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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 000-22697
AT HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0408542
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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)
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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 Registrants 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 MARCH 15, 1998
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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: $797,884,290
Number of shares of Series A Common Stock outstanding: 88,430,167
Number of shares of Series B Common Stock outstanding: 15,400,000
Number of shares of Series K Common Stock outstanding: 14,877,660
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On January 11, 1999, the Company announced that it would restate its
financial statements for the year ended December 31, 1997 and the quarters
ended December 31, 1997, and March 31, June 30 and September 30, 1998 to
reflect a change in accounting relating to a distribution agreement with
Cablevision Systems Corporation entered into in October 1997. This amended
filing contains restated financial information and related disclosures for the
year ended December 31, 1997. (See Note 1 to Condensed Consolidated Financial
Statements.)
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.
Financial statement information and related disclosures included in this
amended filing reflect, where appropriate, change as a result of the
restatements.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD MAY 13, 1998 ARE INCORPORATED BY REFERENCE INTO PART III
(ITEMS 10, 11, 12, AND 13) HEREOF.
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AT HOME CORPORATION
1997 ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 19
ITEM 3. Legal Proceedings........................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 21
ITEM 6. Selected Financial Data..................................... 22
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Restated).... 23
ITEM 8. Restated Financial Statements and Supplementary Data........ 38
ITEM 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ..................... 38
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 39
ITEM 11. Executive Compensation ..................................... 39
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 39
ITEM 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Restated Financial Statements and Reports
on Form 8-K ................................................ 40
SIGNATURES ............................................................ 44
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PART I
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this
Form 10-K/A entitled "Factors That May Affect Future Operating Results" and in
the Company's Final Prospectus for its initial public offering ("IPO") filed
with the Securities and Exchange Commission ("SEC") on July 11, 1997, which
may cause actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within this Form 10-
K/A are identified by words such as "believes", "anticipates", "expects",
"intends", "may", "will" and other similar expressions. However, these words
are not the exclusive means of identifying such statements. In addition, any
statements which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-K/A with the
SEC. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the SEC, including its Final Prospectus, that attempt to
advise interested parties of the risks and factors that may affect the
Company's business.
ITEM 1. BUSINESS
At Home Corporation (the "Company" or "@Home") is a leading provider of Internet
services over the cable television infrastructure and leased digital
telecommunications lines to consumers and businesses. The Company's primary
offering, the @Home service, allows residential subscribers to connect their
personal computers via cable modems to a new high-speed Internet backbone
network developed and managed by the Company. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial ("HFC") cable, at transmission speeds of up to 100 times faster
than typical dial-up connections, "always on" connection, and rich multimedia
programming through an intuitive graphical user interface. The technology
foundation of the @Home Experience is the Company's national Internet network --
a "parallel Internet" that optimizes traffic routing, improves security and
consistency of service, and facilitates end-to-end network management, enhancing
the Company's ability to address performance bottlenecks before they affect the
user experience. The content foundation of the @Home Experience is provided by
the Company's @Media group, which aggregates content, sells advertising to
businesses and will provide premium services to @Home subscribers.
For businesses, the Company's @Work services provide end-to-end managed
connectivity for Internet, intranet and extranet solutions over a variety of
transport media including the cable infrastructure and leased digital
telecommunications lines. In addition, @Work is developing a next generation
platform to support networked business applications and other value-added data
networking solutions. In order to accelerate deployment of the @Work
connectivity solutions into major U.S. metropolitan areas, the Company
established a strategic relationship with Teleport Communications Group, Inc.
("TCG") the country's largest competitive local exchange carrier ("CLEC") in
April 1997, to provide co-location facilities and local telecommunication
circuits for @Work's infrastructure and subscriber connectivity. By combining
the @Home broadband network with cable, telephone and technology relationships,
@Work provides a foundation for nationwide delivery of network-based business
applications and other value-added data networking services. The Company has
developed this platform at a low incremental cost by leveraging its existing
@Home broadband network investment.
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The Company has entered into distribution arrangements for the @Home service
with Tele-Communications, Inc. ("TCI"), Cablevision Systems Corp.
("Cablevision"), Comcast Corporation ("Comcast), Cox Enterprises, Inc. ("Cox"),
Rogers Cablesystems Limited ("Rogers"), Shaw Cablesystems Ltd. ("Shaw"), Marcus
Cable Operating Company, L.P. ("Marcus") and InterMedia Partners IV L.P.
("InterMedia") (collectively, the "Cable Partners"), whose cable systems pass
approximately 50 million homes in North America. As of December 31, 1997
approximately 4.5 million of these homes were currently passed by upgraded two-
way HFC cable, and the Company believes that the Cable Partners will complete
the upgrade of systems passing a majority of their homes within five years. As
of December 31, 1997, the Company had launched its service through its Cable
Partners in portions of 21 cities and communities in the United States and
Canada and had approximately 50,000 cable modem subscribers. To expand
distribution, the Company is seeking to work with additional United States and
international cable system operators. In order to shorten time to market for
cable operators, the Company provides a turnkey solution, which includes not
only a technology platform and a national brand, but also ongoing marketing,
customer service, billing and product development support.
The Company was founded in March 1995 on the premise that the cable
infrastructure could enable the fastest, most cost-effective delivery mechanism
for residential Internet services but that the actual speed of these services
would ultimately be limited by the fundamental architecture of the Internet. As
a result, the Company assembled a team of industry experts to develop an
advanced network architecture and the custom hardware and software products that
would address these limitations. Prior to launching the @Home service in
September 1996, the Company implemented a nationwide backbone, designed and
built its Network Operations Center with 24 x 7 end-to-end network management
capabilities, deployed regional data centers ("RDCs") and headend equipment,
implemented an integrated customer management system including billing and
customer care support for those cable systems operators that elect to obtain
such services from the Company, implemented a customized browser and aggregated
the multimedia content required to deliver the @Home Experience to its first
subscribers.
PRODUCTS AND SERVICES
The Company currently offers two Internet services, @Home for consumers and
@Work for businesses. The Company's @Media group complements the @Home service
by providing programming, selling advertising and facilitating online
transactions and services for @Home subscribers.
@HOME SERVICE
The Company's primary offering is the @Home service, a comprehensive Internet
solution that leverages the two-way HFC cable television infrastructure and the
Company's technological and programming capabilities to provide the @Home
Experience, which the Company believes is the most compelling consumer Internet
experience currently available. By connecting via a cable modem to the @Home
broadband network through the local cable infrastructure, subscribers to the
@Home service can achieve peak data transmission speeds of 2 to 5 Mbps (2,000
Kbps to 5,000 Kbps), which is over 100 times faster than the peak data
transmission speed of a 28.8 Kbps dial-up modem. This high bandwidth is critical
for sophisticated multimedia applications, broadband advertising, online
commerce and interactive games. The @Home service offering also includes
standard Internet service provider ("ISP") functionality, including Web page
hosting for subscribers, and the ability to create and manage multiple email
accounts. In addition, 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.
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The Company's programming services, provided by the @Media group, enhance the
@Home Experience by aggregating high-quality and compelling multimedia content
from the Internet into an intuitive graphical user interface. The home page for
the @Home Experience (the "@Home Page") provides the user with access to an
array of multimedia content "Channels," powerful tools and Web-based
applications designed specifically to take advantage of the Company's broadband
network architecture. The Company believes that the @Home Page broadens the
appeal of online services beyond technology enthusiasts to the mass market by
simplifying navigation, increasing the subscriber's knowledge of Internet
resources, presenting compelling high-bandwidth content (such as animated
graphics, near-CD-quality audio and video clips), and stimulating persistent
usage with timely, dynamic, highly sought-after data streams. The @Home Page 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 compelling
editorial content daily. Through the @Home Page, the Company generates and
directs regular audience traffic to @Media and content providers' offerings.
The @Home Page includes a variety of tools to obtain information quickly and
easily. For example, the "How Do I" section, which is one click from the @Home
Page, 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. The Company also is preparing to
introduce the @Home Assistant, a proprietary @Home software application which
takes advantage of @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, including 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
Page. 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 Communications Corporation ("Netscape") and other high-
performance and multimedia software optimized for the @Home Experience. In
December 1997, the Company and Microsoft Corporation ("Microsoft") announced
@Home's plans to support Microsoft's Internet Explorer 4.0, thereby giving
subscribers a choice of browsers.
The Company is 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. In February 1998, the Company entered into a Memorandum of Understanding
with TCI's National Digital Television Center ("NDTC") pursuant to which the
Company 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 Memorandum of Understanding contemplates that @Home 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. @Home also would work with NDTC on the overall software
integration related to TCI's advanced digital set-top devices. Completion of the
transactions contemplated by the Memorandum of Understanding is subject to
negotiation of a definitive agreement and other conditions, and there can be no
assurance such transactions will be consummated. See "Factors That May Affect
Future Operating Results -- Risks Associated with Joint Development Efforts."
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@WORK SERVICES
For businesses, @Work services provide end-to-end managed connectivity for
Internet, intranet and extranet solutions over a variety of transport media
including the cable infrastructure and leased digital telecommunications lines.
In addition, @Work is developing a next generation platform to support networked
business applications and other value-added data networking solutions. In order
to accelerate deployment of @Work's connectivity solutions in metropolitan areas
throughout the United States, the Company has 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. The Company currently offers 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 leased
digital telecommunications lines and HFC cable. The @Work Internet service
offers telecommunications dedicated access options at peak data transmission
speeds ranging from 56 Kbps to 45 Mbps. These solutions are priced competitively
vis-a-vis existing alternatives. The telco-based @Work Internet service is
currently available in 14 metropolitan markets including Chicago, Los Angeles,
New York, Orange County, San Diego, San Francisco, Seattle, and Washington, D.C.
In February 1998, the Company 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 Mbps downstream using the @Home broadband network.
@Work Remote. The @Work Remote Service is the Company's first Virtual Private
Networking ("VPN") solution. This solution provides a secure, high speed method
for corporations to extend their Local Area Networks ("LANs") to telecommuters
and branch offices via the cable infrastructure. In November 1997, the Company
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 the corporate LAN securely to the @Home broadband network via high-
bandwidth local telephone circuits. @Work Remote users will be able to gain
secure access to all of their corporate LAN resources 24 hours a day, seven days
a week. The Company offers virtual private network capability between branch
offices and corporate headquarters.
The Company's future @Work service offerings will leverage the Company's
existing connectivity solutions and its broadband network architecture to
deliver more value-added services to commercial customers. @Work expects its
telco-based connectivity offerings to include increased service level options as
well as solutions for companies looking for multiple commercial Internet
connections to provide redundancy and load balancing. The Company also plans to
develop additional services that allow corporate information technology
professionals to outsource certain networking tasks. For example, the Company
anticipates introducing a variety of commercial web site hosting and co-
location services. To further this goal, the Company entered into an agreement
in March 1998 with Exodus Communications Inc., a leading provider of Internet
system and network management solutions, to develop and deploy outsourced
network-based commercial applications and related management services. In
addition, by designing each RDC to include high-availability, high-performance
servers and mass storage, the Company believes that it will have the ability to
deliver and facilitate next-generation client-server and distributed-object
networked business applications. See "Factors That May Affect Future Operating
Results -- Risks of Technological Change."
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@MEDIA SERVICES AND TECHNOLOGIES
The @Media group sells advertising and, in partnership with content providers,
packages advertising-supported content and facilitates online transactions and
services for @Home subscribers. Advertisers and content providers can utilize
@Media technologies that enable them to exploit the high-bandwidth, multimedia
capabilities of the @Home broadband network. In addition, the @Media group
provides the programming services that aggregate the high-quality and compelling
multimedia content delivered through the @Home user interface.
The @Media group sells advertising through several advertising 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 Flash, Quicktime Video, and Real
Audio. The Company had 20 revenue generating advertisers as of December 31,
1997, including Proctor & Gamble, Clorox, Toyota and Unilever. Some of these
advertisers now are purchasing advertising from the Company on a cost per
thousand impression ("CPM") basis as opposed to making a one time "sponsorship"
payment as was typically the case with the Company's initial advertisers.
Advertisers also have reported response rates (click-throughs) substantially
greater than they currently experience with traditional Web banner
advertisements. The Company believes that advertisers' ability to present more
compelling messages to online users will lead to advertising rates greater than
those charged for banner advertising on the Web.
The Company believes that growth in its subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing efforts,
the Company has developed a variety of compelling programming services delivered
through the @Home Page in order to drive incremental subscriber penetration. In
addition to receiving advertising fees, the @Media programming services provide
a variety of revenue sources. Examples of @Media programming services include:
Real-Time News and Entertainment Services. Continuously-updated 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, CNN Interactive, The NBA and E! Online.
Enhanced Search and Directory Services. Leading search and directory
services integrated into the @Home Page. The Company shares in the
advertising revenue generated from these services. Current @Media partners
include BigBook, Excite, Infoseek, Switchboard, WhoWhere, Yahoo! and Zip2.
Digital Audio Services. Near-CD-quality audio on various music, talk and
event channels (e.g. jazz, rock and 24-hour sports talk) via the Company's
TuneIn service. Users can simultaneously listen to TuneIn and browse the
Internet. Current @Media partners include CNET Radio, Net Radio, SportsLine
and The DJ.
Software Purchase with Real-Time Downloading. Purchase and download
software titles at speeds substantially faster and with greater reliability
than a typical dial-up modem. @Home has partnered with Release Software to
create the "SoftwareNow" store. In addition to faster than normal download
speeds, SoftwareNow gives @Home users multiple, unique purchase options
including a "Try-Before-Buy" option and rental software.
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High-Speed Multiplayer Gaming. Download and play popular Internet games
against other online players, delivered via the @Home Games channel.
Because the @Home Network combines high speed with very low latency, it is
an excellent environment for high-quality game play. The Company has
already co-located game servers on the network backbone and is currently
developing the capability to offer multiplayer online games to @Home
subscribers.
Interactive Shopping. Evaluate and purchase goods via an interactive
multimedia shopping experience. Current @Media partners include
Amazon.com, BUYDIRECT, N2K, PC Connection and Reel.Com.
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 the
Company's 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 the @Home RDCs. Also, SoftwareNow servers
are co-located on the @Home backbone to enable faster downloading of software,
and multiplayer game servers are co-located to enable low-latency online
gaming.
THE @HOME BROADBAND NETWORK
The Company 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 CLEC telecommunications networks. The three key principles of the
Company's network strategy are moving data closer to the user, end-to-end
network management and "always-on" service.
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 3/4duplicative data transfers. For example, when a subscriber
downloads a video clip from a Web site, the user must "pull" data across the
Internet from that Web site to the user's ISP and finally to the user's
computer. If the user's neighbor requests the same video clip from that Web
site, the neighbor must pull the same data across a similar path. In contrast,
the Company's approach would move the video clip over its high-speed backbone
only once in a given geographic area and retain it in a local cache near the
user's home where it could be accessed by every subscriber within that area
without retransmission over the backbone.
End-to-End Network Management. End-to-end network management is achieved
through the Company's proactive network quality, service and performance
management systems. The @Home broadband network provides visibility from the
Company's servers (or content partners' servers) across the backbone and all the
way to the subscriber's home. Because the @Home broadband network is centrally
managed, the Company can dynamically identify and enhance network quality,
service and performance, or address issues before they affect the user
experience.
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"Always On" Service. The @Home broadband network is "always on", unlike
switched technologies such as dial-up and Integrated Services Digital Network
("ISDN") technologies. The user is always connected to the Internet as long as
their 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. See "Factors That May Affect Future Operating
Results -- Unproven Network Scalability, Speed and Security."
Proximate users share high-bandwidth access (much like corporate LANs) and may
limit the effective bandwidth that is available to a given subscriber at a given
time. However, this shared connection is particularly efficient and well suited
to the sporadic nature of Internet traffic, where browsing tends to consume
bandwidth in discrete bursts intermixed with periods of inactivity. As
subscriber penetration increases, the cable operator has multiple cost-effective
alternatives to increase capacity, including allocating additional 6 MHz
channels for the @Home service or reducing the number of subscribers sharing a
given bandwidth by adding nodes, with each node serving a smaller number of
subscribers over the same fiber-optic infrastructure.
The primary components of the @Home broadband network are the Company's high-
speed private national backbone, RDCs, regional networks, headends (including
caching servers), network connections and cable modems and the Network
Operations Center.
