs charges under the Sprint ATM
Arrangement in excess of five million dollars, @Home will pay the amount of such
excess to AT&T as an Assumption Fee, except if AT&T does not deliver the Phase
Two Capacity by the Phase Two Commitment Date the charges incurred under the
Sprint ATM Arrangement from April 1, 1999 through the date on which AT&T
delivers the Phase Two Capacity will not be counted in calculating any
Assumption Fee. The parties acknowledge and agree that (i) the assumption of the
Sprint ATM Arrangement by AT&T is an accommodation to @Home to induce it to
enter into this Agreement and (ii) @Home has informed AT&T that it would not
enter into this Agreement without this provision.
3.2 Phase Two - OC-48 and OC-3 Capacity. AT&T shall provide,
at no additional cost to @Home, capacity (the "Phase Two Capacity") along
certain Routes (collectively, the "Phase Two Routes") as follows: OC-3 capacity
on the Routes and in the amounts listed on Exhibit C and in OC-48 capacity on
the Routes listed on Exhibit C. The "Phase Two Service Components" shall include
the Phase Two Capacity and corresponding collocation and interconnection
services as set forth in the Section entitled Collocation and Interconnection
and Exhibit F. AT&T shall deliver the Phase Two Service Components so that they
are Accepted no later than March 31, 1999 (the "Phase Two Commitment Date"). The
Phase Two Service Components shall be subject to the testing and acceptance
process set forth in the Section entitled Testing and Acceptance. The Phase Two
Service Components shall terminate upon Acceptance of the Phase Three Service
Components (defined below).
3.3 Phase Three - OC-48 Capacity. AT&T shall provide at no
additional cost to @Home 2 OC-48's (including the Four-Port Network Electronics)
(the "Phase Three Capacity") on the Routes listed on Exhibit D (the "Phase Three
Routes") in accordance with the terms of this Agreement including Exhibit B
(Technical Specifications). The "Phase Three Service Components" shall include
the Phase Three Capacity and corresponding collocation and interconnection
services as set forth in the Section entitled Collocation and Interconnection
and Exhibit F. AT&T shall provide the Phase Three Service Components so that
they are Accepted no later than the relevant scheduled delivery dates specified
on Exhibit D (the "Phase Three Delivery Dates").
3.4 Other Capacity. The parties agree to work together in good
faith to enter into a separate agreement or a contract tariff by January 31,
1999 to cover @Home's additional OC-3 (or larger) needs. In addition, @Home, at
its option, may order, and AT&T shall use commercially reasonable efforts to
promptly provide, capacity on routes not available through the AT&T Network
("Off-net Capacity"). AT&T shall provide such Off-net Capacity at 115% of the
cost (net of discount) such is actually obtained by AT&T from a non-affiliated
third-party carrier, subject to such other terms and conditions as apply between
AT&T and such other carrier.
4. Delivery and Liquidated Damages
<PAGE> 5
Page 5
4.1 Delivery. AT&T shall complete the construction,
installation and testing of the Phase Two Service Components and the Phase Three
Service Components so that they are Accepted in accordance with the terms of
this Agreement and specifically Exhibit B (Technical Specifications) by the
Phase Two Commitment Date and each of the applicable Phase Three Delivery Dates,
respectively. Notwithstanding the foregoing, each party understands that a risk
of delay is inherent in the provisioning of Phase Three Service Components due
to the extent of the project. Therefore, there shall be a completion grace
period extending from each of the Phase Three Delivery Dates as indicated on
Exhibit D until August 31, 1999 (the "Phase Three Commitment Date") for AT&T to
complete the construction, installation and testing of the Phase Three Service
Components. There shall be no grace period associated with the Phase Two
Commitment Date. The Phase Two Commitment Date and the Phase Three Commitment
Date are hereinafter collectively referred to as the "Commitment Dates."
4.2 Liquidated Damages. The parties agree that it would be
difficult to determine the precise amount of damages which @Home would suffer in
the event that the @Home Backbone Network or any portion thereof is not
completed by the applicable Commitment Date. Therefore, the parties agree, as
their best estimate of such damages to @Home that in the event that any of the
Service Components are not delivered and Accepted for any Significant Route by
the applicable Commitment Date, @Home shall receive a discount against the
purchase price (the "Discount") in the amount of $10,000 per month (prorated for
partial months) per City Pair for such Significant Route. The Discount shall
continue to accrue until the Service Components for such Significant Route are
delivered to and Accepted by @Home.
4.3 Cover Service Components. In the event the Service
Components for any Route have not been Accepted 120 days after the applicable
Commitment Date, @Home may, at its option, obtain equivalent capacity for the
Route from another carrier and AT&T shall reimburse @Home for all expenses
charged by such other carrier until such time that the Service Components are
Accepted by @Home for the applicable Route. This cover remedy is in lieu of
liquidated damages under Section 4.2 for such late delivery for the time such
alternative capacity is provided.
4.4 Alternate Service Components. If @Home has not Accepted
the Phase Three Service on any Route by the Phase Three Commitment Date, AT&T
shall provide @Home with two OC-48s between the [City Pairs] for each applicable
Route not yet Accepted (the "Alternate Capacity"). The Alternate Service
Components shall include the Alternate Capacity and corresponding collocation
and interconnection services as set forth in the Section entitled Collocation
and Interconnection and Exhibit F. If necessary, AT&T will provide the Alternate
Service Components with services it obtains from another carrier. AT&T shall
provide the Alternate Service Components to @Home at no additional cost to
@Home. To the extent that AT&T provides Alternate Service Components, @Home will
not have the right to obtain Cover Service Components as set forth in Section
4.3, and will not have the right to liquidated damages under Section 4.2 for
such late delivery for the time the Alternative Service Components are provided.
4.5 Substantial Failure to Deliver Routes. If by March 31,
2000, regardless of any Force Majeure Events, 70% of all the Phase Three Routes
and associated Service Components have not been Accepted by @Home, then @Home
shall have the right to
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terminate this Agreement by providing written notice thereof to AT&T. In such
event, AT&T shall refund to @Home any amounts actually paid by @Home to AT&T
pursuant to the Section entitled Payment, except that AT&T may withhold an
amount for each Accepted Route, the "Usage Fee." The Usage Fee shall equal the
portion of the IRU Fee paid through the date of termination of this Agreement
with respect to such Route (calculated on a pro-rata basis based on mileage)
multiplied by a fraction. The fraction shall have a numerator equal to the
number of months @Home was provided Service on such Route and a denominator of
240. In addition, regardless of any Force Majeure Events, @Home may terminate
this Agreement with respect to any Route for which the Service Components have
not been Accepted within two years of the Effective Date.
5. Payment.
5.1 IRU Fee. In consideration for the Interim Service and the
IRUs granted hereunder in the Capacity, @Home shall pay AT&T ninety million
dollars ($90,000,000) (the "IRU Fee") payable in accordance with the schedule
set forth in Exhibit I (Payment Terms).
5.2 Maintenance. In consideration for the provision of
maintenance services provided by or arranged for by AT&T with respect to Phase
Three Capacity in accordance with the Section entitled Operation, Maintenance
and Repair, @Home shall pay AT&T a quarterly Maintenance Fee (as defined below)
in arrears on a Route mileage basis (regardless of the amount of capacity used
on the Route). The mileage used to calculate the Maintenance Fee for each
quarter shall be calculated by adding together the number of applicable Route
miles in use at the beginning and end of the quarter and dividing by two. The
"Maintenance Fee" shall be the sum of two components: the "Services Component"
and the "Repair/Replacement Component". The Services Component shall be equal to
$6.00 per quarter per Route mile. The Repair/Replacement Component shall be
lower during the period the initial equipment used to provide the Capacity is
new to reflect AT&T's ability to take advantage of manufacturers' warranties.
The Repair/Replacement Component shall be (a) $2.00 per quarter per Route mile
during the first three years of Phase Three Capacity on the relevant Route and
(b) $6.30 per quarter per Route mile thereafter.
5.2.1 CPI Increase. The Maintenance Fee shall be
adjusted annually by the aggregate change in the Consumer Price Index, as set
forth below. Beginning at the start of the first year for which the Maintenance
Fee applies, and each additional year thereafter, the Maintenance Fee payable
hereunder shall be determined by multiplying the monthly Maintenance Fee set
forth in Section 5.2 by a fraction, the numerator of which shall be (i) the
average of the monthly Consumer Price Indices for the 12 months immediately
preceding the date on which the Maintenance Fee is to be adjusted and (ii) the
denominator of which shall be the average of the monthly Consumer Price Indices
for the 12 months immediately preceding the Effective Date of this Agreement.
5.3 Collocation. In consideration for collocation at the AT&T
POPs @Home shall pay AT&T the amounts set forth in Exhibit F. AT&T shall charge
@Home for rack spaces in Third-Party POPs only the actual cost therefor to AT&T,
without mark-up.
5.3.1 CPI Increase. The collocation charges shall be
adjusted annually by the aggregate change in the Consumer Price Index, as set
forth below. At the beginning of each calendar year beginning with 2000, the
collocation charges shall be
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determined by multiplying such charges by a fraction, the numerator of which
shall be (a) the average of the monthly Consumer Price Indices for the 12 months
preceding the date on which the charge is to be adjusted and (b) the denominator
of which shall be the average of the monthly Consumer Price Indices for the 12
months immediately preceding the date on which the charges were first
established under this Agreement.
