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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File No. 000-22697
AT HOME CORPORATION
(Exact name of the Registrant as specified in its charter)
Delaware 77-0408542
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
450 Broadway Street
Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
(650) 556-5000
(The Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Series A Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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As of February 29, 2000
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Aggregate market value of the voting stock held by non-affiliates of the Registrant
based on the closing price per share as reported on the Nasdaq Stock Market on
such date(1):........................................................................ $ 9,870,661,228
Number of shares of Series A Common Stock outstanding:................................ 351,954,355
Number of shares of Series B Common Stock outstanding:................................ 30,800,000
Number of shares of Series K Common Stock outstanding:................................ 2,000,000
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(1)Shares of common stock held by each executive officer and director and by
each person or entity that owns 10% or more of the outstanding common stock have
been excluded in that such persons or entities may be deemed to be affiliates.
This determination of affiliate status is not necessarily conclusive for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the 2000 annual meeting of
stockholders are incorporated by reference into Part III of this annual report
where indicated.
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AT HOME CORPORATION
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business........................................................................... 3
Item 2. Properties......................................................................... 32
Item 3. Legal Proceedings.................................................................. 32
Item 4. Submission of Matters to a Vote of Security Holders................................ 33
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............. 33
Item 6. Selected Financial Data............................................................ 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 52
Item 8. Financial Statements and Supplementary Data........................................ 54
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure....................................................................... 83
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 83
Item 11. Executive Compensation............................................................ 83
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 83
Item 13. Certain Relationships and Related Transactions.................................... 83
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedule and Reports on Form
8-K............................................................................. 83
Signatures................................................................................... 90
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PART I
Item 1. Business
We make many statements in this annual report, such as statements regarding
our plans, objectives, expectations and intentions, that are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. We may identify these statements by the use of words
such as "believe", "expect", "anticipate", "intend", "plan" and similar
expressions. These forward-looking statements involve several risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those we discuss in "Risk Factors" and elsewhere in this annual report. These
forward-looking statements speak only as of the date of this annual report, and
we caution you not to rely on these statements without also considering the
risks and uncertainties associated with these statements and our business as
addressed in this annual report.
Overview
At Home Corporation, or Excite@Home, is a global media company offering
broadband Internet connectivity, personalized, web-based content and targeted
advertising services. We are the leading provider of broadband Internet
services, with approximately 1.1 million subscribers to our @Home service and
over 5,100 @Work business access customers as of December 31, 1999. The Excite
Network, our primary content offering, has 51 million registered users and in
December 1999 had the fifth-widest reach among all Internet properties according
to Media Metrix.
The @Home service is a broadband Internet service delivered to consumers
via the hybrid fiber-coaxial (HFC) cable infrastructure and accessed via cable
modems. Subscribers have access to Internet content and services, including our
proprietary multimedia programming, at speeds up to 50 times faster than typical
56 kilobits-per-second connections. The service is "always on," meaning that
users do not have to go through dial-up procedures and do not experience busy
signals. The foundation of the @Home service is our scalable, distributed,
intelligent private network, which avoids bottlenecks frequently encountered on
the public Internet. Elements of this network include a national, optical-fiber
Internet protocol backbone, regional data centers, local caching servers and a
national network operations center. Our network design facilitates end-to-end
network management, provides for a high level of security and stores data close
to the user in order to minimize the need to retrieve data from the public
Internet. Our network interconnects with the networks of our 22 cable partners,
through which we had access to approximately 72 million homes worldwide as of
December 31, 1999. Of these homes, approximately 24 million were served by
upgraded, two-way cable capable of carrying our broadband service. Our principal
cable partners include AT&T, Comcast, Cox, Cablevision, Rogers, Shaw and others.
Our @Work division further utilizes our network by providing a range of Internet
services for businesses, including high-speed connectivity, web hosting and
development and hosting of e-commerce solutions.
Our primary content offering is the Excite Network, an Internet portal
providing users a broad array of information in categories such as news, finance
and entertainment, as well as services such as search, e-mail, chat, voice mail
and address books. In December 1999, the Excite Network reached 27.7 million
unique visitors according to Media Metrix. Excite customers can create a
personalized My Excite Start Page that allows them to specify the content and
the layout of the information that they see each time they visit Excite. We
provide our consumers with content from a variety of partners, which include
Intuit, Inc., Sportsline USA, Inc., Tickets.com, Inc. and WebMD, Inc. In March
2000, we launched @Home 2000, which extends the benefits of personalized Excite
content to our broadband customers, combining Excite information with the rich
multimedia content made possible by broadband connectivity.
For advertisers, we offer a variety of broadband and narrowband advertising
packages, ad targeting, serving and reporting services, and assistance with
creative development and campaign management. In the fourth quarter of 1999 we
had over 1,900 advertisers on the Excite Network. Our MatchLogic subsidiary owns
a database of over 72 million unique anonymous user profiles and 9.5 million
profiles of people who have agreed to receive promotional messages via e-mail.
Using the targeting capabilities provided by these databases, MatchLogic served
over 15 billion Internet advertising impressions and delivered over 50 million
targeted e-mails during the fourth quarter of 1999.
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Strategy
Our objective is to be the world's leading provider of broadband services.
We believe that broadband connections will become the principal means of
Internet access, and we have invested in technology and formed strategic
relationships that we believe position us to be the leading global broadband
access provider. We also believe that content is a critical part of the online
experience; this was the primary reason for the merger with Excite. We are
applying our expertise in Internet content programming to deliver a compelling
online service for our broadband customers. We intend to monetize our broadband
traffic through subscription fees, advertising and e-commerce transactions. Our
experience in creating rich-media advertisements combined with our MatchLogic
targeting capability positions us to provide valuable services to our
advertising customers.
We believe that narrowband Internet services will remain important for
years to come, and we intend to remain competitive as a portal service on the
web by continuing to develop the Excite Network with new content and
applications. This will include the addition of content elements targeted at
users of medium- and high-speed connections other than our own broadband
service.
Our strategy includes the following key elements:
Increase Our Broadband Subscriber Base
We plan to increase the number of subscribers to our @Home broadband
service as a way to generate both subscription and media revenue. We are working
with our cable partners, technology partners and distributors to make the @Home
broadband service available throughout our global footprint of 72 million homes,
and to make the service easy to buy and install so that it becomes a mass-
marketable product. As of December 31, 1999, approximately 24 million of our
homes were upgraded to two-way cable, giving us a large potential market. The
availability of the DOCSIS standard cable modems through retail channels allows
customers to buy and install our broadband services themselves, which we believe
will facilitate the more rapid deployment of cable modems in homes. To this end,
we have distribution agreements with several large retailers, including Circuit
City, Office Depot, CompUSA and The Good Guys!, as well as original equipment
manufacturers such as Compaq and Dell Computer. We use our databases of 51
million registered Excite customers and 9.5 million e-mail profiles to generate
inexpensive online marketing leads for the @Home service. We believe that this
generated a significant number of qualified marketing leads in 1999 and expect
that it will provide us with a low-cost means of acquiring customers in the
future.
Deliver Compelling Broadband Content and Services
We believe that delivering compelling content and services in addition to
high-speed connections is critical to building relationships with our customers
and to deriving advertising revenues from our broadband traffic. The default
start page for our broadband customers will be our new @Home 2000 service, which
we launched in March 2000. Providing the foundation for this service are the
content and capabilities of the Excite Network. For example, the core philosophy
behind our content offerings is personalization, which we believe is critical to
building customer loyalty. We offer the My Excite Start Page, which allows users
to arrange information such as weather, stock portfolios and news in a modular
fashion so that they receive exactly the information they want in a familiar
format each time they visit the My Excite Start Page. Users of @Home 2000 will
enjoy these same personalization capabilities. In fact, Excite users who have
personalized their start pages will be able to view that same information in the
broadband environment. @Home 2000 also includes a custom browser designed for
broadband usage, which comes with the latest multimedia features and provides
easier and quicker access to personalized national and local content and
utilities such as search and e-mail. We continue to develop our Excite services
with a focus on broadband applications. For example, our acquisition of
Bluemountain.com adds online greeting cards to our portfolio of services. We
believe that online greetings will be enhanced by the inclusion of multimedia
elements such as audio and video, increasing their attractiveness as a broadband
application. Our acquisition of Webshots gives us a leading position in the
distribution of digital photos, another application that we believe will be
attractive to broadband users.
Leverage Our Network Investment to Offer Broadband on Platforms Other Than HFC
and To Serve Commercial Customers
We designed and built the @Home network to provide broadband Internet
connectivity over the cable facilities of our cable partners. The network uses
our dedicated OC-48 Internet protocol backbone to achieve high data
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transmission speeds. This backbone can be upgraded easily as new wave-division
multiplexing technology becomes available. We have private Internet access
arrangements with most major Internet backbone providers, ensuring both faster
and less expensive data transfers than possible through use of public access
points. We use leading caching technologies to store data close to our
customers, thereby reducing redundant data requests from the public Internet and
improving network efficiency. Local news feeds and customer e-mail accounts, as
well as other information, are stored in a distributed fashion in our 25
regional data centers around the world. We monitor the entire network from our
national network operations center in California.
This network architecture includes thousands of servers deployed in
hundreds of cable head-ends, and is tied together by thousands of
telecommunications circuits. We believe that this infrastructure represents an
efficient means of providing broadband services over HFC networks and creates an
opportunity to extend beyond residential HFC to non-HFC broadband platforms such
as digital subscriber lines (DSL) and wireless. We are currently exploring ways
of delivering our broadband services to consumers using these technologies to
the degree permitted by our exclusive agreements with our cable partners.
We also utilize our network investment to provide broadband services to
commercial customers. Our @Work division was serving about 5,100 business
customers with HFC, DSL and high-speed private lines as of December 31, 1999.
@Work also serves customers with private-label shared web-hosting and e-commerce
hosting services. As a result of our acquisition of iMALL in October 1999, we
offer merchants the ability to create online storefronts complete with credit
card payment processing. This capability enables us to expand the shopping
services available on the Excite Network.
Expand the Reach of Our Narrowband Service
We intend to increase the number of unique users, or reach, of our
narrowband media properties in order to offer our advertisers a broader audience
and to increase our advertising and direct marketing-related revenue streams. In
addition, we believe increased reach builds a larger base of customers to which
we can market our broadband services. We will pursue additional reach through
increased marketing efforts and strategic relationships and with acquisitions of
Internet properties. Our acquisition of Bluemountain.com increased our reach by
over 50%, adding 9.6 million unduplicated users (based on Media Metrix reports
for December 1999) to our Excite Network customer base.
Continue Our International Expansion
We are aggressively pursuing opportunities to capitalize on the growth of
broadband services and the Internet outside of North America. We believe that
expansion outside of North America will be the principal means of expanding our
footprint. We have joint ventures with cable partners in Australia, Japan and
the Netherlands and distribution agreements in Belgium and Germany. These
ventures encompass approximately 13.5 million homes, 11.5 million of which we
added in 1999. All of these joint ventures are exclusive, seven-year access
agreements. We launched broadband service in the Netherlands in mid-1999 and in
Australia in January 2000, with launches in Japan, Belgium and Germany planned
for 2000. In addition, we offer Excite-branded portal sites with locally sourced
content in Australia, Canada, France, Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom.
Build Upon Our Advantage in Monetizing Traffic
We believe that our expertise in targeted Internet advertising provides us
with a significant competitive advantage. Our MatchLogic subsidiary utilizes its
databases of 72 million anonymous profiles and 9.5 million e-mail profiles as
well as its rich media capabilities to help advertisers maximize returns through
precision placement of interactive advertisements and through targeted e-mail
campaigns. MatchLogic served over 15 billion Internet advertising impressions
and delivered over 50 million targeted e-mails during the fourth quarter of
1999. As a result of these capabilities, we believe we are a leader in the
industry in revenue efficiency measures such as revenue per page view and
revenue per reach point. We intend to maintain our leadership position by
continuing to build our databases and by offering new tools that are designed to
address advertisers' desire for highly targeted marketing. Our base of 1.1
million broadband customers also enables us to offer advertisers access to a
unique audience capable of viewing eye-catching, highly interactive
advertisements.
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Expand Our Services Into Other Devices
We intend to provide our customers with access to our content and services
at any time and from any Internet-enabled device. We have invested substantial
resources in developing advanced television services including program guides,
e-mail, shopping and web access. We have announced advanced-television
technology relationships with Microsoft Corp. and Liberate Technologies, and
currently plan to distribute these services through two of our cable partners,
AT&T and Cox. In addition, we intend to offer personalized Excite content on a
variety of other devices, including wireless phones and personal information
devices. Excite content is currently available on the Palm VII wireless handheld
device, and we have announced an agreement to offer Excite content through
AT&T's PocketNet wireless data service.
Excite@Home Services
Our service offerings fall into two primary categories: subscriber network
services and media and advertising services. Subscriber network services include
our @Home broadband Internet access service for consumers, as well as our @Work
services, which are end-to-end managed connectivity services for businesses.
Media and advertising services encompass content and interactive applications on
our broadband and narrowband Internet networks, as well as ad serving, targeted
marketing and e-commerce solutions across those and other third-party Internet
destinations. We operate extensive network and computing facilities that carry
and support our services, and maintain 24-hours a day, 7-days a week technical
support and customer care operations for our broadband services.
Subscriber Network Services
@Home Service
We provide consumers with broadband Internet access through our cable
partners' infrastructure. We partner with local cable operators who upgrade
their networks to two-way HFC in order to deliver our services. By connecting
via a cable modem to the @Home broadband network through the local cable
infrastructure, subscribers to the @Home service can achieve peak data
transmission speeds of 2 to 5 megabits-per-second, which is over 50 times faster
than the peak data transmission speed of a 56 kilobits-per-second dial-up modem.
This higher transmission rate enables multimedia applications such as audio and
video, rich-media advertising and multi-player games. We intend to provide these
elements through the @Home 2000 service, which combines Excite-branded national
content programmed by us with content sourced locally by our cable partners. The
@Home service also provides easy access to the Internet and other online
services, as well as other standard Internet service provider (ISP)
functionality, including web page hosting for subscribers, multiple e-mail
accounts and remote access. We also offer the ability to share Internet access
across multiple PCs in the home for an additional monthly fee. A critical
differentiator of the @Home service is that it is "always on," providing
instantaneous access to the Internet and eliminating the need for a time-
consuming dial-up procedure using the telephone network utilized by traditional
ISPs.
Our cable partners are the primary distributors of the @Home service. Our
cable partners install the service at prices generally ranging from $75 to $150,
though installation fees are frequently waived or discounted by the cable
partner as promotional incentives. Generally, our cable partners offer the
service at a flat monthly fee of approximately $40, which typically includes a
cable modem provided by the cable partner. We believe that this business model
will change as self-installable DOCSIS cable modems become more widely
available. Modems will be offered for sale by retailers or through original
equipment manufacturers, reducing the need for cable companies to provide them
and moving the point-of-sale for the @Home service to retail locations. Upon
installation, a new subscriber receives @Home client software, which provides
access to the @Home start page as well as other online services and Internet
content.
We have contracts with 22 cable companies whose systems include
approximately 72 million homes worldwide as of December 31, 1999, including 58.7
million homes in North America in approximately 130 markets. As of December 31,
1999, we had approximately 1.1 million subscribers worldwide, including recently
acquired broadband Internet subscribers in the process of being converted to the
@Home service. These subscribers are being converted to the @Home service. In
the United States, subject to certain exceptions, our agreements with cable
partners, including AT&T, Comcast, Cox and Cablevision, provide that our
partners may only offer the @Home service, and not competing broadband
residential Internet services, over their cable systems through June 4, 2002.
The exclusivity of other cable partners in the United States expires on various
dates between 2002 and 2005. In Canada, our cable partners have agreed to market
and
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promote the @Home service on an exclusive basis into 2003. Please see "Risk
Factors--Our cable partners are not generally obligated to carry our broadband
services and the exclusivity obligations that prevent them from carrying
competing services may be terminated." Upon the expiration of these exclusivity
obligations, other companies may be allowed to offer Internet services on the
networks of our cable partners. However, we believe that the customer base,
network deployment and expertise gained during the period of exclusivity will
position us to compete effectively in this environment. The following table
lists our cable partners as of December 31, 1999:
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Cable Partners
Outside
North America North America
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AT&T Bresnan Jones Essent
Comcast Century MidContinent Jupiter
Cox Charter Prime Optus
Cablevision Cogeco Videon Sumitomo
Rogers Garden State Tele-Columbus
Shaw Insight Telenet
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Under current arrangements with our U.S. cable partners, we receive 35% of
both the basic monthly fees and the fees for premium services, such as Internet
access across multiple personal computers in the home. Our partners retain the
remaining 65% as well as any fees charged for installation. In Canada, we
receive a smaller percentage of the monthly subscription fees billed by our
Canadian partners, who are responsible for various costs not borne by our cable
partners in the United States. These include the costs of providing additional
customer support, data transport within Canada, and national marketing and
content programming.
Outside North America, we have exclusive agreements with six cable
operators whose systems serve approximately 13.5 million homes. Subscriber
pricing and revenue or royalty splits with cable system operators outside North
America vary across these markets based on differences in services and content
provided by the international cable system operators, data transport costs and
regulatory environments. To the extent that we offer terms of distribution and
other services to international cable system operators that are more favorable
than those offered to AT&T, Comcast, Cox and Cablevision, these principal U.S.
cable partners have the right to obtain those favorable terms.
Of the approximately 72 million homes in our global footprint,
approximately 24 million were served by upgraded two-way HFC cable as of
December 31, 1999. Our cable partners are in the process of implementing major
infrastructure investments to continue deploying two-way HFC cable. However,
each cable partner's infrastructure investments could be subject to change,
delay or cancellation. Please see "Risk Factors--We depend on our cable partners
to upgrade to the two-way cable infrastructure necessary to support the @Home
service; the availability and timing of these upgrades are uncertain."
In an effort to increase the deployment of the @Home service in North
American homes and businesses, we have established a joint venture with cable
operators, technology suppliers and systems integrators to encourage small and
medium-sized cable operators to offer the @Home service. Known as @Home
Solutions, the venture provides smaller operators a full range of services,
including financing of cable and network equipment, expanded customer service,
billing systems, service installation and marketing support. @Home Solutions has
secured the participation of six cable operators (not included in the cable
partners listed in the above table) whose systems pass over one million homes in
the United States. Other equity participants in @Home Solutions include Cisco
Systems, Inc., General Instrument Inc. and Motorola, Inc.
In December 1999, we entered into strategic relationships with Cox,
Microsoft and Liberate Technologies for the development and advancement of
interactive television technologies and applications and advanced television
services. We intend to leverage our high-speed backbone and distributed
broadband platform to accelerate the design of advanced set-top box devices and
software optimized for delivery of interactive television services. We believe
that the interactive television experience provides opportunities for expanding
the reach of our broadband services, including personalized content, rich
multimedia and communications and information services.
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@Work Services
@Work offers commercial customers high-speed managed connectivity, web
hosting, virtual private networking and telecommuting services. Using the same
national transport facilities and other infrastructure used to provide the @Home
service, @Work serves over 5,100 customers with high-speed access services over
digital telecommunications lines, HFC cable and digital subscriber lines.
In October 1999, we completed our acquisition of iMALL, a provider of
e-commerce solutions to online merchants. In conjunction with this acquisition,
we entered into a 10-year agreement with First Data Merchant Services Corp., a
former shareholder and marketing partner of iMALL, under which First Data will
market and distribute our e-commerce services to its merchant base. Merchants
using these e-commerce services will be able to establish a storefront and
feature their products on the Excite Shopping Service, and we also intend to
offer these services to our current merchants. As a result of enabling small and
medium-sized businesses to conduct integrated online sales, we expect to
increase the number and variety of products offered through our shopping
services.
In September 1999, we introduced Work.com, a portal service designed
specifically for the needs of business professionals and their companies.
Capitalizing on our experience in the portal business, this effort is the first
phase of an initiative to develop a comprehensive business portal featuring
vertical industry content, communities, business applications and services
customizable to business users' needs. In February 2000, we announced the next
phase of this effort, an agreement with Dow Jones & Co. to form a joint venture
for the further development of the Work.com portal. In addition to cash funding,
both Dow Jones and we will contribute operating assets, content, technology and
business-related Internet properties to the joint venture. The new company will
focus on creating a comprehensive Internet portal offering news, information and
business services to small and medium-sized businesses and professionals.
Media and Advertising Services
Our media and advertising services extend across our narrowband and
broadband services and include two primary activities, the development and
aggregation of content and value-added services and the sale of advertising
within our online networks, as well as other advertising-related activities such
as ad serving, ad content creation and online campaign management. Advertising
sales are conducted by our own sales force, and our ad serving and other
advertising-related services are offered by our MatchLogic subsidiary.
Narrowband Content and Services
Excite@Home offers content for both narrowband and broadband Internet
media. The Excite Network is a global Internet media network offering
comprehensive Internet navigation services with extensive personalization
capabilities. The primary site of the Excite Network is www.excite.com, the
narrowband portal site that consistently has been ranked as one of the top ten
destinations on the Internet. The Excite Network consists of a suite of
specialized information services, organized under easily accessible topical
channels that combine proprietary search technology, aggregated content from
third parties, bulletin boards, chat, editorial web reviews and other community
features. The Excite Network has recently introduced communications and
information management services such as online address books and calendars,
voice chat and voice mail. We offer portal web sites with locally sourced
content in Australia, Canada, France, Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom.
Key features of the Excite Network designed to increase user loyalty and
time spent on the network include:
. Personalization. The Excite Network delivers a personalized Internet
experience for users by allowing them to personalize their home page
Internet interface and choose the information they want delivered.
Users can program their own My Excite Start Page, allowing consumers
to create a personal profile which selects and automatically updates
information of interest such as personalized stock quotes, news
stories, sports scores, horoscopes, local and national weather,
television listings and special reminders. We believe this engenders
user loyalty, increases switching costs and provides data and an
access channel for targeted advertising.
. Excite Search. We maintain an extensive index of Internet documents,
which we refresh automatically on a regular basis. Our search
technology allows consumers to search the Internet in multiple ways,
including by keyword, phrase, concept, Boolean logic or proper name.
The Excite "More Like This" feature, which utilizes
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query-by-example technology, allows users who find a document of
interest to find similar documents with the click of a button. In
addition, our automatic abstract technology provides consumers with a
brief and accurate abstract of each document returned by a search.
Excite Search also permits users to search news articles, Usenet
newsgroups and the Excite City.Net travel index.
. Excite Communications and Information Management Services. In order to
increase the utility of the Excite portal to our customers, we have
developed a set of services designed to help customers manage personal
information and communicate with friends and family. Information
management services include the Excite Planner, an online address
book, calendar and task list, and Excite Assistant, a desktop window
providing an Excite customer access to the most relevant information
in his or her account without the need for a browser window.
Communications services include Excite VoiceMail, the only web-based
voicemail system offered by an Internet portal, and Excite VoiceChat.
. Excite Content and Communities. The channels-based format of the
Excite Network provides consumers with an intuitive interface that
reflects the way they navigate through other forms of media, such as
television. By combining existing services with specialized
information and services from leading content providers, the Excite
Network provides channel-specific content including topical news,
links to related web sites, products and services and directories. The
Excite Shopping Channel offers a safe and convenient online shopping
service for consumers. The Excite Auctions site is a part of the
FairMarket Auction Network, a network of auction sites giving users
access to products for sale across all member sites. This format
enables advertisers and retailers to more effectively reach target
consumers. Community-building services, such as Excite Communities,
Excite Boards and Excite Chat, allow users to join communities of
other users with similar interests or needs, thereby enhancing the
user experience within the Excite Network with the goal of improving
customer retention.
As part of our strategy to offer enhanced content and services, develop
capabilities suited to broadband and expand our narrowband reach, we acquired
Bluemountain.com, a leading provider of online greeting card services, in
December 1999. This acquisition increased the reach of the Excite Network by
over 50% in December 1999. According to Media Metrix, Bluemountain.com had
approximately 18 million unique users in December 1999 and was the eighth-most
frequently visited web site during that time. Although December is historically
one of the busiest months for online greeting card services and therefore is not
indicative of traffic levels for other months, we expect Bluemountain.com to
contribute significantly to Internet traffic on the Excite Network throughout
the year. We intend to integrate our Excite communications services into the
Bluemountain.com service and offer Excite shopping services to Bluemountain.com
customers, each of whom is involved in a potential gift-giving transaction when
sending a greeting card. In conjunction with this announcement, we also
announced distribution agreements with three gift-related e-commerce companies
whose products will be promoted on Bluemountain.com.
Broadband Content and Services
In March 2000, we launched @Home 2000, a broadband online service that
combines the high-speed access of our @Home service with a new Excite broadband
portal enhanced with rich media and personalized content aimed at helping our
subscribers manage their daily lives. The @Home 2000 broadband Internet service
offers an attractive combination of benefits to our subscribers, including
speed, "always-on" connectivity, personalization, utility and rich media. Speed
reduces the time it takes for web pages to load and gives customers access to an
enhanced content experience, including high quality audio and video. An always-
on connection means customers do not have to dial-up to connect to the service,
which turns the computer into a readily accessible information appliance.
Personalization allows customers to select specific content, including stock
quotes and news. @Home 2000's new integrated browser makes personalized and
local content and services such as e-mail more easily accessible. The
combination of speed and content offer customers easy access to rich media on
the Internet.
The new custom browser available with @Home 2000 features an integrated
package customized for the broadband experience. The browser is based on
Internet Explorer 5.0 and includes the latest technology, providing integrated
access to customers' personalized national and local content and utilities such
as e-mail and search. The @Home service has also been enhanced with multiple e-
mail accounts, 70 megabytes of personal storage space, online help utilizing
video tutorials and support for personal home networks of up to five Web-enabled
computers or devices.
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The content and navigation of the Excite narrowband portal have been
enhanced to create a broadband Web portal that enables access to rich media and
personalization. Broadband customers will be able to enjoy the benefits of the
personalized Excite portal on a broadband platform. For example, customers can
view local weather from an animated Doppler radar. Additionally, the Excite
broadband portal enables Web sites to perform in a similar manner to user-
friendly software applications, such as allowing for home pages to be
personalized using "drag and drop". Also, roll-over menus provide visual aids to
help consumers learn more about a service without having to add more links.
Broadband content has been integrated on the new Excite portal and includes such
features as news clips, short animation films and links to broadband content on
the Web.
We believe that the introduction of @Home 2000 and the Excite broadband
portal represents a significant achievement made possible by our merger with
Excite in May 1999. We intend to further leverage the personalization and
content of the Excite Network and the high-speed access of our @Home service by
continuing to enhance our broadband products and services over multiple
platform, including advanced set-top devices and mobile devices, and multiple
delivery channels, such as DSL and wireless.
Advertising Services
Through our various advertising programs, advertisers can combine multiple
advertising packages tailored for their specific needs.
. Banner Advertisements. Banner advertisements are prominently displayed
throughout the Excite Network. Excite offers a variety of banner-
advertising programs that enable advertisers to target various market
segments. Mass-market placements deliver general rotation banner
advertisements throughout the Excite Network but do not have any
particular market segmentation. Targeted advertising addresses an
audience with a specific content interest on one of our services;
these advertisers can target general interest topics such as "sports"
or more specific sub-categories such as "college basketball" or a
particular team. We charge higher per-impression fees for advertising
products based upon the specificity of the target audience.
On the @Home broadband service, we also sell advertising through
several formats, including half-banners and the "B*box", a broadband
audio/video advertising space. With the B*box, advertisers can broaden
their creative presentation using video clips, audio and animation.
Advertisers have the ability to enhance their message by using
multimedia tools and technologies such as Enliven, Flash, Quicktime
Video, Real Audio and Shockwave. Advertisers' ability to present more
compelling messages to online users has resulted in advertising rates
greater than those charged for banner advertising on the narrowband
web sites.
We also sell advertising placements and links outside of the space
normally reserved for banner advertisements. These arrangements are
known as sponsorships because they typically involve the placement of
an advertisement or link in a topical channel as though the advertiser
was sponsoring the content on a specific page. These arrangements have
a longer term than traditional banner advertising agreements. The ad
or link is programmed to appear prominently in the same spot on the
page each time the user calls for that page of channel content. Some
of our sponsors include Amazon.com, AT&T, autobytel.com, Barnes &
Noble and Charles Schwab.
. Targeted Marketing Services. We also provide ad serving, targeted
marketing, campaign management and other advertising-related services
through the operations of our MatchLogic subsidiary. MatchLogic
maintains a database of consumer demographic, purchasing and other
data relevant to marketers, which as of December 31, 1999, consisted
of approximately 72 million unique anonymous profiles and 9.5 million
e-mail profiles. Using MatchLogic's targeting services, advertisers or
advertising agencies can deliver ads based on a user's particular
demographic traits, geographic location, connection capabilities
and/or keyword and virtual keyword data input. MatchLogic serves ad
campaigns simultaneously to multiple web sites in the form of banner
advertisement and to e-mail audiences via targeted e-mail messages.
MatchLogic measures results immediately, produces consolidated results
reports on the success of the entire campaign, and analyzes these
results to enable advertisers to quickly assess the effectiveness of
the campaign. MatchLogic can dynamically adjust campaigns in order to
maximize the effectiveness of the advertiser's investment.
MatchLogic also provides assistance to advertisers in the use of rich media
advertising techniques such as animation and sound to improve the appeal and
interactive nature of their advertisements on narrowband and broadband web
sites.
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Network and Computing Facilities
Residential subscribers access our broadband services primarily through
high-speed cable modems, which attach to their personal computers via a standard
Ethernet connection, while businesses can also connect through
telecommunications networks. The four key principles of our network strategy are
end-to-end network management, "always-on" service, scalability and moving data
closer to the user:
. End-to-End Network Management. The @Home broadband network
architecture allows us to monitor our network all the way to the
subscriber's home. Because the @Home broadband network is centrally
managed, we can dynamically identify and enhance network quality,
service and performance, or address issues before they affect the user
experience.