Private National Backbone. The Company operates its own private national
backbone, which consists of a network of high-speed asynchronous transfer
mode ("ATM") communications services that the Company leases to connect its
RDCs and regional networks with content providers and the Internet. These
services currently operate at a speed of 45 Mbps and can be upgraded to 155
Mbps or higher. This backbone can be viewed as a high-speed "parallel
Internet" that connects via the Company's routers to the Internet at
multiple network access points ("NAPs") with "Tier-One" peering status,
which permits the Company to exchange Internet traffic with other
nationwide ISPs.
Regional Data Centers. The RDCs 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.
The Company uses "high availability" servers from Sun Microsystems, Inc. in
its RDCs for these mission-critical activities. The Company had deployed
RDCs in 19 geographic areas as of December 31, 1997. The Company estimates
that to provide the @Home service throughout North America it will need to
deploy between 40 and 50 RDCs.
Regional Networks. The regional networks consist of network routers and
switches that interconnect the Company's RDCs and its national backbone to
multiple cable headend facilities at speeds of 45 Mbps to 155 Mbps. These
networks generally take advantage of cable operators' fiber optic
infrastructures that are normally used to transport cable television
signals from a consolidated master headend facility to other headends
within a region. This approach often allows the Company to avoid the high
cost of leasing conventional high-speed communication services from local
telephone companies when deploying high-speed connectivity in a region.
Headends. The cable system headends are connected to each RDC through the
regional network. In order to move data as close to the subscriber as
possible and to avoid repetitive transmission of the same data, the
headends employ high-performance caching servers that store frequently
accessed content locally, thereby greatly reducing the amount of data
transmission (and corresponding transport costs) in higher layers of the
network. In addition, local caching servers
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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 Mbps downstream and
0.7 - 10 Mbps 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. The North American cable industry has
recently adopted a set of interface specifications for hardware and
software to support the delivery of data services utilizing interoperable
cable modems. The Company believes that these specifications, together with
the agreement that the Company entered into with Intel Corporation in July
1997 relating to the development of "plug and play" modems, will facilitate
the growth of the cable modem industry and the availability of lower cost
interoperable cable modems through retail channels. See "Factors That May
Affect Future Operating Results -- Unproven Network Scalability, Speed and
Security," and " -- Dependence on Two-Way Cable Modems; New Industry
Standard."
Network Operations Center The Company provides end-to-end network
management through its Network Operations Center (the "NOC"). The NOC 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
NOC, the Company can manage the @Home broadband network from end-to-end,
including the backbone, RDCs, regional networks, headend facilities,
servers and other components of the network infrastructure to the user's
home. See "Factors That May Affect Future Operating Results -- Risk of
System Failure."
The Company also utilizes certain key technologies from third parties to build
and manage the @Home broadband network. In particular, the Company has
established strategic relationships with Sun Microsystems, Inc. for high
availability servers, Silicon Graphics, Inc. for caching servers, Cisco Systems,
Inc. for network routing and switching hardware, Sprint Corporation ("Sprint")
for national switched ATM backbone services, Objective Systems Integrators, Inc.
for network management software, Tivoli Systems Inc. for systems management
software to operate RDCs remotely, Oracle Corporation for advanced database
management software, and Netscape and Microsoft for server and browser software.
See "Factors That May Affect Future Operating Results -- Risks of Technological
Change" and " -- Unproven Network Scalability, Speed and Security."
10
<PAGE>
PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering efforts focus on the design
and development of new technologies and products to increase the speed and
efficiency of the Company's broadband network architecture and to facilitate the
development and distribution of high bandwidth content and commercial value-
added applications. The principal areas of current product development and
engineering include:
. enhancing the current @Home service offering with value-added premium
services that are optimized for @Home's broadband network architecture (e.g.,
CD-ROM on demand, online backup, Internet fax, etc.);
. supporting the development and deployment of self-installable modems purchased
by subscribers through retail outlets;
. enhancing caching and replication techniques to improve network performance
and efficiency;
. advancing multicasting technologies to provide efficient transport of "one-
to-many" content;
. adapting the Company's network services for use over non-HFC access
technologies, such as Asymmetric Digital Subscriber Line ("ADSL") and
conventional twisted-pair Ethernet wiring in multiple dwelling units ("MDUs");
. developing advertisement targeting and content personalization systems to fit
desired subscriber profiles;
. developing VPN technology solutions to enable secure and scalable end-to-end
telecommuting and other commercial services over the Company's broadband
network architecture;
. developing distributed network-based commercial applications and other value-
added services that allow corporate information technology professionals to
outsource certain networking tasks;
. enhancing the Company's advanced network management capabilities to identify
and address network performance issues before they affect the user experience;
. developing advanced directory and certification services to enable the
Company's subscribers to perform electronic commerce and access information
and premium resources securely;
. building a next generation network-based service provisioning and customer
care platform; and
. porting the appropriate components of the @Home Experience to TV-based
Internet devices and developing software, email support and related services
for these devices.
The Company's product development and engineering expenses for 1997, 1996 and
for the period from March 28, 1995 (inception) to December 31, 1995 were $12.0
million, $6.3 million and $1.4 million, respectively.
STRATEGIC DISTRIBUTION RELATIONSHIPS
Strategic Relationships with Cable Partners. The Company has strategic
relationships with eight leading cable companies whose systems pass
approximately 50 million homes. Subject to certain exceptions, TCI, Comcast,
Cablevision and Cox (the "Principal U.S. Cable Partners"), have granted the
Company the exclusive right to offer high-bandwidth residential consumer
Internet services over their cable systems for an agreed period. Rogers and
Shaw have agreed to market and promote the @Home service in Canada on an
exclusive basis. In addition, Marcus and InterMedia have entered into
agreements to distribute the @Home service on an exclusive basis through certain
of their cable systems. The following table sets forth what the Company
believes are the number of homes passed by the cable systems of each of the
Cable Partners and the principal cities and communities served by their cable
systems as of December 31, 1997. See
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<PAGE>
"Factors That May Affect Future Operating Results -- No Obligation of Cable
Partners to Carry the Company's Services; Limitations on Their Exclusivity."
<TABLE>
<CAPTION>
MILLIONS OF PRINCIPAL CITIES AND COMMUNITIES
CABLE PARTNER HOMES PASSED SERVED BY CABLE PARTNERS' SYSTEMS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
TCI 24.1 (1)(2)(4) Chicago, Dallas, Denver, Hartford, Miami, Pittsburgh,
San Francisco Bay Area, Seattle and Washington, D.C.
Cablevision 3.9 (2) Long Island, Southern Connecticut, Boston, Cleveland
Comcast 7.3 Baltimore, Detroit, Northern New Jersey, Orange
County, Philadelphia and Sarasota
Cox 5.2 Hampton Roads, Hartford, New Orleans, Oklahoma City,
Omaha, Orange County, Phoenix, Providence and San
Diego
Rogers 2.7 London, Ottawa, Toronto, Vancouver and Victoria
Shaw 2.0 Calgary, Edmonton, Saskatoon, Windsor and Winnipeg
Marcus 1.9 (3) Fort Worth
InterMedia 1.4 (3)(4) Asheville, Greenville, Nashville and Spartanburg
- ----------------- -----------
TOTAL 48.5 (5)
</TABLE>
Notes:
(1) TCI has announced the proposed sale or transfer of a number of cable systems
to other cable companies or joint ventures, some of which do not currently
have distribution arrangements with the Company. See "Factors That May
Affect Future Operating Results -- Potential Disposition of Cable Systems by
Principal U.S. Cable Partners."
(2) Does not reflect 1,177,755 million homes that TCI transferred to Cablevision
in March 1998 nor an additional 357,819 homes that TCI anticipates
transferring to Cablevision at a later date.
(3) Represents total homes passed by such Cable Partners' cable systems.
The Company has agreements for distribution of its @Home service only with
respect to the cities and communities listed, which represent a small
portion of the total homes passed.
(4) Does not include approximately 0.4 million homes that TCI anticipates
transferring to InterMedia subsequent to December 31, 1997.
(5) Does not include certain pending partnerships, sales or transfers involving
@Home's Principal U.S. Cable Partners and potential new cable affiliates
that may result in additional homes passed.
Approximately 4.5 million of the total homes were passed by upgraded two-way HFC
cable as of December 31, 1997, and the Company believes that the Cable Partners
will complete the upgrade of systems passing a majority of their homes within
five years. However, the Cable Partners have limited experience with these
upgrades, and these investments have placed a significant strain on the
financial, managerial, operating and other resources of the Cable Partners, most
of which are already highly leveraged, and thus have been, and the Company
expects will continue to be, subject to change, delay or cancellation. Although
the Company's commercial success depends on the successful and timely completion
of these infrastructure upgrades, most of the Cable Partners are under no
obligation to the Company to upgrade systems or to roll out, market or promote
the Company's services. In addition, most of the Cable Partners have not agreed
to any specific schedule for rolling out two-way HFC infrastructure
improvements, and most of the Cable Partners are not contractually required to
achieve any specific roll-out schedule. See "Factors That May Affect Future
Operating Results, "-- Dependence
12
<PAGE>
on Cable Partners to Upgrade to Two-Way Cable Infrastructure Necessary to
Support the @Home Service; Uncertain Availability and Timing of Upgrades,"
and "-- Potential Disposition of Cable Systems by Principal U.S. Cable
Partners."
As of December 31, 1997, the Company had approximately 50,000 cable modem
subscribers in the United States and Canada. As of December 31, 1997, TCI,
Comcast, Cox, Rogers, Shaw and InterMedia had launched the @Home service in
portions of the cities and communities set forth in the following table.
<TABLE>
<CAPTION>
TCI COMCAST COX
----------------------- ----------------- -----------------
<S> <C> <C>
Arlington Heights, IL Baltimore, MD Hampton Roads, VA
Fremont, CA Detroit, MI Hartford, CN
Hartford, CT Orange County, CA Omaha, NB
Seattle, WA Philadelphia, PA Orange County, CA
Sarasota, FL Phoenix, AZ
Union, NJ San Diego, CA
ROGERS SHAW INTERMEDIA
---------------------- --------------- ---------------
Toronto Calgary Nashville, TN
Vancouver Toronto
</TABLE>
In order to shorten time to market for cable operators, the Company provides a
turnkey solution, which includes not only a technology platform, but also a
national brand, marketing, customer service and billing. This solution enables
the Cable Partners to leverage their respective infrastructures to deliver high-
bandwidth interactive data services that represent significant new revenue
opportunities. The Company's Cable Partners have the additional opportunity to
develop and receive all the revenues derived from local content distributed
locally through portions of the @Home broadband network to local subscribers.
The Cable Partners bear the cost of upgrading and maintaining their cable
systems to provide high-speed two-way data transmission, installing the @Home
service in subscribers' homes, procuring the cable modems needed to interface
with the @Home broadband network and local marketing efforts. See "Factors That
May Affect Future Operating Results -- Subscriber Growth Risks for the @Home
Service."
Under the current Principal U.S. Cable Partner arrangements, the Company
receives 35% of both the basic monthly fees and the fees for premium services,
and the Cable Partner retains the entire installation payment. In Canada, the
Company receives a smaller percentage of the monthly subscription fees billed by
Rogers and Shaw because Rogers and Shaw are responsible for various costs that
are not borne by the Company's Cable Partners in the United States such as the
costs of providing additional customer support, data transport within Canada,
and marketing and programming. In international markets, the Company anticipates
that the subscriber pricing and revenue or royalty splits with cable system
operators will be different from those that prevail in the United States based
on differences in services and content provided by the international cable
system operators, data transport costs and regulatory environments. To the
extent that the Company offers terms of distribution and other services 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 the Master Distribution Agreement entered into by the Principal
U.S. Cable Partners and @Home as of October 10, 1997 (the "Master Distribution
Agreement").
Agreement with Teleport Communications Group, Inc. ("TCG"). In April 1997, the
Company and TCG entered into a Master Communications Services Agreement. TCG is
the largest CLEC in the United
13
<PAGE>
States, providing high-speed fiber optic telecommunications services to
commercial customer sites in 65 metropolitan centers in the United States. Under
its agreement with the Company, TCG will provide the Company with
telecommunications facilities management and network services for the local
telecommunications transport requirements of the Company's @Work services. In
markets served by TCG networks, TCG will provide the Company with (i) the
ability to co-locate its equipment within TCG's network distribution facilities,
and (ii) 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 the Company with such
telecommunications services at rates generally at or below those of competing
carriers, and the ability to co-locate the Company's RDCs within TCG's network
distribution facilities at favorable rates. The Company's access to TCG's fiber
optic network and switching infrastructure gives the Company a nationwide
opportunity in the commercial marketplace, which the Company believes will
accelerate the deployment of the Company's @Work services into major United
States markets. TCG, which is majority-owned by TCI, Comcast and Cox, announced
in January 1998 that it intends to merge with AT&T Corp., and there can be no
assurance that the Company's favorable relationship with TCG will continue or
will provide the anticipated benefits.
DISTRIBUTION, MARKETING AND SALES
The Company has entered into distribution arrangements for the @Home service
with its eight Cable Partners and is aggressively seeking to work with
additional United States and international cable companies to obtain exclusive
rights to their service areas. The Company has developed a comprehensive set of
step-by-step plans and certification processes to verify that cable companies
have upgraded their cable systems to a two-way HFC cable infrastructure that is
capable of delivering the Company's services. The Company's marketing strategy
is to accelerate penetration within its geographic markets by creating awareness
of the "@Home" brand, making it synonymous with a compelling online interactive
multimedia experience. The Company executes this strategy through cooperative
promotional programs with the Company's Cable Partners, which are licensed by
the Company to use the "@Home" brand in conjunction with their own brands in the
distribution of the Company's services (i.e. "Cox@Home"). Ultimately, the
Company plans to leverage its growing subscriber base by marketing services that
provide incremental revenue opportunities such as advertising, premium
subscriber services and @Work value-added services. See "Factors That May Affect
Future Operating Results -- Subscriber Growth Risks for the @Home Service," and
"-- No Obligation of Cable Partners to Carry the Company's Services; Limitations
on Their Exclusivity."
@Home Service. The @Home service is sold to consumer households by the Cable
Partners in the markets they serve. While the Cable Partners have the primary
responsibility for locally marketing the service, the Company assists them in
local market planning and product promotions by providing templates and
materials for print, direct mail and broadcast advertising. For example, the
Company is working on producing an @Home infomercial that will be used by its
Cable Partners. The Company has also initiated discussions with retailers and
original equipment manufacturers ("OEMs") concerning possible sales and
marketing initiatives designed to increase subscriber penetration. The Company
believes that the retail and OEM channel presents a major opportunity for the
Company to gain exposure to a much wider audience of consumers, provide hands-on
demonstrations of the @Home service, and market "@Home" branded products (such
as a starter kit including @Home software and coupons for discounted
installation) or products such as personal computers and cable modems that are
certified as "@Home Ready."
14
<PAGE>
@Work Services. The Company's sales and marketing strategy for its @Work
services utilizes both a direct sales force and indirect sales channels. The
Company's direct sales force proactively calls on senior executives and chief
information officers at Fortune 1,000 companies in regions where the @Work
services are available. These sales are typically complex in nature and involve
businesses with significant integration needs and multiple sites. The Company's
direct sales force also includes both inbound and outbound telesales
representatives that focus on sales to non-Fortune 1,000 companies. These
telesales representatives respond to call activity and leads generated through
@Work's marketing activities, including direct mail, online Web promotion and
advertising, national and regional industry events, @Work seminars and
promotional programs. The indirect sales team works with @Work partner companies
to leverage their sales forces' distribution assets to sell @Work services.
Indirect sales partners include original equipment manufacturers, value-added
resellers and systems integrators. For example, in November 1997, the Company
entered into an agreement with The Fourth Communications Network, Inc. to
provide high-speed Internet access to hotel operators. In addition, under its
agreement with TCI, Comcast and Cox for @Work Remote services, these Cable
Partners will market and sell @Work Remote in their respective service areas.
The Company also plans to establish distribution arrangements for its existing
telco-based @Work services through its Cable Partners.
@Media Services and Technologies. The Company sells advertising to national
consumer businesses through a direct sales force and attracts advertisers by
providing a series of services and technologies through its Interactive
Advertising Group. The Company's Interactive Advertising Group, which consists
of advertising production resources, ad program management personnel and a
traditional commissioned advertising sales team, works with advertisers to
develop compelling advertising for the @Home Experience. The Company's Media
Development Team works with leading content and application providers to create
broadband content, promote transaction services and package access to premium
subscription offerings. The Company and its Cable Partners market these
offerings to subscribers to the @Home service through online and traditional
media.