5.4 Invoicing and Payment Terms. AT&T shall send a bill to
@Home for all charges payable under this Agreement. With the exception of the
IRU Fee which each shall be due on the dates set forth in Exhibit I, @Home shall
pay all invoiced amounts within 30 days after the date of an invoice therefor.
@Home's obligation to pay a charge that is subject to a specifically identified
good faith dispute will be suspended while the disputed charge is under
investigation by AT&T if (a) @Home provides a written explanation of the basis
for such dispute prior to the date such payment is due or (b) an AT&T account
inquiry and collections representative provides express written consent to
suspend the payment obligation pending investigation. If any amount due under
this Agreement not so disputed is not received within fifteen days after the
date due, then, in addition to its other remedies available under this
Agreement, AT&T may in its sole discretion impose a late payment charge
calculated each month at the rate of 1% per month (or 12% per annum), such late
charge being payable upon demand by AT&T.
6. Upgrades and Expansion.
6.1 Upgrade of @Home Backbone Network at @Home's Request. At
any time after August 31, 1999 and during the Term of this Agreement, @Home
shall have the right to upgrade its Capacity on @Home Routes (a "Requested
Upgrade"). In connection with a Requested Upgrade, @Home shall have the right to
purchase from AT&T additional network electronics and/or circuit electronics, in
order to increase the Capacity on the applicable @Home Route to the Market
Equivalent Capacity. @Home may request such upgrade by providing written notice
(the "Upgrade Request Notice") to such effect to AT&T. The Upgrade Request
Notice shall include the Route(s) and the amount of additional capacity for each
Route (provided however the effective Capacity that @Home obtains shall not
exceed the Market Equivalent Capacity for such Route, except if @Home has
previously made an Existing Route Expansion (as defined below) for the Route
that @Home desires, in which case the effective capacity which @Home obtains
shall not exceed the product of (a) the Market Equivalent Capacity for the Route
and (b) the Excess Expansion Percentage (as defined below) for the Route). At
such time, AT&T shall be obligated to provide @Home with (i) the Requested
Upgrade or (ii) alternative capacity along the Routes and in the amount
requested by @Home as part of the Requested Upgrade ("Additional Capacity
Without Upgrade");. Within 60 days of the date of the Upgrade Request Notice,
AT&T shall respond in writing (the "Upgrade Response Notice") indicating whether
it has selected option (i) or option (ii) above and providing a detailed
description of the upgraded transmission system or the capacity, as applicable,
the anticipated time line for installation, completion and delivery, as
applicable and the estimated cost of the upgrade or capacity. Such cost shall be
calculated in accordance with the Section entitled Upgrade Cost. Within 30 days
after receipt of the Upgrade Response Notice, @Home shall provide AT&T with
written confirmation of @Home's desire (or lack thereof) to proceed with the
Requested Upgrade. @Home shall pay for the Requested Upgrade in accordance with
the Section entitled Upgrade Payment Terms and AT&T shall use commercially
reasonable efforts to provide the additional Capacity promptly.
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6.2 Expansion of @Home Backbone Network. At any time after
August 31, 1999 and during the Term of this Agreement, @Home shall have the
right to request an expansion of the @Home Backbone Network to (a) include
Routes not then on the @Home Backbone Network (a "Route Expansion") or (b)
include additional capacity above the Market Equivalent Capacity on an @Home
Route then in use (an "Existing Route Expansion"), (in either case, a "Requested
Expansion"). In connection with a Requested Expansion, @Home shall have the
right to purchase from AT&T additional network electronics and/or circuit
electronics, in order to obtain Capacity (a) in a Route Expansion, on such
Routes up to the Market Equivalent Capacity or (b) in an Existing Route
Expansion, up to an amount of capacity above the Market Equivalent Capacity as
specified by @Home (the percentage amount requested in an Existing Route
Expansion above the Market Equivalent Capacity is referred to as the "Excess
Expansion Percentage") @Home may request such expansion by providing written
notice (the "Expansion Request Notice") to such effect to AT&T. The Expansion
Notice shall include the new Route(s) and the amount of additional capacity for
each new Route that @Home desires. At such time, AT&T shall provide @Home with
(i) the Requested Expansion using such upgraded facilities; or (ii) alternative
capacity in the amount requested by @Home as part of the Requested Expansion
("Additional Expansion Capacity Without Upgrade"); provided however that in
either case, the Capacity that @Home obtains shall not exceed (a) in the case of
a Route Expansion, the Market Equivalent Capacity or (b) in the case of an
Existing Route Expansion, the product of (1) the Market Equivalent Capacity
multiplied by (2) the sum of one plus the Excess Expansion Percentage. Within 60
days of the date of the Expansion Request Notice, AT&T shall respond in writing
(the "Expansion Response Notice") indicating whether it has selected option (i)
or option (ii) above and providing a detailed description of the upgraded
transmission system or the capacity, as applicable, the anticipated time line
for installation, completion and delivery, as applicable and the estimated cost
of the upgrade or capacity. Such cost shall be calculated in accordance with the
Section entitled Additional Capacity Cost. Within 30 days after receipt of the
Expansion Response Notice, @Home shall provide AT&T with written confirmation of
@Home's desire (or lack thereof) to proceed with the Requested Expansion. @Home
shall pay for the Requested Expansion in accordance with the Section entitled
Expansion Payment Terms and AT&T shall use commercially reasonable efforts to
provide the additional Capacity promptly.
6.3 Upgrade of @Home Backbone Network During AT&T Network
Upgrade. AT&T shall provide written notice (the "Upgrade Notice") to @Home of
each "Upgrade" of the AT&T Network. An "Upgrade" is any change to the AT&T
Network, including but not limited to lighting fiber(s), adding, modifying, or
replacing electronic equipment, that enables AT&T to increase the total number
of channels, or increase the capacity per channel, on a per fiber, per route
basis on all or any part of the AT&T Network. The Upgrade Notice shall include a
detailed description of the upgraded transmission system (including routes,
engineering and capacity), anticipated time line for installation, completion
and delivery and the estimated cost to @Home for @Home's portion of the
Upgrade. Such estimated cost shall be calculated in accordance with the Section
entitled Additional Capacity Cost. @Home may elect to participate in the Upgrade
and to retain AT&T to upgrade the @Home Backbone Network (or such portions of
the @Home Backbone Network as @Home requests) by providing notice (the "Upgrade
Acceptance Notice") to such effect to AT&T in writing within 30 days of
receiving the Upgrade Notice. The Upgrade Acceptance Notice shall include the
Routes and the amounts of capacity for each Route that @Home desires. @Home may
elect to participate in the AT&T Network upgrade on individual Routes, rather
than for the entire Upgrade. @Home may at any time in the future request Service
Components on the Upgraded portions of the AT&T Network in
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accordance with the Section entitled Upgrade of @ Home Backbone Network at @
Home's Request.
6.4 Forecasting and Planning. AT&T and @Home shall meet twice
a year to review @Home's network forecasts, AT&T network planning and status and
to discuss the current Market Equivalent Capacity. In the event the parties do
not agree upon the Market Equivalent Capacity for any Route, at the option of
either party, determination of the Market Equivalent Capacity at such time shall
be referred to the binding decision of a mutually acceptable independent third
party. If the parties do not agree upon such a third party within 30 days of the
exercise of such option, an independent third party will be chosen through
arbitration under the terms of this Agreement.
6.5 Transition to New Service. In the event an Upgrade, an
Expansion or a Requested Upgrade requires a transfer of @Home's Service
Components to different electronics, AT&T will effect the transfer in accordance
with mutually acceptable transition procedures approved by the engineering
groups of @Home and AT&T.
6.6 Collocation with Upgrade or Expansion. In connection with
a Requested Upgrade, an Upgrade or an Expansion, AT&T shall provide collocation
services to @Home in a manner sufficient to meet @Home's needs. @Home shall pay
the cost for such collocation as set forth in Exhibits F and I.
6.7 Acceptance of Upgrade and Expansion. Testing, Acceptance
and payment subsequent thereto of a Requested Upgrade, an Upgrade or an
Expansion shall be in accordance with the section entitled Testing and
Acceptance herein, provided however, that in the event the specifications set
forth in Exhibit B are no longer applicable to the technology employed at the
time of a Requested Upgrade, an Upgrade or an Expansion, the parties shall
mutually agree in writing to specifications in line with industry standards
prior to the testing.
6.8 City-Pair Split. At @Home's request, AT&T shall allow
@Home to split any Route between the two cities of a City Pair if AT&T has a
point of presence (the "New POP") in between the two cities. In such case, AT&T
shall provide @Home with collocation (three rack spaces) and interconnection at
the New POP. AT&T's only charge for allowing and implementing such split in the
City Pair will be for the collocation. @Home shall pay the cost for such
collocation as set forth in Exhibits E and I.