. "Always-on" Service. Unlike dial-up Internet access services, the
@Home broadband network is "always on." The user has an uninterrupted
connection to the Internet as long as his or her computer and cable
modem are on. This eliminates the need for a time-consuming connection
process, making our content and content on the Internet more readily
available and convenient.
. Scalability. The @Home service is designed to be scalable to handle
increasing numbers of subscribers without degradation. As subscriber
penetration increases, the cable operator has multiple cost-effective
alternatives to increase capacity. These include allocating additional
6 MHz channels for the @Home service and reducing the number of
subscribers sharing a given bandwidth by expanding nodes, thereby
allocating more bandwidth to a given number of subscribers.
. Moving Data Closer to the User. The @Home broadband network utilizes
caching and replication technologies to store information closer to
users. These techniques recognize a fundamental weakness of the
Internet, namely duplicative data transfers. By caching a given data
file in a local server the first time it is requested by a user, we
ensure that the same file can be delivered to the next user to request
it without once again retrieving it from the public Internet. This
reduces traffic on our backbone and speeds download time for
subscribers.
The primary components of the @Home broadband network are our high-speed
private national backbone, regional data centers, regional networks, headends
where caching servers are located, network connections, cable modems and our
Network Operations Center.
Private National Backbone
We operate our own private national backbone, which consists of two
dedicated OC-48 private-line circuits under a 20-year agreement with AT&T. This
nationwide Internet protocol network enables us to support up to five million
broadband users initially, and can be upgraded to higher bandwidths as demand
requires. These circuits connect our regional data centers and regional networks
with content providers and the Internet. This backbone can be viewed as a high-
speed "parallel Internet" that connects via our routers to the Internet at
multiple network access points with "Tier-One" peering status, which permits us
to exchange Internet traffic with other nationwide ISPs.
Regional Data Centers
The regional data centers act as service hubs for defined geographic areas,
such as major metropolitan areas. The regional data centers are used to provide
services such as e-mail, news groups and chat, monitor network performance,
replicate content and applications, and provide a cost-efficient infrastructure
to cache and multicast data throughout each region. Regional data centers also
house local content and subscribers' web pages. We currently have 25 regional
data centers in operation worldwide.
Regional Networks
The regional networks consist of network routers and switches that
interconnect our regional data centers and national backbone to multiple cable
headend facilities. These networks generally take advantage of cable operators'
fiber optic infrastructures that are normally used to transport cable television
signals from master headend facilities
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to other headends within a region. This approach often allows us to avoid the
high cost of leasing conventional high-speed communication services from local
telephone companies when deploying high-speed connectivity in a region.
Headends
The cable system headends are connected to each regional data center
through the regional network. In order to move data as close to the subscriber
as possible and to avoid repetitive transmission of data, the headends employ
high-performance caching servers that store frequently accessed content locally,
thereby greatly reducing the amount of data transmission (and corresponding
transport costs) in higher layers of the network. In addition, local caching
servers can compile far more comprehensive usage data than is normally
attainable on the Internet, which can be used for network troubleshooting,
tuning performance and tailoring the @Home service.
Network Connections
The last leg of the network connection is from the headend to the consumer
over a cable operator's cable system. 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.
The data transmission speed of a cable modem depends on the specific model and
can range from 10 to 27 megabits-per-second downstream and 0.7 to 10 megabits-
per-second upstream. The actual performance that subscribers 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. As a
result, downstream transmission speeds are generally limited to 2 to 5 megabits-
per-second. In addition, in some markets, we have limited users' upstream
bandwidth in order to prevent abuse of our systems by users, and we expect to
continue to limit upstream bandwidth in additional portions of our network. The
North American cable industry has adopted DOCSIS to support the delivery of data
services utilizing interoperable cable modems. We believe that this new standard
and the distribution of DOCSIS-compliant modems through retail stores will
facilitate the growth of the cable modem industry. Please see "Risk Factors--If
we cannot maintain the scalability and speed of our @Home broadband network,
customers will not accept our broadband services" and "If new DOCSIS-compliant
cable modems are not deployed timely and successfully, our subscriber growth
could be constrained."
Network Operations Center
We provide end-to-end network management through our network operations
center. The network operations center uses advanced network management tools and
systems to monitor the network infrastructure on a 24-hours a day, 7-days a week
basis, enhancing our ability to address performance bottlenecks before they
affect the user experience. From the network operations center, we can manage
the @Home broadband network from end-to-end, including the backbone, regional
data centers, regional networks, headend facilities, servers and other
components of the network infrastructure to the user's home. Please see "Risk
Factors--Our dependence on our network to provide our broadband services exposes
us to a significant risk of system failure."
Customer Support
Our customer care organization provides a variety of support functions for
our cable partners and their customers, @Home customers and Excite users. These
services generally are available 24-hours a day, 7-days a week. This
organization is also responsible for the Help and Member Services areas within
the @Home broadband services.
There are two levels of support provided to our @Home broadband customers.
When customers need help with their @Home broadband service, they contact the
Tier 1 customer support organization, typically managed by the cable partner in
their area. Customers needing assistance beyond the capability of the cable
partner Tier 1
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organization are transferred to the @Home Tier 2 customer support team. The Tier
2 team provides computer and network technical support to resolve customers'
problems. The Tier 2 team employs a variety of experts familiar with the @Home
Network, including technical support representatives, lead technicians and
product specialists to identify and solve the customer's problems. Each cable
partner's support team and our customer support work together to resolve any
customer issues.
We also provide Tier 1 customer support services for some of the smaller
cable partners that do not have the scale to provide Tier 1 customer support.
Typically, our Tier 1 customer support representatives help customers with the
following: ordering the service, billing questions, password inquiries, simple
browser functionality and simple use of the Internet. Currently, we provide this
service to eight cable partners.
Excite users interact with our Excite support team primarily through e-
mail. The team provides information and guidance to our Excite customers on the
many applications available on the Excite Network and also provides assistance
to third parties that seek to make their web sites available through the Excite
Network. We offer web and e-mail based support for our My Excite Start Page,
Excite Voice Mail, Excite Chat, Excite PAL and Excite Communities services.
Sales and Marketing
We have a direct sales organization with professionals located in Chicago,
Dallas, Detroit, Los Angeles, New York, Boston, Denver, Philadelphia and San
Francisco. This direct sales force sells to advertisers and advertising agencies
and is responsible for selling banner advertisements and sponsorships on the
Excite Network and the @Home broadband service.
For our subscriber network services, we currently rely primarily on our
cable partners to sell the @Home service. In addition, using MatchLogic, we are
marketing our broadband services to users of our Excite narrowband services. Our
cable partners conduct local and regional advertising and marketing campaigns
targeted to geographic areas in which the service is available. These activities
include bill inserts and local television advertising, among others. We have
engaged in nationwide marketing of the service through promotional activities
such as mall tours in which potential customers have the opportunity to "test
drive" the service at a display in a local shopping mall and to sign up for the
service on the spot. Our ability to market the service broadly has been limited
by the availability of the service; as our partners complete further upgrades to
their facilities and the @Home service becomes more widely available, our cable
partners will be able to market the service in a broader fashion.
A key initiative for us and our cable partners is to make the @Home service
available through retail stores such as electronics and office supplies stores,
and through original equipment manufacturers such as computer manufacturers. To
date, we have reached agreements with electronics retailers including Circuit
City, CompUSA and The Good Guys! and with office products retailers including
Office Depot, Staples and OfficeMax, who will offer the @Home pre-installation
kit alongside a demonstration of the service. This allows potential customers to
try the service and contact their cable company to schedule an installation
appointment. Also, we have announced agreements with Dell and Compaq under which
these original equipment manufacturers will promote the @Home service and assist
their customers in scheduling installation appointments with their cable
companies. Dell and Compaq will also ship computers pre-configured for the @Home
service, including a pre-installed network interface card.
International Operations
We have agreements with several cable operators outside of North America
who have agreed to distribute local versions of the @Home service over their
cable systems on an exclusive basis. As of December 31, 1999, we had launched
service in the Netherlands, Belgium and Australia, with launches scheduled in
Germany and Japan in 2000.
We believe that international expansion will be the principal means of
expanding our global footprint. We have portals with locally sourced content in
Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Spain,
Sweden, and the United Kingdom.
Product Development, Technology and Engineering
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Our product development and engineering efforts focus on: (1) design and
development of new technologies and products to increase the speed and
efficiency of our broadband network architecture and to facilitate the
development and distribution of high bandwidth content and commercial value-
added applications; (2) adaptation of our network services for use over non-HFC
access technologies, such as DSL; (3) development of software tools and enabling
platforms for the creation and distribution of enhanced content optimized for
our broadband network; and (4) transferring the appropriate components of our
broadband network to TV-based Internet devices and developing software, e-mail
support and related services for these devices.
Product development and engineering expenses for the years ended December
31, 1999, 1998 and 1997 were $54.8 million, $17.0 million and $12.0 million,
respectively. Research and development expenses related to Excite from the date
of its acquisition in May 1999 to December 31, 1999 were approximately $20.4
million. We believe that developing new and enhanced services and technology is
necessary to remain competitive. Accordingly, we intend to continue to make
investments in research and development, including developing, licensing or
acquiring new technologies.
The markets in which we compete are characterized by rapidly changing
technologies, evolving industry standards, frequent new service and product
announcements, introductions and enhancements and changing customer demands.
These market characteristics are exacerbated by the emerging nature of the
Internet and the desire of companies from a multitude of industries to offer
Internet-based products and services. Accordingly, our future success will
depend on our ability to stay ahead of rapidly changing technologies and to
adapt our services to evolving industry standards. In addition, we will need to
regularly improve the performance, features and reliability of our network in
response to competitive service and product offerings and the evolving demands
of the marketplace. Our failure to adapt to such changes and evolution could
seriously harm our business. In addition, if new Internet, networking or
telecommunications technologies are adopted or if other technological changes
occur, we may incur substantial expenses to modify or adapt our services or
infrastructure.
Competition
Broadband
The markets for consumer and business broadband services are extremely
competitive, and we expect that competition will intensify in the future. Our
most direct competitors for broadband services include the following:
. Providers of cable-based Internet services. Time Warner Inc. and Media
One Group have deployed high-speed Internet access services over their
local cable networks through their own cable-based Internet service,
Road Runner. We currently compete with Road Runner to establish
distribution arrangements with cable system operators and we may
compete for subscribers in the future if and when our cable partners
cease to be subject to their exclusivity obligations to us. However,
we do not compete directly with Road Runner for broadband customers
since the cable networks of our cable partners do not generally
overlap with those of Time Warner and Media One. If the merger between
Time Warner and America Online announced in January 2000 is completed,
we expect the Road Runner service to be aggressively marketed to
America Online customers in Time Warner's cable markets which could
result in an acceleration of Road Runner's subscriber growth rates and
increased competition in forming alliances with broadband content
providers and advertisers. The proposed merger may also result in
increased competition for broadband Internet access service
subscribers after our exclusivity arrangements with our principal
cable partners expire. We also compete with other providers of cable-
based Internet services, such as ISP Channel, Inc. and High Speed
Access Corporation;
. Telecommunications providers. We compete with national long-distance
and local exchange carriers that offer high-speed, Internet access
services such as DSL. Recently, these services have been offered in a
number of areas and at lower prices than in the past. If the advanced
services offered by these companies are deregulated, this would
further enhance the ability of these companies to compete against our
services; and
. Internet and online service providers. We compete with Internet
service providers that provide basic Internet access services and with
online service providers such as America Online and other Internet
portals and online services that have announced broadband strategies,
such as Yahoo!.
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Narrowband
The market for narrowband and broadband services and Internet advertising
is intensely competitive. There are no substantial barriers to entry in these
markets and we expect competition to intensify. We believe that the number of
companies relying on fees from web-based advertising has increased substantially
during the past year. Accordingly, we may face increased pricing pressure for
the sale of advertisements on our network, which may seriously harm our
business. We believe the main competitive factors in this market are brand
recognition, user base, performance, ease of use, variety of value-added
services, features and quality of support.
We compete with a number of companies both for users and advertisers. We
expect this competition will intensify, particularly because there are few
barriers to entry in our market. Our competitors include:
. Internet "portals" such as Lycos, AOL.com, Yahoo!, Alta Vista and NBCi;
. online service providers such as America Online, CompuServe, Microsoft's
MSN and Prodigy services;
. large media companies such as CBS, NBC and Time Warner, who have
announced initiatives to develop web services; and
. other smaller companies providing Internet-based and advertising-
supported content.
In addition, we face increasing competition from a large number of
businesses which offer Internet services such as e-mail, stock quotes, news and
chat features and who publish information and content on the Internet.
We also expect to compete with Internet and online service providers, web
site operators, providers of Internet browser software such as Netscape or
Microsoft, and other Internet services and products that incorporate search and
retrieval features into their offerings. Many of these potential competitors
have announced plans to offer competing Internet services and may take actions
that make it more difficult for consumers to find and use the Excite Network.
We also compete with traditional advertising media such as print, radio and
television for a share of advertisers' total advertising budgets. If advertisers
do not perceive Internet advertising to be as effective as traditional media,
our business may be adversely affected.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the online market, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, distribution
partners, advertisers and content providers. These competitors may develop web
search and retrieval services or other online services that are equal or
superior to that of ours or that achieve greater market acceptance than our
offerings.
As the market continues to develop and competition intensifies, our
competitors may merge or form strategic alliances that would increase their
ability to compete with us for traffic and advertisers. These relationships may
also negatively impact our ability to form or maintain strategic relationships
with those companies. Mergers between Internet and traditional media companies,
such as the proposed merger of America Online and Time Warner Inc., would create
large, diverse media conglomerates with significantly greater Internet service
delivery capabilities and access to content than we have. Please see "Risk
Factors--Increased competition for users of Internet services and content may
result in lower subscriber growth rates for our online and Internet services and
lower advertising rates and decreased demand for advertising space on our web
sites."
Many providers of web services have been entering into distribution
arrangements, co-branding arrangements, content arrangements and other strategic
partnering arrangements with Internet and online service providers, providers of
web browsers, operators of high traffic web sites and other businesses in an
attempt to increase traffic and page views, and thereby making their web sites
more attractive to web advertisers while also making it more difficult for
consumers to access our services. In addition, many large media companies have
either launched or have announced that they are contemplating developing
Internet navigation services and are attempting to become web "gateway" sites
for web users. For example, Infoseek Corporation and the Walt Disney Company
have partnered to launch Go Network, which features ABCNEWS.com for news,
ESPN.com for sports, Disney.com for families and
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kids, Infoseek for search, and Disney and ABC for entertainment, and which will
compete directly with the Excite Network for user traffic and advertisers. Also,
NBC has created NBCi, which operates the xoom.com gateway, and both Time-Warner
and CBS have announced initiatives to develop web services to have their web
sites become the starting point for users navigating the web. In the event these
companies develop such "gateway" sites, we could lose a substantial portion of
our user traffic, which would have a material adverse affect on our advertising
revenues and on our business.
Intellectual Property
We regard our technology as proprietary and we attempt to protect it under
copyrights, trademarks, trade secret laws, restrictions on disclosure and
transferring title and other methods, and we have been issued patents with
respect to certain aspects of our searching and indexing technology. We
currently have several new patent applications pending. These applications may
not result in a patent being issued. Furthermore, any patents that may be issued
from these pending applications may not be sufficiently broad to protect our
technology. In addition, despite having patents, it is possible that our patents
may be challenged, invalidated or circumvented. The failure of any patents to
protect our technology may make it easier for our competitors to offer
technology equivalent or superior to our technology.
We also generally enter into confidentiality or license agreements with our
employees and consultants, and generally control access to and distribution of
our documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
services or technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Policing
unauthorized use of our technology is difficult. The steps taken by us may not
prevent misappropriation or infringement of our technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation may result in substantial
costs and diversion of resources and may have a material adverse affect on our
financial condition.
Many parties, including our competitors, are actively developing
personalization, search, indexing and related web technologies. Some of these
parties have taken, and we believe that others will take, steps to protect these
technologies, including seeking patent protection and enforcement of such
patents through licensing and litigation. As a result, we believe that disputes
regarding the use of such technologies are likely to arise in the future.
Competitors or others may initiate lawsuits against us asserting patent
infringement. We may not be able to defend successfully any such litigation
either on the grounds that patents are invalid or that our search technology
does not infringe on patents of others. Even if we are successful, there can be
no assurance that the costs and resources required to defend any such litigation
will not have a material adverse affect on our financial condition or results of
operations.
In addition, from time to time, we have received, and may receive in the
future, notice of claims of infringement of other parties' proprietary rights,
including claims for infringement resulting from users downloading of materials
by the services operated by us. Although we investigate claims and respond as we
deem appropriate, there can be no assurance that infringement or invalidity
claims, or claims for indemnification resulting from infringement claims, may
not be asserted or prosecuted against us or that any assertions or prosecutions
will not materially and adversely affect our financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, we would incur significant costs and diversion of resources to defend
any such claims which may have a material adverse affect on our financial
condition and results of operations. If any claims or actions were asserted
against us, we might seek to obtain a license under a third party's intellectual
property rights. Such a license may not be available on commercially reasonable
terms, or at all.
We also license certain of our technologies from third parties. As we
continue to introduce new services that incorporate new technologies, we may be
required to license additional technology from others. These third-party
technology licenses may not be available on commercially reasonable terms, if at
all. If we do not obtain any of these technology licenses, we may experience
delays or reductions in the introduction of new services or the performance of
our services may be materially and adversely affected until equivalent
technology could be identified, licensed and integrated. Any such delays or
reductions in the introduction of services or adverse impact on service quality
may materially and adversely affect our business.
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Employees
As of December 31, 1999, Excite@Home had 2,319 employees, excluding
temporary personnel and consultants. Of the total, 793 were employed in
networking, engineering and operations; 339 were employed in customer care; 980
were employed in sales, marketing and related activities; 53 supported our
international operations; and 154 were employed in general and administrative
activities. Our acquisition of iMALL added approximately 170 employees,
primarily to networking, engineering and operations and Bluemountain.com added
approximately 90 employees, primarily to sales, marketing and related
activities. None of our employees are represented by a labor union, and we
consider our relations with our employees to be good. Our ability to achieve our
financial and operational objectives depends in large part upon the continued
service of our senior management and key technical personnel and our continuing
ability to attract and retain highly qualified technical and managerial
personnel. Competition for such qualified personnel in our industry and
geographical location in the San Francisco Bay Area is intense, particularly in
software development, network engineering, cable engineering and product
management personnel. Please see "Risk Factors--Our future success depends on
our ability to attract, retain and motivate highly skilled employees."
Risk Factors
The risks described below are not the only ones facing our company.
Additional risks not presently known to us, or that we currently deem
immaterial, may also impair our business operations. Our business, financial
condition or results of operations could be seriously harmed by any of these
risks. The trading price of our Series A common stock could decline due to any
of these risks.
Risks Related to Excite@Home's Business
We may fail to integrate our business and technologies with the business and
technologies of Excite, Bluemountain.com and the other companies we have
recently acquired or may acquire.
We have completed several acquisitions recently, including our acquisitions
of Excite, Inc. in May 1999, iMALL, Inc. in October 1999 and Bluemountain.com in
December 1999. We intend to pursue additional acquisitions in the future. If we
fail to integrate these businesses, our quarterly and annual results may be
adversely affected. Integrating acquired organizations and products and services
could be expensive, time-consuming and a strain on our resources. Risks we could
face with respect to acquisitions include:
. the difficulty of integrating acquired technology or content and
rights into our services;
. the difficulty of assimilating the personnel of the acquired
companies;
. the difficulty of coordinating and integrating geographically-
dispersed operations;
. our ability to retain customers of an acquired company;
. the potential disruption of our ongoing business and distraction of
management;
. the maintenance of brand recognition of acquired businesses;
. the failure to successfully develop acquired in-process technology;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
. the impairment of relationships with employees and customers as a
result of the integration of new management personnel; and
. the potential unknown liabilities associated with acquired businesses.
Our inability to address any of these risks successfully could harm our
business.
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Although we have launched @Home 2000, which integrates the technology
platform of the @Home network broadband services with Excite's Internet
services, we have not fully integrated such services including the advertising
services of Excite's subsidiary, MatchLogic. In addition, @Home 2000 has not
experienced significant traffic to date due to its recent release and we cannot
ensure that problems will not occur in widespread deployment. Further
integration of the Excite and MatchLogic services to the @Home network broadband
platform poses a number of technical challenges, including difficulties
associated with providing reliable updating and personalization of content over
@Home's broadband services and the difficulties associated with applying the
advertising services and targeting technologies of Excite's MatchLogic
subsidiary over the @Home broadband services. This is particularly challenging
because it is more difficult to provide regularly updated and personalized
information from distributed regional data centers, which we rely upon to
deliver our broadband services, than it is to deliver services from a central
data center, as Excite and MatchLogic currently do, in delivering their
narrowband services. We may not be able to achieve the same level of reliability
in providing updated and personalized Excite broadband content over the @Home
service as we have achieved with the Excite narrowband service.
We may be unable to identify future acquisition targets and we may be
unable to complete future acquisitions on reasonable terms. Even if we complete
an acquisition, we may have difficulty in integrating it with our current
organization, technology and product and services offerings, and any acquired
features, functions, products or services may not achieve market acceptance.
Recently-acquired businesses may not be successful.
We have recently acquired companies in an early stage of development and
with unproven business models.
iMALL. Prior to August 1998, substantially all of iMALL's revenues were
attributable to its seminar business. This business was discontinued in August
1998. iMALL has yet to achieve significant revenue from its current business of
providing turnkey electronic commerce services to online merchants or its other
shopping-oriented web sites. A market for iMALL's services may not develop, and
iMALL's services may not become widely accepted.
Bluemountain.com. The acquisition of Bluemountain.com also involves a
number of risks. For example, prior to the acquisition, the Bluemountain.com
electronic greeting card service only sold limited advertising on its web sites.
Bluemountain.com users may not accept a service that displays advertising.
Bluemountain.com users may not continue to use the Bluemountain.com service for
other reasons. For instance, competitive electronic greeting card sites have
increased in popularity. Also, the popularity of electronic greeting card
services could decline generally. Additionally, advertisers may not choose to
advertise on the Bluemountain.com service if users do not accept advertising or
purchase goods or services advertised on Bluemountain.com in sufficient
quantities.
During the first quarter of 2000, we acquired Kendara, Inc. and Rucker
Design Group and we expect to acquire several other companies during 2000. These
companies have specific technology and other capabilities that we may not be
able to successfully integrate with our services or transition to our online
platforms. As a result, we may incur unexpected integration and product
development expenses that could harm our results of operations. We may also be
required to record charges to operations related to the impairment of acquired
technology or other intangible assets.
We have incurred and expect to continue to incur substantial losses.
At Home Corporation was incorporated in March 1995, commenced operations in
August 1995, and has incurred net losses in each fiscal period since its
inception. As of December 31, 1999, we had an accumulated deficit of $1,685
million, which includes depreciation, cost and amortization of acquisition-
related intangibles and deferred compensation and cost and amortization of
distribution agreements of approximately $1,631 million since inception. Excite,
Inc., which we acquired in May 1999, has never been profitable. In addition, we
currently intend to increase capital expenditures and operating expenses in
order to expand our network and to market and provide our broadband services to
potential subscribers as well as to market our narrowband services. As a result
of the acquisitions of Excite, iMALL, Bluemountain.com and other companies, we
anticipate that we will incur substantial non-cash charges including those
relating to the amortization of goodwill and other intangible assets in future
periods. Therefore, we anticipate that we will incur significant net losses for
the foreseeable future.
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Our quarterly operating results may fluctuate because of a number of factors.
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside of our control.
These factors include:
. the level of usage of the Internet in general and portal web sites in
particular;
. subscriber growth rates and prices charged by our cable partners;
. demand for Internet advertising;
. the addition or loss of advertisers;
. the level of user traffic on our web sites used for our narrowband
services;
. the mix of types of advertising we sell, such as the mix of targeted
advertising as compared to general rotation advertising;
. the amount and timing of capital expenditures and other costs relating
to the expansion of our operations;
. the introduction of new products or services by us or our competitors;
. pricing changes for Internet-based advertising;
. the timing of marketing expenditures to promote our brands;
. costs incurred with respect to acquisitions;
. seasonality during the first quarter of each year associated with the
advertising business and Bluemountain.com; and
. general economic conditions.
Our expense levels are based in part on expectations of future revenue and,
to a large extent, are fixed. We may be unable to adjust spending quickly enough
to compensate for any unexpected revenue shortfall.
Our Internet advertising revenue is subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters,
and user traffic for our narrowband services has historically been lower during
the summer and during year-end vacation and holiday periods.
Due to all of the foregoing factors and the other risks described in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance, particularly in light of the
number of acquisitions we have completed. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our Series A common stock
may fall.
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If we do not develop new and enhanced features, products and services for our
narrowband and broadband services, we may not be able to attract and retain a
sufficient number of users.
Because of the competitiveness of our market, we believe it is important to
introduce additional or enhanced features, products and services in the future
in order to differentiate our services and retain our current users and attract
new users. If we introduce a feature, product or service that is not favorably
received by our current users, they may not continue using our services as
frequently and they may choose a competing service.
We must also continually enhance our products and services to incorporate
rapidly changing Internet technologies. We could incur substantial development
costs if we need to modify our products, services or infrastructure to adapt to
changes in Internet technologies. Our business could be harmed if we incur
significant costs to adapt to these changes. If we cannot adapt to these
changes, users may discontinue using our services.
We may also experience difficulties that could delay or prevent us from
introducing new features, products or services. Furthermore, these features,
products or services may contain errors that are discovered after the feature,
product or services are introduced. We may need to modify their design
significantly to correct these errors. In addition, we must consult with and
involve our principal cable partners in the development and design of new
features, products or services for our broadband services. Therefore, the
process of introducing new broadband features, products and services is time
consuming and if our principal cable partners object to a new feature, product
or service, we could be prohibited from offering it in particular areas. Our
business could be adversely affected if we experience difficulties in
introducing new products and services or if users do not accept these new
products or services.
We depend on the sale of advertisements on our services, and if online
advertising does not become accepted, or if users employ new technology to block
or filter online advertising, our business would be harmed.
We expect to derive a substantial amount of our revenues from the sale of
advertising on our services for the foreseeable future. No standards have been
widely accepted to measure the effectiveness of online advertising. If standards
do not develop, existing advertisers may not continue their current levels of
online advertising. Furthermore, advertisers that have traditionally relied upon
other advertising media may be reluctant to advertise online. Advertisers that
already have invested substantial resources in other advertising methods may be
reluctant to adopt a new strategy. Our business would be harmed if the market
for online advertising fails to develop or develops more slowly than expected.
Different pricing models are used to sell online advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project future advertising rates and revenues. For
example, advertising rates based on the number of "click throughs," or user
requests for additional information made by clicking on the advertisement,
instead of rates based solely on the number of impressions, or number of times
an advertisement is displayed, could adversely affect our revenues because
impression-based advertising comprises a substantial majority of our current
advertising revenues. Our advertising revenues could be harmed if we are unable
to adapt to new forms of online advertising.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to a web user's computer are available. Other software programs
are able to hide a web user's identify and prevent "cookies" from being written
to, or read from, the user's hard drive. Such software prevents the proper
operation of our services, including personalization of the My Excite Start Page
and targeted banner advertising. Widespread adoption of such software products
could reduce the attractiveness of our personalization features and harm the
commercial viability of online advertising.
We must develop and maintain the awareness of our brands to attract consumers
and advertisers.
Maintaining and strengthening our brands is critical to achieving
widespread acceptance of our services by consumers and advertisers, particularly
in light of the competitive nature of our markets. Promoting and positioning our
brands will depend largely on the success of our marketing efforts and our
ability to provide high quality services. In order to promote our brands, we
plan to increase our marketing expenses from prior periods. We may find it
necessary to increase our marketing budget or otherwise increase our financial
commitment to creating and
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maintaining brand loyalty among users. If we fail to promote and maintain our
brands or incur excessive expenses in an attempt to promote and maintain our
brands, our business could be harmed.
Privacy concerns could lead to legislation or new technology that could make it
more difficult for us to deliver targeted advertising.
Due to privacy concerns, some Internet commentators, consumer advocates and
governmental officials have suggested that the use of cookies be limited or
eliminated. In addition, certain currently available web browsers allow a user
to delete cookies or prevent cookies from being stored on the user's hard drive,
and technology that shields e-mail addresses, cookies and other electronic means
of identification could become commercially accepted. Any reduction or
limitation in the use of cookies through legislation, new technology or
otherwise, could limit the effectiveness of our ad targeting, which could harm
our business.
We could face liability related to the privacy of personal information about our
users.
Our narrowband services use cookies to deliver targeted advertising, help
compile demographic information about users and limit the frequency with which
an advertisement is shown to the user. Cookies are bits of information keyed to
a specific memory location and passed to a web site server through the user's
browser software. Cookies are placed on the user's hard drive, often without the
user's knowledge or consent. We could face liability relating to the collection
and use of this information, as well as other misuses such as unauthorized
marketing. The Federal Trade Commission and some states have been investigating
Internet companies regarding their use of personal information, and some groups
have initiated legal action against Internet companies regarding their privacy
practices. In addition, the United States federal and various state governments
have proposed new laws restricting the collection and use of information
regarding Internet users. We could incur additional expenses if new regulations
regarding the use of personal information are introduced or if government
agencies choose to investigate our privacy practices.
The sponsorship advertising we sell subjects us to financial and other risks.
We derive a substantial portion of our revenues from sponsorship
arrangements. These are advertising relationships under which third parties
receive sponsored services and placements on our services in addition to
traditional banner advertisements across our services. These arrangements expose
us to potential financial risks, including the risk that we fail to deliver
required minimum levels of user impressions, that third party sponsors do not
perform their obligations under these agreements, or that they do not renew the
agreements at the end of their term. These arrangements also require us to
integrate sponsors' content with our services, which can require the dedication
of resources and programming and design efforts to accomplish. We may not be
able to attract additional sponsors or renew existing sponsorship arrangements
when they expire.