International Markets. The Company believes that international markets will
provide a substantial opportunity for its services. The Company expects that
many of its services will be highly transferable to international markets,
recognizing that some degree of localization of content will be essential to
achieving success. Accordingly, the Company plans to address targeted
international markets through local partners that will market, sell and
distribute the Company's services in their countries. The international markets
that the Company plans to target first are Canada, the United Kingdom,
Netherlands and Australia. In March 1997, the Company entered into exclusive
arrangements for the distribution of its @Home service in Canada through Rogers
and Shaw, the two leading cable system operators in Canada, whose systems reach
approximately five million homes or 50% of the homes passed by cable in Canada.
Through Rogers and Shaw, which have the right to redistribute the @Home service
to other cable system operators in Canada, the Company expects to expand the
distribution of its service in Canada.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that inadequate customer service and technical support
represent a major shortcoming of Internet access services. The Company and its
Cable Partners have developed a comprehensive approach for managing all
subscriber interactions, including installation, billing and transaction
management, customer service and technical support, intended to ensure that
every interaction a subscriber has with the Company's services is a positive
experience. The @Home service is typically installed in the subscriber's home by
a trained computer technician and a cable technician, both provided by the Cable
Partner, although some Cable Partners have begun to transition to a one person
15
<PAGE>
installation process. The Company assists the Cable Partners in training the
service installers, provides automated installation processes and collateral
materials and, in some cases, coordinates installation schedules. To ensure
ongoing customer satisfaction, the Company and the Cable Partners provide three
tiers of customer service and technical support: general customer service (Tier
1); technical support (Tier 2); and network management support (Tier 3). Tier 1
support, including billing, is typically the responsibility of the Cable
Partner, although the Company offers the full range of services and support as
a complete outsourced solution, and the Cable Partners in the United States
has the option of contracting with the Company for Tier 1 support at the
Company's cost. Tier 2 support is frequently provided by the Company. However,
a Principal U.S. Cable Partner may elect to provide Tier 2 support itself and
then receive compensation from the Company in an amount equal to the resulting
reduction in the Company's support costs. The Company provides Tier 3 support.
The Company also provides an open "ServiceAPI" for cable operators to
integrate their existing billing, service and support systems with the
Company's systems. @Home provides a comprehensive set of education services to
assist the Cable Partner in training installers and customer service
representatives and training developers on implementing the ServiceAPI.
The Company's technical support personnel are co-located with the Company's NOC
staff, who are responsible for monitoring the performance of the @Home broadband
network from end-to-end on a 24 x 7 basis. The co-location of these two
organizations facilitates close collaboration between the two groups to resolve
subscriber problems more rapidly and to anticipate potential problems before
they can affect the user experience. The Company utilizes customized network
tools that enable its technical support staff to deliver solutions that would
otherwise require advanced engineering analysis. The Company also has developed
a state-of-the-art knowledge base system to capture and organize the latest
information to meet the needs of the Company's technical support staff, Cable
Partners and subscribers. By leveraging its integrated subscriber management
systems and technical support database, the Company provides an online customer
support service which enables comprehensive access to its service and support
knowledge base by both subscribers and cable operators through the Web, email
and interactive voice response. There can be no assurance, however, that the
Company and its Cable Partners will provide customer and technical support at a
level sufficient to satisfy the requirements of customers for the Company's
services. Failure to provide a high level of customer support could limit the
rate at which the Company can add new subscribers and could cause subscribers to
discontinue the Company's services.
COMPETITION
The markets for consumer and business Internet services and online content are
extremely competitive, and the Company expects that competition will intensify
in the future. The Company's most direct competitors in this market are
Internet service providers ("ISPs"), national long distance carriers, local
exchange carriers, wireless service providers, online service providers (such as
America Online Inc.) and Internet content aggregators. Many of these competitors
are offering (or may soon offer) technologies that will attempt to compete with
some or all of the Company's high-speed data service offerings. Such
technologies include Integrated Services Digital Network ("ISDN") and ADSL. In
January 1998, Compaq Computer Corporation, Intel Corporation, Microsoft
Corporation, other technology companies and numerous telecommunication providers
announced an initiative to develop a simplified version of ADSL, referred to as
"ADSL Lite", that reduces the complexity and expense of installing the service.
While commercial tests of this simplified version of ADSL are not expected until
the end of 1998, this initiative has the potential to accelerate the deployment
of ADSL services and pose a competitive threat to the Company, particularly in
the business market. While the Company does not compete directly for subscribers
with other cable operators offering cable-based data services given the
franchise nature of the cable industry, the Company does compete with such cable
16
<PAGE>
operators (e.g. Time Warner Cable and MediaOne Group) to the extent they
offer their cable-based data services to other cable operators that are not
subject to an exclusive relationship with the Company. The bases of competition
in these markets include transmission speed, reliability of service, ease of
access, price/performance, ease-of-use, content quality, quality of
presentation, timeliness of content, customer support, brand recognition,
operating experience and revenue sharing.
Many of the Company's competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services or online content than the Company.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect the Company's business, operating
results or financial condition. See "Factors That May Affect Future Operating
Results -- Competition."
EMPLOYEES
As of December 31, 1997, the Company had 329 employees, excluding temporary
personnel and consultants. Of the total, 88 were employed in networking
engineering; 97 supported the @Home service including customer support, sales,
marketing and related activities; 40 supported the @Work services; 62 were
employed in the @Media group and 42 were employed in general and administration.
None of the Company's employees is represented by a labor union, and the Company
considers its relations with its employees to be good. The Company's ability to
achieve its financial and operational objectives depends in large part upon the
continued service of its senior management and key technical personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such qualified personnel in the Company's
industry and geographical location in the San Francisco Bay Area is intense,
particularly in software development, network engineering, cable engineering and
product management personnel. See "Factors That May Affect Future Operating
Results -- Management of Expanded Operations; Dependence on Key Personnel."
PROPRIETARY RIGHTS
The Company regards its technology as proprietary and attempts to protect it
with copyrights, trademarks, trade secret laws, restrictions on disclosure and
other methods. In addition, the Company has filed patent applications, and is
in the process of preparing additional patent applications, pertaining to its
high-bandwidth network technology, proxy server technology and online
advertising processes. However, patents may not issue from these applications,
and, even if patents do issue, any claims allowed may not be sufficiently broad
to protect the Company's technology or may be challenged, invalidated or
circumvented. The Company also generally enters into confidentiality or license
agreements with its employees and consultants, and generally controls access to
and distribution of its documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products, services or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright, patent trademark and trade secret protection may be
unavailable or limited in certain foreign countries, and the global nature of
the Internet makes it virtually impossible to control the ultimate destination
of the Company's content offerings. Although the Company intends to protect its
rights vigorously, the costs of such efforts could be substantial, and there can
be no assurance that they would be successful.
17
<PAGE>
The Company believes that due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a leadership position within
its industry than are various legal protections of its technology.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights, including
claims for infringement resulting from the downloading of materials by the
online or Internet services operated or facilitated by the Company.
Infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) may be asserted or prosecuted against the Company, and such
assertions or prosecutions could materially adversely affect the Company's
business, operating results and financial condition. No litigation is currently
pending or threatened in this area.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Although the Company's services are not directly subject to current regulations
of the Federal Communication Commission (the "FCC") or any other federal or
state communications regulatory agency, changes in the regulatory environment
relating to the Internet connectivity market, including regulatory changes that,
directly or indirectly, affect telecommunications costs, limit usage of
subscriber-related information or increase the likelihood or scope of
competition from the regional bell operating companies (the "RBOCs") or other
telecommunications companies, could affect the Company's pricing and/or ability
to successfully market its services. For example, regulation of cable
television rates may affect the speed at which cable operators that have agreed
or will agree in the future to provide the @Home service will be able to upgrade
their cable systems as necessary to carry the Company's services. Similarly,
enactment of proposed privacy legislation currently pending in Congress, which
would restrict the use of subscriber information by interactive computer
services for marketing and other purposes, could adversely affect the marketing
of the Company's services as well as its revenue form advertising. In addition,
the FCC is currently considering requests by Bell Atlantic Corporation,
Ameritech Corporation, and US West Communications for relief pursuant to Section
706 of the 1996 Telecommunications Act from various restrictions and regulatory
requirements which currently serve to inhibit the RBOCs' provision of Internet
services. Other RBOCs are expected to pursue relief similar to that proposed in
the pending RBOC petitions, which seek authority to provide high-speed, packet-
switched data services, including Internet access and related services, without
regard to Local Access and Transport Area ("LATA") boundaries and free from
otherwise applicable access, unbundling and resale obligations and certain other
regulatory requirements. The FCC also is considering a separate request which
if approved would provide all Incumbent Local Exchange Carriers ("ILECs") with
significant relief from existing access, unbundling, pricing, and cost recovery
rules and policies, in order to encourage the deployment and operations by the
ILECs of high-capacity, packet-switched networks and other advanced
telecommunications facilities and related services, including Internet access
services.
The Cable Partners in the United States have advised the Company that their
local cable operators typically have elected to classify the provision of all
or some of the @Home services as "additional cable services" under their
respective local franchise agreements, and to pay franchise fees in accordance
therewith. Local franchise authorities may attempt to subject cable systems to
higher or other franchise fees or taxes or otherwise seek to 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 the Company or
such cable operators to operate under a unified set of franchise requirements.
Legislation has been introduced in Congress which if enacted would impose a
moratorium limiting the ability of state and local governments to impose taxes
on Internet services pending the formulation and submission to Congress by the
President of recommendations concerning appropriate parameters for state and
local taxation of such services. However, state and local authorities have
expressed strong
18
<PAGE>
opposition to such legislation, and there remains the possibility that the @Home
services may be subject to potentially burdensome taxes or other assessments in
a multitude of state and local jurisdictions. It is also possible that
governmental authorities may attempt to classify the Company in some other
manner (e.g., as a common carrier-type service or information service) and
impose additional potentially burdensome regulatory requirements on the Company,
the Cable Partners, or other cable operators carrying the Company's services.
In the event that the FCC or another governmental agency were to classify the
cable system operators as "common carriers" of Internet services, or cable
system operators were to seek such classification as a means of protecting
themselves against liabilities, the Company's rights as the exclusive ISP over
the systems of certain of its Cable Partners could be lost. In addition, if
the Company or its Cable Partners in the United States were classified as
common carriers, they could be subject to government-regulated tariff
schedules for the amounts they could charge for their services. Rogers and
Shaw have informed the Company that, due to certain Canadian regulations, they
are required to provide access to their respective networks to third-party
ISPs. Although no third party currently uses Rogers' or Shaw's networks for
purposes of offering Internet services, these Canadian regulations preclude
the Company from having an exclusive contractual right to access to these
networks.
ITEM 2. PROPERTIES
The Company is headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which the Company occupies under a 12-
year lease. Under this lease, the Company is obligated to pay for all tenant
improvements, substantially all of which had been completed as of December 31,
1997. In September 1997, the Company exercised its build-to-suit option to
require the landlord to build approximately 180,000 square feet of facilities on
adjacent property. The Company also has two remaining separate build-to-suit
options to require the landlord to build a total of approximately 220,000
additional square feet of facilities on adjacent property, subject to certain
conditions. All facilities constructed under the Company's build-to-suit
options will be subject to leases of up to 15 years in length, have base rent
determined in relation to construction costs and will include tenant
improvements paid for by the Company. In addition to its build-to-suit options,
the Company has the right to purchase two of the buildings leased from the
landlord consisting of approximately 200,000 total square feet. The Company has
also opened a small sales office in Bala Cynwyd, Pennsylvania to support its
Cable Partners in the eastern United States and eastern Canada. The Company
anticipates that its existing facilities, together with the facilities the
Company has the right to have built, will be adequate to accommodate its future
growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On July 8, 1997, PCTV, Inc. ("PCTV") filed a complaint against the Company in
the United States District Court for the District of New Hampshire asserting
rights in the @Home trademark. In the complaint, PCTV alleges trademark
infringement and unfair competition based on the Company's use of the @Home mark
and requests damages and injunctive relief. PCTV is a New Hampshire corporation
that produces computer-related television programs such as "Business Computing,"
"Computer Chronicles" and "@Home." PCTV alleges that it first used the @Home
mark in August 1994.
In February 1998, the Company and PCTV entered into a Settlement Agreement
pursuant to which PCTV assigned any and all right, title and interest in the
@Home trademark to the Company and agreed to dismiss the complaint with
prejudice. The Company, in turn, agreed to: enter into certain distribution
arrangements for its @Home and @Work services with PC Connection Inc., an
affiliated company of
19
<PAGE>
PCTV engaged in the direct marketing of computer hardware and software ("PCC");
promote PCC on the @Home service; and make a one time immaterial payment to
PCTV.
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 1997.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market for Registrant's Common Equity. The Company's Series A Common Stock is
traded on the National Market System of the Nasdaq Stock Market, Inc. (the
"NASDAQ National Market") 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 the Company's 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
</TABLE>
As of March 15, 1998, the number of stockholders of record was 592. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
Sales of Unregistered Securities. Effective October 2, 1997, the Company entered
into a Letter Agreement and Term Sheet with Cablevision, Comcast, Cox, TCI and
Kleiner Perkins Caufield & Byers (the "Cablevision Agreement"). The Cablevision
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. The Cablevision Agreement
also provides for the issuance to Cablevision 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 is 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 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 to the extent certain cable television systems
are transferred from TCI and its controlled affiliates to CSC or certain
controlled affiliates (the "Contingent Warrant"). The securities issued to
Cablevision were issued in a transaction exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
Use of Proceeds from Sales of Registered Securities. The Company commenced its
Initial Public Offering ("IPO") on July 11, 1997 pursuant to a Registration
Statement on Form S-1 (File No. 333-27323). In the IPO the Company sold an
aggregate of 10,350,000 shares of its Series A Common Stock (including
1,350,000 shares sold pursuant to the exercise of the Underwriters' over-
allotment option) at an initial price of $10.50 per share. The IPO was closed on
July 16, 1997.
Aggregate proceeds from the IPO were $108,675,000, which included $14,175,000 in
aggregate proceeds due to the exercise of the underwriters' option to purchase
shares to cover over-allotments. The Company paid underwriters' discounts and
commissions of $7,607,250 and other expenses of approximately $1,300,000 in
connection with the IPO. The total expenses paid by the Company in the IPO were
$8,907,250, and the net proceeds to the Company in the IPO were $99,767,750.
The entire amount has been allocated for general corporate purposes, including
working capital requirements of the Company resulting from its growth. None of
the net proceeds of the Offering were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10 percent or more of any class of equity securities of the Company, or
an affiliate of the Company.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected restated consolidated financial data is qualified by
reference, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein. The selected consolidated statement of operations data presented below
for the years ended December 31, 1997, 1996 and for the period from March 28,
1995 (Inception) to December 31, 1995, respectively, and the selected
consolidated balance sheet data as of December 31, 1997, 1996, and 1995, are
derived from consolidated financial statements of the Company that have been
included elsewhere herein.
See Note 1 to Consolidated Financial Statements for information concerning the
Company's restatement of its consolidated financial statements. All financial
data in the table below as of and for fiscal 1997 presented reflect such
restatement.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MARCH 28, 1995
--------------------------------------- (INCEPTION) TO
1997 1996 DEC. 31, 1995
---------- -------- --------------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues (1)............................................ $ 7,437 $ 676 $ --
Costs and expenses(2):
Operating costs....................................... 22,459 6,969 --
Product development and
engineering.......................................... 11,984 6,312 1,447
Sales and marketing................................... 11,863 6,368 496
General and administrative............................ 10,635 6,054 943
--------- -------- -------
Total costs and expenses before
amortization of distribution agreement................. 56,941 25,703 2,886
--------- -------- -------
Loss from operations before
amortization of distribution agreement................. (49,504) (25,027) (2,886)
Interest income, net.................................... 3,033 514 130
--------- -------- -------
Loss before amortization of
distribution agreement................................. (46,471) (24,513) (2,756)
Amortization of distribution
agreement.............................................. 9,246 -- --
--------- -------- -------
Net loss................................................ $ (55,717) $(24,513) $(2,756)
========= ======== =======
Pro forma basic and diluted net
loss per share (3).................................... $ (0.54) $ (0.26) $ (0.03)
========= ======== =======
Pro forma shares used in per
share calculation (3)................................. 103,543 96,120 95,252
========= ======== =======
- ----------------
(1) Revenues from related parties....................... $ 2,948 $ 634 $ --
========= ======== =======
(2) Depreciation and amortization
included in costs and expenses...................... $ 8,913 $ 1,903 $ 42
========= ======== =======
</TABLE>
(3) Net loss per share differs from amounts reported in the Company's press
release dated January 20, 1998 and the Form S-1 filed with the Securities
and Exchange Commission based on new guidance and pronouncements as
discussed in Note 1 of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1997 1996 1995
--------- -------- -------
(RESTATED)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term cash investments.. $120,379 $16,770 $6,907
Working capital.......................................... 101,390 10,573 6,244
Distribution agreement, net............................. 163,345 -- --
Total assets............................................. 323,928 33,388 8,124
Capital lease obligations, less current portion
and other long-term liabilities.......................... 17,471 7,329 --
Stockholders' equity..................................... 282,407 18,317 7,212
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (RESTATED)
GENERAL
The Company is a leading provider of Internet services over the cable television
infrastructure and leased digital telecommunications lines to consumers and
businesses. The Company's primary offering, the @Home service, allows
residential subscribers to connect their personal computers via cable modems to
a new high-speed Internet backbone network developed and managed by the Company.