7. Payment for Upgrades and Expansions.
7.1 Additional Capacity Cost. Pricing for additional upgrading
to a new higher capacity shall be determined by the following:
7.1.1 New Electronic Equipment Pricing Method. The
payment from @Home for the new network electronics and circuit electronics
required to obtain capacity beyond the Phase Three Capacity (the "Upgrade
Cost") shall be determined by AT&T based on @Home's requested upgraded
configuration of the @Home Backbone Network. The Upgrade Cost shall be equal to
the product of (a) AT&T's Network and Circuit Electronics Cost (as defined
below) and (b) a fraction which shall have a numerator equal to the Additional
Capacity to be derived from such electronics and a denominator which is equal
to the total capacity which can be derived from such electronics. The "Network
and Circuit Electronics Cost" shall be equal to AT&T's "actual cost" to provide
the additional capacity requested, consisting of the actual costs paid by AT&T
to third parties for all physical elements (active and passive) added to the
AT&T fibers to prepare and create channel capacity consistent with this
Agreement and that are used in the deployment of the @Home Backbone Network,
including
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the costs paid to the equipment vendor for engineering and installation. The
Network and Circuit Electronics Cost shall be adjusted as follows:
(a) to not include any cost for
installation services where such services are otherwise included in the costs
of the network and circuit electronics invoiced to AT&T and already included
in the Network and Electronics Cost;
(b) reduced by the "Discount Percentage."
The Discount Percentage is the percentage discount, rebate or other direct or
indirect cost savings ("Discount") that AT&T was given by its supplier of
network or circuit electronics when AT&T purchased such electronics. If a
Discount was made available to AT&T in bundled purchases that include network
electronics or circuit electronics and other equipment not covered under this
Agreement, the same Discount shall be afforded to @Home for the equipment that
is installed on the @Home Network;
(c) decreased to the extent that the
Comparison Price (as defined below) for such upgrade is less expensive or to
the extent that a less expensive upgrade could have been possible if AT&T's
equipment were of a more recent manufacture or design; and
(d) increased by a mark-up of 20% (that
is, after the deductions listed above in subsection (a), (b), and (c) are made
to the Network and Circuit Electronics Cost, the Networks and Circuit
Electronics Cost shall be multiplied by 1.20).
The "Comparison Price" for an upgrade shall be the lower price, if any, any
other AT&T-qualified vendor (or, in the event only one vendor is AT&T qualified
for the type of equipment being considered, any vendor of substantially
equivalent equipment of comparable quality) could have provided the electronics
(or substantially equivalent electronics), established as follows: (a) there
will be semi-annual meetings between @Home and AT&T to review market pricing,
and based on such meetings, the parties will attempt to mutually establish a
Comparison Price for any impending upgrade, (b) if no such price can be
mutually agreed to, the parties will engage a mutually acceptable third-party
expert to determine the Comparison Price, which determination will be binding
on the parties, and (c) if no such expert is mutually agreed to, the choice of
the expert will be determined by an arbitrator under the arbitration provision
of this Agreement. During such process, AT&T will share equipment market price
information it has with @Home to the extent allowed by existing non-disclosure
agreements it has with third parties.
In the event AT&T chooses to supply Additional Capacity Without Upgrade or
Additional Expansion Capacity Without Upgrade pursuant to option (ii) of the
section entitled Upgrade of @Home Backbone Network at @Home's Request or of
option (ii) of the section entitled Expansion of @Home Backbone Network, the
cost to @Home of such Additional Capacity shall be calculated through a
reasonable estimate of what the costs would have been as if the facilities
upgrade set forth above had actually taken place.
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7.1.2 Fiber Cost. @Home shall not be required to pay
anything for the right to use fiber on any @Home Route in connection with the
acquisition of Additional Capacity which together with previously existing
capacity on such Route does not exceed the Market Equivalent Capacity for such
Route. @Home shall pay $2,700 per Route mile for the right to use fiber in
connection with extending the Capacity to an additional Route usage of fiber on
any non-@Home Route. @Home shall pay an amount equal to the product of (a)
$2,700 per Route mile and (b) the Excess Expansion Percentage for the right to
use fiber in connection with an Existing Route Expansion. The route mileage for
new Routes shall be determined by AT&T's final as-built circuit designs.
7.3 Upgrade and Expansion Payment Terms. Upon agreeing to
participate in an upgrade or expansion @Home shall owe AT&T a deposit of 10% of
the estimated cost of the upgrade or expansion. Upon Acceptance in accordance
with the Section entitled Testing and Acceptance and delivery of the Service
Components along the upgraded or expanded portion of the @Home Backbone Network,
@Home shall pay the remainder of the Upgrade Cost or the Expansion Cost;
provided however that @Home shall not be required to pay more than 110% of the
estimated cost given to @Home for such Upgrade or Expansion in the Upgrade
Response Notice, the Upgrade Notice or the Expansion Notice, as applicable. The
Section entitled Invoicing and Payment Terms shall apply to the Upgrade Cost and
the Expansion Cost.
8. Audit of Certain Upgrade, Expansion and Discount-Related Invoices.
@Home may undertake an audit under this Section in connection with a billing
dispute or after payment of the relevant invoice to evaluate the accuracy of
pricing and calculations for such invoice. For a period of twelve (12) months
from the date payment of the relevant invoice by @Home is first due, AT&T agrees
to maintain records related to its purchases of equipment and services related
to an invoice, and to make such records available to a representative of @Home
(or, at AT&T's option, to a third-party auditor acceptable to both parties) at
reasonable times at AT&T headquarters on prior notice in connection with an
audit requested by @Home under this Section. All costs related to such audit
will be borne by @Home. All documents reviewed in connection with such an audit
shall be subject to confidential treatment as set forth in the Section entitled
Confidentiality. If the audit discloses an error in the pricing or discounts
made available to @Home, and such audit indicates @Home paid too much, AT&T and
@Home will promptly review the conclusions of the audit and, where AT&T concurs,
AT&T shall pay @Home the amounts due within 15 days of its concurrence. In the
event the audit reveals that @Home was charged too little, @Home shall pay the
difference within 30 days of receiving an invoice from AT&T therefor. If the
parties disagree, either party may seek to resolve the matter through
arbitration as set forth in the Section entitled Arbitration.
9. Testing and Acceptance.
9.1 Testing. Prior to making any Capacity available to @Home
under this Agreement, AT&T shall test the Capacity on a Route-specific basis
("Testing") to ensure that the Capacity is in conformity with the technical
specifications set forth in Exhibit B (the "Specifications"). If any Testing
establishes that the Capacity does not conform to the Technical Specifications,
AT&T promptly shall correct such nonconformity and conduct additional Testing
prior to making the Service Components available to @Home.
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9.2 Acceptance. If AT&T determines, that for a particular
Route, that the Testing results show that the Capacity meets the Specifications
and that the Service Components are available for @Home's use, AT&T shall
provide @Home with written notice to that effect (the "Delivery Notice"). The
Delivery Notice shall include the Testing results, a description of the
available Service Components (including circuit identifiers) and the date the
Service Components will be available. Prior to providing the Delivery Notice
AT&T shall use commercially reasonable efforts to deliver @Home the applicable
rack spaces pursuant to a Collocation Agreement in the AT&T POP for installation
of its equipment. If @Home fails to give a Non-Acceptance Notice (defined below)
or makes a special request for an extension of the acceptance period (during
which period the applicable Commitment Date for the Route shall be tolled)
within 30 days after @Home's receipt of the Delivery Notice, @Home shall be
deemed to have accepted the Service Components for such Route(s) effective as of
such thirtieth day. The earliest of (i) such date, (ii) the date @Home informs
AT&T that it has accepted the Service Components, or (iii) the date that @Home
actually begins commercial use of the Service Component shall be deemed the
"Acceptance Date" for that Service Component and such Service Component shall be
"Accepted." @Home shall have the right to extend the acceptance period for 15
days upon written request to AT&T.
9.3 Non-Acceptance. If within the 30-day period (or the 45-day
period if applicable) described above, @ Home gives AT&T a written notice of any
nonconformity of the Capacity to the Specifications or stating that the Service
Components are not available for @ Home's use ("Non-Acceptance Notice"),
Acceptance shall not occur. A Non-Acceptance Notice must either specifically
identify the Specifications with which @Home contends the Capacity does not
conform, or provide an explanation of the manner and extent to which the Service
Component is not available. @Home will promptly upon AT&T's written request,
give reasonably specific additional information to AT&T regarding the claimed
nonconformity and , from the date of Non-Acceptance Notice until such
information is provided, any applicable Commitment Date shall be tolled. AT&T
shall use commercially reasonable efforts to correct such nonconformity and make
the Service Component available within 10 days of receipt of @Home's valid
Non-Acceptance Notice. Upon completion of such correction, AT&T shall notify
@Home by providing a Delivery Notice, after which @Home shall have 10 days for
Acceptance or for @Home to provide additional notice of a failure to deliver the
Service Components by providing a Non-Acceptance Notice. Such process shall be
repeated until Acceptance, provided however, if AT&T fails to correct any
nonconformity of any Capacity to the Technical Specifications or to provide the
Service Components within 90 days after the date of the first Delivery Notice,
@Home may at its option terminate this Agreement with respect to the affected
Route(s) only, upon written notice to AT&T. In such case, AT&T need no longer
deliver the affected Route(s), and @Home need no longer pay any amounts due for
such Route(s).
10. Operation, Maintenance and Repair.
10.1 Purchase, Repair or Replacement of Electronic Equipment.
AT&T shall purchase, repair and replace all electronic equipment related to the
provision of the Service Components at all times.
10.2 Operating Standards. During the term of this Agreement,
AT&T shall operate the @Home Backbone Network in accordance with the same
standards with which AT&T operates the AT&T Network and in any case, with at
least the standard of care in the industry.
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10.3 Maintenance and Repair. During the Term hereof, AT&T
shall be responsible, at its sole expense, for the emergency and non-emergency
maintenance, and repair of the AT&T Network and the @ Home Backbone Network, so
as to assure continuing conformity of the @Home Backbone Network with the
Specifications. If routine, scheduled maintenance of the @Home Backbone Network
is expected to result in any interruption of the Service, AT&T shall so notify
@Home in writing at least 10 business days prior to commencing such routine
maintenance. AT&T shall schedule major maintenance of the @Home Backbone Network
at a time selected by AT&T to limit adverse user impacts.