In addition, we have granted exclusivity provisions to some of our
sponsors, and may in the future grant additional exclusivity provisions. These
exclusivity provisions may have the effect of preventing us from accepting
advertising or sponsorship arrangements from certain advertisers during the term
of the agreements. Our inability to enter into further sponsorship or
advertising arrangements as a result of any exclusivity arrangements could harm
our business.
We may face potential liability from our electronic commerce-related advertising
arrangements.
Some of our advertising relationships provide that we may receive payments
based on the amount of goods or services purchased by consumers clicking from
our services to a seller's web site. These arrangements may expose us to legal
risks and uncertainties, including potential liabilities to consumers of the
advertised products and services. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or may not be adequate
to indemnify us for all liability that may be imposed.
Some of the liabilities that may result from these arrangements include:
. potential liabilities for illegal activities that may be conducted by
the sellers;
. product liability or other tort claims relating to goods or services
sold through third-party e-commerce sites;
. claims for consumer fraud and false or deceptive advertising or sales
practices;
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. breach of contract claims relating to purchases; and
. claims that items sold through these sites infringe third-party
intellectual property rights.
Even to the extent that these claims do not result in material liability,
investigating and defending these claims could harm our business.
Our equity investments in other companies may not yield any returns.
We have made equity investments in many Internet companies, including joint
ventures in other countries. In most instances, these investments are in the
form of illiquid securities of private companies. These companies typically are
in an early stage of development and may be expected to incur substantial
losses. Our investments in these companies may not yield any return.
Furthermore, if these companies are not successful, we could incur charges
related to write-downs or write-offs of assets. We also record and continue to
record a share of the net losses in some of these companies, up to our cost
basis, if they are our affiliates. Our strategic investors and we intend to
continue to invest in illiquid securities of private companies and in joint
ventures in the future. Losses or charges resulting from these investments could
harm our operating results.
We must maintain the security of our networks.
We have in the past experienced security breaches in our networks. We have
taken steps to prevent these breaches, to prevent users from sharing files via
the @Home service and to protect against bulk unsolicited e-mail. However,
actual problems with, as well as public concerns about, the security, privacy
and reliability of our networks may inhibit the acceptance of our services.
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications over
the Internet. Any well-publicized compromise of security could deter more people
from using the Internet or our services to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Because many of our advertisers seek to encourage people to use the Internet to
purchase goods or services, our business could be harmed if this were to occur.
We may also incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by these breaches.
Our limited experience with international operations may prevent us from growing
our business outside the United States.
A key component of our strategy is to expand into international markets and
offer broadband and narrowband services in those markets. We have limited
experience in developing localized versions of our products and services and in
developing relationships with international cable system operators. We may not
be successful in expanding our product and service offerings into foreign
markets. Some of our investments in international joint ventures include an
option to purchase the interests of other joint venture stockholders which, if
not exercised by a specified date, gives the other joint venture stockholders
the right to purchase our interest in the joint venture for a nominal price. In
addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, we face specific risks
related to providing broadband and narrowband services in foreign jurisdictions,
including:
. regulatory requirements, including the regulation of Internet access;
. legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions;
. potential inability to use European customer information due to new
European governmental regulations; and
. lack of a developed cable infrastructure in many international markets
We may be liable for our links to third-party web sites.
We could be exposed to liability with respect to the third-party web sites
that may be accessible through our services. These claims may allege, among
other things, that by linking to web sites operated by third parties, we may
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be liable for copyright or trademark infringement or other unauthorized actions
by third parties through these web sites. Other claims may be based on errors or
false or misleading information provided by our services. Our business could be
harmed due to the cost of investigating and defending these claims, even to the
extent these types of claims do not result in liability.
Protection of our intellectual property rights is costly and difficult.
We regard our intellectual property, including our patents, copyrights,
trademarks, trade secrets, and similar intellectual property as critical to our
success. We rely upon patents, trademark and copyright law, trade secret
protection and confidentiality or license agreements to protect our proprietary
rights. Effective protection of intellectual property may not be available in
every country in which our products and services are available. We cannot
guarantee that the steps we have taken to protect our proprietary rights will be
adequate.
We may be subject to intellectual property infringement claims which are costly
to defend and could limit our ability to use certain technologies in the future.
Many parties are actively developing Internet-related technologies. We
believe that these parties will continue to take steps to protect these
technologies, including seeking patent protection. As a result, we believe that
disputes regarding the ownership of these technologies are likely to arise in
the future. From time to time, parties assert patent infringement claims against
us in the form of letters, lawsuits and other forms of communications. In
addition to patent claims, third parties may assert claims against us alleging
infringement of copyrights, trademark rights, trade secret rights or other
proprietary rights or alleging unfair competition.
We may incur substantial expenses in defending against third-party
infringement claims regardless of the merit of the claims. In the event that
there is a determination that we have infringed third-party proprietary rights,
we could incur substantial monetary liability and be prevented from using the
rights in the future.
Our business depends on the continued growth in Internet use.
We operate in a new and rapidly evolving market. Our business may be
adversely affected if usage of the Internet or other online services does not
continue to grow. This growth could be hindered by a number of factors including
the adequacy of the Internet's infrastructure to meet increased usage demands,
privacy and security concerns and the availability of cost-effective services.
Any of these issues could cause the Internet's performance or level of usage to
decline.
Future acquisitions could result in dilutive issuances of stock and the need for
additional financing.
We have typically paid for our acquisitions by issuing shares of our
capital stock. In the future, we may effect other large or small acquisitions by
using stock, and this will dilute our stockholders. We may also use cash to buy
companies or technologies in the future, as we did for a portion of the purchase
price for Bluemountain.com, and we may need to incur additional debt to pay for
these acquisitions. Acquisition financing may not be available on favorable
terms or at all. In addition, we will likely be required to amortize significant
amounts of goodwill and other intangible assets in connection with future
acquisitions, which will have a material effect on our results of operations.
We must manage our growth.
Our growth and recent acquisitions have placed a significant strain on our
managerial, operational, and financial resources. For example, we have grown
from 570 employees at December 31, 1998 to more than 2,300 employees at December
31, 1999. In addition, we plan to continue to hire additional personnel. To
manage our growth, we must continue to implement and improve our operational and
financial systems and to expand, train and manage our employee base. Any failure
to manage growth effectively could harm our business.
Government regulation and legal uncertainties relating to the Internet could
hinder the popularity of the Internet.
New Internet privacy and other laws. There are currently few laws or
regulations that specifically regulate communications or commerce on the
Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, content and the characteristics
and quality of products and services. For example:
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. The United States federal government and various state governments
have proposed limitations on the collection and use of information
regarding Internet users. In October 1998, the European Union adopted
a directive that may result in limitations on our ability to collect
and use information regarding Internet users in Europe.
. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. This
could increase the cost of transmitting data over the Internet.
. A portion of the Telecommunications Act, which has since been ruled
unconstitutional, sought to prohibit transmitting certain types of
information and content over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the Internet
could harm our business.
Tax laws. The tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made at the federal, state
and local level and by certain foreign governments that could impose taxes on
the sale of goods and services and certain other Internet activities. Our
business may be harmed by the passage of laws in the future imposing taxes or
other burdensome regulations on online commerce.
Other jurisdictions. Because our service is available in multiple states
and foreign countries, these jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of these states and
foreign countries. If we fail to qualify as a foreign corporation in a
jurisdiction where we are required to do so, we could be subject to taxes and
penalties.
We could face liability for defamatory or indecent content provided on our
services.
Claims could be made against Internet and online service providers under
both United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of the
materials disseminated through their networks. Several private lawsuits seeking
to impose this liability are currently pending against Internet and online
services providers. Our insurance may not adequately protect us from these types
of claims.
In addition, legislation has been proposed that prohibits, or imposes
liability for, transmission over the Internet of indecent content. The
imposition upon Internet and online service providers of potential liability for
information carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to this liability. This may require
that we expend substantial resources or discontinue service or product
offerings. The increased focus on liability issues as a result of these lawsuits
and legislative proposals could impact the growth of Internet use. Furthermore,
governments of some foreign countries, such as Germany, have enacted laws and
regulations governing content distributed over the Internet that are more strict
than those currently in place in the United States. One or more of these factors
could significantly harm our business.
Year 2000 issues could affect the performance of our systems.
While we have experienced no material year 2000 date-related or other
significant problems to date, not all year 2000 disruption scenarios have
passed. There is a possibility of disruptions in the future including errors
that could still arise in our internal and network information systems because
of their failure to correctly recognize and process date information after the
calendar change from 1999 to 2000. We also may yet experience supplier-related
year 2000 problems. If any of these year 2000 problems occur, our operations
could be significantly hampered. Based on currently available information,
management continues to believe that year 2000 related disruptions or other
problems, if any, will not have a significant adverse impact on our operating
results or financial condition. However, we cannot be certain that year 2000
issues will not have a material adverse impact on us since it is still early in
2000.
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Our future success depends on our ability to attract, retain and motivate highly
skilled employees.
Our future success depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in the Internet industry is
intense, particularly in the Silicon Valley where we are headquartered.
Additionally, it is often more difficult to attract employees once a company's
stock is publicly traded because the exercise price of equity awards such as
stock options are based on the public market, which is highly volatile. We may
be unable to attract, assimilate or retain other highly qualified employees in
the future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. This risk is compounded by
the fact that we are controlled by our principal cable partners, and therefore
we may not have the same flexibility as a typical Silicon Valley company to
pursue initiatives proposed by management. Moreover, hiring and retention is
made more difficult due to the uncertainty concerning the relationship we will
have with our principal cable partners following the expiration of their
exclusivity obligations in June 2002.
Risks Relating to Excite@Home's Broadband Services
Our broadband business is unproven, and it may not achieve profitability.
The profit potential of our broadband business model is unproven and our
broadband services may not achieve widespread consumer or commercial acceptance.
We have had difficulty predicting whether the pricing models or revenue sharing
arrangements with our cable partners for our broadband services will prove to be
viable, whether demand for our broadband services will materialize at the prices
our cable partners charge for our broadband services, or whether current or
future pricing levels will be sustainable. If these pricing levels are not
achieved or sustained or if our broadband services do not achieve or sustain
broad market acceptance, our business will be significantly harmed.
Growth of our broadband service may be inhibited by factors beyond our control.
Our ability to increase the number of subscribers to our broadband service
to achieve our business plans and generate future revenues will depend on many
factors which are beyond our control. For instance, some of our cable partners
have not achieved the subscriber levels that we had originally anticipated.
Other factors include:
. the rate at which our current and future cable partners upgrade their
cable infrastructures for two-way data services;
. our ability and the ability of our cable partners to coordinate timely
and effective marketing campaigns with the availability of cable
infrastructure upgrades;
. the success of our cable partners in marketing and installing the
@Home service in their local cable areas;
. the prices that our cable partners set for the @Home service and for
its installation;
. the speed at which our cable partners can complete the installations
required to initiate service for new subscribers;
. the commercial availability of self-installable, two-way modems that
comply with the recently adopted interface standards known as DOCSIS,
and the success of the roll-out of these products with the @Home
service; and
. the quality of customer and technical support our cable partners
provide.
We need to add subscribers at a rapid rate for our broadband business to
succeed, but we may not achieve our subscriber growth goals.
Our actual revenues or the rate at which we add new subscribers may differ
from our forecasts. We may not be able to increase our subscriber base enough to
meet our internal forecasts or the forecasts of industry analysts or to a level
that meets the expectations of investors. The rate at which subscribers have
increased in the past does not necessarily indicate the rate at which
subscribers may be expected to grow in the future.
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Our broadband subscriber growth is limited by installation and price
constraints.
Installation of the @Home service requires a customer service
representative employed by a cable partner to install a cable modem at a
customer's location and therefore can be time consuming. If we are unable to
speed the installation of our service, our subscriber growth could be
constrained. 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 service. Recently, companies have begun to offer free
Internet access with the purchase of personal computers and some Internet
service providers have reduced or eliminated Internet access charges in exchange
for placing advertisements on a customer's computer screen. If these promotions
become more widely used, or if Internet access fees decline, consumers may be
less willing to pay a premium for broadband services, or our broadband services
in particular.
If we cannot maintain the scalability and speed of our @Home broadband network,
customers will not accept our broadband services.
Due to the limited deployment of our broadband services, the ability of our
broadband network to connect and manage a substantial number of subscribers at
high transmission speeds is unknown. Therefore, we face risks related to our
network's ability to be scaled up to accommodate increased subscriber levels
while maintaining performance. Our network may be unable to achieve or maintain
a high speed of data transmission, especially as the number of our subscribers
increases. Because of our reliance on regional data centers and the cable
infrastructure located in particular geographic areas to support our broadband
services, our and our cable partners' infrastructure must also be able to
accommodate increased subscribers in a particular area. If the existing
infrastructure for a geographic area does not accommodate additional
subscribers, network performance for an area could decline causing us to lose
subscribers in that area, especially if a cable partner was unwilling to upgrade
its infrastructure in that area.
In recent periods, the performance of the @Home network has experienced
some deterioration in some markets partially as a result of subscriber abuse of
the @Home service. While we are seeking to eliminate this abuse by enforcing our
acceptable-use policy and by limiting users' upstream bandwidth, our failure to
do so may result in slower network performance and reduced customer demand for
our services.
If new "DOCSIS" compliant and self-installable cable modems are not deployed
timely and successfully, our subscriber growth could be constrained.
Currently, each of our subscribers must typically obtain a cable modem from
a cable partner to access the @Home service. The North American cable industry
has recently adopted interface standards known as DOCSIS for hardware and
software to support the delivery of data services over the cable infrastructure
utilizing compatible cable modems. Some of our cable partners have chosen to
delay deployments of the @Home service until the commercial availability of
DOCSIS-compliant cable modems is widespread, among other reasons. Subscriber
growth could be constrained and our business could be significantly harmed if
our cable partners choose to slow the deployment of the @Home service because
they are not able to obtain a sufficient quantity of DOCSIS-compliant modems and
if such modems do not become widely available through other channels.
We believe that our ability to meet our subscriber goals depends on the
degree to which two-way cable modems become widely available in channels such as
personal computer manufacturers and retail outlets. Currently, this widespread
availability has not yet occurred. Also, cable modem manufacturers have
experienced, and may continue to experience, production and delivery problems
with cable modem components that may restrict the number of modems available. In
addition, these modems must be easy for consumers to install themselves, rather
than requiring a customer service representative to perform the installation. If
two-way cable modems do not become quickly available in outlets other than
through cable television companies, or if they cannot be installed easily by
consumers, it would be difficult for us to attract large numbers of additional
subscribers and our business would be harmed.
Our broadband business may be impacted by cable unbundling proposals and other
government regulation.
Currently, our broadband services are not directly subject to regulations
of the Federal Communication Commission or any other federal, state or local
communications regulatory agency. However, there may be changes in the
regulatory environment relating to the Internet, cable television or
telecommunications markets. These changes could require regulatory compliance by
us, impact our exclusivity arrangements or limit our ability to provide
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broadband services to our subscribers, and therefore could adversely affect our
revenues and results of operations. Such possible government regulations include
the following:
. The FCC or local agencies could require our cable partners to grant
competitors access to their cable systems. GTE, MindSpring
Enterprises, Inc., Consumers Union and other parties have requested
Congress, the Federal Communications Commission and state and local
authorities to require cable operators to provide Internet and online
service providers with unbundled access to their cable systems.
Although America Online has ceased petitioning government agencies for
unbundled access, other parties will likely continue to lobby heavily
at all levels of government. Some parties have also attempted to
petition for unbundled access under existing cable franchising rules,
such as those for local programming access. If we or our cable
partners are classified as common carriers, or if government
authorities require third-party access to cable networks or
unaffiliated Internet service providers, our competitors may be able
to provide service over our cable partners' systems. The rates that
our cable partners charge for this third-party access, or for the
@Home services, could also be subject to rate regulation or tariffing
requirements.
. Local governmental proceedings. Some local jurisdictions, including
Portland and Multnomah County, Oregon and Broward County, Florida,
have imposed third-party access requirements on AT&T and other cable
companies operating in those communities. The imposition of these
requirements has been challenged in Federal Courts. In June 1999, a
U.S. District Court upheld the third-party access requirement imposed
on AT&T by Portland and Multnomah County. This decision was appealed
to the U.S. Court of Appeals for the Ninth Circuit and arguments were
presented to the court in November 1999. Although appeals decisions
have no time limit, most rulings occur within three to twelve months
after the date arguments are presented. Numerous other local
jurisdictions have considered or are considering imposing similar
third-party access requirements and other municipalities may consider
imposing similar requirements in the future.
. Other litigation. In October 1999, GTE filed a lawsuit in a U.S.
District Court and in November 1999, a class action was filed, each
alleging violations of the federal antitrust laws. Although it is too
early to predict the outcome of this litigation, we could be forced to
pay damages, allow other service providers to utilize our network,
otherwise alter the way we do business or incur significant costs in
defending these litigations. Any of these outcomes could harm our
business. In addition, others could initiate litigation on similar
legal theories in the future.
. Federal regulation. Regulatory changes that affect telecommunications
costs, limit usage of subscriber-related information or increase
competition from telecommunications companies could affect our pricing
or ability to market our broadband services successfully. For example,
changes in the regulation of cable television rates may affect the
speed at which our cable partners upgrade their cable systems to carry
our broadband services.
. Regulation by local franchise authorities. Many of our United States
cable partners' local cable affiliates have elected to classify the
provision of the @Home service as an additional cable service under
their local franchise agreements, and to pay franchise fees under
those agreements. Local franchise authorities may attempt to subject
cable systems to higher or different franchise fees, taxes or
requirements in connection with their distribution of the @Home
service. There are thousands of franchise authorities, and thus it
would be difficult or impossible for us or our cable partners to
operate without a uniform set of franchise requirements.
We could lose subscribers, distribution relationships and revenues related to
broadband services to our competitors.
The markets for consumer and business broadband services are extremely
competitive, and we expect that competition will intensify in the future. Our
most direct competitors for broadband services include the following:
. Providers of cable-based Internet services. Media One Group, which
AT&T has agreed to acquire, and Time Warner Inc. have deployed high-
speed Internet access services over their local cable networks through
their own cable-based Internet service, Road Runner. We currently
compete with Road Runner to establish distribution arrangements with
cable system operators and we may compete for subscribers in the
future if and when our cable partners cease to be subject to their
exclusivity obligations. In addition, we compete with other providers
of cable-based Internet services, such as ISP Channel, Inc. and High
Speed Access Corporation.
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. Telecommunications providers. We compete with national long-distance
and local exchange carriers that offer high-speed, Internet access
services such as asymmetric digital subscriber line, known as DSL.
Recently, these services have been offered in a number of areas and at
lower prices than in the past. If the advanced services offered by
these companies are deregulated, this would further enhance the
ability of these companies to compete against our services.
. Internet and online service providers. We compete with Internet
service providers that provide basic Internet access services and with
online service providers such as America Online and other Internet
portals and online services that have announced broadband strategies,
such as Yahoo!.
Many of our competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than we do.
These competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote more resources to developing
Internet services or online content than we can. We may not be able to compete
successfully against current or future competitors. Competitive pressures could
significantly impact the growth of our broadband subscriber base and our ability
to renew and enter into new distribution agreements and as a result may hurt our
revenues.
The proposed merger between America Online and Time Warner Inc. creates
uncertainties about which cable markets will be served by Road Runner on an
exclusive or non-exclusive basis, and the merger may improve Road Runner's
ability to negotiate exclusive distribution agreements with cable system
operators. Additionally, our principal shareholder, AT&T, will have a
substantial ownership interest in Time Warner and Road Runner if its proposed
merger with MediaOne is completed. This relationship between America Online,
AT&T, Time Warner and Road Runner creates further uncertainties about which
cable markets we will be able to serve and under what terms. The proposed merger
would also give America Online, the dominant dial-up Internet service provider,
the ability to utilize Road Runner's technology as a basis for leveraging its
marketing prowess and extensive subscriber base to compete for customers in
cable markets once our exclusivity agreements have expired. As a result, we may
face intense long-term competition for customers in previously exclusive cable
markets.
Our dependence on our network to provide our broadband services exposes us to a
significant risk of system failure.
Our broadband service operations are dependent upon our ability to support
our highly complex network infrastructure and avoid damage from fires,
earthquakes, floods, power losses, telecommunications failures and similar
events. The occurrence of a natural disaster or other unanticipated problem at
our network operations center or at a number of our regional data centers could
cause interruptions in our broadband services. Additionally, failure of our
cable partners or companies from which we obtain data transport services to
provide the data communications capacity that we require, for example as a
result of natural disaster or operational disruption, could cause interruptions
in our broadband services. Any damage or failure that causes interruptions in
our network operations could harm our business.
Risks Related to Our Relationships With Our Cable Partners
The success of our business depends on our relationships with our cable
partners, most of which have agreed to provide our broadband services on an
exclusive basis. We have also agreed not to provide a variety of Internet
services in the areas covered by our cable partners. Our agreements with our
cable partners are complex. Some of the risks associated with these
relationships are set forth below. Please also refer to "Item 1. Business" for a
further description of our relationships with our cable partners.
We depend on our cable partners to upgrade to the two-way cable infrastructure
necessary to support the @Home service; the availability and timing of these
upgrades are uncertain.
Transmission of our broadband services depends on the availability of high-
speed two-way hybrid fiber coaxial cable infrastructure. However, only a portion
of existing cable plant in the United States and in some international markets
has been upgraded to two-way hybrid fiber coaxial cable, and even less is
capable of high-speed two-way transmission. As of December 31, 1999,
approximately 40% of our North American cable partners' cable infrastructure was
capable of delivering the @Home service. Our cable partners have announced and
are implementing major infrastructure investments in order to deploy two-way
hybrid fiber coaxial cable. However,
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these investments have placed a significant strain on the financial, managerial,
operating and other resources of our cable partners, most of which are already
highly leveraged. Therefore, these infrastructure investments have been, and we
expect will continue to be, subject to change, delay or cancellation.
Furthermore, because of consolidation in the cable television industry, as well
as the sale or transfer of cable assets among cable television operators, many
cable companies have delayed upgrading particular systems that they plan to sell
or transfer. If these upgrades are not completed in a timely manner, our
broadband services may not be available on a widespread basis and we may not be
able to increase our subscriber base at the rate we anticipate. Although our
commercial success depends on the successful and timely completion of these
infrastructure upgrades, most of our cable partners are under no obligation to
upgrade systems or to introduce, market or promote our broadband services. As
has happened in the past, even if a cable partner upgrades its cable
infrastructure, the upgraded infrastructure may not function properly, and
therefore may cause a delay in the availability of our broadband services for
particular areas. The failure of our cable partners to complete these upgrades
in a timely and satisfactory manner, or at all, would prevent us from delivering
broadband services and would significantly harm our business.
Our cable partners are not generally obligated to carry our broadband services,
and the exclusivity obligations that prevent them from carrying competing
services may be terminated.
Most of our cable partners are subject to exclusivity obligations that
prohibit them from obtaining high-speed, greater than 128 kilobits per second,
residential consumer Internet services from any source other than us. However,
most of our cable partners are under no affirmative obligation to carry any of
our broadband services. Also, the exclusivity obligations of our principal cable
partners, AT&T, Comcast, Cox and Cablevision, expire on June 4, 2002, and may be
terminated sooner under some circumstances, as follows:
. principal cable partners may terminate all their exclusivity
obligations upon a change in law that materially impairs some of their
rights;
. Comcast or Cox may terminate all exclusivity obligations of our
principal cable partners at any time if there is a change of control
of TCI that results within 12 months in the incumbent TCI directors no
longer constituting a majority of TCI's board. AT&T, TCI, Comcast and
Cox have agreed, however, that AT&T's acquisition of TCI did not
constitute a change of control under the terms of the original
agreement;
. Comcast or Cox may terminate the exclusivity provisions of our
principal cable partners if AT&T and its affiliates do not meet
specified subscriber penetration levels for the @Home service. On June
4, 1999, Cox had this right, but Cox agreed to waive it for 1999; and
. Comcast may terminate its own exclusivity obligations at any time if
it allows us to repurchase a portion of Comcast's equity interest in
our company. Comcast has informed us that it has entered into an
agreement with Microsoft Corporation under which Microsoft can require
Comcast to terminate its exclusivity obligations.
In consideration for Cox's agreement to waive its right to terminate
exclusivity as of June 4, 1999, changes were made to the corporate governance
provisions of our certificate of incorporation and bylaws. These changes
generally require board action to be approved by a majority of our board,
including the board representatives of AT&T and either Cox or Comcast. In
addition, as further consideration for Cox's waiver, AT&T agreed to increase its
subscriber acquisition goals for the twelve months following June 4, 1999 above
its current goal for that period.
In December 1999, AT&T announced that customers of its broadband cable
systems will be able to choose their Internet service provider for high-speed
Internet access upon expiration of our exclusivity agreement with AT&T.
If the exclusivity obligations of our cable partners are terminated, our
business could be harmed significantly and our stock price would likely suffer
an immediate drop. Our cable partners and we are continuing to explore the
relationships we will have after our exclusivity obligations expire as well as
possible strategic alternatives to our current relationships.
Our cable partners may offer services that compete with the @Home service, but
we are prohibited from offering competing services.
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Many of our cable partners' exclusivity obligations are limited to high-
speed residential Internet services and do not extend to various services that
they may offer without us. These services include, but are not limited to,
telephony services, commercial and business services similar to our @Work
service, Internet services that do not use the cable television infrastructure
or do not require use of an Internet backbone and limited Internet services
including streaming video and other downstream-only services. By providing these
services, most cable partners can compete, directly or indirectly, with our
broadband delivery activities.
Until the expiration of our cable partners' exclusivity obligations which
begins in June 2002, we may not offer the services described above using a cable
partner's cable plant, or to residences in the geographic areas served by its
cable systems, without its consent. These restrictions apply even if we have
integrated such a service with the @Home service in another geographic area. For
example, in order to provide streaming video longer than 10 minutes in duration,
we must seek a cable partner's consent or negotiate a separate agreement,
including a new revenue split, if applicable, prior to offering the service. We
must similarly obtain our cable partners' consent or execute a separate
agreement to provide broadband services over alternate platforms including fixed
wireless, cellular or DSL infrastructures to any residential customers in the
cable partners' geographic area. If our cable partners do not allow us to offer
broadband services over alternate platforms, our market for such services will
be severely limited and our business could be harmed.
We depend on our cable partners to promote our services and obtain new
subscribers.
The rate at which we are able to obtain new subscribers depends not only on
the degree to which our cable partners upgrade their cable systems but also on
the level and effectiveness of the efforts of our cable partners to promote our
services. Our cable partners have achieved different levels of subscriber
penetration. In Canada, for example, where our cable partners have high levels
of upgraded cable systems and faced early competition from other providers of
high speed data services, we have relatively high levels of subscriber
penetration (exceeding those in the United States). Among our principal U.S.
cable partners, AT&T, Cox and Comcast are actively promoting our services and
are beginning to increase their penetration rates. Cablevision, however, has
deployed our service to only a small number of subscribers and continues to
offer its own online service called Optimum Online to the majority of
subscribers in cable systems deployed to date. We cannot predict the rate at
which our cable partners will add new subscribers to our services. If our cable
partners do not actively and effectively promote our services, we will not be
able to reach the level of subscribers necessary to achieve a profitable
business model.
We are controlled by AT&T, Cox and Comcast.
AT&T, through its ownership of TCI, controls approximately 56% of our
voting power. Currently, four of our eleven directors are directors, officers or
employees of TCI, AT&T or their affiliates. AT&T currently owns all 30.8 million
outstanding shares of our Series B common stock, each of which carries ten votes
per share. This Series B common stock ownership gives AT&T the right to elect
five Series B directors, one of which is designated by Comcast and one of which
is designated by Cox. So long as AT&T owns at least 15.4 million shares of our
Series B common stock and holds a majority of our voting power, our board may
take action only if approved by the board and by at least 75%, or four of the
five, of our Series B directors. As a result, corporate actions generally
require the approval of AT&T's three Series B directors and one, or in some
cases both, of the directors designated by Comcast and Cox. Therefore, Comcast
and Cox, acting together, may veto any board action.
We depend on a continuing cooperative relationship with AT&T, Cox, Comcast
and other large stockholders to take action that requires stockholder consent.
It is possible that the objectives of AT&T's stockholders will diverge from what
management considers to be our optimum strategy.
Warrants issued to our cable partners may result in additional dilution to our
stockholders.
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We have entered into agreements with Cablevision, Rogers, Shaw and other
cable partners under which we issued warrants to purchase shares of our Series A
common stock. Under these agreements, warrants to purchase approximately 28.5
million shares of our Series A common stock at an average price of $1.66 per
share were exercisable as of December 31, 1999. To the extent that Cablevision,
Rogers, Shaw or other cable partners become eligible to and exercise their
warrants, our stockholders would experience substantial dilution.
We also may issue additional stock, or warrants to purchase stock, at
prices equal to or less than fair market value in connection with efforts to
expand distribution of the @Home service.
Risks Related to Our Narrowband Services
Our narrowband services could lose users, advertisers and revenues to
competitors.
Our narrowband services compete with a number of companies both for users
and advertisers and, therefore, for revenues. We expect this competition will
intensify, particularly because there are few barriers to entry in this market.
These competitors include:
. Internet portal companies such as Disney's Go Network, Lycos,
Netscape's Netcenter, NBCi and Yahoo!;
. online service providers such as America Online and Microsoft's MSN
service;
. large media companies such as CBS, NBC, Time Warner and USA Networks,
Inc., who have announced initiatives to develop web services or
partner with web companies; and
. providers of a wide variety of online information, entertainment and
community services such as services that are targeted to vertical
markets or electronic commerce services.