This service enables subscribers to receive the "@Home Experience," which
includes Internet service over HFC cable, at average transmission speeds of up
to 100 times faster than typical dial-up connections, "always on" connection,
and rich multimedia programming through an intuitive graphical user interface.
The technology foundation of the @Home Experience is the @Home broadband network
- -- a "parallel Internet" that optimizes traffic routing, improves security and
consistency of service, and facilitates end-to-end network management. The
Company has implemented a nationwide backbone, designed and built its Network
Operations Center with 24 x 7 capabilities, deployed 19 RDCs, implemented an
integrated customer management system including billing and customer care
support, and implemented a customized browser.
The content foundation of the @Home Experience is provided by the Company's
@Media group. @Media's programming services enhance the @Home Experience by
aggregating high-quality and compelling multimedia content from the Internet
into an intuitive graphical user interface. The home page for the @Home
Experience provides the user with access to an array of multimedia content
"Channels," powerful tools and Web-based applications designed specifically to
take advantage of the @Home broadband network. The @Media group also sells
advertising, works with content providers to aggregate content and facilitate
online transactions, and plans to offer premium services. As of December 31,
1997, the Company had 20 revenue generating advertisers.
The Company has entered into distribution arrangements for the @Home service
with TCI, Cablevision, Comcast, Cox, Rogers, Shaw, Marcus and InterMedia, whose
cable systems pass approximately 50 million homes in North America. As of
December 31, 1997, approximately 4.5 million of these homes were passed by
upgraded two-way HFC cable, and the Company believes that its Cable Partners
will complete the upgrade of systems passing a majority of their homes within
five years. As of December 31, 1997, the Company had launched its service
through its Cable Partners in portions of 21 cities and communities in the
United States and Canada and had approximately 50,000 cable modem subscribers.
In the United States, the @Home service is sold for a flat monthly fee generally
ranging from $35 to $55, which typically includes the cost of a cable modem.
Under the current Cable Partner arrangements in the United States, the Company
receives 35% of both the basic monthly fees and the fees for premium services,
and the Cable Partner retains the entire installation payment. In Canada, the
Company receives a smaller percentage of the monthly subscription fees billed by
Rogers and Shaw because Rogers and Shaw are responsible for various costs that
are not borne by the Company's Cable Partners in the United States, such as the
costs of providing additional customer support, data transport within Canada,
and marketing and programming.
The Company is developing software and a specialized @Home service to enable
set-top boxes connected to televisions and cable modems to deliver the @Home
Experience to the broad market that does not use computers. In addition, in
February 1998, the Company entered into a Memorandum of Understanding with TCI's
National Digital Television Center ("NDTC"). The Memorandum of Understanding
contemplates that @Home will supply email accounts for these devices and will
provide connectivity, geographically dispersed mail servers and overall system
management for TCI's email services. @Home also would work with NDTC on the
overall software integration related to TCI's
23
<PAGE>
advanced digital set-top devices. See "Factors That May Affect Future Operating
Results -- Risks Associated with Joint Development Efforts."
For businesses, the Company's @Work services provide end-to-end managed
connectivity for Internet, intranet and extranet solutions over a variety of
transport media including leased digital telecommunications lines. The Company
currently offers two services: @Work Internet, a high-speed Internet
connectivity service for commercial enterprises; and @Work Remote, a Virtual
Private Networking telecommuting solution. The Company receives 100% of
installation and monthly access fees for its @Work Internet services, the
substantial majority of which in 1997 were delivered via leased digital
telecommunications lines. As of December 31, 1997, the Company was receiving
revenue from approximately 300 @Work Internet customers and had agreements with
more than 200 additional customers to begin to install service. Revenues from
@Work Remote are not yet significant but are expected to increase in 1998 as a
result of an agreement between the Company, TCI, Cox and Comcast to develop,
market and deploy this service.
In order to accelerate deployment of the @Work connectivity solutions into major
U.S. metropolitan areas, the Company established a strategic relationship with
TCG, the country's largest CLEC, in April 1997, to provide co-location
facilities and local telecommunication circuits for @Work's infrastructure and
subscriber connectivity. By combining the @Home broadband network with cable,
telephone and technology relationships, @Work provides a foundation for
nationwide delivery of network-based business applications and other value-added
data networking services.
Effective October 2, 1997, the Company entered into a Letter Agreement and Term
Sheet with Cablevision, Comcast, Cox, TCI and Kleiner Perkins Caufield & Byers
(the "Cablevision Agreement"). Pursuant to the Cablevision Agreement,
Cablevision entered into a Master Distribution Agreement for the distribution of
the Company's @Home service on substantially the same terms and conditions as
TCI, Comcast and Cox. Although Cablevision and the other Principal U.S. Cable
Partners are subject to certain exclusivity obligations that prohibit them from
obtaining high-speed (greater than 128 Kbps) residential consumer Internet
services from any source other than the Company, Cablevision and the other
Principal U.S. Cable Partners are under no obligation to upgrade their cable
systems to two-way cable infrastructure and are under no affirmative obligation
to roll out, market, promote or carry any of the Company's services. The
exclusivity obligations in favor of the Company expire on June 4, 2002, and may
be terminated sooner under certain circumstances. These exclusivity obligations
also are subject to exceptions that would permit Cablevision and the other
Principal U.S. Cable Partners to engage in certain activities which could
compete, directly or indirectly, with the activities of the Company.
The Cablevision Agreement also provides for the issuance to Cablevision 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 is
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 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 to the extent
certain cable television systems are transferred from TCI and its controlled
affiliates to Cablevision or certain controlled affiliates (the "Contingent
Warrant").
On January 11, 1999, the Company announced that it would restate its financial
statements for the year ended December 31, 1997 to reflect a change in
accounting related to a distribution agreement with Cablevision Systems
Corporation entered into in October 1997. As a result of this restatement, the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the three months and year ended December 31, 1997
have been restated as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
December 31, 1997 December 31, 1997
(in thousands except per share information)
As previously As previously
reported Restated reported Restated
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Amortization of distribution
agreement........................... $ 172,591 $ 9,246 $ 172,591 $ 9,246
Total costs and expenses............. 189,417 26,072 229,532 66,187
Loss from operations................. (185,717) (22,372) (222,095) (58,750)
Net loss............................. (184,364) (21,019) (219,062) (55,717)
Basic and diluted net loss per
share.............................. (1.67) (0.19) (2.12) (0.54)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
As previously
reported Restated
------------- -------------
<S> <C> <C>
Distribution agreement, net.......... $ -- $163,345
Total assets......................... 160,583 323,928
Accumulated deficit.................. (246,331) (82,986)
Total liabilities and Stockholders'
equity............................. 160,583 323,928
</TABLE>
During the first quarter of 1998, the contingencies surrounding the Contingent
Warrant were satisfied as to 2,355,514 shares of Series A Common Stock.
Accordingly, the financial statements for the first quarter of 1998 will be
restated to record an additional asset of approximately $74.5 million,
representing the fair value of the Contingent Warrant, which will be
amortized over its remaining useful life. The Company identifies and records
impairment losses on intangible assets when events and circumstances indicate
that such assets might be impaired. To date, no such impairment has been
recorded. See Note 8 of Notes to Consolidated Financial Statements.
24
<PAGE>
As of December 31, 1997, the Company had expended approximately $118.6 million
on capital expenditures and operating costs and expenses to design and build
the @Home broadband network and the corporate infrastructure necessary to
support the roll-out of the @Home and @Work services. The Company currently
intends to increase its capital expenditures as well as its operating and
sales and marketing expenditures in order to expand its network to support
additional expected subscribers in existing and future markets and to provide
the Company's services to a growing number of potential subscribers. To the
extent that cable modems are successfully marketed in the future through
retail and other mass-market channels, additional expenditures customary in
this channel could be incurred. As a result, the Company expects to continue
to incur additional substantial net losses for the foreseeable future. The
Company has incurred net losses from operations in each fiscal period since
its inception and, as of December 31, 1997, had an accumulated deficit of
$73.7 million (before the $9.2 million amortization recorded in the fourth
quarter of 1997 in connection with the Cablevision Agreement), and an
accumulated deficit of $83.0 million, including the amortization relating to
the Cablevision Agreement.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES 1997 CHANGE 1996
- -------- ------ ------ ----
<S> <C> <C> <C>
Revenues $7,437 1,000% $676
</TABLE>
Revenue. The Company's revenues consist of monthly subscription fees for the
@Home residential service, installation and monthly access fees for @Work
services, fees for advertising and from @Media content providers, and fees for
customer support activities for cable system operators, all of which are
recognized during the period in which services are provided. Total revenues for
the year ended December 31, 1997 equaled $7.4 million, an increase of $6.7
million over revenues of $676,000 for the year ended December 31, 1996. Related
party revenues as a percentage of total revenues for the years ended December
31, 1997 and 1996, respectively, were approximately 40% and 94%. For the year
ended December 31, 1997, revenues from @Work services in the United States and
from the @Home service in Canada contributed significantly to the Company's
total revenues, especially during the second half of the year. The Company
anticipates that revenues from @Work services will continue to increase as a
percentage of total revenues in 1998.
<TABLE>
<CAPTION>
COSTS AND EXPENSES 1997 CHANGE 1996
- ------------------ -------- ------- -------
(RESTATED)
<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
Amortization of Distribution Agreement 56,941 122% 25,703
Amortization of Distribution Agreement 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 $9.2 million
amortization related to the Cablevision Agreement, were $56.9 million and
$25.7 million for the years ended December 31, 1997 and 1996, respectively.
This year over year increase was primarily a result of operating costs
associated with expansion and deployment of the @Home broadband network to
support the @Home
25
<PAGE>
service subscriber growth, additional corporate infrastructure investments, and
the start-up of @Work services. The Company believes continued expansion of
operations as well as its network infrastructure is critical to the achievement
of its goals and anticipates that costs and expenses will continue to increase
significantly in each quarter for the foreseeable future.
Operating Costs. Operating costs are primarily related to providing services to
customers and maintaining the @Home broadband network, which includes the
functional areas of customer and technical support, RDCs, content programming,
and @Home and @Work telecommunications costs. Included in operating costs are
salaries and related expenses for personnel, telecommunication ("transport")
costs and the depreciation, amortization and maintenance of capital equipment.
Operating costs were $22.5 million and $7.0 million for the years ended December
31, 1997 and 1996, respectively. This increase was primarily a result of:
maintenance and depreciation of capital equipment in support of the RDCs and
headend architecture; additional transport costs to support the deployment of
the @Home broadband network to additional sites; customer service operations;
development of additional content programming resources; and the launch of @Work
services. During 1998, costs are expected to increase substantially in absolute
dollars as the Company continues to make investments in network infrastructure,
computer systems to support the growth in the Company's operations, and
increased personnel and transport costs.
Product Development and Engineering. Product development and engineering
expenses consist primarily of salaries and related expenses for personnel, fees
to outside contractors and consultants, the allocated cost of facilities, and
the depreciation and amortization of capital equipment. Product development and
engineering expenses were $12.0 million and $6.3 million for the years ended
December 31, 1997 and 1996, respectively. The higher level of expenses for
product development and engineering were attributable principally to increases
in personnel and related expenses incurred primarily in four areas: the design,
testing and deployment of the @Home broadband network; the development of
software tools and enabling platforms for the creation and distribution of
enhanced content; applications development specifically designed to take
advantage of the @Home broadband network; and the development of @Work services.
Product development and engineering costs have been expensed as incurred.
During 1998, costs in this area are expected to increase substantially due in
part to the Company embarking on the development of technologies related to the
advanced digital set-top box and to the scaling of the Company's network
backbone.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
were $11.9 million and $6.4 million for the years ended December 31, 1997 and
1996, respectively. This year over year increase was principally the result of:
continued increases in sales and marketing activities to support the expansion
of regional deployments of the @Home and @Work services; the expansion of the
Company's sales force and related travel and entertainment expenses;
expenditures for trade shows; and increased marketing activities, including
market development funds, to attract additional cable partners, subscribers and
corporate accounts. Costs in this area are expected to increase significantly in
1998 primarily due to personnel and other costs required to increase the
Company's focus on national branding, national promotions and retail sales
efforts.
General and Administrative. General and administrative expenses consist
primarily of administrative and executive personnel costs, fees for professional
services and the costs of in-house systems and infrastructure to support the
operations of the Company. General and administrative expenses were $10.6
million and $6.1 million for the years ended December 31, 1997 and 1996,
respectively. This increase was the result of: additions of personnel to
support the operations of the Company and their related costs; stock
compensation charges resulting from stock options and stock purchase agreements;
26
<PAGE>
additional facilities expenditures; and additional expenses related to
activities and requirements of becoming a publicly traded company. During 1998,
the Company anticipates that costs in this area will continue to grow
significantly.
Interest Income, Net. Interest income, net, represents interest earned by the
Company on its cash and short-term cash investments, less interest expense on
capital lease obligations. Interest income, net was $3.0 million and $514,000
for the years ended December 31, 1997 and 1996, respectively. 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 the
Company's Series C Preferred Stock financing in April 1997 and the Company's IPO
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 the Company's leasing of capital
equipment.
Income Taxes. Due to operating losses incurred since inception, the Company
has not recorded a provision for income taxes in 1997 or 1996. At December 31,
1997, the Company had net deferred tax assets of $33.2 million relating
principally to tax net operating loss carryforwards. Realization of deferred
tax assets is dependent on future earnings, if any, the timing and amount of
which are uncertain. A valuation allowance has been recorded for the net
deferred tax assets as of December 31, 1997 and 1996, due to the lack of
earnings history of the Company. Accordingly, the Company has not recorded any
income tax benefit for net losses incurred for any period from inception
through December 31, 1997. See Note 9 of Notes to Consolidated Financial
Statements.
Net Loss. The net loss, before the amortization for the Cablevision Agreement,
were $46.5 million and $24.5 million for the years ended December 31, 1997 and
1996, respectively. The net loss for the year ended December 31, 1997 of $55.7
million includes non-cash amortization of $9.2 million related to the
Cablevision Agreement. The increase in net loss before the Cablevision
Agreement amortization was primarily a result of additional business
activities, partially offset by the additional revenues attributable to the
expansion of the Company's @Home and @Work services. The Company anticipates
that the quarterly net loss, excluding amortization related to the Cablevision
Agreement or potential performance-based warrant charges, will begin to
decline during 1998 as sequential revenues grow at a faster rate than
sequential expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE PERIOD MARCH 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 (INCEPTION PERIOD) (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES 1996 Change 1995
- -------- -------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 676 N/A $ --
</TABLE>
Revenue. Total revenues for the year ended December 31, 1996, and for the period
from March 28, 1995 (inception) to December 31, 1995 (the "Inception Period"),
were $676,000 and $0, respectively. The Company began recognizing revenues in
September 1996. Substantially all of the Company's revenues for 1996 were
derived from customer services provided to TCI and Comcast. Revenues from
related parties (the Principal U.S. Cable Partners) represented 94% of revenues
for the year ended December 31, 1996.
27
<PAGE>
<TABLE>
<CAPTION>
COSTS AND EXPENSES 1996 CHANGE 1995
------------------ ------- ------- ------
<S> <C> <C> <C>
Operating Costs $ 6,969 N/A $ --
Product Development and Engineering 6,312 336% 1,447
Sales and Marketing 6,368 1,184% 496
General and Administrative 6,054 542% 943
------- ----- ------
Total Costs and Expenses $25,703 791% $2,886
</TABLE>
Total Costs and Expenses. Total costs and expenses for the year ended December
31, 1996, and for the Inception Period were $25.7 million and $2.9 million,
respectively. This increase was primarily a result of additional activities
related to the development, testing and deployment of the @Home broadband
network and to support the subscriber growth of the @Home service commencing in
the third quarter of 1996.