10.4 Use of Subcontractors. AT&T may contract with qualified
contractors for the performance of any maintenance and repair services
contemplated by this Agreement, including unaffiliated contractors, but shall
remain responsible for the performance of such services in accordance with the
requirements of this Agreement.
10.5 Response to Interruptions. Subject to geographic
limitations, AT&T shall exercise commercially reasonable efforts to respond to
any Unscheduled Interruption (defined below) involving AT&T facilities
delivering the Service within four hours, measured in each case from the time
that AT&T receives notice of an interruption and ending at the time a qualified
AT&T technician arrives at the site of the reported problem.
10.6 Credit for Total Interruptions.
10.6.1 A Total Interruption is: (a) any situation in
which @Home suffers a total loss of connectivity in one or more Routes, lasting
two or more hours, which loss is not caused by @Home, and that does not occur
within or as a result of equipment connections that @Home provides. In the event
of a Total Interruption that is due to circumstances within AT&T's reasonable
control (fiber cuts shall not be deemed to be within AT&T's reasonable control),
@Home shall be entitled to an allowance in the form of a credit against amounts
otherwise payable by @Home under this Agreement, calculated as set out below. No
credit will be provided for any scheduled interruption. Any credit shall be
applied to the next monthly maintenance invoice issued to @Home.
10.6.2 @Home shall be credited for each two hour
period of a Total Interruption within AT&T's reasonable control in a specific
Route at a rate of $500 for each such period of a Total Interruption for each
Route where the Total Interruption occurs, the duration of such Interruption
being measured from (i) the time of notice to AT&T's network control center that
a Total Interruption has occurred to (ii) the time of restoration of the
Service.
10.6.3 If there shall occur, within any period of 12
consecutive months, more than four Total Interruptions caused by factors within
AT&T's reasonable control on the AT&T Network, AT&T will demonstrate to @Home
actions taken by AT&T to reduce such Interruptions. If there shall occur more
than two additional Total Interruptions due to factors within AT&T's reasonable
control within the subsequent three month period, @Home may at its option
terminate this Agreement upon written notice to AT&T, but only with respect to
the affected Route(s).
10.7 Interference. In any instance in which AT&T believes in
good faith that @Home's use of the @Home Backbone Network is interfering
unreasonably with the use of
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AT&T service by others or the operation of the AT&T Network, AT&T may
immediately restrict or suspend the Service Components, without liability on the
part of AT&T, and then notify @Home of the action that AT&T has taken and the
reason for such action. For purposes of the foregoing sentence, the normal usage
by @Home of all or any part of the Capacity shall be deemed to be reasonable. To
the extent doing so does not interfere with its ability to prevent such
interference, AT&T will attempt to limit any restriction or suspension under
this Section to the Service Components that are causing such interference.
10.8 Ongoing Service Quality Review. The Parties shall
establish an informal mechanism for maintaining communications channels between
their respective network staffs related to service quality on the Routes. In the
event that there arises a service quality issue that a party deems to be
significant and that is not resolved in a satisfactory manner through the
established mechanism, the dissatisfied party may escalate the matter to senior
management of the other party for resolution, at the level of an executive vice
president or higher.
11. Relocation. Unless the circumstances make such notice
impracticable, AT&T shall give @Home at least 90 days prior written notice of
any scheduled relocation of any portion of the @Home Backbone Network, and as
much advance notice as possible of any unscheduled relocation. AT&T shall have
the right to direct any relocation of any portion of the @Home Backbone Network,
including but not limited to the right to determine the extent and timing of,
and the methods to be used for, such relocation; provided, however, that unless
otherwise agreed, any such relocation: (i) shall be constructed and tested in
accordance with the Specifications, and (ii) shall not result in any
Interruption in excess of two hours or degradation of the Service Components. In
the event an AT&T POP or a Third-Party POP is relocated or replaced, by a new
site, AT&T shall relocate the applicable @Home Service Components (including any
facilities necessary to continue the AT&T and third-party interconnections in
place immediately prior to the relocation or replacement). Any such relocation
shall be undertaken at no cost to @Home, except in cases where relocation is
accompanied by additions or other work to benefit @Home and for which @Home
agrees in writing to pay.
12. Term of the Agreement. This Agreement is binding on the parties as
of the Effective Date and, subject to the termination provisions of this
Agreement, shall remain in effect for 20 years from the Acceptance Date of all
Routes listed on Exhibit D (the "Term") . This Agreement, including the Service
Components granted under this Agreement, may be renewed upon terms mutually
agreed upon by the parties in writing.
13. Use of the Services and Restriction on Resale. @Home may use the
Service Components for any lawful purpose and @Home represents and warrants that
its use of the Service Components and its offering of services using the @Home
Backbone Network will comply with all applicable government codes, ordinances,
laws, rules, regulations and/or restrictions. @Home may sell, trade, exchange or
otherwise make available to any person or entity any service so long as @Home's
routers and packet switches or packet based successor equipment are used.
14. Indemnification.
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14.1 @Home shall indemnify, defend, and hold harmless AT&T and
its directors, officers, employees, agents, subsidiaries, affiliates, successors
and assigns from any and all third party claims, damages and expenses whatsoever
(including reasonable attorneys' fees) arising on account of or in connection
with @Home's use of the Service Components provided under this Agreement,
including but not limited to: (a) claims arising from any failure, breakdown,
interruption or deterioration of service components provided by AT&T to @Home or
service provided by @Home to third parties; and (b) claims of patent
infringement arising from combining or using services or equipment furnished by
AT&T in connection with services or equipment furnished by others. @Home's
indemnification obligations do not apply to claims for damages to real or
tangible personal property or for bodily injury or death negligently caused by
AT&T.
14.2 AT&T shall indemnify, defend, and hold harmless @Home and
its directors, officers, employees, agents, subsidiaries, affiliates,
successors, and assigns from all claims of patent infringement arising solely
from the use of the Services.
14.3 The parties hereby expressly recognize and agree that
each party's said obligation to indemnify, defend, protect and save the other
harmless is not a material obligation to the continuing performance of the
parties' other obligations, if any, hereunder. In the event that a party shall
fail for any reason to so indemnify, defend, protect and save the other
harmless, the injured party hereby expressly recognizes that its sole remedy in
such event shall be the right to bring an arbitration proceeding pursuant to the
terms of this Agreement against the other party for its damages as a result of
the other party's said failure to indemnify, defend, protect and save harmless.
These obligations shall survive the expiration or termination of this Agreement.
14.4 Nothing contained herein shall operate as a limitation on
the right of either party hereto to bring an action for damages against any
third party, including indirect, special or consequential damages, based on any
acts or omissions of such third party as such acts or omissions may affect the
construction, operation or use of the AT&T Network or the @Home Backbone
Network, as the case may be; provided, however, that each party hereto shall
assign such rights of claims, execute such documents and do whatever else may be
reasonably necessary to enable the other party to pursue any such action against
such third party.
15. [Reserved]
16. Limitation of Liability.
16.1 EXCEPT AS SET FORTH IN THE SECTIONS ENTITLED DELIVERY AND
LIQUIDATED DAMAGES, AND CREDIT FOR TOTAL INTERRUPTIONS OR AS OTHERWISE SPECIFIED
HEREIN, THE LIABILITY OF AT&T ASSOCIATED WITH THE INSTALLATION, PROVISION, USE,
MAINTENANCE, REPAIR, TERMINATION OR RESTORATION OF SERVICE COMPONENTS PROVIDED
PURSUANT TO THIS AGREEMENT SHALL NOT EXCEED AN AMOUNT EQUAL TO THE PRORATED
PORTION OF CHARGES FOR THE AFFECTED SERVICE COMPONENTS FOR THE PERIOD DURING
WHICH THAT SERVICE COMPONENT WAS AFFECTED.
<PAGE> 16
Page 16
16.2 NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE
CONTRARY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE, RELIANCE OR CONSEQUENTIAL DAMAGES,
WHETHER FORESEEABLE OR NOT, ARISING OUT OF, OR IN CONNECTION WITH, TRANSMISSION
INTERRUPTIONS OR PROBLEMS, INCLUDING, BUT NOT LIMITED TO, DAMAGE OR LOSS OF
PROPERTY OR EQUIPMENT, LOSS OF PROFITS OR REVENUE, COST OF CAPITAL, COST OF
REPLACEMENT SERVICES, OR CLAIMS OF CUSTOMERS, WHETHER OCCASIONED BY ANY REPAIR
OR MAINTENANCE PERFORMED BY, OR FAILED TO BE PERFORMED BY, THE FIRST PARTY OR
ANY OTHER CAUSE WHATSOEVER, INCLUDING, WITHOUT LIMITATION, BREACH OF CONTRACT,
BREACH OF WARRANTY, NEGLIGENCE OR STRICT LIABILITY. THIS PARAGRAPH SHALL NOT BE
CONSTRUED TO LIMIT EITHER PARTY'S ABILITY TO RECOVER UNDER THE SECTION ENTITLED
INDEMNIFICATION WITH RESPECT TO CLAIMS OF THIRD PARTIES BROUGHT AGAINST SUCH
PARTY OR THE RIGHT TO RECOVER LIQUIDATED DAMAGES UNDER THE SECTIONS ENTITLED
DELIVERY AND LIQUIDATED DAMAGES AND OPERATION, MAINTENANCE AND REPAIR.