Many providers of Internet services have been entering into distribution
arrangements, co-branding arrangements, content arrangements and other strategic
partnering arrangements with ISPs, online service providers, providers of web
browsers, operators of high-traffic web sites and other businesses in an attempt
to increase traffic and page views, thereby making their web sites more
attractive to advertisers while also making it more difficult for consumers to
link to services. To the extent that our direct competitors or other web site
operators are able to enter into successful strategic relationships, these
competitors and web sites could experience increases in traffic and page views,
or the traffic and page views on our narrowband services could remain constant
or decline, either of which could harm our business by making these web sites
appear more attractive to advertisers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, distribution
partners, advertisers and content providers. Further, it is possible that our
competitors could develop search and retrieval services or other online services
that are equal or superior to ours or that achieve greater market acceptance
than our offerings.
The Internet in general, and our narrowband services specifically, also
must compete with traditional advertising media, such as print, radio and
television, for a share of advertisers' total advertising budgets. To the extent
that the Internet is not perceived as an effective advertising medium,
advertisers may be reluctant to devote a significant portion of their
advertising budgets to Internet advertising.
The proposed merger between Time Warner Inc. and America Online announced
in January 2000 would create a very large, diverse media conglomerate. The
combined companies may be able to use their diverse media holdings and Internet
service delivery capabilities to develop or expand Internet services and content
that could attract a significant number of new users and increased traffic.
Additionally, America Online will likely use Time Warner's subscription-based
services as an advertising mechanism to attract users to the Internet access
services provided by America Online and Road Runner. Increased competition for
users of Internet services and content may result in lower subscriber growth
rates for our online and Internet services and lower advertising rates and
decreased demand for advertising space on our web sites.
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If Internet users do not continue to use Internet portal sites, our business
could be harmed.
The success of our Internet portal web sites is also dependent on Internet
users continuing to use "portal" web sites for their information needs. Internet
measurement services have reported that the number of unique users of Internet
portal sites has been decreasing in recent periods. If Internet users begin to
become less dependent on portal sites, and instead go directly to particular web
sites, our traffic levels could decrease as measured by unique users, reach and
pages views. As a result, the number of advertising impressions and the
attractiveness of our sites to advertisers could be impacted, which would harm
our media and advertising revenues.
Our systems may not be able to accommodate increases in the number of users of
our narrowband services.
Our web sites for the Excite Network are currently hosted and operated on a
computer network infrastructure separate from our broadband services. The Excite
Network must accommodate a high volume of traffic and deliver frequently-updated
information. The web sites for the Excite Network have in the past, and may in
the future, experience slower response times or other problems for a variety of
reasons. We also depend on third party information providers to provide updated
information and content for these services on a timely basis. The Excite Network
could experience disruptions or interruption in service due to the failure or
delay in the transmission or receipt of this information. In addition, the users
of these Excite Network services depend on Internet service providers, online
service providers and other web site operators for access to the Excite Network.
Each of these parties has experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. These types of occurrences could cause users to
perceive the Excite Network as not functioning properly and therefore cause them
to use other services.
We depend on several third-party relationships for users, advertisers and
revenues.
We depend on a number of third party relationships to provide users and
content for the Excite Network, including agreements for links to narrowband
services to be placed on high-traffic web sites and agreements for third parties
to provide content, games and e-mail for narrowband web sites. We are not
guaranteed of recouping our investments in these agreements through additional
users or advertising revenues, and we may have to pay penalties for terminating
agreements early. Some of these third parties could become our competitors, or
provide their services to our competitors, upon termination of such
relationships. If these relationships are terminated and we are not able to
replace them, we could lose users or advertisers.
Item 2. Properties
We are headquartered in facilities consisting of approximately 670,000
square feet in Redwood City, California, which we occupy under 12 to 15 year
leases. Our headquarters facilities include buildings constructed during 1999
and new facilities that we occupied at the beginning of 2000 as a result of
build-to-suit options we exercised in September 1997 and March 1998. All
facilities constructed under our build-to-suit options are subject to leases of
up to 15 years in length, have base rents determined in relation to construction
costs and include tenant improvements paid for by us. The build-to-suit options
that have been exercised to date provide for monthly rental payments that begin
upon the phased completion of the buildings. In addition to our build-to-suit
options, in December 1998 we exercised our right to purchase one land parcel
from the landlord. The purchase price of the exercised option included a payment
of $5.2 million in 1999. We also lease space at smaller facilities in various
locations throughout the United States as well as in several international
locations. These facilities primarily house our regional support and sales
offices in locations such as New York, Chicago, Los Angeles, Philadelphia and
San Francisco, as well as the operations of businesses we have acquired,
including the offices of Excite's MatchLogic subsidiary in Westminster, Colorado
and in Waltham, Massachusetts, iMALL's offices in Provo, Utah and Santa Monica,
California, Bluemountain.com's offices in Boulder, Colorado, and other small
offices in various domestic and international locations. In January 2000, we
also entered into agreements for the construction of additional facilities near
our headquarters which are expected to be completed in late 2001. We believe
that our existing facilities and the facilities planned for construction will be
adequate to accommodate our growth for the foreseeable future.
Item 3. Legal Proceedings
Sheldon Pittleman and Ralph Zonies each filed derivative lawsuits on behalf
of Excite@Home against AT&T and Messrs. Armstrong, Petrillo, Roberts, Woodrow,
Doerr, Hearst, Bell, Malone, Shaw and Jermoluk, who are our directors, in the
Court of Chancery of the State of Delaware on October 15, 1999. We are named as
a nominal defendant in each complaint. Each complaint alleges breaches of
fiduciary duty to Excite@Home and its public stockholders. We have not yet filed
responsive pleadings in either matter. Each of Messrs. Pittleman and Zonies
seeks an injunction requiring us to alter our corporate governance, including
appointing new, unaffiliated directors,
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as well as payment of monetary damages, costs and attorneys' fees. If we do not
prevail in this action, we may be required to alter our corporate governance and
pay substantial damages, which could seriously harm our business.
GTE Internetworking Incorporated and GTE Intelligent Network Services
Incorporated filed a lawsuit against TCI (now a subsidiary of AT&T), Comcast
Corporation and us in the United States District Court for the Western District
of Pennsylvania on October 25, 1999. The complaint alleges violations of the
federal antitrust laws. GTE is seeking an injunction prohibiting continued
performance under our exclusive distribution and sales arrangements with our
cable partners, damages (including treble damages), costs and attorneys' fees.
We filed an answer to the complaint in this matter on December 15, 1999, which
was amended on December 21, 1999, denying the allegations of unlawful conduct in
the complaint. If we do not prevail in this action, our cable partners, when
providing high speed data transport to residential consumers, may be required to
offer the services of other Internet service providers in addition to the @Home
service. We may also be required to pay substantial damages. Either of these
results could seriously harm our business and could encourage others to initiate
litigation on similar legal theories in the future.
Fred and Roberta Lipschutz, Arthur Simon and John Galley, III, as named
plaintiffs, filed a class action against us, AT&T, ServiceCo L.L.C. and entities
affiliated with eight other cable companies in the United States District Court
for the Central District of California on November 10, 1999. The complaint
alleges violations of the federal antitrust laws. The plaintiffs seek an
injunction prohibiting the alleged acts, damages (including treble damages),
costs and attorneys' fees. We filed an answer to the complaint in this matter on
January 21, 2000, denying the allegations of unlawful conduct in the complaint.
If we do not prevail in this action, we may be required to pay substantial
damages, or we may be forced to alter the way we do business. Either of these
results could seriously harm our business and could encourage others to initiate
litigation on similar legal theories in the future.
We cannot assure you that we will prevail in any litigation. Regardless of
the outcome, any litigation may require us to incur significant litigation
expenses and may result in significant diversion of management.
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 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market for the Registrant's Common Equity
Our Series A common stock trades on the Nasdaq National Market under the
symbol "ATHM." The following table sets forth, on a per share basis, the high
and low sales prices of the Series A common stock for the periods indicated, as
reported by the Nasdaq National Market. The prices in the table have been
adjusted to reflect our two-for-one stock split effective June 1999.
<TABLE>
<CAPTION>
High Low
----------- -----------
<S> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter................................ $19.06 $10.25
Second Quarter............................... $28.63 $14.88
Third Quarter................................ $27.47 $11.75
Fourth Quarter............................... $42.38 $17.25
Fiscal Year Ended December 31, 1999:
First Quarter................................ $81.75 $37.25
Second Quarter............................... $99.00 $39.00
Third Quarter................................ $59.63 $33.13
Fourth Quarter............................... $59.75 $36.69
</TABLE>
As of December 31, 1999, the number of stockholders of record was
approximately 3,000. We have never declared or paid any cash dividends on our
Series A common stock. We presently intend to retain future earnings, if
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any, for use in our business and, therefore, we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
Recent Sales of Unregistered Securities
On October 27, 1999, in consideration for amending an e-commerce services
agreement between iMall, which we acquired the same day, and First Data Merchant
Services, a subsidiary of First Data Corporation, we issued fully-vested
warrants to purchase 2,300,000 shares of our Series A common stock in a private
transaction that was exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act.
On October 27, 1999, in connection with our acquisition of Webshots
Corporation, we issued 2,050,326 shares of our Series A common stock to the
shareholders of Webshots in a private transaction that was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act.
On December 13, 1999, in connection with our acquisition of
Bluemountain.com, we issued 10,674 shares of our Series A preferred stock to
the shareholders of Hartford House, Ltd., the operator of the Bluemountain.com
web site, in a private transaction that was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act.
On December 15, 1999, we issued $500 million principal amount of
Convertible Subordinated Notes due 2006 in a transaction that was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act. Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Deutsche Bank
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht
& Quist LLC and BancBoston Robertson Stephens Inc. acted as initial purchasers
and offered the notes primarily to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. Each note was issued in denominations of
$1,000 or multiples of $1,000 and is convertible at any time into Series A
common stock at a conversion price of $56.52 per share, subject to adjustment in
specified circumstances. We may redeem these notes on or after December 20, 2002
by giving note holders at least 30 days' notice. We received net proceeds of
$485.7 million from the offering.
Use of Proceeds from Sales of Registered Securities
Not applicable.
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Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes appearing elsewhere in this annual report. The selected consolidated
balance sheet data as of December 31, 1999 and 1998 and the selected
consolidated statement of operations data for each of the three years in the
period ended December 31, 1999 are derived from our consolidated financial
statements appearing elsewhere in this annual report. Consolidated statement of
operations and balance sheet data as of and for the year ended December 31, 1999
includes the results of operations and financial condition of Excite, which we
acquired on May 28, 1999. Therefore, comparisons of our results of operations
and financial condition for periods prior to and subsequent to our acquisition
of Excite are not indicative of future results. In addition, historical results
are not necessarily indicative of future results. Selected financial data as of
and for the period from our inception on March 28, 1995 to December 31, 1995 are
not presented because our financial condition and results of operations as of
and for that period were insignificant. Share and per share data have been
adjusted to reflect our two-for-one stock split effective June 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(In Thousands, Except Per Share Data)
Consolidated Statement Of Operations Data:
Revenues(1).............................................................. $ 336,955 $ 48,045 $ 7,437 $ 676
Costs and expenses(2):
Operating costs......................................................... 143,056 46,965 22,459 6,969
Product development and engineering..................................... 54,805 17,009 11,984 6,312
Sales and marketing..................................................... 130,725 18,091 11,863 6,368
General and administrative.............................................. 30,276 12,429 10,635 6,054
Cost and amortization of distribution agreements........................ 291,967 101,385 9,246 --
Amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs....................... 1,157,009 2,758 -- --
----------- --------- -------- --------
Loss from operations..................................................... (1,470,883) (150,592) (58,750) (25,027)
Interest and other income, net........................................... 10,253 6,413 3,033 514
Realized gain on investment.............................................. 12,566 -- -- --
Equity share of losses of affiliates..................................... (9,574) -- -- --
----------- --------- -------- --------
Net loss................................................................. $(1,457,638) $(144,179) $(55,717) $(24,513)
=========== ========= ======== ========
Net loss per share - basic and diluted................................... $(4.61) $(0.63) $(0.27) $(0.13)
=========== ========= ======== ========
Shares used in per share calculation..................................... 316,441 228,479 207,086 192,240
=========== ========= ======== ========
_________________
Supplemental Consolidated Statement of Operations Data:
(1) Revenues from related parties....................................... $ 28,821 $ 10,458 $ 2,948 $ 634
=========== ========= ======== ========
(2) Depreciation and amortization included in costs and expenses,
excluding amortization of distribution agreements and
acquisition-related amounts........................................ $ 49,467 $ 15,029 $ 8,913 $ 1,903
=========== ========= ======== ========
Loss from operations before cost and amortization of distribution
agreements and costs and amortization related to acquisitions...... $ (21,097) $ (46,449) $ (49,504) $(25,027)
============ ========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1999 1998 1997 1996
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments........................... $ 525,223 $419,289 $120,379 $16,770
Working capital................................................................ 389,023 390,324 101,390 10,573
Distribution agreements, net of accumulated amortization....................... 313,772 186,247 163,345 --
Total assets................................................................... 9,104,279 780,631 323,928 33,388
Convertible debentures......................................................... 736,294 229,344 -- --
Capital lease obligations, less current portion and other long-term liabilities 57,552 14,356 15,735 5,654
Stockholders' equity........................................................... 8,067,017 493,866 282,407 18,317
</TABLE>
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<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes contained in Item 8 of this annual report. This
discussion contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. We may identify these
statements by the use of words such as "believe", "expect", "anticipate",
"intend", "plan" and similar expressions. These forward-looking statements
involve several risks and uncertainties. Our actual results could differ
materially from those set forth in these forward-looking statements as a result
of a number of factors, including those described under the caption "Risk
Factors" in "Item 1. Business" and elsewhere in this annual report. These
forward-looking statements speak only as of the date of this annual report, and
we caution you not to rely on these statements without also considering the
risks and uncertainties associated with these statements and our business as
addressed in this annual report.
Overview
Excite@Home is a global media company offering broadband Internet
connectivity, personalized web-based content and targeted advertising services.
Our @Home service provides broadband Internet access from consumers' homes over
the cable television infrastructure and offers end-to-end managed connectivity
services for businesses over both cable and digital telecommunications lines.
Our @Work division further utilizes our network by providing a range of Internet
services for businesses, including high-speed connectivity, web hosting and
development and hosting of e-commerce solutions. Our media services include the
Excite Network, a leading consumer Internet portal, MatchLogic, our targeted
advertising service, Bluemountain.com, the most-used online greeting card
service according to Media Metrix, and other media properties that deliver
entertainment, shopping and information services to our users. The Excite
Network offers search, content, community, communications services and commerce
functionality to Internet users. Excite's media services focus on comprehensive
navigation, global reach and personalization technology to attract and retain
users and achieve market share. MatchLogic provides advertisers with targeted ad
campaign management and other advertising-related services designed to improve
the effectiveness of their advertising campaigns. Bluemountain.com enables
Internet users to select from a wide range of online greeting cards on its web
site, which can then be personalized and accessed by recipients through a link
in an electronic mail message.
Media and Advertising Services
The Excite Network contains a wide variety of specialized narrowband and
broadband information services, organized under numerous topical channels that
combine proprietary search technology as well as content, community features and
information management services. For over two years, the Excite Network has been
ranked by Media Metrix as one of the top ten destinations on the Internet and
during December 1999 reached over 27.7 million unique users, as reported by
Media Metrix. We provide our consumers compelling content from our content
partners which include Intuit, Sportsline, Tickets.com and WebMD. For
advertisers, we offer a variety of broadband and narrowband advertising options
including banner advertising and sponsorships, allowing them to develop an
advertising plan designed to optimize their reach, frequency of exposure and
consumer response.
Subscriber Network Services
We are the leading provider of broadband Internet services with
approximately 1.1 million subscribers to our @Home service and over 5,100 @Work
business access customers as of December 31, 1999. Subscribers have access to
Internet content and services, including our proprietary multimedia programming,
at speeds up to 50 times faster than typical 56 kilobits-per-second connections.
The service is "always on," meaning that users do not have to go through dial-up
procedures and do not experience busy signals. The foundation of the @Home
service is our scalable, distributed, intelligent private network, which is
designed to avoid bottlenecks frequently encountered on the public Internet.
Elements of this network include a national, optical fiber Internet protocol
backbone, regional data centers and local caching servers. Our network design
facilitates end-to-end network management, provides for a high level of security
and stores data close to the user in order to minimize the need to retrieve data
from the public Internet. Our network interconnects with the networks of our 22
cable partners, through which we had access to approximately 72 million homes
worldwide as of December 31, 1999. Of these homes, approximately 23.8 million
were served by upgraded two-way cable capable of carrying our broadband service.
Our principal cable partners include AT&T, Comcast, Cox, Cablevision, Rogers,
Shaw and others. Our @Work division further utilizes our
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<PAGE>
network by providing a range of Internet services for businesses, including
high-speed connectivity, web hosting and development and hosting of e-commerce
solutions.
In March 2000, we introduced @Home 2000, a broadband portal which
incorporates the high-speed connection of our @Home service with the
personalized content of Excite to help our subscribers manage their daily lives
in an easily accessible and media rich environment. Utilizing enhanced features
and a custom browser, @Home 2000 offers a personalized broadband experience to
@Home subscribers.
Recent Events
The following developments, starting with the most recent, occurred during the
fourth quarter of 1999 and the first quarter of 2000.
Announcement of Work.com Joint Venture
On February 22, 2000, we entered into a preliminary agreement with Dow
Jones & Co., Inc. to form a joint venture for the purpose of establishing and
operating an Internet site providing news, information and business services to
small and medium-sized businesses. Under the agreement, we will contribute to
the joint venture approximately $16 million in cash, our Work.com web site
including the related technology and certain of our business-related advertising
and content relationships, in exchange for a 50% equity interest. Under a
separate agreement, we will receive a percentage of the advertising revenues
generated by the joint venture over a three-year term up to a total of $31
million. The joint venture will be accounted for as an investment under the
equity method.
Acquisition of Kendara, Inc.
On February 20, 2000, we completed our acquisition of Kendara, Inc., a
Delaware corporation, for approximately 1.5 million shares of our Series A
common stock, 202 shares of our Series B non-voting preferred stock and 1,279
shares of our Series C non-voting preferred stock. We also assumed Kendara's
outstanding stock options, which were converted into options to purchase
approximately 128,000 shares of our Series A common stock. The merger
consideration is approximately $120 million. Each share of Series B preferred
stock is being held in escrow for one year and will automatically convert into
1,000 shares of our Series A common stock upon the expiration of the escrow
period. Each share of Series C preferred stock is also convertible into 1,000
shares of our Series A common stock, subject to a vesting schedule and escrow.
Kendara provides browser-based marketing services. We accounted for this
acquisition as a purchase.
Issuance of Convertible Subordinated Notes
On December 15, 1999, we issued $500 million principal amount of
Convertible Subordinated Notes in a private offering primarily to qualified
institutional buyers. The notes bear interest at an annual rate of 4.75%. Each
$1,000 note is convertible at any time into Series A common stock at a
conversion price of $56.52 per share. We may redeem these notes on or after
December 20, 2002 by giving note holders at least 30 days' notice. We received
net proceeds of $485.7 million from the offering, of which we used $350 million
to finance the cash component of our acquisition of Bluemountain.com. We intend
to use the remainder of the proceeds for working capital and general corporate
purposes.
Acquisition of Bluemountain.com
On December 13, 1999, we completed our merger with Hartford House, Ltd., a
Delaware corporation, the operator of the Bluemountain.com web site.
Bluemountain.com is a leading provider of online greeting card services. In the
merger, we paid $350 million in cash and issued 10,674 shares of our non-voting
Series A preferred stock, which is convertible into approximately 10.7 million
shares of our Series A common stock as the restrictions on resale lapse. Of the
Series A convertible preferred stock issued in this transaction, approximately
50% may not be converted into our Series A common stock and resold until a
period of two years after the closing of the transaction. The remaining
initially issued shares may only be resold at a rate of 500,000 shares of Series
A common stock per month. We also assumed options to purchase shares of Hartford
House common stock, which were converted into options to purchase approximately
3 million shares of our Series A common stock. The preliminary purchase
consideration of $970 million included $150 million related to our Series A
common stock issuable
37
<PAGE>
contingently upon the achievement of certain performance goals, which were
achieved by the Bluemountain.com web site during December 1999. We accounted for
this acquisition as a purchase.
Based upon the achievement of these and a portion of additional performance
goals in December 1999, we issued in the first quarter of 2000 approximately 3.5
million additional shares of our Series A common stock to Hartford House
stockholders and also issued additional options and shares related to the
assumed stock option plan for an aggregate of 542,000 shares of Series A common.
The shares are freely tradable upon issuance. The fair value of this contingent
consideration did not differ significantly from the amount recorded as of
December 31, 1999.
In addition, we also entered into distribution relationships with former
affiliates of Hartford House, including Proflowers.com, Inc., an online flower
company, Dan's Chocolates, an online gift company, and Lucidity, Inc., an online
electronic gift certificate company. These three agreements provide for us to
receive aggregate revenues of up to approximately $34 million over the three-
year terms of the agreements. Revenue recorded during the year ended December
31, 1999 related to these relationships was not significant.
Acquisition of iMALL, Inc.
On October 27, 1999, we acquired iMALL, Inc., a Nevada corporation, for
approximately 9.3 million shares of our Series A common stock. We also assumed
iMALL's outstanding options and warrants, which were converted into options to
purchase approximately 1.5 million shares and 159,000 shares our Series A common
stock, respectively, and issued to First Data Corporation a warrant to purchase
2.3 million shares of our Series A common stock at an exercise price of $36.96
per share. This warrant is immediately exercisable and will expire on October
30, 2003. The allocation of the total purchase consideration of approximately
$637 million included a charge related to acquired in-process research and
development of $1.9 million. iMALL provides electronic commerce services and
solutions to small and medium-sized businesses enabling them to sell their
products over the Internet. We accounted for this acquisition as a purchase.
Acquisition of Webshots Corporation
On October 27, 1999, we acquired Webshots Corporation, a California
corporation, for approximately 2.1 million shares of our Series A common stock,
of which 30% is subject to a restriction on resale that will lapse ratably over
the 24 months following the completion of the acquisition. The allocation of the
total purchase consideration of approximately $83 million included a charge of
$425,000 related to acquired in-process research and development. Webshots
operates a website that offers free copyrighted digital photographs that are
viewable with Webshots' proprietary software. We accounted for this acquisition
as a purchase.
Acquisition of Assets of Perspecta, Inc.
On October 25, 1999, we acquired certain assets and technology of
Perspecta, Inc., a California corporation, for approximately $8.7 million in
cash. Perspecta develops software for mapping large databases. We accounted for
this acquisition as a purchase.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
We accounted for the Excite acquisition as a purchase and Excite's revenues
have been included in our results of operations commencing on May 28, 1999, the
date of the acquisition. Therefore, we believe that comparisons of our revenues
in 1999 to prior years are not relevant for purposes of indicating revenue
growth in 1999 and future years.
Our revenues are derived from our two business segments, media and
advertising services and subscriber network and other services. Media and
advertising revenues are generated from advertising, sponsorship commerce
agreements and ad serving and targeting services on our narrowband portal
resulting primarily from our acquisition of Excite in May 1999, as well as our
acquisitions of other companies, and our advertising and related services on the
broadband portals accessible by subscribers of the @Home service. Subscriber
network and other revenues are
38
<PAGE>
derived primarily from monthly customer subscription fees from the @Home and
@Work services and from support services provided to cable system operators,
such as customer support, network maintenance, local area content development,
development fees for set-top devices, and pre-commercial deployment consulting.
The following represents our revenues by business segment for the years
indicated (in thousands):
<TABLE>
<CAPTION>
1999 Change 1998
----------- ------------ -----------
Revenues:
<S> <C> <C> <C>
Media and advertising services............................... $203,714 3,642% $ 5,444
Subscriber network and other services........................ 133,241 213% 42,601
-------- ----- -------
Total revenues.......................................... $336,955 601% $48,045
======== ===== =======
</TABLE>
Media and advertising revenues
Media and advertising revenues increased to $203.7 million, or 60% of total
revenues, for the year ended December 31, 1999 as compared to $5.4 million, or
11% of total revenues, for the year ended December 31, 1998. The increase in
media and advertising revenue in 1999 over 1998 was attributable primarily to
our acquisition of Excite. Under the purchase method of accounting, our results
of operations include the operations of Excite commencing on May 28, 1999, the
date of the acquisition. Given the above, comparisons of total media and
advertising revenue for periods prior to and subsequent to May 1999 are not
relevant for purposes of indicating the trend of our media and advertising
revenues in 1999 and future years. Excluding the impact of Excite, the increase
in media and advertising revenues in 1999 over 1998 was generated by our @Home
service offering and our acquisitions other than Excite. Approximately two-
thirds of the increase, excluding the impact of Excite, in media and advertising
revenues in 1999 compared to 1998 resulted from growth in traffic and page views
related to our broadband portals accessible by subscribers of our @Home service;
this growth was generally commensurate with the growth in broadband Internet
subscribers. Several acquisitions, including Narrative in the fourth quarter of
1998 and Webshots, iMALL and Bluemountain.com in the fourth quarter of 1999,
generated the remaining one-third of the increase in 1999 media and advertising
revenues excluding Excite. These acquisitions were accounted for using the
purchase method of accounting, under which our results of operations include the
results of operations of each acquired entity commencing on the date of its
acquisition.
As a result of our acquisition of Excite, traffic on our Internet sites
increased to approximately 125 million page views per day in December 1999, from
less than one million page views per day in December 1998. Our acquisition of
Bluemountain.com contributed significantly to the number of page views per day
in December 1999. Further, the reach of our Internet properties including
Bluemountain.com, as measured by Media Metrix, was approximately 27.7 million
unique visitors, or 42.5% of total domestic Internet users for the month of
December 1999. In addition, the number of advertisers on our Internet sites
increased to more than 1,900 as of the end of 1999 from approximately 50 as of
the end of 1998. Our ability to generate media and advertising revenues in the
future will depend partially on the traffic on our Internet sites as measured by
page views, and increasingly by average time spent per page, as well as the
number of unique visitors to our sites and the number of advertisers and ad
placements on our sites. Please see "Risk Factors" in "Item 1. Business" of this
annual report for further discussion of factors that may affect our ability to
generate media and advertising revenues in the future.
Subscriber network and other revenues
Subscriber network and other revenues increased to $133.2 million, or 40%
of total revenues, for the year ended December 31, 1999, from $42.6 million, or
89% of total revenues, for the year ended December 31, 1998. The increase in
1999 was primarily attributable to an increase in the number of subscribers to
the broadband Internet services of @Home and @Work.
@Home service. The @Home service represented approximately 70% of
subscriber network and other revenues for the year ended December 31, 1999 as
compared to approximately 60% for the year ended December 31, 1998. Subscriber
network and other revenues generated by the @Home service during 1999 increased
by approximately 290% over the prior year due primarily to the number of @Home
subscribers, which increased by 247% to 1.1 million as of December 31, 1999 from
331,000 as of December 31, 1998. The @Home subscriber base was 50,000 at the end
of 1997. For the year ended December 31, 1999, the geographic source of @Home
subscriber network and other revenues was: 78% from cable partners and
subscribers in the United States; 16% from cable partners and subscribers in
Canada; and 6% from our international joint ventures. For the year ended
December 31, 1998, these
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<PAGE>
percentages were 78% for the United States and 22% for Canada. The number of
markets and households that our cable partners upgrade to receive our services
and the subscriber penetration rates in those markets will determine the source
of our subscriber network and other revenues in future years. As of December 31,
1999, the markets of our cable partners in North America included approximately
58.7 million households, of which approximately 40% were capable of receiving
our services. The markets of our international joint ventures included
approximately 13.5 million households, of which approximately 10% were upgraded
to receive our services. Please see "Risk Factors" in "Item 1. Business" of this
annual report for further discussion of factors that may affect our ability to
generate subscriber network and other revenues from our @Home service in the
future.
@Work service. Subscriber network and other revenues from the @Work service
represented approximately 30% of total subscriber network and other revenues for
the year ended December 31, 1999 as compared to approximately 40% for the year
ended December 31, 1998. @Work subscriber network and other revenues increased
for the year ended December 31, 1999 by approximately 90% over the prior year as
a result of the growth in the number of @Work customers, which increased by 200%
to approximately 5,100 as of December 31, 1999 from approximately 1,700 as of
December 31, 1998. There were approximately 330 @Work customers at the end of
1997.
Revenues from related parties
Revenues from related parties were $28.8 million, or 9% of total revenues,
for the year ended December 31, 1999, as compared to $10.5 million, or 22% of
total revenues, for the year ended December 31, 1998. Revenues from related
parties included $18.3 million in 1999 and $10.5 million in 1998 generated from
support services such as customer support, local area content development,
development of set-top devices and pre-commercial deployment consulting provided
to our cable partners that are also our stockholders. The remaining $10.5
million of revenues from related parties in 1999 were earned primarily from
consulting and other services rendered to our international joint ventures
reimbursed on a cost-plus basis.
Revenues related to our strategic investments
We have made investments in certain companies for strategic purposes,
primarily in connection with expanding content and services available on our
narrowband and broadband portals and providing improved broadband services to
our @Work and @Home subscribers. Revenues from these strategic investments
generally consist of purchased sponsorship or advertising space and revenue
share arrangements on our narrowband or broadband portals, and we expect
revenues from some of our strategic investments to equal or exceed our cash
investment. Revenues related to our strategic investments were $26.1 million and
$780,000 for the years ended December 31, 1999 and 1998, respectively.
Barter revenues
Revenues from the exchange of media and advertising services related to our
Internet sites for advertising in other media were less than 10% of total
revenues for the year ended December 31, 1999; such revenues were insignificant
in 1998. Revenues from these exchanges are recorded at the lower of the fair
value of the services provided or the services received.
Total Costs and Expenses
We accounted for the Excite acquisition as a purchase and Excite's costs
and expenses have been included in our results of operations commencing on May
28, 1999, the date of the acquisition. Therefore, we believe that comparisons of
our costs and expenses in 1999 to prior years are not relevant for purposes of
indicating the trend of our costs and expenses in 1999 and future years.