Operating Costs. As a development stage company with no revenues, there were no
operating costs during the Inception Period. For the year ended December 31,
1996, operating costs were $7.0 million, primarily as a result of activities
associated with deploying the @Home broadband network and the @Home service.
These expenses were primarily in the areas of: the development of content
programming resources; transport costs related to the deployment of the @Home
broadband network; maintenance and depreciation of capital equipment; and the
start-up of customer service operations to support the subscriber base.
Product Development and Engineering. Product development and engineering
expenses increased from $1.4 million for the Inception Period to $6.3 million
for the year ended December 31, 1996 as a result of additional personnel costs
and related expenses required to support the design, testing and deployment of
the @Home broadband network. All product development and engineering costs have
been expensed as incurred.
Sales and Marketing. Sales and marketing expenses were $6.4 million and
$500,000 for the year ended December 31, 1996 and the Inception Period,
respectively. This year over year increase was principally the result of
continued increases in sales and marketing activities to support the expansion
of regional deployments of the @Home and @Work services.
General and Administrative. General and administrative expenses increased from
$943,000 for the Inception Period to $6.1 million for the year ended December
31, 1996. The increase in general and administrative costs also included stock
compensation charges resulting from stock options and restricted stock purchase
agreements as well as additional facilities expenditures.
Interest Income, Net. Interest income, net increased from $130,000 for the
Inception Period to $514,000 for the year ended December 31, 1996.
Income Taxes. Due to operating losses incurred since inception, the Company did
not record a provision for income taxes in 1996 or 1995. At December 31, 1996,
the Company had net deferred tax assets of $10.9 million relating principally to
tax net operating loss carryforwards and other temporary differences. A
valuation allowance has been recorded for the net deferred tax assets as of
December 31, 1996, due to the lack of earnings history of the Company. See Note
7 of Notes to Consolidated Financial Statements.
Net Loss. The net loss for the Inception Period was $2.8 million as compared to
$24.5 million for the year ended December 31, 1996. The increase was due
primarily to increases in expenses as a result of additional business
activities.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of private and public sales of equity securities and capital
equipment leases. At December 31, 1997, the principal source of liquidity for
the Company was $120.4 million of cash, cash equivalents and short-term cash
investments, as compared to $16.8 million at December 31, 1996. The Company
finances and expects to continue financing a substantial amount of its capital
equipment expenditures from a variety of sources, including direct vendor
leasing programs, third party commercial leasing arrangements and bank
financing.
In September, 1997, the Company entered into a Term Loan Agreement (the "Term
Loan") with Silicon Valley Bank (the "Bank"). The Term Loan provides for
borrowings of up to $8.0 million to finance the acquisition of property,
equipment and improvements, and to collateralize letters of credit. Borrowings
under this Term Loan bear interest at the Bank's prime rate. As of December 31,
1997, there were no borrowings under this Term Loan although there was an
outstanding letter of credit in the amount of $568,000 issued as a security
deposit on real estate. Under the Term Loan, the Company is required to meet
certain financial covenants. The Term Loan expires in September 2001.
Net cash used in operating activities for 1997 was $31.6 million primarily as
a result of net losses ($46.5 million) after adjustment for the non-cash
Cablevision Agreement amortization ($9.2 million), partially offset by
depreciation and amortization ($8.9 million) and changes in other accrued
liabilities ($6.0 million). Net cash used in operating activities for 1996 was
$19.3 million, primarily as a result of net losses. Net cash used in operating
activities for the Inception Period was $2.1 million.
Net cash used in investing activities in 1997 was $79.1 million, primarily from
purchases of short-term cash investments ($103.0 million) and cash purchases of
property, equipment, and improvements ($10.0 million), partially offset by sales
and maturities of short-term cash investments ($33.9 million). Net cash used
for investing activities in 1996 of $14.3 million was primarily the result of
purchases of short-term cash investments ($9.0 million) as well as the cash
purchases of property, equipment and improvements ($7.3 million). Gross
capital expenditures for equipment, software, furniture, leasehold improvements
and fixtures for the years 1997 and 1996 were $26.5 million and $15.2 million,
respectively, of which $16.5 million and $7.9 million, respectively, were
financed through capital leases. Net cash used in investing activities for the
Inception Period was $1.0 million.
Net cash provided by financing activities for 1997 was $145.2 million, resulting
primarily from net proceeds of $46.3 million from the sale of Preferred Stock in
April 1997, and net proceeds from the Company's IPO in July 1997 of $99.8
million. For 1996, cash provided by financing activities was $36.5 million,
resulting primarily from net proceeds from the sale of Preferred Stock ($35.0
million) in several private offerings. Net cash provided by financing
activities for the Inception Period was $6.8 million.
The Company believes that it has the financial resources needed to meet its
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next twelve months. Thereafter,
if cash generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may need to sell additional equity or debt
securities or obtain additional credit facilities. The sale of additional
equity or convertible debt securities may result in additional dilution to the
Company's stockholders. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
The Company is headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which the Company occupies under a 12-
year lease. Under this lease, the Company is obligated to pay for all tenant
improvements, substantially all of which had been completed as of
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December 31, 1997. In September 1997, the Company exercised its build-to-suit
option to require the landlord to build approximately 180,000 square feet of
facilities on adjacent property. The Company also has two remaining separate
build-to-suit options to require the landlord to build a total of approximately
220,000 additional square feet of facilities on adjacent property, subject to
certain conditions. All facilities constructed under the Company's build-to-suit
options will be subject to leases of up to 15 years in length, have base rent
determined in relation to construction costs and will include tenant
improvements paid for by the Company. In addition to its build-to-suit options,
the Company has the right to purchase two of the buildings leased from the
landlord consisting of approximately 200,000 total square feet. The Company has
also opened a small sales office in Bala Cynwyd, Pennsylvania to support its
Cable Partners in the eastern United States and eastern Canada. The Company
anticipates that its existing facilities, together with the facilities the
Company has the right to have built, will be adequate to accommodate its future
growth for the foreseeable future.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997. Under the new requirements, primary
earnings per share (referred to as basic earnings per share under the new
pronouncement) excludes the dilutive effect of stock options.
In February 1998, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of convertible
preferred stock, options, and warrants to purchase common stock, issued at
prices substantially below the per share price sold in the Company's IPO in July
1997, previously included in the computation of shares outstanding pursuant to
Staff Accounting Bulletin Nos. 55, 64, and 83 are now excluded from the
computation. Basic and diluted net loss per share for the years ended December
31, 1997 and 1996 have been restated to apply the requirements of FAS 128 and
SAB 98.
As described above, the adoption of FAS 128 and SAB 98 require certain changes
in the manner in which the Company calculates net loss per share. Under FAS
128 and SAB 98, shares exercised and unvested, and therefore subject to
repurchase by the Company upon termination of employment, are excluded from
the basic and diluted net loss per share calculation. The weighted average
number of equivalent shares applicable to unvested common stock subject to
repurchase agreements which were excluded from the computation of net loss per
share were approximately 10.4 million shares for the year ended December 31,
1997. This restatement had the effect of increasing the pro forma basic and
diluted net loss per share for 1997 from $0.49 to $0.54, and for 1996 from
$0.22 to $0.26. In addition, for the quarter ended December 31, 1997, the pro
forma basic and diluted net loss per share before the Cablevision Agreement
were revised from $0.10 to $0.11, and the pro forma basic and diluted net loss
per share after the Cablevision Agreement increased from $0.10 to $0.11.
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
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segments, products and services, geographic areas and major customers. The
Company is required to adopt these Statements in 1998. Adoption of these
Statements is expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.
IMPACT OF THE YEAR 2000 ISSUE
The Company has recently commenced reviewing its internal management information
systems as well as third parties' systems in order to assess the possible impact
of year 2000 issues on its business. The Company expects this review and
assessment will enable it to develop plans for any necessary changes, including
the testing and implementation of these changes and to make estimates of the
likely time and costs of any required changes. To the extent that such
modifications need to be made, the Company will endeavor to make them on a
timely basis and does not believe that the cost of such modifications will have
a material effect on the Company's operating results, due to its relatively
short operating history and small number of installed computer systems.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Unproven Business; No Assurance of Profitability. The Company was incorporated
in March 1995, commenced operations in August 1995, and has incurred net
losses from operations in each fiscal period since its inception. As of
December 31, 1997, the Company had an accumulated deficit of $73.7 million
(before the $9.2 million amortization recorded in the fourth quarter of 1997
in connection with the Cablevision Agreement), and an accumulated deficit of
$83.0 million, including the amortization relating to the Cablevision
Agreement. In addition, the Company currently intends to increase its capital
expenditures and operating expenses in order to expand its network to support
additional expected subscribers in existing and future markets, to support the
continued roll-out of its @Work services and to market and provide the
Company's services to a growing number of potential subscribers. As a result,
the Company expects to incur additional substantial operating and net losses
for the foreseeable future. The profit potential of the Company's business
model is unproven. The @Home service has only recently been launched, was only
available in portions of 21 geographic markets as of December 31, 1997 and may
not achieve broad consumer or commercial acceptance. The Company's @Work
services have also only recently been launched. Although approximately 500
organizations have agreed to utilize @Work services as of December 31, 1997,
@Work services may not achieve broad commercial acceptance and the current
rate of deployment for @Work services may not be sustained. The Company has
difficulty predicting whether the pricing models for its Internet services
will prove to be viable, whether demand for its Internet services will
materialize at the prices it expects its Cable Partners to charge (for the
@Home service) or the prices it charges (for @Work services), or whether
current or future pricing levels will be sustainable. If such pricing levels
are not achieved or sustained or if the
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Company's services do not achieve or sustain broad market acceptance, the
Company's business, operating results and financial condition will be materially
adversely affected. There can be no assurance that the Company will ever achieve
favorable operating results or profitability.
Subscriber Growth Risks for the @Home Service. As of December 31, 1997, the
Company had approximately 50,000 cable modem subscribers to its @Home service.
The Company's ability to increase the number of subscribers to the @Home service
to achieve its business plans and generate future revenues will be dependent on
a number of factors, many of which are beyond the Company's control. These
factors include, among others: (i) the rate at which the Company's current and
future Cable Partners upgrade their cable infrastructures; (ii) the ability of
the Company and its Cable Partners to coordinate timely and effective marketing
campaigns with the availability of such upgrades; (iii) the success of the Cable
Partners in marketing the @Home service to subscribers in their local cable
areas; (iv) the prices that the Cable Partners set for the @Home service and its
installation; (v) the speed at which the Cable Partners can complete the
installations required to initiate service for new subscribers; and (vi) the
quality of customer and technical support the Company and its Cable Partners
provide. The Company believes subscriber growth has been constrained, and will
continue to be constrained, by the amount of time required to install the
@Home service for each residential consumer. In addition, most of the
Company's Cable Partners are not obligated to upgrade their cable
infrastructures or market the @Home service. Moreover, the @Home service is
currently priced at a premium to many other online services, and large numbers
of subscribers may not be willing to pay a premium for the @Home service.
Because of the foregoing factors, among others, the Company is able to
forecast its revenues or the rate at which it will add new subscribers with
only a limited degree of accuracy. The Company may not be able to increase its
subscriber base in accordance with its internal forecasts or the forecasts of
industry analysts or to a level that meets the expectations of investors. The
rate at which subscribers have increased during the four quarters of 1997
should not be taken as indicative of the rate at which subscribers may be
expected to increase in the future. In particular, while the Company has
forecast that its number of subscribers could grow to 350,000 or more by the
end of 1998 from approximately 50,000 subscribers at the end of 1997, the
Company may not achieve this level of subscriber growth, particularly given
the risks set forth in this "Factors That May Affect Future Operating Results"
section.
Potential Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside the Company's control. Factors
that may affect the Company's quarterly operating results attributable to its
@Home service include: (i) the timing of the Company's Cable Partners' upgrades
of their cable infrastructures and roll-outs of the @Home service; (ii) the rate
at which customers subscribe to the Company's Internet services and the prices
subscribers pay for such services; (iii) subscriber churn rates; (iv) changes in
the revenue splits between the Company and its Cable Partners; (v) the demand
for Internet advertising; (vi) the effectiveness of the Cable Partners'
marketing and other operations; and (vii) potential competition with Cable
Partners for advertising revenue. Quarterly operating results attributable to
the Company's @Work services are dependent on: (i) the demand for, and level of
acceptance of, the Company's corporate Internet, intranet and extranet
connectivity and telecommuting solutions; (ii) the introduction of, demand for,
and level of acceptance of, the Company's value-added business applications; and
(iii) in part, the timing of the Cable Partners' upgrades of their cable
infrastructures. The Company operates with very little backlog, and quarterly
sales and operating results are difficult to forecast even in the short term. A
significant portion of the Company's expenses are fixed in advance based in
large part on future revenue forecasts. If revenue is below expectations in any
given quarter, the adverse impact of the shortfall on the Company's operating
results may be magnified by the Company's inability to adjust spending to
compensate for the shortfall. Moreover, the Company's Cable Partners have
complete discretion regarding the pricing of the @Home service in their
territories which could further impact the Company's ability to generate
sufficient revenue. A shortfall in actual as
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compared to estimated revenue would have an immediate adverse effect on the
Company's business, financial condition and operating results that could be
material.
Dependence on Cable Partners to Upgrade to Two-Way Cable Infrastructure
Necessary to Support the @Home Service; Uncertain Availability and Timing of
Upgrades. Transmission of the @Home service over cable is dependent on the
availability of high-speed two-way HFC cable infrastructure. However, only a
small portion of existing cable plant in the United States has been upgraded to
HFC cable, and even less is capable of high-speed two-way transmission. The
Company's Cable Partners have announced and begun to implement major
infrastructure investments in order to deploy two-way HFC cable. However, cable
system operators have limited experience with these upgrades, and these
investments have placed a significant strain on the financial, managerial,
operating and other resources of the Cable Partners, most of which are already
highly leveraged. Therefore, these infrastructure investments have been, and
the Company expects will continue to be, subject to change, delay or
cancellation. Although the Company's commercial success depends on the
successful and timely completion of these infrastructure upgrades, most of the
Cable Partners are under no obligation to the Company to upgrade systems or to
roll out, market or promote the Company's services. In addition, most of the
Cable Partners are not contractually required to achieve any specific roll-out
schedule. The failure of the Cable Partners to complete these upgrades in a
timely and satisfactory manner, or at all, would prevent the Company from
delivering high-performance Internet services and would have a material adverse
effect on the Company's business, operating results and financial condition.
No Obligation of Principal U.S. Cable Partners to Carry the Company's
Services; Limitations on Their Exclusivity. Although the Company's Principal
U.S. Cable Partners are subject to certain exclusivity obligations that
prohibit them from obtaining high-speed (greater than 128 Kbps) residential
consumer Internet services from any source other than the Company, such
Principal U.S. Cable Partners are under no affirmative obligation to carry any
of the Company's services. Such exclusivity obligations in favor of the
Company expire on June 4, 2002, and may be terminated sooner under certain
circumstances. The Principal U.S. Cable Partners' exclusivity obligations are
limited to high-speed residential Internet services and normally do not extend
to various "Excluded Services" which the Company's Principal U.S. Cable
Partners may offer without the Company. "Excluded Services" include: (i) the
provision of telephony services; (ii) the provision of services that are
primarily work-related (such as @Work services); (iii) the provision of
Internet services that do not use the Principal U.S. Cable Partners' cable
television infrastructures; (iv) the provision of any local Internet service
that does not require use of an Internet backbone outside a single
metropolitan area; (v) the provision of services that are utilized primarily
to connect students to schools, colleges or universities; (vi) the provision
of Internet telephony, Internet video telephony or Internet video
conferencing; (vii) the provision of certain limited Internet services
primarily intended for display on a television such as some types of Internet-
based digital set-top services; (viii) the provision of certain Internet
services that are primarily downstream services where the user cannot send
upstream commands in real-time; (ix) the provision of streaming video services
that include video segments longer than ten minutes in duration; and (x)
limited testing, trials and similar activities of less than six months. By
engaging in the Excluded Services, the Principal U.S. Cable Partners can
compete, directly or indirectly, with the activities of the Company, including
the Company's @Work services.