16.3 PURSUANT TO THIS SECTION, NO PARTY SHALL BE PREVENTED
FROM MAKING A CLAIM OR FILING SUIT AGAINST AN INDEPENDENT CONTRACTOR FOR
SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE, RELIANCE OR CONSEQUENTIAL DAMAGES
ARISING OUT OF SUCH INDEPENDENT CONTRACTOR'S PERFORMANCE OF MAINTENANCE OR
REPAIR SERVICES FOR THE SYSTEM OWNER, BUT THE PARTY MAKING THE CLAIM OR FILING
SUIT AGREES THAT IT WILL NOT SEEK RECOVERY OF SUCH DAMAGES TO THE EXTENT SUCH
INDEPENDENT CONTRACTOR HAS A CONTRACTUAL OR COMMON LAW RIGHT OF RECOVERY AGAINST
OR AN INDEMNITY FROM THE OTHER PARTY.
17. Notice.
17.1 Unless otherwise provided herein, all notices and
communications concerning this Agreement shall be in writing and addressed to
the other party as follows:
If to @Home: At Home Corporation
425 Broadway Street
Redwood City, California 94063
Attention: General Counsel
Telephone: (650) 569-5000
Facsimile No: (650) 482-4606
with a copy to: Michael P. Whalen, Esq.
Riordan & McKinzie
695 Town Center Drive, Suite 1500
Costa Mesa, CA 92626
Facsimile No: (714) 549-3244
<PAGE> 17
Page 17
If to AT&T: AT&T Corp.
4450 Rosewood Drive Room 5155
Pleasanton, California, 94588
Attn: Douglas Markling
General Manager - @Home
Facsimile No: (925) 224-6556
with a copy to: AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey, 07920
Attn: David J. Ritchie
General Attorney - Wholesale Markets
Facsimile No: (908) 953-8360
or at such other address as may be designated in writing to the other party.
17.2 Unless otherwise provided herein, notices shall be sent
by registered or certified U.S. Mail, postage prepaid, or by commercial
overnight delivery service, or by facsimile, and shall be deemed served or
delivered to the addressee or its office on the date of receipt acknowledgment
or, if postal claim notices are given, on the date of its return marked
"unclaimed," provided, however, that upon receipt of a returned notice marked
"unclaimed," the sending party shall make reasonable effort to contact and
notify the other party by telephone.
18. Confidentiality. The parties hereto agree that this Agreement and
the terms hereof are "Confidential Information" as defined in the Nondisclosure
Agreement dated as of September 8, 1998 between the parties. Notwithstanding the
terms of that agreement however, either party may disclose the contents of, or
information concerning, this Agreement to the extent required by law after using
reasonable efforts to consult with the other party regarding such disclosure
and, as applicable, using reasonable efforts to obtain confidential treatment
from the applicable regulatory agency regarding the pricing terms hereof.
18A Use of Marks Nothing in this Agreement creates in a party any
rights in the other party's trade names, trademarks, service marks or any other
intellectual property. Except as may be otherwise agreed between the parties in
writing:
18A.1 Either party may use the other party's trade names,
trademarks, or service marks only to the extent such use is not prohibited by
this Agreement and is otherwise permitted by law (including but not limited to
the Lanham Act).
18A.2 In no event shall either party use or display, in
advertising or otherwise, any of the other party's logos, trade dress, trade
devices or other indicia of origin, or any confusingly similar logos, trade
dress, trade devices or indicia of origin.
18A.3 Neither party shall conduct business under the other
party's corporate or trade name, trademark, service mark, logo, trade dress,
trade device, indicia of origin or other symbol that serves to identify and
distinguish the other party from its competitors, or under any
<PAGE> 18
Page 18
confusingly similar corporate or trade name, trademark, service mark, logo,
trade dress, trade device, indicia of origin or other symbol.
18A.4 Neither party (the "First Party") shall indicate or
imply to any third party that the First Party is affiliated with the other
party, that the First Party is authorized by the other party to sell or provide
service to them, that the First Party is providing (or will provide) service to
such party jointly or in collaboration or partnership with the other party, or
as the agent of the other party, or that service provided by the First Party or
another carrier is provided by the other party.
18A.5 Except to the limited extent (if any) as may be required
under law, neither party shall indicate or imply to any existing or potential
end user that any portion of the service provided to the end user by a party is
provided by the other party or is carried over the other party's network or
facilities.
19. Default.
19.1 A party may deliver to the other party a written "Notice
of Default" for: (i) failing to make any payment owed hereunder, when no bona
fide dispute exists (a "Monetary Default"); or (ii) the breaching by either
party or its agents, assigns or affiliates of any Material Provision; or (iii)
the filing or initiating of proceedings by or against a party seeking
liquidation, reorganization or other such relief under any federal or state
bankruptcy or insolvency law (a "Bankruptcy Proceeding"). Such Notice of Default
must prominently contain the following sentences in capital letters: "THIS IS A
FORMAL NOTICE OF A BREACH OF CONTRACT. FAILURE TO CURE SUCH BREACH WILL HAVE
SIGNIFICANT LEGAL CONSEQUENCES."
19.2 A party that has received a Notice of Default arising out
of a Monetary Default shall have 30 days to cure. If @Home fails to cure a
Monetary Default within the cure period, AT&T shall have the right to either (a)
suspend its performance obligations under this Agreement, (b) seek an award for
the past due balance, including interest and reasonable attorneys' fees, and/or
(c) require @Home to post a reasonable deposit or other adequate assurance of
payment as a condition of continuing performance by AT&T. Notwithstanding the
foregoing, AT&T may not disconnect service or revoke the IRU with respect to any
Route except for non-payment of the IRU Fee with respect to any Route.
19.3 A party that has received a Notice of Default arising out
of an alleged breach of a Material Provision shall have 30 days to cure the
alleged breach. If the defaulting party shall have commenced actions in good
faith to cure such defaults which are not susceptible of being cured during such
30-day period, such period shall be extended (but not in excess of 90 additional
days) while such party continues such actions to cure. If such party fails to
cure the breach within the applicable cure period, as long as such default shall
be continuing, the non-defaulting party shall have the right to either (a)
suspend its performance or payment obligations under this Agreement, (b) seek an
order of specific performance, and/or (c) seek the award of compensatory
damages. Any event of default by either party may be waived under the terms of
this Agreement at the other party's option.
<PAGE> 19
Page 19
20. Termination.
20.1 Upon the expiration of the Term of this Agreement, the
Services Components shall terminate and @Home shall owe AT&T no additional
consideration.
20.2 Notwithstanding the foregoing, no termination of this
Agreement shall affect the rights or obligations of any party hereto with
respect to any payment hereunder for services rendered prior to the date of
termination or pursuant to the Sections entitled Indemnification, or Arbitration
herein.
21. Force Majeure. If, by reason of any Force Majeure Event (as
hereinafter defined), a party shall be unable to carry out any of its
obligations (other than the payment of monetary amounts due) under this
Agreement and that party gives the other party prompt written notice thereof,
then, except as otherwise set forth herein, any such obligations shall be
suspended to the extent made necessary by reason of such Force Majeure Event
during its continuance, provided that such party attempts to eliminate insofar
as is reasonably possible the effect of such force majeure with all reasonable
dispatch. The term "Force Majeure Event" shall mean: (i) an act of God, (ii)
fire, (iii) flood, (iv) explosion (v) material shortage or unavailability not
resulting from the responsible Party's failure to timely place orders or take
other necessary actions therefor, (vi) war, civil disorder, earthquake or labor
strikes or (vii) national emergency. The party claiming relief under this
Section shall promptly notify the other in writing of the existence of the
event(s) (i) through (vii) relied on, the expected duration of the Force Majeure
Event, and the cessation or termination of said event.
22. Arbitration
22.1 An "Arbitrable Dispute" is any dispute or disagreement
arising between @Home and AT&T in connection with this Agreement in which the
dollar amount in dispute is less than one million dollars ($1,000,000) or which
involves quality issues not settled by the parties pursuant to the section
entitled ongoing Service Quality Review. Any Arbitrable Dispute which is not
settled to the mutual satisfaction of @Home and AT&T within thirty (30) days
from the date that either party informs the other in writing that such dispute
or disagreement exists, shall be settled by arbitration in San Francisco,
California in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in effect on the date that such notice is given. If the
parties are unable to agree on a single arbitrator within 15 days from the date
of receipt of the notice notifying a party of a dispute or disagreement, each
party shall select an arbitrator within 15 days and the two arbitrators shall
select a third arbitrator within 10 days. The decision of the arbitrator(s)
shall be final and binding upon the parties and shall include written findings
of law and fact, and judgment may be obtained thereon by either party in a court
of competent jurisdiction. Each party shall bear the cost of preparing and
presenting its own case. The cost of the arbitration, including the fees and
expenses of the arbitrator(s), shall be shared equally by the parties hereto
unless the award otherwise provides. The arbitrator(s) shall be instructed by
the parties to establish procedures such that a decision can be rendered by the
arbitrator(s) within 60 days of their appointment.
22.2 The obligation herein to arbitrate shall not be binding
upon any party with respect to requests for preliminary injunctions, temporary
restraining orders, specific performance or other procedures in a court of
competent jurisdiction to obtain interim relief
<PAGE> 20
Page 20
when deemed necessary by such court to preserve the status quo or prevent
irreparable injury pending resolution by arbitration of the actual dispute.