40
<PAGE>
Our costs and expenses were as follows for the years indicated (in thousands):
<TABLE>
<CAPTION>
1999 Change 1998
--------------- ------------ ------------
Costs and expenses:
<S> <C> <C> <C>
Operating costs.................................................. $ 143,056 205% $ 46,965
Product development and engineering.............................. 54,805 222% 17,009
Sales and marketing.............................................. 130,725 623% 18,091
General and administrative....................................... 30,276 144% 12,429
---------- --- --------
Total costs and expenses excluding costs and amortization
of acquisitions and distribution agreements........................ 358,862 280% 94,494
Costs and amortization of distribution agreements................ 291,967 188% 101,385
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-related costs...... 1,157,009 n/a 2,758
---------- ---- --------
Total costs and expenses............................................ $1,807,838 810% $198,637
========== === ========
</TABLE>
Operating costs
Operating costs are primarily related to providing services to customers,
maintaining the @Home broadband network, royalties, license agreements and
revenue sharing arrangements for content and other services. In addition,
operating costs include hosting costs related to the maintenance and technical
support of our Internet portals, including Excite, and are comprised principally
of personnel costs, telecommunications costs and equipment depreciation.
Operating costs in our media and advertising business are typically lower than
the operating costs related to the @Home broadband network. Operating costs
increased by 205% to $143.0 million, or 42% of total revenues, for the year
ended December 31, 1999, from $47.0 million, or 98% of total revenues, for the
year ended December 31, 1998. A significant portion of the increase in operating
costs in 1999 was related to our acquisition of Excite on May 28, 1999. The
increase in operating costs in 1999, including Excite, was primarily
attributable to the following factors in the proportions indicated:
. approximately 22% related to hosting costs for our Internet portals
and ad serving and target marketing services which resulted
predominantly from the acquisition of Excite on May 28, 1999;
. approximately 24% related to maintenance and depreciation of capital
equipment and telecommunications costs required for the expansion of
our broadband network;
. approximately 14% related to royalties, license agreements and revenue
sharing arrangements for content and other services for content and
other services for our Internet portals, which resulted predominantly
from the acquisition of Excite on May 28, 1999;
. approximately 16% related to costs of customer service operations to
support a larger @Home subscriber base;
. approximately 24% related to increases in operating costs of @Work and
our international operations, as well as costs allocated for
facilities and other miscellaneous costs, due to the expansion of our
operations.
We expect operating costs to increase on an absolute dollar basis in the
future as our subscriber base grows, as we continue to make investments in
network infrastructure and customer service operations, as a result of
consolidating results of operations of international joint ventures previously
accounted for under the equity method and as our results of operations will
reflect Excite for an entire year. Recent acquisitions, such as iMALL and
Bluemountain.com, as well as future acquisitions, expansion into international
markets and deployment of advanced technologies will result in further increases
in operating costs due to additional personnel, equipment depreciation,
royalties and revenue sharing arrangements.
Operating costs as a percentage of total revenues. Total revenues net of
operating costs increased to $194.0 million, or 58% of total revenues, for the
year ended December 31, 1999, from $1.0 million, or 2% of total revenues, for
the year ended December 31, 1998. The increase in total revenues net of
operating costs and operating costs as a percentage of total revenues in 1999
was primarily due to an increase in media and advertising revenues related to
our acquisition of Excite in May 1999, and efficiencies derived from scaling the
deployment of the @Home service to approximately 1.1 million subscribers. Media
and advertising revenues historically have lower direct costs than subscriber
network services.
41
<PAGE>
In the future, the types of advertising revenues generated and the revenue
sharing provisions of distribution and content agreements may affect operating
costs as a percentage of total revenues. Additionally, the expansion of our
subscriber network services may require higher operating costs, or conversely,
may reduce incremental operating costs, and as a result affect gross margin. We
believe that the continued expansion of our operations is critical to the
achievement of our goals and we anticipate that operating costs will increase in
the future; specifically, we expect to significantly increase operating costs
to continue building out our infrastructure to improve our operational
readiness. Nonetheless, operating results may fluctuate significantly, and
revenues may grow at a slower rate than operating costs.
Product development and engineering
Product development and engineering expenses consist primarily of salaries
and related expenses for hardware and software engineering and development
personnel, consulting fees, equipment depreciation, supplies, the allocated cost
of facilities and related miscellaneous expenses. Product development and
engineering expenses increased by 222% to $54.8 million, or 16% of total
revenues, for the year ended December 31, 1999, from $17.0 million, or 35% of
total revenues, for the year ended December 31, 1999. A significant portion of
the increase in product development and engineering costs in 1999 was related to
our acquisition of Excite on May 28, 1999. The increase in product development
and engineering expenses in 1999, including Excite, was primarily attributable
to the following factors in the proportions indicated:
. approximately 33% related to the development and introduction of new
services and functionality on our Internet portals, which resulted
predominantly from the acquisition of Excite on May 28, 1999;
. approximately 27% related to the continued development of the @Home
backbone to incorporate new telecommunications and server technologies
and efforts to incorporate Internet technologies into advanced digital
set-top boxes;
. approximately 17% related to the development of ad serving and
targeted marketing technologies for advertisers on the Internet, which
resulted predominantly from the acquisition of Excite on May 28, 1999;
and
. approximately 23% related to development of technologies for our @Work
offering and e-commerce initiatives, as well as costs allocated for
facilities and other miscellaneous costs, due to the expansion of
product development and engineering efforts.
We anticipate that product development and engineering expenses will
continue to increase on an absolute dollar basis in the future due in part to:
. increased technology development efforts related to our broadband
network, including continuing design and deployment costs and costs
related to providing the Excite personalized service, the @Home
broadband lateral service and the recently-announced @Home 2000
service;
. development and introduction of new content and services on our
Internet sites, in order to create and maintain brand loyalty among
customers and users of our narrowband and broadband Internet services;
. additional technology development efforts and integration of acquired
technologies from Excite, iMALL, Bluemountain.com and other companies
acquired in the future; and
. our results of operations reflecting Excite for an entire year.
Sales and marketing
Sales and marketing expenses consist primarily of promotional and
advertising expenses, personnel costs, commissions and agency and consulting
fees. For our media and advertising services, we have a direct sales force that
sells banner advertisements and sponsorships on the Excite Network and the @Home
broadband Internet service to advertisers and advertising agencies. For our
subscriber network services, we currently rely on our cable partners to market
the @Home broadband Internet service. In addition, we have engaged in nationwide
marketing of the service through promotional activities and retail initiatives.
We also incur promotional and advertising expenses as we promote our brands and
introduce new services in order to create and maintain brand loyalty among
customers.
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<PAGE>
Sales and marketing expenses increased by 623% to $130.8 million, or 39% of
total revenues, for the year ended December 31, 1999, from $18.0 million, or 38%
of total revenues, for the year ended December 31, 1998. A significant portion
of the increase in sales and marketing expenses in 1999 was related to our
acquisition of Excite on May 28, 1999. Excite maintains a direct sales force and
engages in marketing activities to promote its brands and customer loyalty. The
increase in sales and marketing expenses in 1999, including Excite, was
primarily attributable to the following factors in the proportions indicated:
. approximately 30% related to public relations and costs of promotions,
marketing and advertising in various media, primarily resulting from
our acquisition of Excite on May 28, 1999;
. approximately 21% related to costs of internal advertising sales
activities directly undertaken for the generation of media and
advertising revenues, primarily resulting from our acquisition of
Excite on May 28, 1999;
. approximately 16% related to sponsorship and content arrangements for
the continued expansion of our Internet portals' market reach and
number of users, primarily resulting from our acquisition of Excite on
May 28, 1999;
. approximately 5% related to @Home subscriber acquisitions; and
. approximately 28% related to marketing costs for @Work and our ad
serving and targeting services, as well as costs allocated for
facilities and other miscellaneous costs, due to the expansion of our
services.
We expect sales and marketing expenses will continue to increase on an
absolute dollar basis in the future primarily due to:
. an increase in our direct sales force, which sells banner advertisements
and sponsorships on the Excite Network and on the @Home broadband
service to advertisers and advertising agencies;
. expanded marketing campaigns and greater use of media advertising and
promotions in an effort to create and maintain brand loyalty among
customers and expand market reach;
. more sponsorship and content arrangements to enhance our narrowband and
broadband Internet services;
. acceleration of marketing activities related to @Home and @Work
subscriber acquisitions, including expanded retail and self-installation
initiatives; and
. our results of operations reflecting Excite for an entire year.
General and administrative
General and administrative expenses consist primarily of administrative and
executive personnel costs, fees for professional services and the costs of
computer systems to support our operations. General and administrative expenses
increased by 144% to $30.3 million, or 9% of total revenues, for the year ended
December 31, 1999, from $12.4 million, or 26% of total revenues, for the year
ended December 31, 1998. A significant portion of the increase in general and
administrative expenses in 1999 was related to our acquisition of Excite on May
28, 1999. The decrease in general and administrative expense as a percentage of
revenue was primarily attributable to increased revenues from the Excite
acquisition. The increase in general and administrative expenses in 1999,
including Excite, was attributable to the addition of personnel from Excite and
other acquisitions and expenditures related to facilities and information
technology to support the expansion and infrastructure of our operations and
business strategy.
We anticipate that general and administrative expenses will continue to
increase on an absolute dollar basis in the future as we expand our
administrative and executive staff, add infrastructure and assimilate acquired
technologies and businesses.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements were $292 million and
$101.4 million for the years ended December 31, 1999 and 1998, respectively, and
consisted primarily of charges and amortization related to warrants
43
<PAGE>
to purchase our common stock issued to some of our cable partners in connection
with distribution agreements and performance incentives for distributing our
broadband Internet services. Warrants that vest based on future performance
under an exclusive distribution agreement are recorded as intangible assets at
fair value when the performance criteria are met, and the intangible assets are
amortized to expense over the remaining term of the distribution agreement,
representing approximately $77.4 million in 1999 and $51.6 million in 1998. The
increase in amortization of distribution agreements in 1999 compared to 1998 was
due to an increase in the number of warrants earned by cable partners that met
certain performance milestones. Warrants that vest based on performance
incentives that were not negotiated as part of an exclusive distribution
agreement are charged to operations as such warrants are earned, amounting to
$213.1 million in 1999 and $49.8 million in 1998. The increase in the cost of
these performance incentives in 1999 compared to 1998 was primarily attributable
to our cable partners achieving performance milestones which significantly
increased the number of warrants earned.
We will incur a minimum of approximately $23.5 million per quarter for
amortization of our distribution agreements through the first half of 2002. This
amount may increase if AT&T transfers specific cable systems to Cablevision. In
addition, during any particular quarter or year, the cost of performance
incentives may fluctuate significantly in the future depending upon our cable
partners further achieving performance milestones.
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs
Amortization of goodwill and intangible assets. During the year ended
December 31, 1999, we incurred approximately $1,103.6 million of goodwill and
intangible asset amortization related to acquisitions accounted for as
purchases, including our acquisitions of Narrative in December 1998, Excite in
May 1999, iMALL and Webshots in October 1999 and Bluemountain.com in December
1999, as well as other less-significant acquisitions. There were no significant
goodwill and intangible amortization charges related to acquisitions in 1998. We
expect to incur goodwill and intangible asset amortization charges of over
$550.0 million per quarter until the goodwill and intangible asset balances from
each of our acquisitions become fully amortized starting in 2003. In addition,
we expect to incur additional goodwill and intangible asset amortization charges
related to future acquisitions, all of which will be accounted for as purchases.
Purchased in-process research and development. The cost of purchased in-
process research and development for which technological feasibility has not
been achieved and which has no alternative future use is charged to operations
at the date of acquisition, and consisted of $36.7 million and $2.8 million for
the years ended December 31, 1999 and 1998, respectively. In connection with the
purchase of Excite, we charged $34.4 million to in-process research and
development during the second quarter of 1999 and we charged an additional $2.3
million to in-process research and development during the fourth quarter of 1999
related to our acquisitions of iMALL and Webshots. The charge in 1998 was
related primarily to our acquisition of Narrative.
The cost of acquired in-process research and development is based on a fair
value allocation of the purchase price we paid to acquire a particular entity.
The fair value allocation to in-process research and development was determined
by identifying the research projects for which technological feasibility had not
been achieved and which had no alternative future use at the date of
acquisition, assessing the stage and expected date of completion of the research
and development effort at the acquisition date, and calculating the net present
value of cash flows expected to result from the successful deployment of the new
technology or product resulting from the in-process research and development
effort.
The stages of completion were determined by estimating the costs and time
incurred to date relative to the costs and time to be incurred to develop the
in-process technology into a commercially viable technology or product. In
general, the percentage of completion of in-process technology acquired in 1999
was less than 50% at the date of acquisition and was substantially completed at
December 31, 1999. Costs incurred after the date of acquisition to develop
acquired in-process technology into viable products represented a significant
portion of the increase in 1999 compared to 1998 of product development and
engineering costs and expenses.
The estimated net present value of cash flows was based on incremental
future cash flows from revenues expected to be generated by technology and
products in the process of research and development, taking into account the
characteristics and applications of the technology or product, the size and
growth rate of existing and future markets and an evaluation of past and
anticipated technology and product life cycles. Estimated net future cash flows
also included allocations of operating costs, sales and marketing, general and
administrative expenses, fixed charges, the portion of product development costs
related to maintenance and the net impact of income taxes. Estimated net
44
<PAGE>
future cash flows were discounted to arrive at a net present value and were
allocated to in-process research and development based on the percentage of
completion at the date of acquisition. The discount rate included a factor that
took into account the uncertainty surrounding the successful development of in-
process technology projects.
If we do not successfully deploy commercially-accepted technology or
products based on the acquired in-process research and development, our
operating results could be adversely affected in future periods.
Amortization of deferred compensation.
Amortization of deferred compensation related to acquisitions was $2.4
million for the year ended December 31, 1999 and none for the year ended
December 31, 1998. Acquisition-related deferred compensation resulted from our
assumption of stock-based awards issued to employees of Bluemountain.com and
Webshots immediately prior to the acquisition and represents the difference
between the exercise price of unvested awards and the fair market value of our
Series A common stock. Deferred compensation is amortized over the vesting term
of the award and is expected to be approximately $5.0 million per quarter until
the end of 2001 when the stock-based awards begin to fully vest. Amortization of
deferred compensation related to issuance of restricted stock in the ordinary
course of business to employees under stock purchase agreements was
approximately $1.0 million during both 1999 and 1998 and is included in the
category of costs and expenses in which the related employee salaries are
recorded.
Other acquisition-related costs. Costs directly associated with our
acquisitions that were not capitalized as part of the purchase consideration,
primarily resulting from our acquisition of Excite, were $14.3 million for the
year ended December 31, 1999; there were no such costs in 1998. Such costs
included $8.1 million in employee severance and retention costs, $1.8 million of
systems integration costs, $1.4 million of professional fees and $3.0 million in
other related costs. We expect to continue to incur additional integration and
other costs in the future related to our acquisitions.
Equity Share of Losses of Affiliated Companies
Our equity share of losses of affiliated companies, which include joint
ventures and investments in privately held companies accounted for under the
equity method, was $9.6 million and none for the years ended December 31, 1999
and 1998, respectively. These companies include Excite's international joint
ventures in which Excite has not made cash investments and that were recorded at
a fair value of $20.8 million as part of the allocation of the purchase
consideration for Excite. Our equity interest in these affiliated companies
range from 20% to 50% and we consider such affiliated companies to be related
parties. Our investments under the equity method were $19.0 million as of
December 31, 1999 and none as of December 31, 1998 and included international
joint ventures to provide Excite-branded Internet services as well as domestic
and international joint ventures related to the distribution and delivery of our
@Home service. We expect to record further losses related to our equity share in
these affiliated companies in the future.
Realized Gain on Investment
We recognized a gain of $12.6 million in February 1999 as a result of an
investee, a privately held company that we had accounted for under the cost
method, being acquired in a common stock acquisition by a publicly traded
company.
Interest and Other Income, Net
Our net interest and other income consisted of the following amounts for
the years indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 Change 1998
------------- ------------ ------------
<S> <C> <C> <C>
Interest and other income, net:
Interest and other income ...................................... $ 26,021 209% $ 8,410
Interest and other expense ..................................... (15,769) 690% (1,997)
-------- --- -------
Total interest and other income, net ........................ $ 10,252 60% $ 6,413
======== === =======
</TABLE>
Interest and other income, net increased to $10.3 million for the year
ended December 31, 1999 compared to $6.4 million for the year ended December 31,
1998. The increase in 1999 was due primarily to an increase in interest income
earned on higher cash and investment balances as a result of the funds received
from our secondary public offering in August 1998 and private offering of
convertible subordinated debentures in December 1998, as well as
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<PAGE>
realized gains from our sale of equity securities in publicly held companies.
The increase in interest and other income in 1999 compared to 1998 was partially
offset by an increase in interest expense and other expenses, primarily due to
higher capital lease obligations in 1999 and the interest expense on the
convertible subordinated debentures issued in December 1998 which were
outstanding for the entire year in 1999. Interest expense will be higher
commencing in 2000 due to the issuance in December 1999 of $500 million in
convertible notes bearing interest at 4.75%.
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes in 1999 or 1998. As of December 31, 1999 and 1998, we
had net deferred tax assets of $528.1 million and $92.5 million, respectively,
principally relating to net operating loss carryforwards and the temporary
difference relating to the cost and amortization of distribution agreements
recorded in 1999, 1998 and 1997. Realization of deferred tax assets is dependent
on future earnings, if any, the timing and amount of which are uncertain. A
valuation allowance has been recorded for the net deferred tax assets as of
December 31, 1999 and 1998, since we lack an earnings history. Accordingly, we
have not recorded any income tax benefit for net losses incurred for any period
from inception through December 31, 1999.
Net Loss
Our net loss for the years ended December 31, 1999 and 1998 was $1,457.6
million and $144.2 million, respectively. The net loss in 1999 was due
predominantly to the cost and amortization of distribution agreements of $292
million and the amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs of $1,157 million, the
substantial portion of which did not require cash outlay. Net loss before such
costs and expenses was $8.7 million in 1999 and $40.0 million in 1998. The
decrease in net loss before costs and amortization related to acquisitions and
distribution agreements was due to an increase in revenues in 1999 at a faster
rate than the increase in operating costs and expenses due to improved
operating results of Excite.
We will continue to generate net losses in the foreseeable future due to
the significant non-cash charges associated with the costs and amortization
related to acquisitions and distribution agreements. The amount of future net
loss or income before such costs and amortization will depend on our future
revenues and the costs and expenses required to generate those revenues.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Our revenues during 1998 and 1997 consisted primarily of monthly
subscription fees for the @Home residential service and installation and monthly
access fees for @Work services, as well as fees for advertising, content
placement and content development related to our broadband portals. Our revenues
by business segment were as follows for the years indicated (in thousands):
<TABLE>
<CAPTION>
1998 Change 1997
----------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Media and advertising services................................ $ 5,444 624% $ 752
Subscriber network and other services......................... 42,601 473% 6,685
------- --- ------
Total revenues........................................... $48,045 546% $7,437
======= === ======
</TABLE>
Media and advertising revenues
Media and advertising revenues were $5.4 million, or 11% of total revenues,
for the year ended December 31, 1998 and $752,000, or 10% of total revenues, for
the year ended December 31, 1997. Media and advertising revenues increased in
1998 primarily as a result of the increase in consulting and development
agreements with our cable partners and from sales of advertisements on our
broadband portals to approximately 50 advertisers as of December 31, 1998 as
compared to approximately 30 advertisers as of December 31, 1997. Average daily
page views on our broadband portals increased from an insignificant amount as of
December 31, 1997 to almost 1 million as of December 31, 1998.
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<PAGE>
Subscriber network and other revenues
Subscriber network and other revenues increased to $42.6 million, or 89% of
total revenues, for the year ended December 31, 1998, from $6.7 million, or 90%
of total revenues, for the year ended December 31, 1997. The increase in 1998
was primarily attributable to an increase in the number of subscribers to the
broadband Internet services of @Home and @Work.
@Home service. The @Home service represented approximately 60% of
subscriber network and other revenues for the year ended December 31, 1998 as
compared to approximately 70% for the year ended December 31, 1997. Subscriber
network and other revenues generated by the @Home service increased during 1998
primarily due to the number of @Home subscribers, which increased 562% to
approximately 331,000 at the end of 1998 from approximately 50,000 at the end of
1997. For the year ended December 31, 1998, the geographic source of @Home
subscriber network and other revenues was 78% from the United States and 22%
from Canada.
@Work service. Subscriber network and other revenues from the @Work service
represented approximately 40% of total subscriber network and other revenues for
the year ended December 31, 1998 as compared to approximately 30% for the year
ended December 31, 1997. The increase in @Work subscriber network and other
revenues during 1998 resulted from the 415% increase in the number of @Work
customers to approximately 1,700 as of December 31, 1998 from approximately 330
as of December 31, 1997.
Revenues from related parties
Revenues from related parties were $10.5 million, or 22% of total revenues,
for the year ended December 31, 1998, as compared to $3.0 million, or 40% of
total revenues, for the year ended December 31, 1997. Revenues from related
parties in 1998 and 1997 were generated from support services such as customer
support, local area content development, development of set-top devices and pre-
commercial deployment consulting provided to our cable partners that are
Excite@Home stockholders.
Revenues related to our strategic investments
Our investments in 1998 included investments in certain companies for
strategic purposes, primarily in connection with expanding content and services
available on our broadband portals and providing improved broadband services to
our @Work and @Home subscribers. Revenues from these strategic investments
generally consisted of purchased sponsorship or advertising space and revenue
share arrangements on our broadband portals. Revenues related to our strategic
investments were $780,000 for the year ended December 31, 1998; such revenues
were insignificant for the year ended December 31, 1997.
Total Costs and Expenses
Our costs and expenses were as follows for the years indicated (in thousands):
<TABLE>
<CAPTION>
1998 Change 1997
------------- ------------- -------------
Costs and expenses:
<S> <C> <C> <C>
Operating costs.................................................... $ 46,965 109% $22,459
Product development and engineering................................ 17,009 42% 11,984
Sales and marketing................................................ 18,091 52% 11,863
General and administrative......................................... 12,429 17% 10,635
-------- --- -------
Total costs and expenses excluding costs and amortization
of acquisitions and distribution agreements........................ 94,494 66% 56,941
Cost and amortization of distribution agreements................... 101,385 997% 9,246
Amortization of goodwill, intangible assets and
deferred compensation and other acquisition-related costs......... 2,758 n/a --
-------- --- -------
Total costs and expenses............................................ $198,637 200% $66,187
======== === =======
</TABLE>
47
<PAGE>
Operating costs
Operating costs for years ended December 31, 1998 and 1997 were primarily
related to providing services to customers, maintaining the @Home broadband
network, generating content programming for the @Home portal and deploying the
@Home service in Europe. Operating costs increased to $47.0 million for 1998, or
98% of total revenues, from $22.5 million for 1997, or 302% of total revenues.
This increase of $24.5 million, or 109%, in operating costs was primarily
attributable to the following factors in the proportions indicated:
. approximately 25% related to costs of customer service operations to
support a larger subscriber base;
. approximately 20% related to telecommunications costs required to
connect the @Home broadband network to additional areas;
. approximately 15% related to telecommunications costs related to our
@Work business;
. approximately 15% related to maintenance and depreciation of capital
equipment required for our network; and
. approximately 25% related to increases in operating costs of our
international operations, as well as costs allocated for facilities
and other miscellaneous costs, due to the expansion of our operations.
Operating costs as a percentage of total revenues. Total revenues net of
operating costs increased to $1.0 million, or 2% of total revenues, for the year
ended December 31, 1998, from $(15.0) million for the year ended December 31,
1997. The increase in total revenues net of operating costs in 1998 was
primarily due to the increase in revenues from subscriber growth and expansion
of advertising services on our broadband portals, which was achieved with a
proportionally lower rate of increase in operating costs.
Product development and engineering
Product development and engineering expenses for the years ended December
31, 1998 and 1997 consisted primarily of salaries and related expenses for
personnel, fees to outside contractors and consultants and the allocated cost of
facilities. Product development and engineering expenses increased to $17.0
million, or 35% of total revenues, for 1998, from $12.0 million, or 161% of
total revenues, for 1997. The increase of $5.0 million, or 42%, in product
development and engineering expenses was primarily attributable to the following
factors in the proportions indicated:
. approximately 45% related to expenditures focused on the continued
development of the @Home backbone to incorporate new
telecommunications and server technologies;
. approximately 45% related to efforts to incorporate Internet
technologies into advanced digital set-top boxes; and
. approximately 10% related to development of technologies for our @Work
offering, as well as costs allocated for facilities and other
miscellaneous costs, due to the expansion of product development and
engineering efforts.
Sales and marketing
Sales and marketing expenses for the years ended December 31, 1998 and 1997
consisted primarily of personnel costs, commissions and promotional and
advertising expenses. Sales and marketing expenses increased to $18.1 million,
or 38% of total revenues, for 1998, from $11.9 million, or 160% of total
revenues, for 1997. The increase of $6.2 million, or 52%, in sales and marketing
expenses in 1998 was primarily attributable to the following factors in the
proportions indicated:
. approximately 40% related to additional spending to support the
expansion of @Work services;
. approximately 25% related to advertising and content partnering
arrangements and regional deployments of the @Home service; and
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<PAGE>
. approximately 35% related to costs allocated for facilities and other
miscellaneous costs, due to the expansion of our services.
General and administrative
General and administrative expenses during the years ended December 31,
1998 and 1997 consisted primarily of administrative and executive personnel
costs, fees for professional services and the costs of computer systems to
support our operations. General and administrative expenses increased by 17% to
$12.4 million, or 26% of total revenues, in 1998 from $10.6 million, or 143% of
total revenues, in 1998. The increase in general and administrative expenses in
1999 was attributable primarily to the hiring of additional finance, human
resources and facilities personnel.
Cost and amortization of distribution agreements
Cost and amortization of distribution agreements were $101.4 million and
$9.2 million for the years ended December 31, 1998 and 1997, respectively, and
consisted primarily of charges and amortization related to warrants to purchase
our common stock issued to some of our cable partners in connection with
distribution agreements and performance incentives for distributing our
broadband Internet services. Warrants that vest based on future performance
under an exclusive distribution agreement are recorded at fair value as
intangible assets and amortized over the remaining term of the distribution
agreement, representing approximately $51.6 million in 1998 and $9.2 million in
1997. The increase in amortization of distribution agreements in 1998 compared
to 1997 was due to an increase in the number of warrants earned by cable
partners that met certain performance milestones. Warrants that vest based on
performance incentives that are not part of an exclusive distribution agreement
are charged to operations as such warrants are earned, amounting to $49.8
million in 1998 and none in 1997. The increase in the cost of these performance
incentives in 1998 compared to 1997 was primarily attributable to our cable
partners achieving performance milestones which significantly increased the
number of warrants earned.
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs
Amortization of goodwill, intangible assets and deferred compensation and
other acquisition-related costs consisted of a charge of $2.8 million for the
year ended December 1998 related to purchased in-process research and
development; there were no charges in 1997. The cost of purchased in-process
research and development for which technological feasibility has not been
achieved and which has no alternative future use is charged to operations at the
date of acquisition, and consisted of $2.8 million related primarily to our
acquisition of Narrative in December 1998. In general, the percentage of
completion of in-process technology acquired in 1998 was approximately 15% at
the date of acquisition and the projects were substantially complete at June 30,
1999. Costs incurred after the date of our acquisition of Narrative to develop
acquired in-process technology into viable products represented a portion of the
product development and engineering costs and expenses recorded during the first
half of 1999.
Please see discussion under Purchased in-process research and development
in the section entitled Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998 for further discussion about the methodologies we use to
determine purchased in-process research and development charges.
Interest and Other Income, Net
Interest income, net during the years ended December 31, 1998 and 1997
represented interest and realized gains earned on our cash and cash equivalents
and short-term investments less interest expense on debt obligations, including
our convertible subordinated debentures. Interest income, net was $6.4 million
for 1998 and $3.0 million for 1997. Interest income for 1998 was $8.4 million
compared to $4.2 million for 1997. This increase was principally due to the
increased cash balances available for investment following our secondary public
offering in August 1998. Interest expense for 1998 was $2.0 million compared to
$1.2 million for 1997. This increase was due primarily to increases in capital
lease obligations associated with our leasing of capital equipment.
Income Taxes
Due to operating losses incurred since inception, we did not record a
provision for income taxes in 1998 or 1997. As of December 31, 1998 and 1997, we
had net deferred tax assets of $92.5 million and $33.7 million, respectively,
49
<PAGE>
relating principally to net operating loss carryforwards and the temporary
difference relating to the cost and amortization of distribution agreements
recorded in 1998 and 1997. Realization of deferred tax assets is dependent on
future earnings, if any, the timing and amount of which are uncertain. A
valuation allowance has been recorded for the net deferred tax assets reducing
such amounts to zero as of December 31, 1998 and 1997, since we lack an earnings
history. Accordingly, we did not record any income tax benefit for net losses
incurred for any period from inception through December 31, 1998.