Control by TCI. TCI controls approximately 72% of the voting power of the
Company as of December 31, 1997. Therefore, TCI has the ability to control most
significant matters requiring stockholder approval, including the election of a
majority of the Company's directors, subject to certain supermajority approval
rights held by Comcast and Cox. In addition, the Company's Board of Directors,
which is controlled by TCI and certain of the Company's other Principal U.S.
Cable Partners, has the power, subject to directors' fiduciary duties, to
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change the terms of distribution for the Company's Internet services to be more
favorable for the Company's Principal U.S. Cable Partners and less favorable for
the Company. See the Company's Registration Statement on Form S-1 (File No. 333-
27323), and exhibits thereto, which became effective on July 11, 1997 for
additional information on the rights of TCI and other Principal U.S. Cable
Partners.
Limitations on the Company's Ability to Provide Certain Excluded Services.
Until at least June 4, 2002, the Company has agreed with its Principal U.S.
Cable Partners (i) not to offer or provide Internet services at data
transmission speeds greater than 128 Kbps to residences in any geographic area
served by the cable systems of those Principal U.S. Cable Partners that remain
in compliance with their exclusivity provisions (the "Exclusive Territory")
and (ii) not to directly or indirectly offer, provide, distribute, advertise,
promote or market (or carry or otherwise distribute advertising or promotions
with respect to) any streaming video transmissions that include video segments
longer than ten minutes in duration or any other Excluded Service to
residences in the Exclusive Territory of a Principal U.S. Cable Partner
without its prior written consent even if such Excluded Service has been
integrated with the @Home service in other areas. No assurance can be given
that the Company will have access to the cable infrastructures of its
Principal U.S. Cable Partners for Excluded Services, and the Company must
negotiate a separate agreement with the Principal U.S. Cable Partners for each
portion of such services that the Company seeks to provide over their cable
infrastructures. Any such denial of access or exclusion, or competition from
the Company's Principal U.S. Cable Partners in providing Excluded Services,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Potential Disposition of Cable Systems by Principal U.S. Cable Partners. The
Company's agreements with its Principal U.S. Cable Partners do not require that
they maintain a specified number of cable systems, subscribers or homes passed
in order to maintain their control over and equity ownership of the Company.
Therefore, these Principal U.S. Cable Partners may dispose of a significant
amount of their cable systems without requiring that such cable systems remain
subject to any exclusivity provisions. However, to the extent that any
Principal U.S. Cable Partner disposes of more than 20% of the number of homes
passed in its service areas as of June 4, 1996 (subject to certain exceptions)
without causing such transferred homes to remain exclusive to @Home, then such
Principal U.S. Cable Partner may be required to sell a proportionate amount of
its equity interest in the Company to the other Principal U.S. Cable Partners at
the fair market value thereof. TCI has recently announced the proposed sale or
transfer of certain cable systems and is considering various plans and proposals
that may result in the disposition of other of its cable systems. In addition,
Marcus has announced its intention to be acquired or to sell substantially all
of its assets to one or more third parties, which may or may not be current
Cable Partners of the Company. Such dispositions may have an adverse effect
upon the business, operating results and financial condition of the Company if
the transferred homes do not remain exclusive to @Home.
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Unproven Network Scalability, Speed and Security. Due to the limited deployment
of the Company's services, the ability of the @Home broadband network to connect
and manage a substantial number of online subscribers at high transmission
speeds is as yet unknown, and the Company faces risks related to the @Home
broadband network's ability to be scaled up to its expected subscriber levels
while maintaining superior performance. The @Home broadband network may be
unable to achieve or maintain a high speed of data transmission, especially as
the number of the Company's subscribers grows. The Company's failure to achieve
or maintain high-speed data transmission would significantly reduce consumer
demand for its services and have a material adverse effect on its business,
operating results and financial condition. In addition, while the Company has
taken steps to prevent users from sharing files via the @Home service and to
protect against "email spamming", public concerns about security, privacy and
reliability of the cable network, or actual problems with the security, privacy
or reliability of the Company's network, may inhibit the acceptance of the
Company's Internet services.
Management of Expanded Operations; Dependence on Key Personnel. The Company may
not be able to successfully manage any future periods of rapid growth or
expansion, which could be expected to place a significant strain on the
Company's managerial, operating, financial and other resources. The failure of
the Company or its Cable Partners to provide adequate customer service or
efficient provisioning of new subscribers as the Company's Internet service
offerings scale would have a material adverse affect on subscriber growth and
retention and would materially adversely affect the Company's business,
operating results and financial condition. The Company is highly dependent upon
the efforts of its senior management team, and the Company's future performance
will depend, in part, upon the ability of senior management to manage growth
effectively, which will require the Company: (i) to implement additional
management information systems capabilities; (ii) to develop further its
operating, administrative, financial and accounting systems and controls; (iii)
to maintain close coordination among engineering, accounting, finance,
marketing, sales and operations; and (iv) to hire and train additional technical
and marketing personnel. There is intense competition for senior management,
technical and marketing personnel in the areas of the Company's activities. The
loss of the services of any of the Company's senior management team or the
failure to attract and retain additional key employees could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company maintains no key-person life insurance.
Dependence on Two-Way Cable Modems; New Industry Standard. Each of the
Company's subscribers currently must obtain a cable modem from a cable affiliate
to access the @Home service. The North American cable industry has recently
adopted a set of interface specifications for hardware and software to support
the delivery of data services over the cable infrastructure utilizing
interoperable cable modems. The Company believes that these specifications,
together with its development agreement with Intel Corporation relating to "plug
and play" modems, will facilitate the growth of the cable modem industry and the
availability of lower cost interoperable cable modems through retail channels.
However, to the extent that any of the Company's Cable Partners choose to slow
the deployment of the @Home service until the commercial availability of cable
modems that are compliant with these new specifications, the Company's
subscriber growth could be constrained and the Company's business, operating
results and financial condition could
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be materially adversely affected during the period of such a delay. Cable modems
that are compliant with the cable industry's interface specifications are
currently expected to be commercially available in the fourth quarter of 1998.
Competition. The markets for consumer and business Internet services and online
content are extremely competitive, and the Company expects that competition will
intensify in the future. The Company's most direct competitors in these markets
are Internet service providers, national long distance carriers and local
exchange carriers, wireless service providers, online service providers and
Internet content aggregators. Many of these competitors are offering (or may
soon offer) technologies that will attempt to compete with some or all of the
Company's high-speed data service offerings. Such technologies include
Integrated Services Digital Network ("ISDN") and Asymmetric Digital Subscriber
Line ("ADSL"). In January 1998, Compaq Computer Corporation, Intel Corporation,
Microsoft Corporation, other technology companies and numerous telecommunication
providers announced an initiative to develop a simplified version of ADSL,
referred to as "ADSL Lite," that reduces the complexity and expense of
installing Internet services based on ADSL. While commercial tests of this
simplified version of ADSL are not expected until the end of 1998, this
initiative may accelerate the deployment of ADSL services. Widespread commercial
acceptance of ADSL technologies could significantly reduce the potential
subscriber base for the Company's Internet services, which would have an
immediate adverse effect on the Company's business, operating results and
financial conditions.
Many of the Company's competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services or online content than the Company.
The Company may not be able to compete successfully against current or future
competitors, and competitive pressures faced by the Company could materially
adversely affect the Company's business, operating results or financial
condition. Further, as a strategic response to changes in the competitive
environment, the Company and its Cable Partners may make certain pricing,
service or marketing decisions or enter into acquisitions or new ventures that
could have a material adverse effect on the Company's business, operating
results or financial condition.
Risks Associated with Joint Development Efforts. The Company was recently
selected by TCI to develop software and integration services for TCI's next
generation advanced digital set-top devices, which could enable the Company to
expand its product line and market the @Home service to a broader audience of
consumers that do not regularly use a personal computer. Completion of the
transactions contemplated by the Memorandum of Understanding between the Company
and TCI's National Digital Television Center is subject to negotiation of a
definitive agreement and other conditions, and there can be no assurance that
such transactions will be consummated. Moreover, the Company cannot predict
when such set-top devices will become commercially available, and, in addition
to the technological, financial and infrastructure challenges TCI faces in
deploying the new set-top devices, the success of this development effort is
subject to: (i) the technological and operational challenges of providing and
supporting email and other Internet services to set-top device users; (ii)
competition from alternative Internet service providers and deployment
technologies; and (iii) the degree to which consumers desire Internet services,
including email, on their televisions.
Risk of System Failure. The Company's operations are dependent upon its ability
to support its highly complex network infrastructure and avoid damage from
fires, earthquakes, floods, power losses, telecommunications failures and
similar events. The occurrence of a natural disaster or other unanticipated
problem at the Company's Network Operations Center ("NOC") or at a number of the
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Company's regional data centers ("RDCs") could cause interruptions in the
services provided by the Company. Additionally, failure of the Company's Cable
Partners or companies from which the Company obtains data transport services to
provide the data communications capacity required by the Company, as a result of
natural disaster, operational disruption or any other reason, could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, operating results and financial
condition.
Risks of Technological Change. The markets for consumer and business Internet
access services and online content are characterized by rapid technological
developments, frequent new product introductions and evolving industry
standards. The emerging nature of these products and services and their rapid
evolution will require that the Company continually improve the performance,
features and reliability of its network, Internet content and consumer and
business services, particularly in response to competitive offerings. The
Company may not be successful in responding quickly, cost effectively and
sufficiently to these developments. There may be a time-limited market
opportunity for the Company's cable-based consumer and business Internet
services, and the Company may not be successful in achieving widespread
acceptance of its services before competitors offer products and services with
speed and performance similar to the Company's current offerings. In addition,
the widespread adoption of new Internet or telecommuting technologies or
standards, cable-based or otherwise, could require substantial expenditures by
the Company to modify or adapt its network, products and services and could
fundamentally affect the character, viability and frequency of Internet-based
advertising, either of which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, new
Internet or telecommuting services or enhancements offered by the Company may
contain design flaws or other defects that could have a material adverse effect
on the Company's business, operating results and financial condition.
Risks Associated with International Operations. A key component of the
Company's strategy is expansion into international markets. To date, the
Company has developed relationships only with United States and Canadian cable
system operators. The Company has extremely limited experience in developing
localized versions of its products and services and in developing relationships
with international cable system operators. The Company may not be successful in
expanding its product and service offerings into foreign markets. In addition
to the uncertainty regarding the Company's ability to generate revenues from
foreign operations and expand its international presence, there are certain
risks inherent in doing business on an international level, such as: (i)
regulatory requirements (including the regulation of Internet access); (ii)
legal uncertainty regarding liability for information retrieved and replicated
in foreign jurisdictions; (iii) export and import restrictions; (iv) tariffs and
other trade barriers; (v) difficulties in staffing and managing foreign
operations; (vi) longer payment cycles; (vii) problems in collecting accounts
receivable; (viii) political instability; (ix) fluctuations in currency exchange
rates; (x) seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and (xi) potentially adverse tax
consequences, which could adversely affect the success of the Company's future
international operations. One or more of such factors could have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations. In addition, the market
price of the shares of the Company's Series A Common Stock, similar to the
market prices of other Internet companies, has been and is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, regulatory actions, market
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rumors and general market conditions may have a significant effect on the market
price of the Company's Series A Common Stock.
Dilution from Certain Transactions. As a result of a transaction effective
October 2, 1997, whereby Cablevision agreed to enter into an agreement to
distribute the @Home service on substantially the same terms and conditions as
TCI, Comcast and Cox, Cablevision was granted warrants to purchase up to
10,946,936 shares of the Company's Series A Common Stock at an exercise price
of $0.50 per share under certain conditions (the "Cablevision Agreement"). A
portion of the warrants issued to Cablevision (the "Contingent Warrants") are
not exercisable unless certain cable systems are transferred by TCI to
Cablevision. To the extent that Cablevision exercises its warrants, the
Company's stockholders will experience substantial dilution. In the fourth
quarter of 1997, the Company recorded an asset of $172.6 million that is being
amortized ratably over the 56-month term of the Cablevision Agreement. During
the first quarter of 1998, as a result of the transfer of 1,177,757 homes from
TCI to Cablevision on March 4, 1998, an additional asset of approximately
$74.5 million, representing the fair value of the Contingent Warrant, which
will be amortized over the Cablevision Agreement's remaining useful life, will
be recorded. An additional asset will be recorded in connection with the
Contingent Warrants if and when the remaining 357,819 TCI homes are
transferred to Cablevision.
In addition, in March 1998, the Company issued performance-based warrants to
Rogers and Shaw to purchase up to 5,000,000 shares of Series A Common Stock at
an exercise price of $10.50 per share. These warrants will become exercisable
when, as and if Rogers and Shaw meet certain performance milestones for homes
passed, subscribers and revenue. To the extent that Rogers or Shaw exercise
their warrants, the Company's stockholders would experience additional
dilution. The Company also may issue additional stock, or warrants to purchase
the same, at less than fair market value in connection with its efforts to
expand its distribution of the @Home service to other cable operators.
ITEM 8. RESTATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Company's Restated Financial Statements, Financial Schedules,
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.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning the Company's directors required by Item 10 is
incorporated by reference herein to section entitled "Proposal No. 1 - Election
of Directors" of the Proxy Statement. The information concerning the Company's
executive officers required by Item 10 is incorporated by reference to the
section of the 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 the 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 the Proxy Statement.
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 the Proxy Statement.
With the exception of the information specifically stated as being
incorporated by reference from the Company's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders (the "Proxy Statement") in Part III of
this Annual Report on Form 10-K/A, the Company's 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 within 120 days of the Company's fiscal
year end.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements (Restated). The Company's financial statements
-------------------------------
filed are as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.............. 47
Consolidated Balance Sheets at December 31, 1997 and 1996...... 48
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 and for the period from
March 28, 1995 (inception) to December 31, 1995.............. 49
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997 and 1996, and for the period from
March 28, 1995 (inception) to December 31, 1995.............. 50
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996, and for the period from
March 28, 1995 (inception) to December 31, 1995.............. 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)
4.01 Third Amended and Restated Registration Rights Agreement, dated
April 11, 1997, among Registrant and the parties indicated therein
(1)
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<S> <C>
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)
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 Letter Agreement and Term Sheet among the Registrant, Cablevision
Systems Corporation, CSC Parent Corporation, Comcast Corporation,
Cox Enterprises, Inc., Kleiner Perkins Caufield & Byers and Tele-
Communications, Inc. dated as of October 2, 1997 (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 among the Registrant, Cablevision
Systems Corporation, CSC Parent Corporation, Comcast Corporation,
Cox Enterprises, Inc., Kleiner Perkins Caufield & Byers and Tele-
Communications, Inc., dated as of October 2, 1997 (2)
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 between the Registrant and Cablevision
Systems Corporation, dated October 10, 1997 (2)
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 the
Registrant issued to CSC Parent Corporation, dated October 10, 1997
(2)
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
the Registrant issued to CSC Parent Corporation, dated October 10,
1997 (2)
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)
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<S> <C>
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 entered into by Registrant with
each of its directors and executive officers(1)
10.10 Registrant's 1996 Incentive Stock Option Plan (*)(1)
10.11 Registrant's 1996 Incentive Stock Option Plan No. 2 (*)(1)
10.12 Registrant's 1997 Equity Incentive Plan (*)(1)
10.13 Registrant's 1997 Employee Stock Purchase Plan (*)(1)
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 entered into by and between Martin/Campus
Associates, L.P. and At Home Corporation dated September 29, 1997
(425 Broadway, Redwood City, California) (3)
10.22 Build To Suit Lease entered into by and between Martin/Campus
Associates, L.P., and At Home Corporation dated September 29, 1997
(440 Broadway, Redwood City, California) (3)
10.23 Loan and Security Agreement entered into by and between Silicon
Valley Bank and At Home Corporation dated September 30, 1997 (3)
11.01 Statement regarding the computation of net loss and of pro forma net
loss per share
21.01 Subsidiaries of Registrant (1)
23.01 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
24.01 Form of power of attorney executed by each officer and director
whose signature has been conformed on the signature page appearing
on page 44 of this Form 10-K/A
27.01 Restated Financial data schedule for year ended December 31, 1997
27.02 Restated financial data schedule for quarter ended September 30,
1997(4)
27.03 Restated financial data schedule for quarter ended June 30, 1997(4)
27.04 Restated financial data schedule for quarter ended March 31, 1997(4)
27.05 Restated financial data schedule for year ended December 31, 1996(4)
27.06 Restated financial data schedule for year ended December 31, 1995(4)
- ----------------
</TABLE>
* Management contracts or compensatory plans required to be filed as an
exhibit to Form 10-K.