23. Waiver. The failure of either party hereto to enforce any of the
provisions of this Agreement, or the waiver thereof in any instance, shall not
be construed as a general waiver or relinquishment on its part of any such
provision, but the same shall nevertheless be and remain in full force and
effect.
24. Taxes.
24.1 @Home shall pay any applicable local, state and federal
taxes, levied upon the sale, installation, use or provision of the Services
Components, the IRU, or any equipment provided under this Agreement, except to
the extent @Home provides a valid tax exemption certificate to AT&T prior to the
delivery thereof.
24.2 AT&T shall be responsible for and shall timely pay any
and all (i) taxes and franchise, license and permit fees based on the physical
location of the AT&T Network and the @Home Backbone Network; and (ii)
right-of-way payments on the AT&T Network and the @Home Backbone Network. Each
of AT&T and @Home shall be responsible for any and all sales, use, income, gross
receipts or other taxes assessed on the basis of revenues received by such party
due to its use of the AT&T Network and the @Home Backbone Network, respectively.
24A Equipment. AT&T shall retain title to all of its equipment and
facilities used to meet its performance obligations this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York without reference to
its choice of law principles.
26. Rules of Construction.
26.1 The captions or headings in this Agreement are strictly
for convenience and shall not be considered in interpreting this Agreement or as
amplifying or limiting any of its content. Words in this Agreement which import
the singular connotation shall be interpreted as plural, and words which import
the plural connotation shall be interpreted as singular, as the identity of the
parties or objects referred to may require.
26.2 Unless expressly defined herein, words having well-known
technical or trade meanings shall be so construed. All listing of items shall
not be taken to be exclusive, but shall include other items, whether similar or
dissimilar to those listed, as the context reasonably requires.
26.3 Except as set forth to the contrary herein, any right or
remedy of AT&T or @Home shall be cumulative and without prejudice to any other
right or remedy, whether contained herein or not.
<PAGE> 21
Page 21
26.4 Nothing in this Agreement is intended to provide any
legal rights to anyone not an executing party of this Agreement.
26.5 This Agreement has been fully negotiated between and
jointly drafted by the parties.
26.6 In the event of a conflict between the provisions of this
Agreement and those of any Exhibit, the provisions of this Agreement shall
prevail and such Exhibits shall be corrected accordingly.
26.7 All actions, activities, consents, approvals and other
undertakings of the parties in this Agreement shall be performed in a reasonable
and timely manner. Except as specifically set forth herein, for the purpose of
this Section the normal standards of performance within the telecommunications
industry in the relevant market shall be the measure of whether a party's
performance is reasonable and timely.
27. Assignment. Neither Party shall assign or otherwise transfer this
Agreement or its rights or obligations hereunder to any person or entity without
the prior written consent of the other party, which shall not be unreasonably
withheld or delayed; provided, however, that either party shall have the right,
without the consent of the other, to grant a security interest in this Agreement
or the rights hereunder as collateral to any lender, or to assign or otherwise
transfer the Agreement to any person or entity that controls, is under the
control of, or is under common control with the assigning party, or any
corporation into which such party may be merged or consolidated or that
purchases all or substantially all of the assets of such party used by such
party in connection with the Capacity Service; provided, further, that any such
assignment or transfer shall be subject to the other party's rights under this
Agreement and any assignee or transferee (other than a lender, in the case of a
security interest) shall continue to perform the assigning or transferring
party's obligations under this Agreement. This Agreement is intended to pass by
operation of law to any party to whom AT&T may assign all or substantially all
of the AT&T Network, but only to the extent that it is in fact assigned.
28. Representations and Warranties. Each party represents and warrants
that:
28.1 It has the full right and authority to enter into,
execute, deliver and perform its obligations under this Agreement;
28.2 It has taken all requisite corporate action to approve
the execution, delivery and performance of this Agreement;
28.3 This Agreement constitutes a legal, valid and binding
obligation enforceable against such party in accordance with its terms; and
28.4 EXCEPT AS PROVIDED IN THIS SECTION, AT&T MAKES NO
WARRANTIES, EXPRESS OR IMPLIED, UNDER THIS AGREEMENT AND SPECIFICALLY DISCLAIMS
ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. AT&T DOES
NOT WARRANT THAT THE SERVICES WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT THE
SERVICES WILL MEET CUSTOMER'S REQUIREMENTS OR THAT THE SERVICES WILL PREVENT
UNAUTHORIZED ACCESS BY THIRD PARTIES.
<PAGE> 22
Page 22
28.5 Its execution of and performance under this Agreement
shall not violate any applicable existing regulations, rules, statutes, or court
orders of any local, state or federal governmental agency, court or body.
29. Entire Agreement; Amendment. This Agreement constitutes the entire
and final agreement and understanding between the parties with respect to the
subject matter hereof and supersedes all prior agreements relating to the
subject matter hereof, which are of no further force or effect. The Exhibits
referred to herein are integral parts hereof and are hereby made a part of this
Agreement. This Agreement may only be modified or supplemented by an instrument
in writing executed by a duly authorized representative of each party.
30. No Personal Liability. Each action or claim against any party
arising under or relating to this Agreement shall be made only against such
party as a corporation, and any liability relating thereto shall be enforceable
only against the corporate assets of such party. No party shall seek to pierce
the corporate veil or otherwise seek to impose any liability relating to, or
arising from, this Agreement against any shareholder, employee, officer or
director of the other party. Each of such persons is an intended beneficiary of
the mutual promises set forth in this Section and shall be entitled to enforce
the obligations of this Section.
31. Relationship of the Parties. The relationship between AT&T and
@Home shall be that of independent contractors and not of principal and agent,
franchiser and franchisee, dealer and distributor, partners or joint venturers
for one another, and nothing contained in this Agreement shall be deemed to
constitute a partnership or agency agreement between them for any purposes,
including, but not limited to federal income tax purposes. AT&T and @Home, in
performing any of their obligations hereunder, shall be independent contractors
or independent parties and shall discharge their contractual obligations at
their own risk. Each party acknowledges that nothing in this Agreement
diminishes or restricts in any way the rights of the parties to engage in
competition with each other. Each party acknowledges that it remains at all
times solely responsible for the success and profits of its own business.
32. Export Regulations. The parties acknowledge that any products,
software, and technical information (including, but not limited to, services and
training) provided under this Agreement are subject to U.S. export laws and
regulations and any use of or transfer of such products, software and technical
information must be authorized under those regulations. @Home agrees that it
will not use distribute, transfer or transmit the products, software or
technical information (even if incorporated into other products) except in
compliance with U.S. export regulations. If requested by AT&T, @Home also agrees
to sign written assurances and other export-related documents as may be required
for AT&T to comply with U.S. export regulations.
33. Severability. If any term, covenant or condition herein shall, to
any extent, be invalid or unenforceable in any respect under the laws governing
this Agreement, the remainder of this Agreement shall not be affected thereby,
and each term, covenant or condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
<PAGE> 23
Page 23
34. Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, in confirmation of their consent to the terms and
conditions contained in this Agreement and intending to be legally bound
thereby, the parties have executed this IRU Capacity Agreement on the dates
shown below but effective for all purposes as of the Effective Date.
AT&T CORP. AT HOME CORPORATION
By: /s/ MIKE ARMSTRONG By: /s/ THOMAS A. JERMALUK
------------------------------- ---------------------------------
Title: Title:
---------------------------- ------------------------------
Date: Dec. 19, 1998 Date: Dec. 19, 1998
----------------------------- -------------------------------
<PAGE> 24
Page 24
EXHIBITS
Exhibit A [Reserved]
Exhibit B Technical Specifications
Exhibit C Phase Two Capacity
Exhibit D Phase Three Capacity
Exhibit E AT&T POPs
Exhibit F Collocation Agreement
Exhibit G Third Party POPs
Exhibit H [Reserved]
Exhibit I Payment Terms
<PAGE> 25
EXHIBIT B PAGE 1
AT&T/@Home Proprietary
Subject to non-disclosure obligations
TECHNICAL SPECIFICATIONS
The technical specifications for the Capacity are as set forth in the following
AT&T Technical References, as revised from time to time, and such other
Technical References (or successor documents that state generally applicable
service specifications for applicable levels of service) that apply with respect
to the Capacity furnished to @Home under this Agreement:
- AT&T Technical Reference 54018 (OC-3)
- AT&T Technical Reference 54077 (OC-12)
- AT&T Technical Reference 54078 (OC-48)
Notwithstanding specifications set forth in such Technical References (or
successor documents):
(a) the average quarterly OC-48 circuit availability during
each day will be equal to or greater than 99.8%; and
(b) the OC-48 error performance rate shall not exceed 30
errored seconds (ES) per day and 4 severely errored seconds (SES)
per day.