Net Loss
Our net loss for the years ended December 31, 1998 and 1997 was $144.2
million and $55.7 million, respectively. A significant portion of the net loss
in 1998 and 1997 was due to the cost and amortization of distribution agreements
which amounted to $101.4 million in 1998 and $9.2 million in 1998. Additionally,
net loss in 1998 included a charge of $2.8 million for in-process research and
development. Excluding these costs and charges, a substantial portion of which
did not require a cash outlay, net loss was $40.0 million in 1998 and $46.5
million in 1997. The decrease in net loss before costs and amortization related
to acquisitions and distribution agreements was due to an increase in revenues
in 1998 at a faster rate than the increase in operating costs and expenses.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through a
combination of private and public sales of equity and convertible debt
securities and capital lease and other financing arrangements. At December 31,
1999, our principal source of liquidity was approximately $525.2 million of
cash, cash equivalents and short-term investments, compared with $419.3 million
at December 31, 1998. Our short-term investments consist predominantly of debt
instruments that mature in less than one year, are highly liquid and have a
high-quality investment rating. We intend to make our short-term investments
available, if and when needed, for operating purposes.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 Change 1998
------------- ------------ ------------
<S> <C> <C> <C>
(dollars in thousands)
Cash and cash equivalents......................................... $ 224,548 (25)% $300,702
Net cash provided by (used in) operating activities............... 112,403 n/a (30,212)
Net cash used in investing activities............................. (708,201) 1,193% (54,778)
Net cash provided by financing activities......................... 519,644 52% 341,479
</TABLE>
Operating Activities
Net cash provided by operating activities during the year ended December
31, 1999 was $112.4 million compared to net cash used in operating activities of
$30.2 million for the year ended December 31, 1998. Net cash provided by
operating activities during 1999 reflects a net loss of $1,457.6 million
compared to $144.2 million during 1998. Charges to operations included in net
loss that do not require the use of cash amounted to $1,495.3 million during
1999 compared to $116.4 million during 1998. This increase in non-cash charges
during 1999 included: amortization of goodwill and other intangible assets of
$1,103 million related to the our acquisitions in 1999 and 1998; cost and
amortization of distribution agreements of $292 million; depreciation and other
amortization charges of $49.5 million; purchased in-process research and
development of $36.7 million related to our acquisitions; and various other
items netting to $14.1 million. Net cash provided by operating activities after
non-cash charges for the year ended December 31, 1999 compared to net cash used
in operating activities for the year ended December 31, 1998 also reflects the
impact of accounts receivable and other assets and accounts payable and other
liabilities, which decreased on a net basis by $74.8 million during 1999
compared to a net increase of $5.2 million during 1998.
Investing Activities
Net cash used in investing activities for the year ended December 31, 1999
was $708.2 million compared to $54.8 million for the year ended December 31,
1998. The increase in net cash used in investing activities during 1999 as
compared to 1998 was partially attributable to purchases of short-term
investments net of sales and maturities of $161.7 million in 1999 as compared to
$42.4 million in 1998 and net purchases of other investments of $104.7 million
in 1999 compared to $4.3 million in 1998. The increase was also due to net cash
received in acquisitions of $(316.4) million in 1999 compared to $0.1 million in
1998, net purchases of property, equipment and
50
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improvements of $60.8 million in 1999 as compared to $16.8 million in 1998,
payments under our backbone agreement of $57 million in 1999 and none in 1998
and investments in joint ventures of $7.6 million in 1999 and none in 1998. We
anticipate future capital expenditures to be primarily for facilities and
equipment to support expansion of our business and network operations and,
consequently, we expect that our capital expenditures will increase
significantly as our business and employee base grows.
Financing Activities
Net cash from financing activities for the year ended December 31, 1999 was
$519.6 million compared to $341.5 million for the year ended December 31, 1998.
The increase in cash provided by financing activities during 1999 as compared to
1999 was attributable to: net proceeds from issuance of convertible debt in 1999
of $485.7 million as compared to $222.5 million in 1998; payments on capital
lease obligations of $34.5 million in 1999 as compared to $12.1 million in 1998;
and a decrease in proceeds from issuance of common stock and from stock option
exercises of $68.4 in 1999 compared to $130.8 million in 1998, primarily due to
proceeds of $125.7 million from our secondary public offering in August 1998.
The $350 million cash portion of the purchase price of Bluemountain.com was
financed from the net proceeds of the issuance of convertible debt in December
1999.
Commitments
In December 1998, we entered into an agreement with AT&T to create a
nationwide network utilizing AT&T's 15,000-mile fiber optic data communications
line, or backbone. Under the terms of this agreement, we paid approximately $57
million in 1999 and we are required to make additional payments totaling $45
million in 2000. We expect to make additional disbursements of approximately $5
million per year during the 20-year term of this agreement for connection space,
equipment and support and maintenance fees.
Our corporate headquarters, including recently constructed facilities,
consist of approximately 670,000 square feet in Redwood City, California, which
we occupy under 12 to 15 year leases. Rent under leases for recently constructed
headquarters facilities is based on construction costs, and we are responsible
for some tenant improvements. We occupied these new facilities early in 2000.
Rental payments for our headquarters facilities, including recently constructed
facilities, are approximately $1.1 million per month. Total rental payments on
facilities in other locations are approximately $0.4 million per month.
In September 1997, we entered into a term loan agreement with Silicon
Valley Bank. The term loan, as amended in October 1998, allows us to borrow up
to $15 million to finance the acquisition of property, equipment and
improvements and to collateralize letters of credit. At our option, borrowings
under this term loan bear interest either at the Bank's prime rate or at LIBOR
plus 2.5%. As of December 31, 1999, there were no borrowings under this term
loan, although there were outstanding letters of credit in the amount of $2.4
million related to real property transactions. Under the term loan agreement, we
are required to meet financial covenants. At December 31, 1999, we were in
compliance with these covenants. The term loan expires on October 19, 2002.
We believe that we have the financial resources needed to meet our
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next 12 months. Thereafter, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to seek alternative financing, such as selling
additional equity or debt securities or obtaining additional credit facilities.
However, depending on market conditions, we may consider alternative financing
even if our financial resources are adequate to meet presently anticipated
business requirements. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. Financing may
not be available on terms acceptable to us or at all.
Impact of Adoption of New Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. Although we have not fully assessed the impact
of adopting SAB 101 on our financial position and results of operations in 2000
and thereafter, we do not expect the effect, if any, to be material.
51
<PAGE>
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that entities
recognize all derivatives in the balance sheet at fair value and record gains
and losses resulting from changes in fair value according to the purpose of the
derivative and whether it qualifies as a hedge. The effective date of this
Statement was delayed by the issuance of SFAS No. 137 to fiscal years beginning
after June 15, 2000, with earlier application encouraged. We expect to adopt
this Statement effective January 1, 2001 and do not anticipate that its adoption
will have a significant effect on our financial position or results of
operations.
Year 2000 Implications
As of December 31, 1999, we completed our plan to ready our computer
systems for possible year 2000 effects. Although we are not aware of the
occurrence of any significant year 2000 related problems being reported to date,
disruptions to our operations could still occur. Based on currently available
information, management continues to believe that year 2000-related disruptions
or other problems, if any, will not have a significant adverse impact on our
operational results or financial condition. The costs incurred through December
31, 1999 to support our year 2000 compliance initiative were approximately
$450,000. While there is risk that additional costs may be incurred beyond
December 31, 1999, we do not believe that these costs would be significant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
Interest Rate Sensitivity
Short-Term Investments
We had short-term investments of $300.7 million as of December 31, 1999.
These short-term investments consist predominantly of highly liquid debt
instruments that are of high-quality investment grade and mature in one year or
less. These investments are subject to interest rate risk in that their value
will fall if market interest rates increase. A hypothetical increase in market
interest rates by 10 percent from levels at December 31, 1999 would cause the
fair value of these short-term investments to decline by an immaterial amount.
Because we are not required to sell these investments before maturity, we have
the ability to avoid realizing losses on these investments due to a sudden
change in market interest rates. However, we could choose to sell these
investments before maturity at a loss. Declines in interest rates over time
will, however, reduce our interest income.
Outstanding Convertible Debt
As of December 31, 1999, we had two issuances of long-term convertible debt
outstanding. The balance of our convertible debentures issued in December 1998,
net of unamortized original issue discount, was approximately $236.3 million as
of December 31, 1999 and bears an effective interest rate of approximately 4%.
Our convertible notes issued in December 1999 had an outstanding balance of $500
million on December 31, 1999 and bear a fixed rate of interest of 4.75%. In
certain circumstances, we may be required to redeem these debt instruments for
our Series A common stock or cash. Because the interest rates on these debt
instruments are fixed, a hypothetical 10 percent decrease in interest rates
would not have a material impact on us. Increases in market interest rates
could, however, increase the interest expense associated with future borrowings
by us, if any. We do not hedge against interest rate increases.
Equity Price Risk
We own shares of certain public companies. We value these investments using
the closing fair market value stated in the Wall Street Journal for the last day
of each month. As a result, we reflect these investments in our consolidated
balance sheet at December 31, 1999 at their fair market value of $273 million,
with the unrealized gains and losses reported in stockholders' equity as
"Accumulated Other Comprehensive Income". We do not hedge against equity price
changes.
52
<PAGE>
Foreign Currency Exchange Rate Risk
Substantially all of our revenues are realized in U.S. dollars and most of
our revenues are from customers in the United States. Therefore, we do not
believe we face significant direct foreign currency exchange rate risk. We do
not hedge against foreign currency exchange rate changes.
53
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors.................................................... 55
Consolidated Financial Statements as of December 31, 1999 and 1998 and for the Three Years Ended
December 31, 1999, 1998, and 1997:
Consolidated Balances Sheets..................................................................... 56
Consolidated Statements of Operations............................................................ 57
Consolidated Statements of Stockholders' Equity.................................................. 58
Consolidated Statements of Cash Flows............................................................ 59
Notes to Consolidated Financial Statements....................................................... 60
Quarterly Financial Information for the Two Years Ended December 31, 1999 (Unaudited)................. 82
</TABLE>
54
<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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedules presented at Item 14(b). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 20, 2000
55
<PAGE>
AT HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 224,548 $ 300,702
Short-term investments............................................................. 300,675 118,587
----------- ---------
Total cash, cash equivalents and short-term investments.................... 525,223 419,289
Accounts receivable, net of allowance of $3,454 in 1999 and $252 in 1998........... 52,253 6,358
Accounts receivable -- related parties............................................. 18,279 4,300
Other current assets............................................................... 35,151 3,381
----------- ---------
Total current assets....................................................... 630,906 433,328
Property, equipment and improvements, net............................................ 176,077 49,240
Investments in affiliated companies.................................................. 19,015 --
Other investments.................................................................... 273,005 8,527
Distribution agreements, net......................................................... 313,772 186,247
Goodwill and other intangible assets, net............................................ 7,614,847 93,989
Other assets......................................................................... 76,657 9,300
----------- ---------
Total assets............................................................... $ 9,104,279 $ 780,631
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 44,781 $ 7,100
Accounts payable -- related parties................................................ 22,916 3,684
Accrued compensation and related expenses.......................................... 15,632 2,504
Deferred revenue................................................................... 56,844 5,164
Other accrued liabilities.......................................................... 63,044 12,507
Current portion of capital lease and other obligations............................. 38,666 12,045
----------- ---------
Total current liabilities.................................................. 241,883 43,004
Convertible notes and debentures..................................................... 736,294 229,344
Capital lease and other obligations, less current portion............................ 52,552 14,356
Other liabilities.................................................................... 6,533 61
Commitments and contingencies (Note 8)
Stockholders' equity(1):
Convertible preferred stock, no par value:
Authorized shares -- 9,650,000
Issued and outstanding shares -- 10,134 in 1999 and none in 1998................ 397,019 --
Common stock, $0.01 par value:
Authorized shares -- 719,719,414
Issued and outstanding shares -- 384,754,355 in 1999 and
246,545,734 in 1998.......................................................... 9,312,700 719,676
Deferred compensation.............................................................. (50,493) (2,880)
Accumulated other comprehensive income............................................. 92,594 4,235
Accumulated deficit................................................................ (1,684,803) (227,165)
----------- ---------
Total stockholders' equity................................................. 8,067,017 493,866
----------- ---------
Total liabilities and stockholders' equity................................. $ 9,104,279 $ 780,631
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
56
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues(1)........................................................ $ 336,955 $ 48,045 $ 7,437
Costs and expenses(2):
Operating costs.................................................. 143,056 46,965 22,459
Product development and engineering.............................. 54,805 17,009 11,984
Sales and marketing.............................................. 130,725 18,091 11,863
General and administrative....................................... 30,276 12,429 10,635
Cost and amortization of distribution agreements................. 291,967 101,385 9,246
Amortization of goodwill, intangible assets and deferred
compensation and other acquisition-related costs............... 1,157,009 2,758 --
----------- --------- --------
Total costs and expenses........................................... 1,807,838 198,637 66,187
----------- --------- --------
Loss from operations............................................... (1,470,883) (150,592) (58,750)
Interest and other income, net..................................... 10,253 6,413 3,033
Investment gain from business combination.......................... 12,566 -- --
Equity share of losses of affiliated companies..................... (9,574) -- --
----------- --------- --------
Net loss........................................................... $(1,457,638) $(144,179) $(55,717)
=========== ========= ========
Net loss per share -- basic and diluted............................ $(4.61) $(0.63) $(0.27)
=========== ========= ========
Shares used in per share computation -- basic and diluted.......... 316,441 228,479 207,086
=========== ========= ========
_______________________
(1)Revenues from related parties................................... $ 28,821 $ 10,458 $ 2,948
=========== ========= ========
(2)Depreciation and amortization included in costs and expenses,
excluding amortization of distribution agreements and
acquisition-related amounts.................................... $ 49,467 $ 15,029 $ 8,913
=========== ========= ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
57
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Notes Accum.
Convertible Receivable Other Total
Preferred Stock Common Stock From Deferred Compre- Stock-
----------------- ----------------- Stock- Compen- hensive Accumulated holders'
Shares Amount Shares Amount holders sation Income Deficit Equity
-------- -------- ------- ------- ------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996............ 4,522 $44,993 23,710 $1,035 $(170) $(272) $ -- $(27,269) $18,317
Net issuance of
Series C preferred
stock........................ 240 46,339 -- -- -- -- -- -- 46,339
Preferred stock
converted to common
stock........................ (4,762) (91,332) 190,504 91,332 -- -- -- -- --
Net issuance of Series A
common stock in initial
public offering.............. -- -- 20,700 99,768 -- -- -- -- 99,768
Series A
common stock issued under
stock option and
restricted stock plans....... -- -- 4,382 527 (234) -- -- -- 293
Repurchases of Series A
common stock................. -- -- (2,090) (91) 15 -- -- -- (76)
Repayment of notes
receivable................... -- -- -- -- 70 -- -- -- 70
Warrants to purchase
Series A common
stock under
distribution agreements...... -- -- -- 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....................... -- -- -- -- -- -- -- (55,717) (55,717)
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Comprehensive loss............. -- -- -- -- -- -- -- -- (55,717)
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Balances at December 31, 1997.. -- -- 237,206 370,111 (319) (4,399) -- (82,986) 282,407
Net issuance of Series A
common stock in secondary
offering..................... -- -- 5,750 125,725 -- -- -- -- 125,725
Series A common stock
issued and stock options
assumed in acquisitions...... -- -- 2,488 94,953 -- -- -- -- 94,953
Series A common stock
issued upon exercise of
warrants..................... -- -- 192 -- -- -- -- -- --
Series A common stock
issued under stock option
and employee stock purchase
plans........................ -- -- 1,300 5,139 -- -- -- -- 5,139
Repurchases of Series A
common stock................. -- -- (390) (40) 16 -- -- -- (24)
Repayment of notes
receivable................... -- -- -- -- 303 -- -- -- 303
Warrants to purchase Series
A common stock under
distribution
agreements................... -- -- -- 124,287 -- -- -- -- 124,287
Amortization of deferred
compensation, net of
cancelled stock options...... -- -- -- (499) -- 1,519 -- -- 1,020
Net loss....................... -- -- -- -- -- -- -- (144,179) (144,179)
Net unrealized gain on
available-for-sale
investments.................. -- -- -- -- -- -- 4,235 -- 4,235
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Comprehensive loss............. -- -- -- -- -- -- -- -- (139,944)
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Balances at
December 31, 1998............ -- -- 246,546 719,676 -- (2,880) 4,235 (227,165) 493,866
Series A common stock
issued and stock
options and warrants
assumed in
acquisitions................. -- -- 126,808 8,083,468 -- -- -- -- 8,083,468
Series A preferred stock
issued in acquisition........ 11 418,175 -- -- -- -- -- -- 418,175
Series A common stock
issued upon exercise of
warrants..................... -- -- 5,417 10,507 -- -- -- -- 10,507
Series A common stock
issued under stock option
and employee stock purchase
plans........................ -- -- 5,767 58,024 -- -- -- -- 58,024
Repurchases of Series A
common stock................. -- -- (324) (90) -- -- -- -- (90)
Warrants to purchase Series
A common stock under
distribution agreements...... -- -- -- 417,847 -- -- -- -- 417,847
Conversion of Series A
preferred stock to
Series A common stock........ (1) (21,156) 540 21,156 -- -- -- -- --
Warrants to purchase
Series A common stock
contributed to
joint venture................ -- -- -- 2,112 -- -- -- -- 2,112
Deferred compensation
from stock options
and restricted
stock assumed
in acquisitions.............. -- -- -- -- -- (51,061) -- -- (51,061)
Amortization of deferred
compensation................. -- -- -- -- -- 3,448 -- -- 3,448
Net Loss....................... -- -- -- -- -- -- -- (1,457,638) (1,457,638)
Net unrealized gain on
available-for-sale
investments.................. -- -- -- -- -- -- 88,456 -- 88,456
Foreign currency
translation
adjustment................... -- -- -- -- -- -- (97) -- (97)
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Comprehensive loss............. -- -- -- -- -- -- -- -- (1,369,279)
-------- -------- -------- --------- -------- --------- -------- ---------- ----------
Balances at
December 31, 1999............ 10 $397,019 384,754 $9,312,700 -- $(50,493) $92,594 $(1,684,803) $8,067,017
======== ======== ======== ========== ======== ========= ======== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
58
<PAGE>
AT HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------- ----------- ----------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss.............................................................. $(1,457,638) $(144,179) $ (55,717)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization....................................... 49,467 14,009 7,783
Amortization of distribution agreements............................. 78,843 51,591 9,246
Cost of distribution agreements..................................... 213,124 49,794 --
Amortization of deferred and other stock-based compensation......... 10,159 1,020 1,130
Amortization of goodwill and other intangible assets................ 1,103,005 -- --
Accretion of discount on convertible debentures..................... 6,950 -- --
Recognition of non-cash gain on investment.......................... (12,556) -- --
Charge for purchased in-process research and development............ 36,715 2,758 --
Equity share of losses of affiliated companies...................... 9,574 -- --
Changes in assets and liabilities:
Accounts receivable............................................... (8,972) (8,099) (1,338)
Other assets...................................................... (6,691) (9,143) (2,251)
Accounts payable.................................................. 39,198 5,822 1,089
Accrued compensation and related expenses......................... (2,165) 322 550
Deferred revenues................................................. 43,157 3,126 1,853
Other accrued liabilities......................................... 10,148 4,503 6,026
Other long-term liabilities....................................... 85 (1,736) 61
----------- --------- ---------
Cash provided by (used in) operating activities....................... 112,403 (30,212) (31,568)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of short-term investments................................... (340,050) (135,342) (103,030)
Sales and maturities of short-term investments........................ 178,386 92,922 33,925
Net purchases of other investments.................................... (104,732) 4,291 --
Net purchases of property, equipment and improvements................. (60,809) (16,793) (9,989)
Payments under backbone agreement..................................... (57,052) -- --
Investment in joint ventures.......................................... (7,561) -- --
Business combinations, net of cash received........................... (316,383) 144 --
----------- --------- ---------
Cash used in investing activities..................................... (708,201) (54,778) (79,094)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures...................... 485,750 222,466 --
Proceeds from issuance of convertible preferred stock................. -- -- 46,339
Proceeds from issuance of common stock, net of repurchases............ 68,441 130,828 99,985
Proceeds from capital lease financing................................. -- -- 5,630
Payments on capital lease obligations................................. (34,547) (12,118) (6,858)
Repayment of notes receivable from stockholders....................... -- 303 70
----------- --------- ---------
Cash provided by financing activities................................. 519,644 341,479 145,166
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. (76,154) 256,489 34,504
Cash and cash equivalents, beginning of period........................ 300,702 44,213 9,709
----------- --------- ---------
Cash and cash equivalents, end of period.............................. $ 224,548 $ 300,702 $ 44,213
=========== ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid....................................................... $ 7,236 $ 2,148 $ 1,039
=========== ========= =========
Acquisition of equipment under capital leases....................... $ 54,322 $ 12,872 $ 16,527
=========== ========= =========
Warrants to purchase Series A common stock earned by cable partners
under distribution agreements and capitalized as intangibles...... $ 204,723 $ 74,493 $ 172,283
=========== ========= =========
Conversion of preferred stock to common stock....................... $ 21,156 $ -- $ 91,332
=========== ========== =========
Mergers and acquisitions:
Common stock issued and options and warrants exercisable for
common stock assumed............................................ $ 8,083,468 $ 94,953 $ --
=========== ========= =========
Liabilities assumed............................................... $ 133,349 $ 2,589 $ --
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
59
<PAGE>
AT HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
The Company
At Home Corporation, or Excite@Home, which was incorporated in the state of
Delaware on March 28, 1995, is a global media company that provides consumers
with high speed, high bandwidth Internet connectivity and content and
interactive services available on multiple bandwidth platforms. Our @Home
service provides broadband Internet access from consumers' homes over the cable
television infrastructure and offers end-to-end managed connectivity services
for businesses over both cable and digital telecommunications lines. Our @Work
division further utilizes our network by providing a range of Internet services
for businesses, including high-speed connectivity, web hosting and development
and hosting of e-commerce solutions. Our media and marketing services include
the Excite Network, MatchLogic and Bluemountain.com, as well as other media
properties that deliver entertainment, shopping and information services to our
customers. The Excite Network offers search, content, community, communications
services and commerce functionality to Internet users. Excite's media services
focus on comprehensive navigation, global reach and personalization technology
to attract and retain users and achieve market share. MatchLogic, a subsidiary
of Excite, is a proprietary advertising distribution platform that provides
advertisers with targeted ad campaign management designed to improve the
effectiveness of their advertising campaigns. Bluemountain.com provides online
greeting cards at no cost to visitors of its web site.
Dependence on Cable System Operators
We have strategic partnerships with 22 cable system operators that provide,
through their cable systems, the principal distribution network for our services
to subscribers. Our cable partners have granted us the exclusive right to offer
high-speed residential consumer Internet services over their cable systems,
subject to certain exceptions. However, these cable partners are under no
obligation to carry our services. In addition, the cable partners' exclusivity
obligations in our favor begin expiring in June 2002, and may be terminated
prior to that date under certain circumstances.
Transmission of data over cable is dependent on the availability of high-speed
two-way hybrid fiber coaxial cable infrastructure. Currently, significant
portions of the cable infrastructure in the United States have not been upgraded
from coaxial cable to hybrid fiber-coaxial cable and, in addition, are not
capable of two-way transmission. Cable system operators have announced and have
started to implement major infrastructure investments in order to deploy data-
over-cable services. However, there can be no assurance that such infrastructure
improvements will be completed.
Certain parties, including other Internet service providers, have petitioned
federal, state and local authorities to require cable operators to provide
Internet and online service providers with unbundled access to their cable
systems. The rates that our cable partners charge for this third-party access,
or for the @Home services, could also be subject to rate regulation or tariffing
requirements. Our financial position and results of operations would likely be
materially affected if we or our cable partners are classified as common
carriers, or if government authorities require third-party access to cable
networks or unaffiliated Internet service providers. In addition, some local
jurisdictions, including Portland and Multnomah County, Oregon and Broward
County, Florida, have imposed third-party access requirements on AT&T and other
cable companies operating in those communities. The imposition of these
requirements has been challenged in Federal Courts. In June 1999, a U.S.
District Court upheld the third-party access requirement imposed on AT&T by
Portland and Multnomah County. This decision was appealed to the U.S. Court of
Appeals for the Ninth Circuit and arguments were presented to the court in
November 1999. Although appeals decisions have no time limit, most rulings occur
within three to twelve months after the date arguments are presented. Numerous
other local jurisdictions have considered or are considering imposing similar
third-party access requirements and other municipalities may consider imposing
similar requirements in the future.
In December 1999, AT&T announced that customers of its broadband cable systems
will be able to choose their Internet service provider for high-speed Internet
access upon expiration of our exclusivity agreement with AT&T.
<PAGE>
Dependence on Key Technology Suppliers
We currently depend on a limited number of suppliers for certain key
technologies, including cable modems, which are needed to build, manage and
operate our services. Although we believe that there are alternative suppliers
for each of these technologies, we have established favorable relationships with
each of our 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 our relationships with our current suppliers
could have a material adverse effect on our financial condition and results of
operations.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of At Home
Corporation and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
Investments in entities owned 20% or more but less than majority owned and not
otherwise controlled by us are accounted for under the equity method and
presented in the consolidated balance sheets as investments in affiliated
companies.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to current year's presentation.
Stock Split
In May 1999, our stockholders approved a two-for-one split of our common
stock, which occurred on June 16, 1999 to stockholders of record on May 29,
1999. All of the common stock share and per share data appearing in the
consolidated financial statements have been adjusted to retroactively reflect
this stock split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Monthly customer subscription revenue for the @Home and @Work services is
recognized in the period in which subscription services are provided. We also
earn revenue from cable system operators for providing certain support services,
such as customer support, local area content development and pre-commercial
deployment fees. Revenue from cable system operators is recognized as the
services are performed. We have also entered into agreements with 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.
Revenues also include on-line advertising revenues which are derived
principally from short-term advertising contracts in which we guarantee a
minimum number of impressions (a view of an advertisement by a consumer) for a
fixed fee. We also enter into a number of longer-term advertising and e-commerce
sponsorship agreements. Under these agreements, we earn fees for initial
programming, initiation of service and for generating impressions, which in some
instances are guaranteed. These revenues, as well as contract and other
revenues, which include ad serving and targeting revenues, are generally
recognized ratably over the term of the agreements, provided that we do not have
any significant remaining obligations and collection of the resulting receivable
is probable. To the extent that
<PAGE>
impression deliveries do not meet the guarantees, we defer recognition of the
corresponding revenues until impressions are delivered.
Revenues from the exchange of media and advertising services related to our
Internet sites for advertising in other media were less than 10% of total
revenues for the year ended December 31, 1999; such revenues were insignificant
in 1998. Revenues from these exchanges are recorded at the lower of the fair
value of the services provided or the services received.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of 90 days or less and are stated at amounts that
approximate fair value, based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and the
U.S. Government. We include in cash and cash equivalents all short-term, highly
liquid investments that mature within 90 days of their acquisition date.
Other Investments
Other investments primarily consist of strategic investments of less than 20%
equity interest in certain companies. We do not have the ability to exercise
significant influence over any of these companies and therefore account for such
investments as available-for-sale securities under Statement of Financial
Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Investments in publicly held companies are recorded at
fair value as measured by quoted market prices and investments in privately held
companies, which are recorded at cost, are accounted for under the cost method
of accounting. Changes in fair value are included in comprehensive loss and
unrealized gains and losses are included in accumulated other comprehensive
income or loss. Realized gains and losses are recorded in net interest and other
income when the related investments are sold. Our investments in privately held
companies are assessed for impairment periodically through review of operations
and indications of continued viability, such as subsequent rounds of financing.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets consist of purchased technology, acquired workforce,
acquired brand name and content, and goodwill related to the acquisitions of
Narrative Communications Corp., Full Force Systems, Inc., Excite, Inc., iMALL,
Inc., Hartford House, Ltd. and its wholly-owned subsidiary Bluemountain.com,
Webshots Corporation, certain assets of Perspecta, Inc. and Excite Espana. These
acquisitions were accounted for as purchases and are further described in Note
3. Amortization of goodwill and intangible assets is provided on the straight-
line basis over the estimated useful lives of the assets, which generally range
from two to four years. Acquired in-process research and development without
alternative future use is charged to operations at the date of acquisition.
We record impairment losses on intangible assets when events and circumstances
indicate that such assets might be impaired and the estimated fair value of the
asset is less than its recorded amount. Conditions that would trigger an
impairment assessment include material adverse changes in operations or our
decision to abandon acquired products, services or technologies. Measurement of
fair value would be based on discounted cash flows at our incremental borrowing
rate and would include a factor for the probability that the impaired product,
service or technology would be successful. To date, no such impairment has
occurred.
Stock-Based Compensation
We account for stock-based awards to employees in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", and have adopted the disclosure-only alternative of Statement of
Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation".
<PAGE>
Advertising Costs
All advertising costs are expensed as incurred. Advertising costs, which are
included in sales and marketing expenses, were $18.3 million, $1.8 million and
$0.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Software Development Costs
Costs of software developed internally by us for use in our operations are
accounted for under the American Institute of Certified Public Accountants'
Statement of Position (SOP) 98-1, "Internal Use Software", which we adopted on
January 1, 1999. Under SOP 98-1, we expense costs of research, including pre-
development efforts prior to establishing technological feasibility, and costs
incurred for training and maintenance. Software development costs are
capitalized when technological feasibility has been established and it is
probable that the project will be completed and the software will be used as
intended. Costs incurred for upgrades and enhancements to our software are
capitalized when we believe such efforts result in additional functionality to
the software. Capitalized software costs are amortized to expense over the
estimated useful life of the software. Capitalized software costs for the year
ended December 31, 1999 were not significant. Prior to the adoption of SOP 98-1,
substantially all software development costs were recorded in a manner similar
to SOP 98-1.
Interest Expense
Interest expense includes interest on convertible debt and capital lease and
other obligations of $15.8 million, $2 million and $.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
Income Taxes
Income taxes are computed using the asset and liability method, under which
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws. A
valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
Effect of New Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. Although we have not fully assessed the impact
of adopting SAB 101 on our financial position and results of operations in 2000
and thereafter, we do not expect the effect, if any, to be material.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that entities recognize all derivatives in the balance sheet at fair
value and record gains and losses resulting from changes in fair value according
to the purpose of the derivative and whether it qualifies as a hedge. The
effective date of this Statement was delayed by the issuance of FAS 137 to
fiscal years beginning after June 15, 2000, with earlier application encouraged.