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-27323), which became effective on
July 11, 1997.
(2) Incorporated by reference to exhibits to the Company's Registration
Statement on Form 8-K filed on October 21, 1997 (File No. 000-22697)
(3) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on November 14, 1997 (File No. 000-22697).
(4) Incorporated by reference to exhibits to the Company's Report on Form
10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K.
-------------------
The Company filed a report on Form 8-K on October 22, 1997 which included
the following item:
Item 5. Disclosure of a Letter Agreement and Term Sheet with Cablevision
Systems Corporation ("Cablevision"), CSC Parent Corporation ("CSC
Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc. ("Cox"),
Kleiner Perkins Caufield & Byers and Tele-Communications, Inc. ("TCI").
The Agreement provides that Cablevision will enter into a Master
Distribution Agreement for the distribution of the Company's @Home
services on substantially the same terms and conditions as TCI, Comcast
and Cox. The Agreement also provides for the issuance to Cablevision and
CSC Parent of certain warrants.
(c) Exhibits. - See (a) (3) above.
--------
(d) Financial Statement Schedules. - Not applicable.
-----------------------------
43
<PAGE>
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.
AT HOME CORPORATION
DATE 2/8/99
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:
Thomas A. Jermoluk* Chairman, President and Chief Executive 2/8/99
- --------------------- Officer
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Name TITLE DATE
- ---- ----- ----
<S> <C> <C>
Principal Financial Officer:
/s/Kenneth A. Goldman Senior Vice President and 2/8/99
- --------------------- Chief Financial Officer
Chief Accounting Officer:
Robert A. Lerner* Controller 2/8/99
- -------------------
Directors:
Thomas A. Jermoluk* Chairman, President and 2/8/99
- --------------------- Chief Executive Officer
William R. Hearst III* Vice Chairman 2/8/99
- ------------------------
L. John Doerr* Director 2/8/99
- ---------------------
Leo J. Hindery, Jr.* Director 2/8/99
- ----------------------
John C. Malone* Director 2/8/99
- -----------------
Bruce W. Ravenel* Director 2/8/99
- -------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
Brian L. Roberts* Director 2/8/99
- -------------------
Larry E. Romrell* Director 2/8/99
- -------------------
Director
- -------------------
James R. Shaw, Jr.
David M. Woodrow* Director 2/8/99
- -------------------
*By: /s/ Kenneth A. Goldman
_______________________
Kenneth A. Goldman
Attorney-in-fact
</TABLE>
46
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
At Home Corporation
We have audited the accompanying consolidated balance sheets of At Home
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended and for the period from March 28, 1995 (inception) to December 31,
1995. 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for the years then ended and for the period
from March 28, 1995 (inception) to December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1, the consolidated financial statements for the year
ended December 31, 1997 have been restated to record an intangible asset and
the related amortization, in connection with warrants issued under a
distribution agreement.
/s/ ERNST & YOUNG LLP
San Jose, California
January 19, 1998,
except for Note 12, as to which the date is
March 18, 1998
and Note 1, as to which the date is
January 11, 1999
47
<PAGE>
AT HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 44,213 $ 9,709
Short-term cash investments................................... 76,166 7,061
--------- --------
Total cash, cash equivalents and short-term cash investments.. 120,379 16,770
Accounts receivable........................................... 1,470 164
Accounts receivable -- related parties........................ 672 640
Other current assets.......................................... 2,919 741
--------- --------
Total current assets............................................ 125,440 18,315
Property, equipment and improvements, net....................... 33,061 14,328
Distribution agreement, net..................................... 163,345 --
Other assets.................................................... 2,082 745
--------- --------
Total assets.................................................... $ 323,928 $ 33,388
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 2,409 $ 1,946
Accounts payable -- related parties........................... 2,108 1,482
Accrued compensation and related expenses..................... 798 248
Deferred revenues............................................. 1,941 87
Other accrued liabilities..................................... 6,823 798
Current portion of capital lease obligations.................. 9,971 3,181
--------- --------
Total current liabilities....................................... 24,050 7,742
Capital lease obligations, less current portion................. 15,735 5,654
Other long-term liabilities..................................... 1,736 1,675
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value:
Authorized shares -- 9,650,000
Issued and outstanding shares--
none in 1997 and 4,522,613 in 1996....................... -- 44,993
Common stock, $0.01 par value:
Authorized shares--230,277,660
Issued and outstanding shares--
118,603,220 in 1997 and 11,855,008 in 1996............... 370,111 1,035
Notes receivable from stockholders............................ (319) (170)
Deferred compensation......................................... (4,399) (272)
Accumulated deficit........................................... (82,986) (27,269)
--------- --------
Total stockholders' equity...................................... 282,407 18,317
--------- --------
Total liabilities and stockholders' equity...................... $ 323,928 $ 33,388
========= ========
</TABLE>
See accompanying notes
48
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- ---------------
(RESTATED)
<S> <C> <C> <C>
Revenues (1).................................... $ 7,437 $ 676 $ --
Costs and expenses:
Operating costs.............................. 22,459 6,969 --
Product development and engineering ......... 11,984 6,312 1,447
Sales and marketing.......................... 11,863 6,368 496
General and administrative................... 10,635 6,054 943
Amortization of distribution agreement....... 9,246 -- --
------------ ----------- --------------
Total costs and expenses........................ 66,187 25,703 2,886
------------ ----------- --------------
Loss from operations............................ (58,750) (25,027) (2,886)
Interest income, net............................ 3,033 514 130
------------ ----------- --------------
Net loss........................................ $ (55,717) $ (24,513) $ (2,756)
============ =========== ==============
Pro forma basic and diluted net loss per share.. $(0.54) $(0.26) $(0.03)
============ =========== ==============
Pro forma basic and diluted shares used in
per share calculations....................... 103,543,348 96,119,832 95,252,260
============ =========== ==============
- ---------
(1) Revenues from related parties $ 2,948 $ 634 $ --
============ =========== ==============
</TABLE>
See accompanying notes
49
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL STOCK-
--------------------- ---------------------- FROM DEFERRED ACCUMULATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION DEFICIT EQUITY
---------- -------- ----------- -------- ------------- ------------ ---------- ---------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of preferred
stock, less issuance costs 1,000,000 $ 9,968 -- $ -- $ -- $ -- $ -- $ 9,968
Net loss................... -- -- -- -- -- -- (2,756) (2,756)
---------- -------- ----------- -------- ----- ------- -------- --------
BALANCES AT DECEMBER 31,
1995...................... 1,000,000 9,968 -- -- -- -- (2,756) 7,212
Issuance of preferred
stock, less issuance costs 3,522,613 35,025 -- -- -- -- -- 35,025
Series A common stock
issued under stock option
plans and restricted stock
agreements................ -- -- 12,402,500 718 (170) -- -- 548
Repurchases of Series A
common stock.............. -- -- (547,492) (29) -- -- -- (29)
Deferred compensation
related to grant of stock
options................... -- -- -- 346 -- (346) -- --
Amortization of deferred
compensation.............. -- -- -- -- -- 74 -- 74
Net loss................... -- -- -- -- -- -- (24,513) (24,513)
---------- -------- ----------- -------- ----- ------- -------- --------
BALANCES AT DECEMBER 31,
1996...................... 4,522,613 44,993 11,855,008 1,035 (170) (272) (27,269) 18,317
Issuance of Series C
preferred stock, less
issuance costs............ 240,000 46,339 -- -- -- -- -- 46,339
Conversion of preferred
stock to common stock..... (4,762,613) (91,332) 95,252,260 91,332 -- -- -- --
Series A common stock
issued in the initial
public offering, less
issuance costs........... -- -- 10,350,000 99,768 -- -- -- 99,768
Series A common stock
issued under stock option
plans and restricted stock
agreements................ -- -- 2,190,586 527 (234) -- -- 293
Repurchases of Series A
common stock.............. -- -- (1,044,634) (91) 15 -- -- (76)
Repayment of notes
receivable................ -- -- -- -- 70 -- -- 70
Warrants issued to purchase
Series A common stock in
connection with the
distribution agreement.... -- -- -- 172,283 -- -- -- 172,283
Deferred compensation
related to
grant of stock options.... -- -- -- 5,257 -- (5,257) -- --
Amortization of deferred
compensation.............. -- -- -- -- -- 1,130 -- 1,130
Net loss (Restated)........ -- -- -- -- -- -- (55,717) (55,717)
---------- -------- ----------- -------- ----- ------- -------- --------
BALANCES AT DECEMBER 31,
1997...................... -- $ -- 118,603,220 $370,111 $(319) $(4,399) $(82,986) $282,407
========== ======== =========== ======== ===== ======= ======== ========
</TABLE>
See accompanying notes
50
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995
YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ---------- ---------------
(RESTATED)
<S> <C> <C> <C>
Cash (used in) operating activities
Net loss............................................... $ (55,717) $(24,513) $(2,756)
Adjustments to reconcile net loss to cash used
in operating activities:
Amortization of deferred compensation.............. 1,130 74 --
Depreciation and amortization...................... 7,783 1,829 42
Amortization of distribution agreement............. 9,246 -- --
Changes in assets and liabilities:
Accounts receivable.............................. (1,338) (804) --
Distribution agreements.......................... (308) -- --
Other assets..................................... (1,943) (1,190) (296)
Accounts payable................................. 1,089 2,605 823
Accrued compensation and related expenses........ 550 159 89
Deferred revenues................................ 1,853 87 --
Other accrued liabilities........................ 6,026 798 --
Other long-term liabilities...................... 61 1,675 --
--------- -------- -------
Cash (used in) operating activities.................... (31,568) (19,280) (2,098)
CASH (USED IN) INVESTING ACTIVITIES
Purchase of short-term cash investments................ (103,030) (8,998) (63)
Sales and maturities of short-term cash investments.... 33,925 2,000 --
Purchase of property, equipment and improvements....... (9,989) (7,320) (963)
--------- -------- -------
Cash (used in) investing activities.................... (79,094) (14,318) (1,026)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock.. 46,339 35,025 9,968
Proceeds from net issuance of common stock............. 99,985 519 --
Proceeds from capital lease financing.................. 5,630 1,500 --
Payments on capital lease obligations.................. (6,858) (581) --
Repayment of notes receivable from stockholders........ 70 -- --
--------- -------- -------
Cash provided by financing activities.................. 145,166 36,463 9,968
--------- -------- -------
Net increase in cash and cash equivalents.............. 34,504 2,865 6,844
Cash and cash equivalents, beginning of period......... 9,709 6,844 --
--------- -------- -------
Cash and cash equivalents, end of period............... $ 44,213 $ 9,709 $ 6,844
========= ======== =======
SUPPLEMENTAL DISCLOSURES
Interest paid.......................................... $ 1,039 $ 143 $ --
========= ======== =======
Acquisition of equipment under capital leases.......... $ 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 common stock warrants in connection
with the distribution agreement...................... $ 172,283 $ -- $ --
========= ======== =======
</TABLE>
See accompanying notes
51
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED)
1. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of December 31, 1997, the
accompanying consolidated statement of operations, cash flows and stockholders'
equity for the year ended December 31, 1997 have been restated to record and
amortize an intangible asset associated with the distribution agreement with
Cablevision Systems Corporation in October 1997 which amounts had been
previously expensed. As a result of this restatement, the consolidated balance
sheet as of December 31, 1997 and consolidated statement of operations for the
year ended December 31, 1997 have been restated as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1997
------------------------------
(in thousands except
per share information)
As previously
reported Restated
------------- --------------
<S> <C> <C>
Cost and amortization of
distribution agreements............ $ 172,591 $ 9,246
Total costs and expenses............. 229,532 66,187
Loss from operations................. (222,095) (58,750)
Net loss............................. (219,062) (55,717)
Basic and diluted net loss per
share.............................. (2.12) (0.54)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
As previously
reported Restated
------------- -------------
<S> <C> <C>
Distribution agreement, net.......... $ -- $163,345
Total assets......................... 160,583 323,928
Accumulated deficit.................. (246,331) (82,986)
Total liabilities and Stockholders'
equity............................. 160,583 323,928
</TABLE>
2. 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 and leased digital
telecommunications lines. As of December 31, 1997, the Company's services were
available through cable systems and directly to businesses in a limited number
of cities in the United States and Canada.
Dependence on Cable Companies
The Company has strategic relationships with eight major cable companies
which are expected to provide through their cable systems the principal
distribution network for the Company's services to its subscribers. The
Company's four principal U.S. cable stockholders have granted the Company the
exclusive right to offer high-speed residential consumer Internet services over
their cable systems, subject to certain exceptions. However, the principal U.S.
cable stockholders are under no obligation to roll out, market, carry or promote
the Company's services. In addition, the principal U.S. cable stockholders'
exclusivity obligations in favor of the Company expire in June 2002, and may be
terminated prior to that date under certain circumstances.
Transmission of data over cable is dependent on the availability of high-
speed two-way hybrid fiber-coaxial cable infrastructure. Currently, a
substantial majority of existing cable plants in the United States have not been
upgraded from coaxial cable to hybrid fiber-coaxial cable and, in addition, are
not capable of two-way transmission. Cable system operators have announced and
begun to implement major infrastructure investments in order to deploy data-
over-cable services. However, the four principal U.S. cable stockholders are
under no obligation to upgrade their systems and therefore, there can be no
assurance that such infrastructure improvements will be completed.
Dependence on Key Technology Suppliers
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material adverse effect on the Company's financial
condition and results of operations.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
52
<PAGE>
date of the financial statements and the reported results of operations during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Monthly customer subscription revenue, as generally billed by cable system
operators, 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. Through December 31, 1997, 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 primarily based on fixed-fee charter programs. Such revenues are
recognized over the term of the programs. The Company has also entered into
agreements with three of the U.S. cable stockholders for the development,
deployment and marketing of additional services. Revenues for these development
agreements are recognized on the percentage of completion basis.
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.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective January 1, 1996. The adoption did not have a material
impact on the Company's financial statements.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123").
Pro Forma Basic and Diluted Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards Statement
No. 128, "Earnings Per Share" ("FAS 128"), which 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 the
dilutive effects of outstanding options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of
convertible preferred stock, options, and warrants to purchase common stock,
issued at prices substantially below the per share price sold in the Company's
Initial Public Offering in July 1997, previously included in the computation of
shares outstanding pursuant to Staff Accounting Bulletin Nos. 55, 64, and 83 are
now excluded from the computation. Pro forma basic and diluted net loss per
share for the years ended
53
<PAGE>
December 31, 1997 and 1996 and for the period from March 28, 1995 (inception) to
December 31, 1995 have been restated to apply the requirements of FAS 128 and
SAB 98.
Pro forma basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding and also gives effect to
the conversion, in connection with the Company's initial public offering, of all
outstanding shares of convertible preferred stock into shares of common stock
for all periods presented. The effect of outstanding stock options, warrants,
and common stock subject to repurchase (Note 6) is excluded from the computation
as their inclusion would be anti-dilutive.
Historical net loss per share is not presented since such amounts are not
considered meaningful as a result of the significant change in the Company's
capital structure (Note 6) that occurred in connection with the initial public
offering of its common stock in July 1997.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these Statements in fiscal 1998. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and service, geographic areas of operation and
major customers. Adoption of these Statements is expected to have no material
impact on the Company's financial position, results of operations or cash flows.
3. FINANCIAL INSTRUMENTS.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of three months or less and are stated at amounts that
approximate fair value, based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and the
U.S. Government. The Company includes in cash and cash equivalents all short-
term, highly liquid investments that mature within three months of their
acquisition date.
Short-Term Cash Investments
The Company has classified all short-term cash investments as available-for-
sale. Available-for-sale securities are carried at amounts that approximate fair
market value based on quoted market prices. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. Interest on securities classified as
available-for-sale is also included in interest income. The Company's cash,
cash equivalents and short-term investments are held with three financial
institutions.
54
<PAGE>
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Corporate bonds and notes................ $74,867 $1,003
U.S. government obligations.............. 5,772 4,000
Money market instruments................. 2,789 9,933
Certificates of deposit.................. 15,004 --
Market auction preferred stock........... 21,000 --
------- ------
119,432 14,936
Included in cash and cash equivalents.... 43,266 7,875
------- ------
Included in short-term cash investments.. $76,166 $7,061
======= ======
</TABLE>
Unrealized gains and losses at December 31, 1997 and 1996 and realized gains
and losses for the years then ended and for the period from March 28, 1995
(inception) to December 31, 1995 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, 1997 and December 31, 1996 have
maturity dates in 1998 and 1997, respectively.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS.