<PAGE> 26
EXHIBIT C PAGE 1
PHASE TWO CAPACITY
@Home will be provided total bandwidth of 622 Mbps (either provisioned by
4 OC-3's or an OC-12) between each of these city pairs by 3/31/1999:
<TABLE>
<CAPTION>
CITY A CITY Z CLLI CODE A CLLI CODE Z MILES
<S> <C> <C> <C> <C>
San Diego, CA San Jose, CA SNDGCA02 SNJSCA02 454
Camden, NJ New York City, NY CMDNNJCE NYCMNYBW 156
San Francisco, CA Seattle, WA SNFCCA21 STTLWA06 731
San Francisco, CA San Jose, CA SNFCCA21 SNJSCA02 45
Mishawaka, IN Toledo, OH MSHWINQ0010 TOLDOH21 339
San Jose, CA Salt Lake City, UT SNJSCA02 SLKCUTMA 731
Lamesa, TX San Diego, CA LAMSTXR0010 SNDGCA02 1,059
Dallas, TX Lamesa, TX DLLSTXTL LAMSTXR0010 438
Birmingham, AL New Orleans, LA BRHMALMT NWORLAMA 408
Greenville, SC Norfolk, VA GNVLSCTL NRFLVABS 422
Norfolk, VA Washington DC NRFLVABS WASHDCSWW20 174
Cleveland, OH Camden, NJ CLEVOH02S10 CMDNNJCE 417
Hartford, CT New Haven, CT HRFRCT03 NWHNCT02 333
Buffalo, NY Hartford, CT BFLONYFR HRFRCT03 463
Atlanta, GA Miami, FL ATLNGATL MIAMFLAC 666
Miami, FL New Orleans, LA MIAMFLAC NWORLAMA 884
Longmont, CO Omaha, NE LNMTCO01 OMAHNENW 546
Amarillo, TX Lamesa, TX AMRLTXDR LAMSTXR0010 220
Anaheim, CA Los Angeles, CA ANHMCA01 LSANCA03 43
Camden, NJ Newark, NJ CMDNNJCE NWRKNJ02 146
Newark, NJ New York City, NY NWRKNJ02 NYCMNYBW 9
San Francisco, CA San Jose, CA SNFCCA21 SNJSCA02 45
Detroit, MI Toledo, OH DTRTMIBA TOLDOH21 70
San Jose, CA Salt Lake City, UT SNJSCA02 SLKCUTMA 731
Los Angeles, CA Santa Barbara, CA LSANCA03 SNBBCA01 88
San Diego, CA Phoenix, AZ SNDGCA02 PHNXAZMA 418
Lamesa, TX Phoenix, AZ LAMSTXR0010 PHNXAZMA 641
Fort Worth, TX Lamesa, TX FTWOTXED LAMSTXR0010 406
Indianapolis, IN Louisville, KY IPLSINAT LSVLKYCS 110
Cleveland, OH Indianapolis, IN CLEVOH02S10 IPLSINAT 389
Birmingham, AL New Orleans, LA BRHMALMT NWORLAMA 408
Greenville, SC Norfolk, VA GNVLSCTL NRFLVABS 422
Norfolk, VA Washington DC NRFLVABS WASHDCSWW20 174
Baltimore, MD Camden, NJ BLTMMDCHT10 CMDNNJCE 124
Cleveland, OH Pittsburgh, PA CLEVOH02S10 PITBPADGW10 155
Camden, NJ Philadelphia, PA CMDNNJCE PHLAPASL 3
New Haven, CT Providence, RI NWHNCT02 PRVDRIGR 99
Cambridge, MA Providence, RI CMBRMA01 PRVDRIGR 131
Cambridge, MA Hartford, CT CMBRMA01 HRFRCT03 103
Buffalo, NY Hartford, CT BFLONYFR HRFRCT03 463
Atlanta, GA Orlando, FL ATLNGATL ORLDFLMA 439
Miami, FL Orlando, FL MIAMFLAC ORLDFLMA 228
Miami, FL Sarasota, FL MIAMFLAC SRSTFLMA 182
New Orleans, LA Sarasota, FL NWORLAMA SRSTFLMA 702
Longmont, CO Omaha, NE LNMTCO01 OMAHNENW 546
</TABLE>
<PAGE> 27
EXHIBIT C PAGE 2
<TABLE>
<S> <C> <C> <C> <C>
Amarillo, TX Lamesa, TX AMRLTXDR LAMSTXR0010 220
</TABLE>
<PAGE> 28
EXHIBIT C PAGE 3
@Home will be provided an OC-48 between each of these city pairs by 3/31/1999:
<TABLE>
<CAPTION>
CITY A CITY Z CLLI CODE A CLLI CODE Z MILES
<S> <C> <C> <C> <C>
Longmont, CO Seattle, WA LNMTCO01 STTLWA06 1,201
Longmont, CO Salt Lake City, UT LNMTCO01 SLKCUTMA 446
Amarillo, TX Longmont, CO AMRLTXDR LNMTCO01 558
Amarillo, TX Tulsa, OK AMRLTXDR TULSOKTB 342
Dallas, TX Tulsa, OK DLLSTXTL TULSOKTB 248
Omaha, NE Tulsa, OK OMAHNENW TULSOKTB 406
Chicago, IL Omaha, NE CHCGILCLW60 OMAHNENW 433
Birmingham, AL Cleveland, OH BRHMALMT CLEVOH02S10 841
Chicago, IL Cleveland, OH CHCGILCLW60 CLEVOH02S10 669
Dallas, TX New Orleans, LA DLLSTXTL NWORLAMA 556
Atlanta, GA Birmingham, AL ATLNGATL BRHMALMT 141
Atlanta, GA Greenville, SC ATLNGATL GNVLSCTL 400
Camden, NJ Washington DC CMDNNJCE WASHDCSWW20 162
Buffalo, NY Cleveland, OH BFLONYFR CLEVOH02S10 173
New Haven, CT New York City, NY NWHNCT02 NYCMNYBW 86
Spokane, WA Seattle, WA SPKNWA01 STTLWA06 313
Billings, MT Spokane, WA BLNGMTMA SPKNWA01 460
Billings, MT Longmont, CO BLNGMTMA LNMTCO01 429
San Francisco, CA Portland, OR SNFCCA21 PTLDOR62 572
Portland, OR Seattle, WA PTLDOR62 STTLWA06 159
Longmont, CO Salt Lake City, UT LNMTCO01 SLKCUTMA 446
Santa Barbara, CA San Jose, CA SNBBCA01 SNJSCA02 243
Anaheim, CA San Diego, CA ANHMCA01 SNDGCA02 80
Dallas, TX Fort Worth, TX DLLSTXTL FTWOTXED 32
Amarillo, TX Denver, CO AMRLTXDR DNVRCOMA 522
Denver, CO Longmont, CO DNVRCOMA LNMTCO01 36
Amarillo, TX Oklahoma City, OK AMRLTXDR OKCYOKCE 245
Oklahoma City, OK Tulsa, OK OKCYOKCE TULSOKTB 97
Dallas, TX Tulsa, OK DLLSTXTL TULSOKTB 248
Kansas City, MO Tulsa, OK KSCYMO09 TULSOKTB 227
Kansas City, MO Omaha, NE KSCYMO09 OMAHNENW 180
Chicago, IL Des Moines, IA CHCGILCLW60 DESMIADT 312
Des Moines, IA Omaha, NE DESMIADT OMAHNENW 121
Birmingham, AL Nashville, TN BRHMALMT NSVLTNMT 183
Louisville, KY Nashville, TN LSVLKYCS NSVLTNMT 158
Chicago, IL Cleveland, OH CHCGILCLW60 CLEVOH02S10 669
Detroit, MI Mishawaka, IN DTRTMIBA MSHWINQ0010 269
Dallas, TX Houston, TX DLLSTXTL HSTNTX01 225
Baton Rouge, LA Houston, TX BTRGLAMA HSTNTX01 256
Baton Rouge, LA New Orleans, LA BTRGLAMA NWORLAMA 75
Atlanta, GA Birmingham, AL ATLNGATL BRHMALMT 141
Atlanta, GA Greenville, SC ATLNGATL GNVLSCTL 400
Baltimore, MD Washington DC BLTMMDCHT10 WASHDCSWW20 38
Buffalo, NY Cleveland, OH BFLONYFR CLEVOH02S10 173
Philadelphia, PA Pittsburgh, PA PHLAPASL PITBPADGW10 259
New Haven, CT New York City, NY NWHNCT02 NYCMNYBW 86
</TABLE>
<PAGE> 29
EXHIBIT C PAGE 4
Significant Routes:
<TABLE>
<CAPTION>
CITY A CITY Z
<S> <C>
San Diego, CA San Jose, CA
Camden, NJ New York City, NY
San Francisco, CA Seattle, WA
San Francisco, CA San Jose, CA
Mishawaka, IN Toledo, OH
San Jose, CA Salt Lake City, UT
Lamesa, TX San Diego, CA
Dallas, TX Lamesa, TX
Birmingham, AL New Orleans, LA
Greenville, SC Norfolk, VA
Norfolk, VA Washington DC
Cleveland, OH Camden, NJ
Hartford, CT New Haven, CT
Buffalo, NY Hartford, CT
Atlanta, GA Miami, FL
Miami, FL New Orleans, LA
Longmont, CO Omaha, NE
Amarillo, TX Lamesa, TX
CITY A CITY Z
Longmont, CO Seattle, WA
Longmont, CO Salt Lake City, UT
Amarillo, TX Longmont, CO
Amarillo, TX Tulsa, OK
Dallas, TX Tulsa, OK
Omaha, NE Tulsa, OK
Chicago, IL Omaha, NE
Birmingham, AL Cleveland, OH
Chicago, IL Cleveland, OH
Dallas, TX New Orleans, LA
Atlanta, GA Birmingham, AL
Atlanta, GA Greenville, SC
Camden, NJ Washington DC
Buffalo, NY Cleveland, OH
New Haven, CT New York City, NY
</TABLE>
<PAGE> 30
Page 1
EXHIBIT D
@Home will be provided an OC-48c between each of these city pairs by 8/31/1999:
Significant Routes are listed in Exhibit C.