We expect to adopt this Statement effective January 1, 2001 and do not
anticipate that its adoption will have a significant effect on our financial
position or results of operations.
2. Calculation of Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding. The computation for the period ended December 31, 1997 also
gives pro forma effect to the conversion, in connection with our initial public
offering in July 1997, of all outstanding shares of convertible preferred stock
into shares of common stock. Since we have a net loss for all periods presented,
net loss per share on a diluted basis is equivalent to basic net loss per share
because the effect of converting outstanding stock options, warrants, common
stock subject to repurchase, convertible debt, preferred stock and other common
stock equivalents would be anti-dilutive.
<PAGE>
The computation of basic and diluted net loss per share is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss........................................................... $(1,457,638) $(144,179) $(55,717)
=========== ========= ========
Weighted average shares of common stock outstanding................ 322,456 240,108 35,030
Less: weighted average shares of common stock subject
to repurchase.................................................... (6,015) (11,629) (18,448)
Pro forma common equivalent shares from convertible
preferred stock.................................................. -- -- 190,504
----------- --------- --------
Shares used in per share calculations.............................. 316,441 228,479 207,086
=========== ========= ========
Net loss per share--basic and diluted.............................. $ (4.61) $ (0.63) $(0.27)
=========== ========= ========
</TABLE>
3. Business Combinations
Our acquisitions include Full Force in November 1998; Narrative in December
1998; Excite in May 1999; iMALL, Webshots and Perspecta in October 1999; Excite
Spain in November 1999; and Bluemountain.com in December 1999. All of our
acquisitions were accounted for as purchases. Accordingly, the total purchase
consideration for each acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of the
acquisition. Goodwill represents the excess of purchase consideration over the
fair value of assets, including identifiable intangible assets, net of the fair
value of liabilities assumed. Our consolidated financial statements include the
results of operations of acquired companies commencing on the date of
acquisition.
Narrative is a provider of advertising solutions for the Internet. The
purchase consideration was $93.8 million, comprised of the issuance of 2,410,666
shares of our Series A common stock with an aggregate fair value of $84.2
million, the assumption of stock options to purchase approximately 282,000
shares of our Series A common stock with an aggregate fair value of $9.2
million, and $0.4 million of acquisition costs. Goodwill and intangible assets
are being amortized on a straight-line basis over approximately three years.
Full Force is a developer of set-top applications for interactive television.
The purchase consideration was approximately $1.7 million, comprised of the
issuance of 76,380 shares of our Series A common stock with an aggregate fair
value of approximately $1.6 million and $0.1 million of acquisition costs.
Goodwill and intangible assets are being amortized on a straight-line basis over
approximately three years.
Excite offers consumers and advertisers comprehensive Internet navigation
services with personalization capabilities and specializes in the delivery of
targeted marketing solutions through its subsidiary, MatchLogic. The acquisition
was accomplished through a merger of Excite, previously a publicly held company,
with and into a wholly-owned subsidiary of our company. The total purchase
consideration of approximately $7,231 million was based on: the fair value of
our Series A common stock issued; stock option, stock purchase plan and warrant
obligations assumed; and merger-related costs. At the closing, we issued
115,438,508 million shares of our Series A common stock with a fair value of
approximately $6,051 million as of the announcement date, based on an exchange
ratio of 2.083804 shares of our Series A common stock for each outstanding share
of Excite common stock, adjusted to reflect the two-for-one split of our common
stock on June 16, 1999. We assumed outstanding options to purchase Excite common
stock, which were converted into options to acquire approximately 25,714,000
shares of our Series A common stock. The fair value of the assumed options was
approximately $1,105 million based on the merger exchange ratio. The converted
options are subject to the terms and conditions, including exercisability and
vesting schedules, of the original options. We also assumed outstanding warrants
and convertible debt instruments under which approximately 232,000 shares of our
Series A common stock is issuable, with a fair value of approximately $10
million. In addition, we incurred direct merger costs of approximately $65.4
million, which were included in the purchase consideration. These direct merger
costs primarily consisted of investment banking fees, severance and stock
compensation to certain employees and other professional fees. Goodwill and
intangible assets are being amortized on a straight-line basis over
approximately four years.
iMALL provides integrated e-commerce solutions which allow businesses to
create fully commerce-enabled web sites or add transaction capabilities to their
existing ones. The purchase consideration of $637.1 million was based primarily
on the aggregate fair value of our Series A common stock issued in exchange for
shares of iMALL and the obligation to issue our Series A common stock under
assumed warrants and stock options: $481.2 million fair value
<PAGE>
related to 9,319,760 shares issued; $82.8 million fair value related to
2,300,000 warrants issued; $7.4 million fair value related to approximately
159,000 warrants assumed; and $61.5 million fair value related to approximately
1,497,000 stock options assumed. In addition, the purchase consideration
included $4.2 million of direct acquisition costs, consisting primarily of
investment banking fees. Goodwill and intangible assets are being amortized on a
straight-line basis over approximately three years.
Webshots offers free copyrighted digital photographs over the Internet,
viewable with its proprietary software. The purchase price consideration of
$83.3 million was comprised of the issuance of 2,050,326 shares of our Series A
common stock with an aggregate fair value of $82.5 million and $0.8 million of
direct acquisition costs. The resale of 30% of the Series A common stock issued
in this acquisition is subject to vesting during the employment of their holders
over the 24 months following the acquisition. The $25.0 million aggregate fair
value of such restricted stock was allocated to deferred compensation in the
purchase price allocation. The deferred compensation is being amortized on a
straight-line basis over 24 months. Goodwill and intangible assets are being
amortized on a straight-line basis over approximately four years.
Bluemountain.com provides free online greeting cards. The preliminary purchase
consideration of $970 million as of December 31, 1999 was based primarily on a
cash payment of $350 million, the issuance of 10,674 shares of our Series A
non-voting preferred stock, which may be converted to 10,673,549 shares of
Series A Common Stock, with an aggregate fair value of $418.2 million, the
assumption of stock options with fair value of $44.7 million under which
approximately 3,011,000 shares of our Series A common stock are issuable and
$150 million related to performance-based contingent purchase consideration
earned in December 1999. In addition, the purchase consideration included $7.2
million of direct acquisition costs, primarily investment banking and legal
fees. Each Series A preferred stock issued in the acquisition is convertible
into 1,000 shares of Series A common stock at a rate of 500,000 shares of common
stock per month during the twelve months following the acquisition, and the
remaining shares will become fully convertible after two years. Newly issued
unvested stock options assumed in the acquisition were recorded as deferred
compensation in the purchase price allocation based on their intrinsic value of
$26.1 million. Deferred compensation is amortized as the related stock options
vest and become exercisable. We recorded the remainder of stock options assumed
in the acquisition at fair value, representing fully vested options and options
held by third parties.. The performance-based contingent purchase consideration
consisted of up to $300 million in additional shares of Series A common stock
and stock options at fair value. The number of additional shares issuable was
based on the dollar amount associated with achievement of the performance goals
divided by the average price of our Series A common stock during the month of
December 1999, the period during which the performance was measured. Based on
information available as of December 31, 1999, $150 million of the performance-
based consideration was determinable and was recorded as common stock in the
consolidated balance sheet. In February 2000, we were able to determine the
final amount of performance-based purchase consideration. Based on the average
closing price of our Series A common stock during the month of December 1999, we
will issue approximately 3,485,000 shares of Series A common stock during the
first quarter of 2000 having an aggregate fair value of approximately $150
million. In addition, the purchase agreement requires that we increase the
number of shares issuable upon exercise of assumed stock options by
approximately 542,000 shares. Goodwill and intangible assets are being amortized
on a straight-line basis over approximately four years.
During the year ended December 31, 1999, we also acquired Perspecta and Excite
Espana for a total purchase consideration of $11.1 million consisting of cash
payments of $10.8 million and approximately $0.3 million of acquisition costs.
Goodwill and intangible assets are being amortized on a straight-line basis over
approximately four years.
Allocation of Purchase Consideration
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<CAPTION>
Acquisitions in 1998 Acquisitions in 1999
---------------------- ----------------------------------------------------------------
Blue
Narrative Full Force Excite iMALL Webshots Mountain Others (1)
----------- ---------- ------------ ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.............................. $ 77 69 $ 34,341 $ 8,974 $ 73 $ 611 $ 432
Accounts receivable and other 233,338 -- 298
assets.......................... 584 60 884 1,204
Property and equipment............ 520 5 48,376 3,368 68 3,577 78
Purchased technology.............. 22,900 215 94,500 13,200 2,200 800 --
Other identified intangible assets 1,050 101 162,700 35,600 22,800 27,000 --
Goodwill.......................... 68,404 1,318 6,729,164 576,500 33,110 912,730 13,560
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Purchased in-process research
and development................. 2,700 58 34,400 1,890 425 -- --
Deferred compensation............. -- -- -- -- 25,000 26,087 --
Liabilities assumed............... (2,435) (154) (105,743) (3,282) (378) (1,986) (3,308)
------- ------ ---------- -------- ------- -------- -------
Total purchase consideration. $93,800 $1,672 $7,231,076 $637,134 $83,298 $970,023 $11,060
======= ====== ========== ======== ======= ======== =======
</TABLE>
/(1)/Includes the acquisitions of Perspecta in October 1999 and Excite Espana
in November 1999.
Acquisition-related Amortization
As a result of our acquisitions during 1999 and 1998, we recorded $8,335
million of goodwill and $249.3 million of other acquisition-related intangible
assets. Amortization of goodwill and acquisition-related intangibles was $1,103
million for the year ended December 31, 1999 and insignificant for the year
ended December 31, 1998. Accumulated amortization of goodwill and acquisition-
related intangibles was $1,103 million as of December 31, 1999. In addition, we
recorded $51.1 million of stock-based deferred compensation related to our
acquisitions of Bluemountain.com and Webshots. We are amortizing deferred
compensation to expense over the vesting terms of the stock-based awards, which
range from two to four years. Accumulated amortization of acquisition-related
deferred compensation as of December 31, 1999 and the related amortization
expense for 1999 was $2.4 million.
Purchased In-Process Research and Development
The fair value assigned to purchased in-process research and development in
the allocation of purchase consideration includes research and development
projects for which technological feasibility had not been achieved at the date
of acquisition and which had no alternative future use. This allocation of fair
value is charged to operations at the date of acquisition, and included $34.4
million for Excite, $1.9 million for iMALL, and $425,000 for Webshots during the
year ended December 31, 1999. The charge of $2.8 million in 1998 related
primarily to Narrative.
In order to determine the fair value of purchased in-process research and
development, we estimated the date of completion of the research and development
effort, assessed the state of such effort at the acquisition date, and
calculated the estimated net present value of cash flows expected to result from
the successful deployment of the new technology or product resulting from the
in-process research and development effort. The state of completion was
determined by estimating the costs and time incurred to date relative to the
costs and time to be incurred to develop the in-process technology into a
commercially viable technology or product. The estimated net present value of
cash flows was based on incremental future cash flows from revenues expected to
be generated by the technology or products being developed, taking into account
the characteristics and applications of the technology or product, the size and
growth rate of existing and future markets and an evaluation of past and
anticipated technology and product life cycles. Estimated net future cash flows
also included allocations of operating costs, sales and marketing, general and
administrative expenses, fixed charges, the portion of product development costs
related to maintenance and the net impact of income taxes. Estimated net future
cash flows were discounted to arrive at a net present value and were allocated
to in-process research and development based on the percentage of completion at
the date of acquisition. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of in-process
technology projects.
Other Acquisition-related Costs
Costs directly associated with our acquisitions that were not capitalized as
part of the purchase consideration, primarily resulting from our acquisition of
Excite, were $14.3 million for the year ended December 31, 1999; there were no
such costs in 1998. Such costs included $8.1 million in employee severance and
retention costs, $1.8 million of systems integration costs, $1.4 million of
professional fees and $3.0 million in other related costs.
Pro Forma Results of Operations
<PAGE>
The following unaudited pro forma summary represents the consolidated results
of operations as if our acquisitions had occurred at the beginning of each of
the years presented and includes the amortization of goodwill and other
intangible assets and a charge for in-process research and development. Our 1998
acquisitions are already fully reflected in our 1999 results of operations and
therefore no pro forma adjustments are made for these acquisitions in 1999. Pro
forma shares include a factor for the number of shares of Series A common stock
issued or issuable, excluding employee stock options, as if such shares were
converted and outstanding at the beginning of each of the years presented. The
pro forma summary excludes the results of operations of Perspecta and Excite
Espana because they are not material to the consolidated pro forma disclosures
(in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Pro forma revenues..................................... $ 426,009 $ 207,423
=========== ===========
Pro forma net loss..................................... $(2,694,301) $(2,532,646)
=========== ===========
Pro forma net loss per share - basic and diluted....... $ (6.90) $ (6.76)
=========== ===========
Pro forma shares used in per share calculation - basic
and diluted.......................................... 390,383 374,624
=========== ===========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred if our business combinations had occurred at
the beginning of each year presented and are not intended to be indicative of
future results of operations.
4. Cash and Cash Equivalents and Short-Term Investments
Our short-term investments as of December 31, 1999 consist primarily of highly
liquid debt instruments with original maturities at the date of purchase of
between three and twelve months as well as other highly liquid investments which
generally mature in one year or less. Highly liquid short-term investments
maturing in 90 days or less at the date of purchase are included in cash and
cash equivalents. We have classified all short-term investments as available-
for-sale. Available-for-sale securities are carried at amounts that approximate
fair market value based on quoted market prices. Realized gains and losses and
declines in fair market value judged to be other-than-temporary are included in
interest income and were not material during the years ended December 31, 1999,
1998, and 1997. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Corporate bonds and notes..................................... $330,759 $280,429
Market auction preferred stock................................ 1,000 98,609
U.S. government obligations................................... 67,534 8,760
Money market instruments...................................... 100,142 620
Certificates of deposit....................................... 19,626 9,388
-------- --------
Total available-for-sale securities................... 519,061 397,806
Less amounts included in cash and cash equivalents............ 218,386 279,219
-------- --------
Short-term investments........................................ $300,675 $118,587
======== ========
</TABLE>
Unrealized gains and losses on available-for-sale securities at December 31,
1999 and 1998 were not material. Accordingly, we have not made a provision for
such amounts in our consolidated balance sheets.
<PAGE>
5. Investments in Affiliated Companies
Our investments in affiliated companies represent investments of between 20%
and 50% in the equity of certain companies in which we do not have majority
voting control, including joint ventures formed with various entities for the
purpose of expanding the distribution of our @Home broadband and Excite content
services internationally. Investments in affiliated companies are accounted for
under the equity method. Our equity share of losses in affiliated companies was
$9.6 million for the year ended December 31, 1999; we had no equity investments
in operating companies in prior years. Condensed financial information of our
equity-method investments has not been presented as the financial condition and
results of operations of these companies are not material to our consolidated
financial statements.
In general, we have service agreements with affiliated companies under which
we have agreed to provide certain consulting services on a cost-plus basis (see
Note 13).
At Home Solutions
In May 1999, we entered into a joint venture agreement with Motorola, Inc. to
form At Home Network Solutions, Inc. ("Solutions"). In July 1999, Cisco Systems,
Inc. and General Instrument Corporation also invested in Solutions. As of
December 31, 1999, we owned approximately 46% of Solutions and each of Motorola,
Cisco and General Instrument owned approximately 18% of Solutions. Solutions
offers production, packaging, marketing, distribution and support of our
broadband Internet services for delivery by small and medium-sized cable
operations to residential, small office and home office customers in the United
States. We have an option for a three-year period commencing on April 1, 2002 to
purchase the interest owned by each of the other joint venture partners at fair
market value. If we do not exercise the purchase option, each joint venture
partner will have the right to sell its interest in Solutions to the other
partners, and the partners collectively will have the right to require Solutions
to register the sale of their interests to the public or collectively to
purchase our interest in Solutions for a nominal price.
At Home Australia
In June 1999, we entered into a joint venture agreement with Optus Vision Pty
Ltd. to form At Home Network Australia Pty Ltd. At Home Australia is owned 50%
by us and 50% by Optus and will conduct a business consisting of the production,
packaging, marketing, distribution and support of our broadband Internet service
for delivery to residential, small office and home office customers in
Australia. Optus and we may each be required to contribute up to approximately
$20 million, or 32 million Australian Dollars, to the joint venture and we have
contributed approximately $3.4 million, or 4 million Australian Dollars, during
the year ended December 31, 1999. In March 2000, At Home Australia acquired
Excite Asia Pacific Pty Ltd and the combined entity was renamed Excite@Home
Australia Pty Limited. We have retained our 50% interest in the combined joint
venture and remain subject to the contribution requirements under the At Home
Australia joint venture agreement.
At Home Japan
On August 26, 1999, we and Jupiter Telecommunications Co., Ltd. and Sumitomo
Corporation entered into a joint venture agreement to form At Home Japan
Limited. At Home Japan is indirectly owned 43% by us, 36% by Jupiter and 21% by
Sumitomo and will conduct operations in Japan in a similar manner as our joint
venture in Australia. The joint venture partners have agreed to contribute up to
approximately $74.9 million, or 7.8 billion Yen, based on amounts and timing
determined by At Home Japan's board of directors. Our share of this funding
obligation is $32.6 million, or 3.4 billion Yen. Under certain circumstances, we
may sell up to 50% of our interest in At Home Japan. We issued performance-based
warrants to our joint venture partners under which up to 900,000 shares of our
Series A common stock may be issuable (see Note 10).
Other Joint Ventures
We have also formed a joint venture in the Netherlands with a local cable
operator and other investors to deliver broadband Internet services. We account
for this joint venture under the equity method but have not recorded our equity
share of losses in this investment because we have not made any cash
contributions and have no obligation to do so in the future.
<PAGE>
In May 1999, in connection with the acquisition of Excite, approximately $21
million of the purchase price was allocated to Excite's affiliated companies
based on the fair value of these investments at the date of acquisition,
including Excite Japan, Excite Italia, Excite Asia Pacific Pty Ltd., Excite UK
Limited, Excite Espana and Excite Canada. We have a 50% interest in all of these
joint ventures as of December 31, 1999, except Excite Espana, which became a
wholly-owned subsidiary when we purchased our joint venture partner's 50%
interest for approximately $2 million in November 1999. Excite Japan is a joint
venture with Itochu Corporation and Dai Nippon Printing formed in October 1997
in which we have, as of December 31, 1999, a 50% interest and a related
promissory note payable to Itochu for $5 million (see Note 9), which was used to
fund a portion of Excite's required capital contribution. We have a 50% equity
interest in our remaining Excite joint ventures and have no related cash funding
requirements.
6. Other Investments
As of December 31, 1999, our other investments totaled $273 million,
primarily consisting of equity instruments of publicly held companies. We
invested approximately $104.7 million during the year ended December 31, 1999 in
these equity instruments. In addition, we acquired approximately $60 million of
other investments at fair value in connection with the acquisition of Excite in
May 1999. During the year ended December 31, 1999, unrealized gains of $88.5
million on other investments in publicly held companies were included in
accumulated other comprehensive income.
In February 1999, we recorded a $12.6 million realized gain on our investment
in a privately held company due to its acquisition in a common stock exchange
with a publicly traded company.
We have made cash investments in several companies with which we also have
strategic relationships under which we have or expect to earn revenues. Revenues
from these companies were $26.1 million and $0.8 million for the years ended
December 31, 1999 and 1998, respectively. There were no such revenues in 1997.
7. Property, Equipment and Improvements
The components of property, equipment and improvements are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, Estimated
-------------------------------
1999 1998 Useful Lives
-------------- -------------- -----------------
<S> <C> <C> <C>
Computer equipment and software...................... $206,865 $56,004 3-4 years
Furniture and fixtures............................... 27,086 7,271 5 years
Leasehold improvements............................... 36,474 9,628 Lease term
Land................................................. 5,239 -- n/a
-------- -------
Total property, equipment and improvements......... 275,664 72,903
Less accumulated depreciation and amortization....... 99,587 23,663
-------- -------
Net property, equipment and improvements........... $176,077 $49,240
======== =======
</TABLE>
Equipment and improvements include amounts for assets acquired under capital
leases, principally computer equipment and software and furniture and fixtures,
of approximately $133.5 million and $40 million as of December 31, 1999 and
1998, respectively. Accumulated amortization of these assets was approximately
$64.4 million and $15.8 million as of December 31, 1999 and 1998, respectively.
8. Commitments and Contingencies
Facility and Equipment Leases
We lease certain office facilities under non-cancelable operating leases that
expire at various dates through 2014, and which require us to pay operating
costs, including property taxes, insurance and maintenance. These facility
leases generally contain renewal options and provisions adjusting the lease
payments based upon changes in the consumer price index and increases in real
estate taxes and operating expenses or in fixed increments. Rent expense is
recorded on a straight-line basis over the terms of the leases. We also have
obligations under a number of capital equipment leases which generally have
terms of 36 months.
Future minimum lease payments under non-cancelable operating and capital
leases having original terms in excess of one year are as follows as of December
31, 1999 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------ -----------
<S> <C> <C>
Year ending December 31,
2000............................................... $ 18,026 $37,108
2001............................................... 18,311 35,499
2002............................................... 18,946 17,196
2003............................................... 19,366 --
2004............................................... 19,916 --
Thereafter......................................... 144,264 --
-------- -------
Total minimum lease payments............... $238,829 89,803
========
Less amounts representing interest................... 7,436
-------
Present value of minimum capital lease obligations... 82,367
Less current portion................................. 34,015
-------
Noncurrent portion................................... $48,352
=======
</TABLE>
We paid expenditures for tenant improvements, primarily related to the
exercise of our build-to-suit options under our headquarters facility agreement,
of approximately $18.5 million in 1999; additional commitments during 2000 are
not significant.
Facility rent expense amounted to approximately $10.2 million, $3.6 million,
and $1.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Other Financing Obligations
As a result of the Excite merger, we assumed obligations related to non-lease
equipment financing arrangements secured by specific computer equipment,
purchased software and office furniture. Amounts due under these obligations
total approximately $4.7 million during 2000 with the significant portion of the
remaining $4.2 million due in 2001.
Backbone Agreement
We have a twenty-year agreement with a major telecommunications company to
develop and utilize a high capacity nationwide 15,000-mile fiber optic data
communications line, or backbone. In connection with this agreement, we made
disbursements of $57 million in 1999 to guarantee backbone capacity and purchase
related equipment and are required to make additional payments totaling $45
million in 2000, which will be capitalized as the payments are made. The
capitalized amount will be amortized by charges to operations over the term of
the agreement or the estimated useful life of the equipment purchased. In
addition, we will be required to make additional payments of approximately $5
million per year during the 20-year term of this agreement for connection space,
equipment and support and maintenance fees.
Litigation
Sheldon Pittleman and Ralph Zonies each filed derivative lawsuits on behalf of
Excite@Home against AT&T and Messrs. Armstrong, Petrillo, Roberts, Woodrow,
Doerr, Hearst, Bell, Malone, Shaw and Jermoluk, who are our directors, in the
Court of Chancery of the State of Delaware on October 15, 1999. We are named as
a nominal defendant in each complaint. Each complaint alleges breaches of
fiduciary duty to Excite@Home and its public stockholders. We have not yet filed
responsive pleadings in either matter. Each of Messrs. Pittleman and Zonies
seeks an injunction requiring us to alter our corporate governance, including
appointing new, unaffiliated directors, as well as payment of monetary damages,
costs and attorneys' fees. If we do not prevail in this action, we may be
required to alter our corporate governance and pay substantial damages, which
could have a material effect on our financial position and results of
operations.
GTE Internetworking Incorporated and GTE Intelligent Network Services
Incorporated filed a lawsuit against TCI (now a subsidiary of AT&T), Comcast
Corporation and us in the United States District Court for the Western District
of Pennsylvania on October 25, 1999. The complaint alleges violations of the
federal antitrust laws. GTE is seeking an injunction prohibiting continued
performance under our exclusive distribution and sales arrangements with our
cable partners, damages (including treble damages), costs and attorneys' fees.
We filed an answer to the complaint in this matter on December 15, 1999, which
was amended on December 21, 1999, denying the allegations
<PAGE>
of unlawful conduct in the complaint. If we do not prevail in this action, our
cable partners, when providing high speed data transport to residential
consumers, may be required to offer the services of other Internet service
providers in addition to the @Home service. We may also be required to pay
substantial damages. Either of these results could materially affect our
financial position and results of operations and could encourage others to
initiate litigation on similar legal theories in the future.
Fred and Roberta Lipschutz, Arthur Simon and John Galley, III, as named
plaintiffs, filed a class action against us, AT&T, ServiceCo L.L.C. and entities
affiliated with eight other cable companies in the United States District Court
for the Central District of California on November 10, 1999. The complaint
alleges violations of the federal antitrust laws. The plaintiffs seek an
injunction prohibiting the alleged acts, damages (including treble damages),
costs and attorneys' fees. We filed an answer to the complaint in this matter on
January 21, 2000, denying the allegations of unlawful conduct in the complaint.
If we do not prevail in this action, we may be required to pay substantial
damages, or we may be forced to alter the way we do business. Either of these
results could materially affect our financial position and results of operations
and could encourage others to initiate litigation on similar legal theories in
the future.
We cannot give assurance that we will prevail in any litigation. Regardless
of the outcome, any litigation may require that we incur significant litigation
expenses and may result in significant diversion of management. An unfavorable
outcome in any of these matters may have a material adverse effect on our
financial position or results of operations.
9. Convertible Debt and Other Liabilities
Convertible Debt
On December 28, 1998, we issued $437 million of Convertible Subordinated
Debentures in a private offering within the United States to qualified
institutional investors. The issue price of each $1,000 debenture was $524.64
(52.464% of principal amount at maturity), or approximately $229.3 million.
Issuance costs were approximately $6.9 million, resulting in net proceeds to us
of approximately $222.4 million. The issuance costs were recorded as other
assets and are being amortized by charges to interest expense ratably over the
term of the debentures. Each debenture is convertible at the option of the
holder at any time prior to maturity, unless redeemed or otherwise purchased,
into 13.10 shares of our Series A common stock. The debentures mature on
December 28, 2018, and interest on the debentures at the rate of 0.5246% per
annum on the $437 million principal amount due at maturity is payable
semiannually commencing on June 28, 1999. At our option, we may redeem the
debentures beginning in December 2003 for cash equal to the issue price plus
accrued original issue discount and accrued interest. The effective annual
interest rate on the debentures, including accretion of original issuance
discount and amortization of the issuance costs, is approximately 4%. No
conversions of these debentures have occurred through December 31, 1999.
On December 15, 1999, we issued $500 million principal amount of Convertible
Subordinated Notes due 2006 in a transaction that was exempt under Section 4(2)
of the Securities Act. The proceeds from this issuance were $485.7 million net
of issuance costs of $14.3 million. The issuance costs were recorded as other
assets and are being amortized by charges to interest expense ratably over the
term of the debentures. Each note was issued in denominations of $1,000 or
multiples of $1,000 and is convertible into Series A common stock at a
conversion price of $56.52 per share. We may redeem these notes on or after
December 20, 2002 by giving note holders at least 30 days' notice and paying
cash equal to a redemption price which decreases ratably from 102.7% of the
principal balance in December 2003 to 100% of the principal balance in December
2006, plus accrued interest. The notes bear interest at an annual rate of 4.75%
and mature on December 15, 2006. The net proceeds from the offering were used to
finance the $350 million cash component of the purchase price of
Bluemountain.com and the remainder is intended for working capital and general
corporate purposes. No conversions of these notes have occurred through December
31, 1999.
Promissory Note
Through our acquisition of Excite, we assumed a convertible promissory note
issued by Excite to Itochu Corporation and certain affiliated entities for the
principal amount of $5 million, which is included in other liabilities in the
consolidated balance sheet as of December 31, 1999. The note matures on October
27, 2002 and bears interest at the London Interbank Offer Rate plus 1%,
resulting in an interest rate of approximately 7.14% as of December 31,
<PAGE>
1999. The unpaid principal amount at the date of maturity is convertible, at the
option of the note holder, into shares of Series A common stock at a conversion
price equal to the average closing price of the stock for the 30 day trading
period preceding the conversion. In addition, we may elect to prepay these notes
at any time by converting them to common stock using the same exchange ratio.
Term Loan Agreement
We have available a $15 million term loan agreement with a bank to finance
the acquisition of property, equipment and improvements, and to collateralize
letters of credit. At our option, borrowings under this term loan bear interest
either at the Bank's prime rate or at LIBOR plus 2.5%. Under the terms of the
term loan, we are required to meet certain financial covenants. These covenants
were met as of December 31, 1999. The term loan expires in October 19, 2002.
As of December 31, 1999, there were no borrowings under this term loan
although there were outstanding letters of credit in the amount of $2.4 million
issued as security deposits on real property leases.
10. Stockholders' Equity
Unless otherwise indicated, all share and per share data have been adjusted
to reflect our two-for-one stock split effective June 1999.
Common Stock
On July 11, 1997, we completed our initial public stock offering and issued
20,700,000 shares (including 2,700,000 shares issued in connection with the
exercise of the underwriters' over-allotment option) of our Series A common
stock to the public at a price of $5.25 per share. We received net proceeds of
approximately $99,800,000 in cash. Concurrent with the initial public offering,
each share of preferred stock converted to common stock on a 20-for-1 basis.
Shares of Series AT, AX, AM, and C preferred stock converted into 129,949,200
shares of Series A common stock. Shares of Series T preferred stock converted
into 30,800,000 shares of Series B common stock. Shares of Series K preferred
stock converted into 29,755,320 shares of Series K common stock.