The components of property, equipment and improvements are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- ESTIMATED
1997 1996 USEFUL LIVES
------------ ------- ------------
<S> <C> <C> <C>
Computer equipment and software.... $32,318 $13,952 3-4 years
Furniture and fixtures............. 5,278 1,881 5 years
Leasehold improvements............. 5,119 366 lease term
------- -------
42,715 16,199
Less accumulated depreciation and
amortization....................... 9,654 1,871
------- -------
$33,061 $14,328
======= =======
</TABLE>
Equipment and improvements include amounts for assets acquired under capital
leases, principally computer equipment and software and furniture and fixtures
of approximately $24,443,000 and $7,916,000 at December 31, 1997 and 1996,
respectively. Accumulated amortization of these assets was approximately
$7,339,000 and $817,000 at December 31, 1997 and 1996, respectively.
5. CABLEVISION DISTRIBUTION AGREEMENT
In October 1997, the Company entered into a contract with Cablevision
Systems Corporation ("Cablevision"), and its parent, CSC Parent Corporation
("CSC Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc.
("Cox"), Kleiner Perkins Caufield & Byers and Tele-Communications, Inc.
("TCI") (the "Cablevision Agreement"). Pursuant to the Cablevision Agreement,
Cablevision entered into a Master Distribution Agreement for the distribution
of the Company's @Home service on substantially the same terms and conditions
as TCI, Comcast and Cox. Although Cablevision is subject to certain
exclusivity obligations that prohibit it from obtaining high-speed (greater
than 128 kilobits per second) residential consumer Internet services from any
source other than the Company, Cablevision is under no obligation to upgrade
its cable systems to two-way cable infrastructure and is under no affirmative
obligation to roll out, market, promote or carry any of the Company's
services. The exclusivity obligations in favor of the Company expire in June
2002, and may be terminated sooner under certain circumstances. These
exclusivity obligations are also 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 Cablevision 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 Cablevision, CSC Parent or their controlled
affiliates. The Company recorded an intangible asset in the fourth quarter of
1997 of $172,600,000, which represents the cost of the distribution agreement,
based on the fair value of the Warrant. This asset is being amortized on the
straight-line method over the 56-month term of the Cablevision Agreement.
Amortization of this asset in 1997 was $9,246,000.
In March 1998, the contingencies surrounding the Contingent Warrant were
satisfied relating to 2,355,514 shares and, accordingly, an additional
intangible asset of approximately $74,500,000, based on the fair value of the
Contingent Warrant, will be recorded in the first quarter of 1998. This asset
will be amortized straight-line over the remaining life of the Cablevision
Agreement.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicated that such assets might be impaired. To
date, no such impairment has been recorded.
6. LEASE OBLIGATIONS.
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 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.
55
<PAGE>
Future minimum lease payments under non-cancelable operating and capital
leases having terms in excess of one year as of December 31, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
Year Ending December 31,
1998................................ $ 2,856 $12,135
1999................................ 2,975 10,326
2000................................ 3,049 5,103
2001................................ 3,133 504
2002................................ 2,693 --
Thereafter.......................... 9,539 --
------- -------
Total minimum lease payments..... $34,245 28,068
======= =======
Less amounts representing interest.. (2,362)
-------
Present value of minimum
capital lease obligations......... 25,706
Less current portion................ (9,971)
-------
Noncurrent portion.................. $15,735
=======
</TABLE>
The Company has also entered into a build-to-suit agreement that obligates
the Company to a 15 year lease on two buildings comprising approximately 180,000
square feet which begins when construction is completed, currently anticipated
to occur in 1999. The agreement provides for monthly rental payments of
approximately $322,000.
The Company is also committed under an existing operating lease to make
expenditures for tenant improvements estimated to be approximately $2,500,000 in
1998.
Facility rent expense amounted to approximately $1,245,000, $600,000, and
$98,000 for the years ended December 31, 1997 and 1996 and for the period from
March 28, 1995 (inception) to December 31, 1995, respectively.
7. BANK TERM LOAN AGREEMENT.
The Company has available an $8 million Term Loan Agreement secured by
certain assets of the Company to finance the acquisition of property,
equipment and improvements, and to collateralize letters of credit. Borrowings
under this term loan bear interest at the lender's prime rate. Under the terms
of the term loan, which expires in September, 2001, the Company is required to
meet certain financial covenants. As of December 31, 1997, a letter of credit
in the amount of $568,000 was outstanding.
8. STOCKHOLDERS' EQUITY.
Common Stock
In July 1997, the Company completed its 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 Series A common
stock to the public at a price of $10.50 per share. The Company received net
proceeds of approximately $99.8 million in cash. In connection 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.
56
<PAGE>
Common stock consists of the following:
<TABLE>
<CAPTION>
SHARES ISSUED
SHARES AUTHORIZED AND OUTSTANDING
AT DECEMBER 31, AT DECEMBER 31,
Series 1997 1996 1997 1996
------------------------------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
A................................... 200,000,000 150,000,000 88,325,560 11,855,008
B................................... 15,400,000 15,400,000 15,400,000 --
K................................... 14,877,660 14,877,660 14,877,660 --
----------- ----------- ----------- ----------
230,277,660 180,277,660 118,603,220 11,855,008
=========== =========== =========== ==========
</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, 1997, one principal cable stockholder, TCI, owned all of
the Series B common stock and controlled approximately 72% 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 9,650,00
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 of
Directors resolution or resolutions providing for the issue of such series
without any further vote or action by the stockholders.
Stock Splits
In August 1996, the Company completed a one-for-ten reverse stock split of the
outstanding shares of Series K and T preferred stock and a two-for-one stock
split of the outstanding shares of Series A common stock. All share and per
share amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock splits.
Stock Purchase Agreements
During 1996, the Company entered into stock purchase agreements with certain
employees, officers, directors and consultants under which the Company issued
7,527,000 shares of Series A common stock at prices ranging from $0.01 to $0.10
per share, and 50,000 shares of Series K preferred stock at $10.00 per share.
Proceeds from the issuance of the restricted stock were received in the form of
cash or five-year secured promissory notes bearing interest at a rate of
approximately 5.9% per annum. Certain of the agreements provide that the
unvested shares are subject to repurchase by the Company upon termination of
employment at the original price paid for the shares. The shares generally vest
at the rate of 25% after one year and ratably on a monthly basis for three years
thereafter. During the years ended December 31, 1997 and 1996, the Company
repurchased 519,350 and 400,000 shares of common stock, respectively, pursuant
to such agreements. As of December 31, 1997, 3,386,812 shares were subject to
repurchase.
57
<PAGE>
Under the terms of an employment agreement with an executive officer, so long
as the officer is employed by the Company, and for 90 days thereafter if his
employment is terminated without cause, to the extent the officer sells any of
his vested common shares during a five-year guarantee period beginning in July
2000 at an average price less than $5 per share, if the Company's stock is
publicly traded, the Company is obligated to pay the officer the difference
between $5 per share and the average price for each share sold. At December 31,
1997 and 1996, the officer owned 3,000,000 shares of Series A common stock. At
December 31, 1997, the officer owned 1,000,000 shares of Series K common stock
which were issued at the Initial Public Offering upon conversion of 50,000
shares of Series K preferred stock issued to the officer in 1996. During the
year ended December 31, 1996, the Company accrued compensation expense of
$1,675,000 in connection with this agreement, which amount is included in other
long-term liabilities in the consolidated balance sheet.
Warrants
In July 1997, the Company issued a warrant to Intel Corporation in connection
with a development agreement that gives the warrant holder 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 over 30 months. The
warrant is exercisable through September 2002. In September 1997, the Company
amended the development agreement and issued a second warrant ("Intel Warrant
2") that gives the warrant holder the right to purchase 100,000 shares of
Series A common stock for $21.00 per share. The shares subject to Intel
Warrant 2 vest upon the
58
<PAGE>
completion of certain performance criteria 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.
In April 1997, the Company issued warrants to certain of the Series C
preferred stock investors to purchase 100,000 shares of Series C preferred
stock. These warrants were converted into warrants to purchase 2,000,000 shares
of Series A common stock at a price of $10 per share at the time of the
Company's initial public offering. 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.
In October 1996, the Company issued a warrant to its facilities lessor that
gives the lessor the right to purchase 200,000 shares of Series A common stock
for $15 per share. The warrant is exercisable for a five-year period beginning
in October 1997. The Company deemed the warrant to have insignificant fair
value at the time of issuance.
Stock Options
In January 1996, the Company adopted the 1996 Incentive Stock Option Plan,
and in July 1996, the Company adopted the 1996 Incentive Stock Option Plan No. 2
(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 Board of Directors. The 1996 Plans also provide for
nonqualified stock options to be issued to employees, officers, non-employee
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 16,000,000
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.
59
<PAGE>
A summary of activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance at beginning of year..... 223,000 $ 0.06 -- --
Options granted................ 5,158,001 $ 6.30 5,296,500 $0.06
Options exercised.............. (2,170,586) $ 0.25 (4,875,500) $0.06
Options canceled............... (152,280) $ 3.78 (198,000) $0.05
---------- ----------
Balance at end of year........... 3,058,135 $10.26 223,000 $0.06
========== ==========
Options exercisable at year-end.. 1,641,885 223,000
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<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 1,505,635 9.29 $ 2.22 1,505,635 $ 2.22
$5.60 - $8.00 133,500 9.50 $ 5.87 133,500 $ 5.87
$18.44 1,170,000 9.90 $18.44 2,750 $18.44
$18.63 - $24.50 249,000 9.76 $22.76 -- --
--------- ---------
$0.05 - $24.50 3,058,135 9.57 $10.26 1,641,885 $ 2.54
========= =========
</TABLE>
At December 31, 1997, outstanding options to purchase 80,204 shares were
vested and 4,196,346 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 1997
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. 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. There have been no purchases under the
ESPP as of December 31, 1997.
60
<PAGE>
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.
From inception through December 31, 1995, the Company made no stock-based
awards to employees. The value of the Company's stock-based awards granted to
employees in 1997 and 1996, 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 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
------------------------ ---------------
1997 1996 1997
------------ -------- ---------------
<S> <C> <C> <C>
Expected life of options......... 4 years 4 years 7 months
Expected volatility.............. 0.71 N/A 0.72
Risk free interest rate.......... 6.00% 6.50% 5.09%
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995
YEAR ENDED DECEMBER 31, (INCEPTION) TO
----------------------- DECEMBER 31,
1997 1996 1995
--------- -------- --------------
(Restated)
<S> <C> <C> <C>
Net loss as reported............. $(55,717) $(24,513) $(2,756)
Pro forma net loss............... $(56,746) $(24,520) $(2,756)
Pro forma basic and diluted net
loss per share.................. $ (0.54) $ (0.26) $ (0.03)
Pro forma basic and diluted net
loss per share, as adjusted..... $ (0.55) $ (0.26) $ (0.03)
</TABLE>
The weighted-average fair value of options granted during 1997 and 1996 was
$3.29 and $0.01, respectively. The weighted-average fair value of ESPP rights
granted in 1997 was $3.97.
7. INCOME TAXES.
The Company's income tax provision (benefit) differs from the income tax
(benefit) determined by applying the U.S. federal statutory rate to the net loss
as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 28, 1995
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------- DECEMBER 31,
1997 1996 1995
---------- ---------- ---------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate.. $(19,501) $(8,334) $(937)
Valuation allowance for deferred tax assets..... 19,501 8,334 937
-------- ------- -----
Tax provision (benefit)......................... $ -- $ -- $ --
======== ======= =====
</TABLE>
61
<PAGE>
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 December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
(Restated)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 25,484 $ 6,568
Capitalized start-up costs................. 3,357 4,284
Amortization of distribution agreement..... 3,767 --
Other...................................... 1,106 525
-------- --------
Total gross deferred tax assets....... 33,714 11,377
Less valuation allowance................... (33,181) (10,857)
-------- --------
Deferred tax assets........................ 533 520
Deferred tax liabilities:
Property and equipment depreciation........ 533 520
-------- --------
Total gross deferred tax liabilities.. 533 520
-------- --------
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, 1997 and 1996 has been established to reflect these uncertainties. The
valuation allowance increased by $22,324,000, $9,714,000, and $1,143,000 in
1997, 1996 and 1995, respectively.
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $62,240,000. 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, 1997 and 1996, the Company purchased
services of approximately $215,000 and $2,726,000 respectively, from certain
principal cable stockholders.
The Company entered into a software license agreement under which the Company
paid the vendor $2,275,000 and $1,388,000 during 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.
62
<PAGE>
12. SUBSEQUENT EVENTS.
Litigation
On July 8, 1997, PCTV, Inc. ("PCTV") filed a complaint against the Company in
the United States District Court for the District of New Hampshire asserting
rights in the @Home trademark. In the complaint, PCTV alleges trademark
infringement and unfair competition based on the Company's use of the @Home mark
and requests damages and injunctive relief. PCTV is a New Hampshire corporation
that produces computer-related television programs such as "Business Computing,"
"Computer Chronicles" and "@Home." PCTV alleges that it first used the @Home
mark in August 1994.
In February 1998, the Company and PCTV entered into a Settlement Agreement
pursuant to which PCTV assigned any and all right, title and interest in the
@Home trademark to the Company and agreed to dismiss the complaint with
prejudice. The Company, in turn, agreed to: enter into certain distribution
arrangements for its @Home and @Work services with PC Connection Inc., an
affiliated company of PCTV engaged in the direct marketing of computer hardware
and software ("PCC"); promote PCC on the @Home service; and make a one time
immaterial payment to PCTV.
Stockholders' Equity
The Board of Directors approved increases in the common stock reserved for
issuance to the participants in the ESPP of 150,000 and 450,000 shares on
January 14, 1998 and March 18, 1998, respectively.
On March 18, 1998, the Board of Directors approved a 4,975,000 share increase
in the common stock reserved for issuance under the Company's 1997 Plan.
On March 18, 1998, the Company issued performance-based warrants to purchase
an aggregate of up to 5,000,000 shares of common stock at a price of $10.50 per
share to two stockholders that are also cable system operators. The warrants are
exercisable as and to the extent certain performance criteria primarily related
to achieving upgraded homes passed, subscribers and revenue goals are met by
these cable systems operators. The warrants expire in March 2008.
63
<PAGE>
Exhibit 11.01
AT HOME CORPORATION
STATEMENT REGARDING THE COMPUTATION OF PRO FORMA BASIC AND DILUTED NET
LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MARCH 28, 1995
------------------------- (INCEPTION) TO
1997 1996 DEC. 31, 1995
------------ ----------- ---------------
(Restated)
<S> <C> <C> <C>
Computation of pro forma basic and diluted
net loss per share:
Net loss.................................... $(55,717) $(24,513) $ (2,756)
======== ======== ========
Shares of weighted average common stock..... 8,291 868 --
Common equivalent shares from convertible
preferred stock.......................... 95,252 95,252 95,252
-------- -------- -------
Pro forma shares used in per share
calculation.............................. 103,543 96,120 95,252
======== ======== =======
Pro forma basic and diluted net
loss per share........................... $ (0.54) $ (0.26) $ (0.03)
======== ======== =======
</TABLE>
<PAGE>
Exhibit 23.01
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos 333-31115, and 333-38833) 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, 1998, (except for Note 12, as to which the date is
March 18, 1998 and Note 1, as to which the date is January 11, 1999), included
in the Annual Report on Form 10-K of At Home Corporation for the year ended
December 31, 1997, with respect to the consolidated financial statements, as
amended, included in this Form 10-K/A.
/s/ ERNST & YOUNG LLP
San Jose, California
February 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 44,213
<SECURITIES> 76,166
<RECEIVABLES> 2,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,440
<PP&E> 42,715
<DEPRECIATION> 9,654
<TOTAL-ASSETS> 323,928
<CURRENT-LIABILITIES> 24,050
<BONDS> 0
0
0
<COMMON> 370,111
<OTHER-SE> (87,704)
<TOTAL-LIABILITY-AND-EQUITY> 323,928
<SALES> 0
<TOTAL-REVENUES> 7,437
<CGS> 0
<TOTAL-COSTS> 22,459
<OTHER-EXPENSES> 43,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,039
<INCOME-PRETAX> (55,717)
<INCOME-TAX> 0
<INCOME-CONTINUING> (55,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,717)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