<TABLE>
<CAPTION>
CITY A CITY Z CLLI CODE A CLLI CODE Z MILES
<S> <C> <C> <C> <C>
Longmont, CO Seattle, WA LNMTCO01 STTLWA06 1,201
San Francisco, CA Seattle, WA SNFCCA21 STTLWA06 731
San Francisco, CA San Jose, CA SNFCCA21 SNJSCA02 45
Longmont, CO Salt Lake City, UT LNMTCO01 SLKCUTMA 446
San Jose, CA Salt Lake City, UT SNJSCA02 SLKCUTMA 731
San Diego, CA San Jose, CA SNDGCA02 SNJSCA02 454
Lamesa, TX San Diego, CA LAMSTXR0010 SNDGCA02 1,059
Dallas, TX Lamesa, TX DLLSTXTL LAMSTXR0010 438
Amarillo, TX Longmont, CO AMRLTXDR LNMTCO01 558
Amarillo, TX Tulsa, OK AMRLTXDR TULSOKTB 342
Dallas, TX Tulsa, OK DLLSTXTL TULSOKTB 248
Omaha, NE Tulsa, OK OMAHNENW TULSOKTB 406
Chicago, IL Omaha, NE CHCGILCLW60 OMAHNENW 433
Birmingham, AL Cleveland, OH BRHMALMT CLEVOH02S10 841
Chicago, IL Cleveland, OH CHCGILCLW60 CLEVOH02S10 669
Mishawaka, IN Toledo, OH MSHWINQ0010 TOLDOH21 339
Dallas, TX New Orleans, LA DLLSTXTL NWORLAMA 556
Birmingham, AL New Orleans, LA BRHMALMT NWORLAMA 408
Atlanta, GA Birmingham, AL ATLNGATL BRHMALMT 141
Atlanta, GA Greenville, SC ATLNGATL GNVLSCTL 400
Greenville, SC Norfolk, VA GNVLSCTL NRFLVABS 422
Norfolk, VA Washington, DC NRFLVABS WASHDCSWW20 174
Camden, NJ Washington DC CMDNNJCE WASHDCSWW20 162
Buffalo, NY Cleveland, OH BFLONYFR CLEVOH02S10 173
Cleveland, OH Camden, NJ CLEVOHO2S10 CAMDNNJCE 417
Camden, NJ New York City, NY CMDNNJCE NYCMNYBW 156
New Haven, CT New York City, NY NWHNCT02 NYCMNYBW 86
Hartford, CT New Haven, CT HRFRCT03 NWHNCT02 333
Buffalo, NY Hartford, CT BFLONYFR HRFCT03 463
Atlanta, GA Miami, FL ATLAGATL MIAMFLAC 666
Miami, FL New Orleans, LA MIAMFLAC NWORLAMA 884
Longmont, CO Omaha, NE LNMTCO01 OMAHNENW 548
Amarillo, TX Lamesa, TX AMRLTXDR LAMSTXR0010 220
Spokane, WA Seattle, WA SPKNWA01 STTLWA06 313
Billings, MT Spokane, WA BLNGMTMA SPKNWA01 460
Billings, MT Longmont, CO BLNGMTMA LNMTCO01 429
San Francisco, CA Portland, OR SNFCCA21 PTLDOR62 572
Portland, OR Seattle, WA PTLDOR62 STTLWA06 159
San Francisco, CA San Jose, CA SNFCCA21 SNJSCA02 45
Longmont, CO Salt Lake City, UT LNMTCO01 SLKCUTMA 446
San Jose, CA Salt Lake City, UT SNJSCA02 SLKCUTMA 731
Santa Barbara, CA San Jose, CA SNBBCA01 SNJSCA02 243
</TABLE>
<PAGE> 31
PAGE 2
Exhibit D
<TABLE>
<CAPTION>
CITY A CITY 2 CLLI CODE A CLLI CODE Z MILES
<S> <C> <C> <C> <C>
Los Angeles, CA Santa Barbara, CA LSANCA03 SNBBCA01 88
Anaheim, CA Los Angeles, CA ANHMCA01 LSANCA03 43
Anaheim, CA San Diego, CA ANHMCA01 SNDGCA02 80
San Diego, CA Phoenix, AZ SNDGCA02 PHNXAZMA 418
Lamesa, TX Phoenix, AZ LAMSTXR0010 PHNXAZMA 641
Dallas, TX Fort Worth, TX DLLSTXTL FTWOTXED 32
Fort Worth, TX Lamesa, TX FTWOTXED LAMSTXR0010 406
Amarillo, TX Denver, CO AMRLTXDR DNVRCOMA 522
Denver, CO Longmont, CO DNVRCOMA LNMTCO01 36
Amarillo, TX Oklahoma City, OK AMRLTXDR OKCYOKCE 245
Oklahoma City, OK Tulsa, OK OKCYOKCE TULSOKTB 97
Dallas, TX Tulsa, OK DLLSTXTL TULSOKTB 248
Kansas City, MO Tulsa, OK KSCYMOO9 TULSOKTB 227
Kansas City, MO Omaha, NE KBCYMOO9 OMAHNENW 180
Chicago, IL Des Moines, IA CHCGILCLW60 DESMIADT 312
Des Moines, IA Omaha, NE DESMIADT OMAHNENW 121
Birmingham, AL Nashville, TN BRHMALMT NSVLTNMT 183
Louisville, KY Nashville, TN LSVLKYCS NSVLTNMT 158
Indianapolis, IN Louisville, KY IPLSINAT LSVLKYCS 110
Cleveland, OH Indianapolis, IN CLEVOH02S10 IPLSINAT 389
Chicago, IL Cleveland, OH CHCGILCLW00 CLEVOH02S10 669
Detroit, MI Mishawaka, IN DTRTMIBA MSHWINQ0010 269
Detroit, MI Toledo, OH DTRTMIBA TOLDOH21 70
Dallas, TX Houston, TX DLLSTXTL HSTNTX01 225
Baton Rouge, LA Houston, TX BTRGLAMA HSTNTX01 256
Baton Rouge, LA New Orleans, LA BTRGLAMA NWORLAMA 75
Birmingham, AL New Orleans, LA BRHMALMT NWORLAMA 406
Atlanta, GA Birmingham, AL ATLNGATL BRHMALMT 141
Atlanta, GA Greenville, SC ATLNGATL GNVLSCTL 400
Greenville, SC Norfolk, VA GNVLSCTL NRFLVABS 422
Norfolk, VA Washington, DC NRFLVABS WASHDCSWW20 174
Baltimore, MD Camden, NJ BLTMMDCHT10 CMDNNJCE 124
Baltimore, MD Washington, DC BLTMMDCHT10 WASHDCSWW20 38
Buffalo, NY Cleveland, OH BFLONYFR CLEVOH02S10 173
Cleveland, OH Pittsburgh, PA CLEVOH02S10 PITBPADGW10 155
Philadelphia, PA Pittsburgh, PA PHLAPASL PITBPADGW10 259
Camden, NJ Philadelphia, PA CMDNNJCE PHLAPASL 3
Camden, NJ Newark, NJ CMDNNJCE NWRKNJ02 146
Newark, NJ New York City, NY NWRKNJ02 NYCMNYBW 9
New Haven, CT New York City, NY NWHNCT02 NYCMNYBW 86
New Haven, CT Providence, RI NWHNCT02 PRVDRIGR 99
Cambridge, MA Providence, RI CMBRMA01 PRVDRIGR 131
Cambridge, MA Hartford, CT CMBRMA01 HRFRCT03 103
Buffalo, NY Hartford, CT BFLONYFR HRFRCT03 463
Atlanta, GA Orlando, FL ATLNGATL ORLDFLMA 439
Miami, FL Orlando, FL MIAMFLAC ORLDFLMA 228
Miami, FL Sarasota, FL MIAMFLAC SRSTFLMA 182
New Orleans, LA Sarasota, FL NWORLAMA SRSTFLMA 702
Longmont, CO Omaha, NE LNMTCO01 OMAHNENW 546
Amarillo, TX Lamesa, TX AMRLTXDR LAMSTXR0010 220
</TABLE>
<PAGE> 32
EXHIBIT I PAGE 1
PAYMENT TERMS
IRU Fee. @Home shall pay proportionate amounts (the "Route Payments") of the IRU
Fee Payment as listed below.
<TABLE>
<CAPTION>
IRU Fee Payments Due Date Amount
- ---------------- -------- ------
<S> <C> <C>
Initial Payment January 15, 1999 10%
Payment #2 March 31, 1999 20%
Payment #3 August 30, 1999 20%
Payment #4 January 15, 1999 6.7%
Payment #5 March 31, 2000 6.7%
Payment #6 June 1, 2000 6.6%
Payment #7 September 1, 2000 30%
Total 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-31115, 333-38833 and 333-60037) pertaining to the 1996
Incentive Stock Option Plan, 1996 Incentive Stock Option Plan No. 2, 1997
Employee Stock Purchase Plan and 1997 Equity Incentive Plan of At Home
Corporation of our report dated January 19, 1999, with respect to the
consolidated financial statements of At Home Corporation included in this Annual
Report (Form 10-K/A) for the year ended December 31, 1998.
/s/ Ernst & Young
San Jose, California
April 26, 1999