Common stock consisted of the following as of the dates indicated:
<TABLE>
<CAPTION>
Shares Issued
Shares Authorized and Outstanding
At December 31, At December 31,
-------------------------------- ---------------------------------
Series 1999 1998 1999 1998
------ -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
A............................... 683,700,000 400,000,000 351,954,355 210,526,320
B............................... 30,800,000 30,800,000 30,800,000 30,800,000
K............................... 5,219,414 29,755,320 2,000,000 5,219,414
----------- ----------- ----------- -----------
719,719,414 460,555,320 384,754,355 246,545,734
=========== =========== =========== ===========
</TABLE>
During the year ended December 31, 1999, our Board of Directors authorized
and our stockholders approved an increase in the authorized number of shares of
Series A common stock from 400,000,000 shares to 683,700,000 shares and a
decrease in the number of authorized shares of Series K common stock from
29,755,320 shares to 5,219,414 shares.
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. During the years ended December 31, 1999 and 1998, 3,219,414 and
24,535,906 shares, respectively, were converted by holders of Series K common
stock to Series A common stock. There were no such conversions during the year
ended December 31, 1997.
As of December 31, 1999, AT&T controlled approximately 56% of our voting
power as a result of its ownership in Series A and Series B common stock. The
Series B common stock ownership gives AT&T the right to elect five Series B
directors, one of which is designated by Comcast and one of which is designated
by Cox. So long as AT&T owns at least 15,400,000 shares of our Series B common
stock and holds a majority of our voting power, our board may take action only
if approved by the board and by at least 75%, or four of the five, of our Series
B directors. As a result, corporate actions generally require the approval of
AT&T's three Series B directors and one, or in some cases
<PAGE>
both, of the directors designated by Comcast and Cox. Therefore, Comcast and
Cox, acting together, may veto any board action.
Preferred Stock
Our Board of Directors is authorized, subject to any limitation prescribed by
Delaware law, to issue, from time to time, in one or more series, up to
9,650,000 shares of preferred stock, with such designation, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a Board
resolution or resolutions providing for the issue of such series without any
further vote or action by the stockholders. The Board may authorize the issuance
of such preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock. Thus,
the issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company.
We issued 10,674 shares of Series A non-voting preferred stock, which may be
convertible into 10,673,549 shares of Series A common stock, in connection with
the acquisition and merger of Hartford House, Ltd. and Bluemountain.com. Each
share of Series A preferred stock is convertible into 1,000 shares of Series A
common stock at a rate of 500 shares of Series A preferred stock per month
during the first 12 months following the acquisition, with the remainder
convertible 24 months after such date. Preferred stock converted during the
first 12 months may be accelerated under certain circumstances, including the
charitable contribution of such shares. No shares of preferred stock were issued
or outstanding as of December 31, 1998.
Stock Purchase Agreements
During 1996, we entered into stock purchase agreements with certain employees,
officers, directors and consultants under which we issued 15,054,000 shares of
Series A common stock at prices ranging from $0.01 to $0.05 per share, and
100,000 shares of Series K preferred stock at $5.00 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 us upon termination of employment at the original price paid for
the shares. The shares generally vest at the rate of 25% after one year and
ratably on a monthly basis for three years thereafter. During the year ended
December 31, 1997, we repurchased 1,038,700 shares pursuant to such agreements;
there were no shares repurchased under these agreements during the years ended
December 31, 1999 and 1998. As of December 31, 1999, 1,250,806 shares were
subject to repurchase.
Warrants
Lessor Warrants
In October 1996, we issued a warrant to our facilities lessor that gives the
lessor the right to purchase 400,000 shares of Series A common stock for $7.50
per share. The warrant is exercisable for a five-year period beginning in
October 1997. We deemed the warrant to have insignificant fair value at the time
of issuance. During the years ended December 31, 1999 and 1998, the lessor
acquired 29,328 and 191,812 shares, respectively, through net exercises under
the terms of the warrant. As of December 31, 1999, 48,712 shares remained
available for issuance under this warrant.
Series C Warrants
In April 1997, we issued warrants to purchase 4,000,000 shares of Series C
preferred stock at a price of $5.00 per share to Rogers Cablesystems Limited and
Shaw Cablesystems Ltd., our primary cable partners in Canada that were Series C
preferred stock investors prior to our initial public offering. The warrants are
exercisable beginning June 2004, or earlier subject to certain performance
standards being met by the cable system operators as specified in the agreement.
We deemed the warrants to have insignificant fair value at the time of issuance.
During the year ended December 31, 1999, the holders of these warrants acquired
1,904,708 shares through net exercises under the terms of these warrants. As of
December 31, 1999, approximately 85,000 warrants were exercisable.
Intel Warrants
<PAGE>
In July 1997, we issued a warrant to Intel Corporation in connection with a
development agreement that gives Intel Corporation the right to purchase 200,000
shares of Series A common stock for $5.00 per share. The shares exercisable
under this warrant vest 25% on the six-month anniversary of the agreement and
the remainder vests monthly for two years thereafter. The warrant is exercisable
through September 2002. In September 1997, we issued, in an amendment to the
development agreement, a second warrant that gives Intel Corporation the right
to purchase an additional 200,000 shares of Series A common stock for $10.50 per
share. The shares exercisable under this second warrant vest on an accelerated
basis from September 2004 or earlier, subject to certain performance standards
being met by Intel, as specified in the amended development agreement. In
September 2004, all unvested shares will automatically vest. We deemed the
warrants to have insignificant fair value at the time of issuance. No shares
have been issued under these warrants through December 31, 1999. As of December
31, 1999, 266,667 warrants were exercisable.
Warrants Subject to Distribution Agreements
Cablevision
In October 1997, we entered into a contract with Cablevision Systems
Corporation, and its parent, CSC Parent Corporation, Comcast Corporation, Cox
Enterprises, Inc., Kleiner, Perkins, Caufield & Byers and Tele-Communications,
Inc. This agreement provides that Cablevision will enter into a master
distribution agreement for the distribution of our @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 us, 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 our
services. The exclusivity obligations in our favor expire in June 2002, and may
be terminated sooner under certain circumstances. These exclusivity obligations
also are subject to exceptions that would permit Cablevision to engage in
certain activities which could compete, directly or indirectly, with our
activities in certain markets.
The Agreement provides for the issuance to Cablevision and CSC Parent of a
warrant to purchase 15,751,568 shares of our Series A Common Stock at an
exercise price of $0.25 per share. The warrant was immediately exercisable,
subject to the receipt of all necessary governmental consents or approvals.
During the year ended December 31, 1997, we recorded $172.6 million as
distribution agreements in the consolidated balance sheets representing the fair
value of the warrant, and we are amortizing the amount ratably over 56 months,
the remaining term of the exclusivity obligations at the time the warrant became
exercisable.
The agreement with Cablevision provides for the issuance of an additional
warrant to Cablevision and CSC Parent to purchase up to 6,142,304 shares of our
Series A common stock at an exercise price of $0.25 per share under certain
conditions. This contingent warrant was not immediately exercisable and becomes
exercisable as and to the extent certain cable television systems are
transferred from TCI and its controlled affiliates to CSC, CSC Parent or their
controlled affiliates. During the year ended December 31, 1998, the contingent
warrant became exercisable for 4,711,028 shares of Series A common stock or
$74.5 million at fair value. No further shares became exercisable under the
contingent warrant during the year ended December 31, 1999. We capitalized the
fair value of the contingent warrant as distribution agreements in the
consolidated balance sheets and we are amortizing the amount ratably over 51
months, the remaining term of the exclusivity obligations at the time the
contingent warrant became exercisable.
For the years ended December 31, 1999, 1998, and 1997, amortization of
intangible assets under the exclusive provisions of this distribution agreement
was $54.5 million, $51.6 million, and $9.2 million, respectively. As of December
31, 1999 and 1998, accumulated amortization of the cost of the distribution
agreement totaled $115.3 million and $60.8 million, respectively. No shares have
been issued under exercises of either the warrant or contingent warrant through
December 31, 1999.
Other cable system operators
At various dates during the years ended December 31, 1999 and 1998, we issued
performance-based warrants to certain other cable system operators as part of
the execution of exclusive distribution agreements over the cable systems of
these operators. Warrants to purchase up to 2,587,700 and 10,544,200 shares of
Series A common stock
<PAGE>
were issued during 1999 and 1998, respectively, at an exercise price of $5.25
per share. We also issued additional warrants to a cable operator in March 1999
to purchase up to 3,600,000 shares of Series A common stock at an exercise price
of $23.13 per share under a similar arrangement. As a result of changes in
ownership during 1999 of certain cable systems covered by warrants with a $5.25
exercise price, warrants to purchase 537,660 shares of Series A common stock
were canceled. During the year ended December 31, 1999, warrants to purchase
4,381,728 shares became exercisable as a result of the cable system operators
meeting certain system upgrade and subscriber performance milestones. As the
warrants became exercisable, we recorded $206 million as distribution agreements
in our consolidated balances sheets representing the fair value of exercisable
warrants, and we are amortizing the amount ratably over the remaining terms of
the exclusive distribution agreements, which expire at various times in 2004.
Amortization under these distribution agreements during the year ended December
31, 1999, and the related accumulated amortization as of December 31, 1999, was
$22.9 million. Exercises of warrants resulted in the net issuance of 441,080
shares during the year ended December 31, 1999; there were no issuances in prior
years.
Cable System Operator Performance Warrants
In February 1998, we issued performance-based warrants to Rogers Cablesystems
Limited and Shaw Cablesystems Ltd. to purchase up to 10,000,000 shares of Series
A common stock, respectively, at an exercise price of $5.25 per share. Warrants
to purchase 5,471,879 and 1,839,536 shares of common stock became exercisable
when Rogers and Shaw met certain subscriber performance milestones during the
years ended December 31, 1999 and 1998, respectively. We recorded non-cash
charges to operations for the fair value of these warrants of $213.1 million and
$49.8 million during the years ended December 31, 1999 and 1998, respectively.
Exercises of warrants resulted in the net issuance of 3,044,534 shares during
the year ended December 31, 1999; there were no issuances in prior years.
Warrants Issued to Joint Venture Partners
In April 1999, we issued performance-based warrants to partners in our At Home
Japan joint venture to purchase up to 900,000 shares of Series A common stock at
an exercise price of $32.50. These warrants become exercisable based on the
achievement of certain system upgrade, subscriber and other performance
milestones by the joint venture partners. Warrants to purchase 100,000 shares of
common stock became exercisable during the year ended December 31, 1999 when one
of the joint venture partners met certain of these performance milestones. We
recorded $2.1 million as an additional non-cash investment in the joint venture
based on the fair value of the exercisable warrants. None of these warrants have
been exercised as of December 31, 1999.
Excite Warrants
As a result of our merger with Excite in May 1999, we assumed warrants that
Excite had issued to Netscape to purchase, on a converted basis, 150,886 shares
of Series A common stock at an exercise price of $66.28 per share. These
warrants are exercisable until April 30, 2001 and were fully vested at the date
of the acquisition of Excite. We also assumed other fully-vested warrants to
purchase 8,696 shares, on a converted basis, of Series A common stock at an
exercise price of $2.76. The purchase price allocation of Excite included an
allocation to the fair value of these warrants at the date of acquisition (see
Note 3). None of these warrants have been exercised as of December 31, 1999.
iMALL Warrants
In our acquisition of iMALL in October 1999, we issued warrants to First Data
Corporation to purchase 2,300,000 shares of Series A common stock at an exercise
price of $36.96 per share, with a fair value of $82.8 million. In addition, we
also assumed warrants to purchase 158,728 shares, on a converted basis, of
Series A common stock at an exercise price of $6.96, with a fair value of $7.4
million. All warrants issued and assumed in the iMALL acquisition were
exercisable at the date of acquisition and their fair values were included in
the allocation of purchase price (see Note 3). None of these warrants have been
exercised as of December 31, 1999.
Stock Options
Our stock option plans provide for incentive stock options, nonqualified stock
options and restricted stock awards and bonuses to our employees, directors and
consultants. We adopt stock option plans at the discretion of
<PAGE>
management and the Board of Directors and upon approval by stockholders, if
required. We have also assumed the stock option plans of several acquired
entities.
Stock Option Plans We Have Adopted
In January 1996, we adopted the 1996 Incentive Stock Option Plan, and in July
1996, we adopted the 1996 Incentive Stock Option Plan No. 2. These plans adopted
in 1996 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 nonemployee
officers, directors and consultants at an exercise price of not less than 85% of
the fair value at the grant date. The options granted under the 1996 plans were
exercisable immediately upon issuance and generally have a term of ten years.
Upon termination of employment, unvested shares may be repurchased by us at the
original purchase price. 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 and are exercisable at the earlier of 90 days after termination or 10
years from the date of grant.
Our 1997 Equity Incentive 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 our
employees, directors and consultants. 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 and are exercisable at the earlier of 90 days after termination or 10
years from the date of grant.
Our stockholders approved an increase in the total number of shares of Series
A common stock reserved for issuance under our equity incentive plans of
17,350,000 in May 1999. As of December 31, 1999, the total number of shares
reserved for issuance under the 1997 plan was 68,900,000 less the total number
of shares issued or issuable to employees, officers, directors and consultants
under restricted stock purchase agreements, the 1996 plans and the 1997 Employee
Stock Purchase Plan, discussed below.
Stock Option Plans Assumed Through Mergers and Acquisitions
Shares issuable under stock option plans assumed in acquisitions are converted
to stock options to purchase shares of our Series A common stock based on the
respective share exchange ratio in the merger or acquisition. The following
summarizes stock options to purchase shares of Series A common stock which were
assumed in acquisitions (see Note 3):
<TABLE>
<CAPTION>
Options
Assumed
---------------
Assumed during the year ended December 31, 1998:
<S> <C>
Narrative Plans /(1)/............................ 1,177,070
Assumed during the year ended December 31, 1999:
Excite Plans..................................... 25,713,702
iMALL Plans...................................... 1,497,165
Hartford House Ltd. Plan (Bluemountain.com)...... 3,011,348
</TABLE>
/(1)/ Includes options to purchase 894,600 shares issued to existing
Narrative employees on December 30, 1998, the date of Narrative's
acquisition.
As a result of meeting certain performance criteria during the month of
December 1999, the number of shares issuable under stock options assumed in the
acquisition of Bluemountain.com were increased from 3,011,348 to 3,552,875
during the first quarter of 2000.
Stock options available for grant under assumed stock option plans are
eliminated at the date of acquisition and outstanding options are subject to
existing vesting and exercise terms, which are generally similar to options
issued under the 1997 plan. However, the vesting schedules of stock options
under several of the assumed plans vary. The most significant variations include
iMALL stock options that vest at a rate of 33% per year and Hartford House stock
options that vest subject to a number of different schedules, the most common of
which is 12.5% vesting after six
<PAGE>
months with the remainder vesting ratably over 42 months. Outstanding stock
options under plans assumed in acquisitions are included as options granted in
the following table summarizing activity under our stock option plans.
Stock Option Plan Activity
The following summarizes the activity related to our stock options for the
periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
Of Exercise Of Exercise Of Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.............. 20,026,590 $16.72 6,116,270 $ 5.13 446,000 $ 0.03
Options granted............................... 50,176,276 $29.24 15,295,304 $20.37 10,316,002 $ 3.15
Options exercised............................. (5,045,756) $10.44 (849,106) $ 3.51 (4,341,172) $ 0.13
Options cancelled............................. (5,546,826) $22.75 (535,878) $ 9.42 (304,560) $ 1.89
---------- ---------- ----------
Outstanding at end of year.................... 59,610,284 $27.23 20,026,590 $16.72 6,116,270 $ 5.13
========== ========== ==========
Options exercisable at year-end............... 14,846,032 $16.50 3,232,786 $ 3.35 3,283,770 $ 1.27
========== ========== ==========
</TABLE>
As of December 31, 1999, there were 4,203,991 shares available for grant under
our stock option plans. The following table summarizes information about stock
options outstanding as of December 31, 1999:
<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>
$ 0.01 -- $ 9.22 10,501,448 7.34 $ 3.26 5,762,445 $ 2.54
$ 9.31 -- $ 16.97 10,081,635 8.34 $14.55 3,209,639 $ 14.66
$ 17.06 -- $ 20.13 5,611,598 9.08 $18.54 1,576,097 $ 18.53
$ 20.18 -- $ 32.39 9,502,646 9.19 $27.64 2,134,992 $ 26.58
$ 32.61 -- $ 32.61 9,529,989 9.44 $34.57 1,193,123 $ 34.41
$ 36.66 -- $ 57.78 8,335,073 9.56 $44.07 247,238 $ 50.36
$ 59.47 -- $ 76.50 6,047,895 9.30 $62.59 722,498 $ 60.63
---------- ---- ------ ---------- -------
$ 0.01 -- $ 76.50 59,610,284 8.82 $27.23 14,846,032 $ 16.50
========== ==========
</TABLE>
As of December 31, 1999, shares issued under stock option plans subject to
repurchase, based on the original exercise price, at our option in the event of
employee terminations consisted of 1,511,035 unvested shares issued pursuant to
exercises of stock options. In addition, shares assumed in the acquisition of
Excite that were subject to repurchase in the event of employee terminations
consisted of 51,205 unvested shares as of December 31, 1999.
We recorded deferred compensation of $51.1 million during the year ended
December 31, 1999 for the deemed fair value of restricted stock issued and newly
issued options assumed in connection with acquisitions and we are amortizing
these amounts over the vesting terms of the awards, which range from two to four
years. The $5.3 million deferred compensation recorded prior to 1999 was related
to stock options granted and stock issued under stock purchase agreements prior
to our initial public offering in July 1997. These amounts are being amortized
on a straight-line basis by charges to operations over the vesting periods of
the individual stock options and stock purchase agreements, which are generally
four years.
Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (ESPP) was established in July 1997 to
provide employees with an opportunity to purchase our common stock through
payroll deductions. We initially reserved 800,000 shares of common stock for
issuance to participants and an additional 1,200,000 shares were reserved during
the year ended December 31, 1998. Under the ESPP, our employees may purchase,
subject to certain restrictions, shares of common stock at the lesser of 85
percent of the fair 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. During the years ended December 31, 1999 and 1998, employees purchased
721,014 and 463,890 shares, respectively. There were no purchases under this
plan during the year ended December 31, 1997. As a result of our merger with
Excite, we assumed an obligation to issue shares related to outstanding offering
periods under Excite's ESPP as of May 28, 1999. Shares purchased by Excite
employees under the remaining offering periods of Excite's ESPP are not deducted
from the reserve for issuance of shares under our ESPP.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
<PAGE>
Pro forma information regarding results of operations and loss per share is
required by FAS No. 123, "Accounting for Stock-Based Compensation." Such pro
forma information summarizes our results of operations as if stock-based awards
to employees had been accounted for using a valuation method permitted under FAS
123.
The fair value of our stock-based awards to employees prior to our initial
public offering in July 1997 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 our 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 our stock-based awards to employees was estimated assuming
no expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------------------ -------------------------------------
Year ended December 31, Year ended December 31,
------------------------------------ -------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life of options... 4 years 4 years 4 years 6 months 6 months 7 months
Expected volatility........ 0.82 1.00 0.71 0.80 1.00 0.72
Risk free interest rate.... 6.46% 4.69% 6.00% 6.01% 4.50% 5.09%
</TABLE>
The following summarizes our hypothetical results of operations for the
periods indicated had we accounted for our stock-based awards in accordance with
FAS 123 (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Net loss as reported................ $ (1,457,638) $ (144,179) $ (55,717)
Pro forma net loss.................. $ (1,583,777) $ (166,401) $ (56,746)
Basic and diluted net loss per share $ (4.61) $ (0.63) $ (0.27)
as reported.......................
Pro forma basic and diluted net per $ (5.00) $ (0.73) $ (0.28)
share -- as adjusted..............
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $28.70, $14.01 and $1.65, respectively. The
weighted-average fair value of ESPP rights granted during the years ended
December 31, 1999, 1998 and 1997 was $18.80, $2.67 and $1.99, respectively.
11. Retirement Plan
We have 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. We
may make contributions to the plan at the discretion of the Board of Directors.
To date, no such contributions have been made by us.
12. Income Taxes
Our income tax benefit differs from the income tax benefit determined by
applying the U.S. federal statutory rate to the net loss as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Income tax benefit at U.S. statutory rate.......... $(510,173) $(50,463) $(19,501)
Non-deductible amortization........................ 388,144 -- --
Acquisition-related costs.......................... 18,305 -- --
Valuation allowance for deferred tax assets........ 103,724 50,463 19,501
--------- -------- --------
Income tax benefit................................. $ -- $ -- $ --
========= ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets and liabilities for federal and state income taxes as of
the dates indicated were (in thousands):
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards.................... $ 169,798 $ 38,394
Stock options assumed in acquisitions................ 269,248 --
Cost and amortization of distribution agreements..... 168,877 45,078
Accrued costs and expenses........................... 27,969 6,054
Deferred revenue..................................... 19,058 --
Depreciation and amortization........................ 12,054 2,462
Research and development credits..................... 2,248 480
Capitalized research and development costs........... 4,922 --
Other.................................................. 88 --
--------- --------
Total gross deferred tax assets........................ 674,262 92,468
Less valuation allowance............................... (528,065) (92,468)
--------- --------
Deferred tax assets............................... 146,197 --
--------- --------
Deferred tax liabilities:
Acquisition-related intangibles...................... 146,197 --
--------- --------
Total gross deferred tax liabilities................... 146,197 --
--------- --------
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,
1999 and 1998 has been established to reflect these uncertainties. The valuation
allowance increased by $435.6 million, $59.3 million and $22.3 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Approximately $135.4
million of the valuation allowance as of December 31, 1999 is attributable to
stock option deductions, the benefit of which will be credited to paid-in
capital when realized. Approximately $269.2 million of the valuation allowance
as of December 31, 1999 is attributable to deferred tax assets that when
realized, will first reduce unamortized goodwill, then other non-current
intangible assets of acquired subsidiaries, and then income tax expense.
As of December 31, 1999, we had net operating loss carryforwards for federal
and state tax purposes of approximately $452.6 million and $197.9 million,
respectively. We also had research and development credit carryforwards for
federal and state tax purposes of approximately $1.1 million and $1.6 million,
respectively. These carryforwards will expire beginning in 2002, if not
utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operation loss and tax credit carryforwards before utilization.
13. Related Party and Other Significant Transactions
We are involved in transactions with certain related parties in the ordinary
course of business. These related parties include stockholders and certain cable
partners with significant investments in our common stock, our joint venture
entities and its partners, and our executive officers and members of our Board
of Directors.
Revenues from related parties were $28.8 million, $10.5 million, and $3
million for the years ended December 31, 1999, 1998 and 1997, respectively, and
were primarily related to support services such as customer support, local area
content development, development of set-top devices and pre-commercial
deployment consulting provided to our cable partners with significant
investments in our common stock. During 1999, revenues from related parties
included $10.5 million related predominantly to consulting and other services
rendered to our international joint ventures reimbursed on a cost-plus basis.
Our agreements with cable partners and communications providers for license
and distribution of our services involve significant costs, including payments
under the backbone agreement described in Note 8.
<PAGE>
We received financing from several cable partners and other strategic partners
prior to our initial public offering in July 1997. We have also issued warrants
to cable partners and others in connection with license and distribution
agreements as described in Note 10.
14. Segment Reporting
Since our merger with Excite in May 1999, we operate in two significant
business segments, media and advertising services and subscriber network and
other services. Revenues for these two segments are reported separately for
internal purposes, but costs and expenses, loss from operations, net loss and
assets and liabilities are not reported separately for each segment because this
information is not produced internally. Our key operating segments are
aggregated into the reported business segments based upon how our management
organizes and manages our operations. Key operating segments within media and
advertising services include content development for our Excite narrowband
portal, targeted narrowband and electronic mail advertising services provided by
Matchlogic, media-rich advertising services provided by our Enliven service and
other advertising and media services provided over our narrowband and broadband
portals. Key operating segments within subscriber network and other services
include our @Home network engineering, maintenance and customer support
services, our @Work services and our set-top box and pre-deployment consulting
services. In addition, we have corporate marketing, general and administrative
and business development operations which generate no revenues.
The following represents revenues for our reported business segments (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Media and advertising services......................... $203,714 $ 5,444 $ 752
Subscriber network and other services.................. 133,241 42,601 6,685
-------- ------- ------
Total consolidated revenues....................... $336,955 $48,045 $7,437
======== ======= ======
</TABLE>
Revenues from media and advertising services are derived predominantly from
customers located within the United States. Revenues from customers located
outside the United States, derived primarily from our international joint
ventures, were approximately $2.6 million for the year ended December 31, 1999
and were insignificant for the years ended December 31, 1998 and 1997.
Revenues from subscriber network and other services are derived from customers
located outside the United States included approximately $22.6 million, $5.2
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997.
Our international customers include our cable partners and their cable customers
and joint venture partners located outside of the United States. Approximately
70% of these revenues from customers located outside the United States in each
of 1999, 1998 and 1997 consisted of cable subscription fees and other revenues
from Canadian customers and the remainder was comprised primarily of pre-
deployment consulting services to our joint ventures in Europe, Japan and
Australia.
No individual customer accounted for more than 10% of total revenues during
the years ended December 31, 1999, 1998 and 1997.
15. Financial Instruments
Financial instruments that subject us to concentrations of credit risk consist
primarily of cash, cash equivalents and short-term investments and trade
accounts receivable. We maintain cash, cash equivalents and short-term
investments with domestic financial institutions and broker-dealers with a high
credit standing. We perform periodic evaluations of the relative credit standing
of these institutions and, if warranted, adjust the investment portfolio
maintained with these institutions. Our business involves transactions that
arise in trade accounts receivable with companies in various industries
throughout the United States as well as international locations. Ongoing credit
evaluations of corporate customers and other counterparties are performed to
limit credit risk. While trade accounts receivable generally do not require
collateral, reserves are maintained for potential credit losses. Credit losses
to date have been within management's expectations.
We use the following methods and assumptions in estimating the fair values of
our financial instruments:
<PAGE>
Cash and cash equivalents: The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates its fair value as of
December 31, 1999 and 1998.
Short-term investments: The fair values of short-term investments, all of
which have been classified as available-for-sale, are based on quoted market
prices as reported in the consolidated balance sheets. Thus, the carrying
amounts of short-term investments are equal to their fair values as of December
31, 1999 and 1998.
Accounts receivable and accounts payable: The carrying amounts reported in the
consolidated balance sheets for accounts receivable and accounts payable, which
are presented net of reserves, approximate their fair value as of December 31,
1999 and 1998.
Other investments: The fair values of our other investments, which are
accounted for as available-for-sale investments, are based on quoted market
prices for publicly held securities and the lower of cost or estimated fair
value for privately held securities as reported in the consolidated balance
sheets. Thus, the carrying amounts of other investments are equal to their fair
values as of December 31, 1999 and 1998.
Capital lease and other obligations: We estimate the fair values of our
capital lease and other equipment financing obligations based on the implicit
interest rates for capital lease obligations we entered into recently compared
to the weighted average interest rates in our existing financings. Based on this
analysis, the carrying amounts of capital lease and other obligations
approximate their fair values as of December 31, 1999 and 1998.
Convertible debt: The fair values of our convertible debentures and notes are
estimated using market rates for similar securities. The $485.7 million carrying
amount of convertible debt issued in December 1999 approximates its fair value
as of December 31, 1999. The fair value of convertible debt issued in December
1998 is approximately $274 million and the carrying amount is $236.3 as of
December 31, 1999; the carrying amount of this convertible debt
approximated its fair value as of December 31, 1998.
16. Subsequent Events (Unaudited)
Acquisition of Kendara, Inc.
On February 20, 2000, we completed our acquisition of Kendara, Inc., a
Delaware corporation, for approximately 1.5 million shares of our Series A
common stock, 202 shares of our Series B non-voting preferred stock and 1,279
shares of our Series C non-voting preferred stock, which may be converted into
1,299,296 shares of Series A common stock. We also assumed Kendara's outstanding
options, which were converted into options to purchase shares of our Series A
common stock. The merger consideration is approximately $120 million. Each share
of Series B preferred stock is being held in escrow for one year and will
automatically convert into 1,000 shares of our Series A common stock upon the
expiration of the escrow period. Each share of Series C preferred stock is also
convertible into 1,000 shares of our Series A common stock, subject to a vesting
schedule and escrow. Kendara is a provider of browser-based marketing services.
We accounted for this acquisition as a purchase.
Announcement of Work.com Joint Venture
On February 22, 2000, we entered into a preliminary agreement with Dow Jones &
Co., Inc. to form a joint venture for the purpose of establishing and operating
an Internet site providing news, information and business services to small and
medium-sized businesses. Under the agreement, we will contribute to the joint
venture approximately $16 million in cash, our Work.com web site including the
related technology and certain of our business-related advertising and content
relationships, in exchange for a 50% equity interest. Under a separate
agreement, we will receive a percentage of the advertising revenues generated by
the joint venture over a three-year term up to a total of $31 million. The joint
venture will be accounted for as an investment under the equity method.
<PAGE>
Quarterly financial information (unaudited)
<TABLE>
<CAPTION>
Three months Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------- ------------- ------------- -------------
(In thousands, except per share and stock price data)
<S> <C> <C> <C> <C>
Total revenue........................................... $ 25,098 $ 70,542 $ 112,562 $ 128,753
Costs and expenses:
Operating costs....................................... 18,600 29,084 45,260 50,112
Product development and engineering................... 6,467 11,281 16,834 20,223
Sales and marketing................................... 7,676 25,274 48,179 49,596
General and administrative............................ 4,103 6,423 9,028 10,722
Cost and amortization of distribution
agreements.......................................... 15,020 18,703 43,932 214,312
Amortization of goodwill, intangible assets
and deferred compensation and other
acquisition-related costs........................... 6,733 199,451 447,569 503,256
-------- --------- --------- ---------
Total costs and expenses................................ 58,599 290,216 610,802 848,221
-------- --------- --------- ---------
Loss from operations.................................... (33,501) (219,674) (498,240) (719,468)
Interest and other income, net.......................... 2,811 2,472 2,556 2,414
Investment gain from business combination............... 12,566 -- -- --
Equity share of losses of affiliates.................... -- (742) (2,876) (5,956)
-------- --------- --------- ---------
Net loss................................................ $(18,124) $(217,944) $(498,560) $(723,010)
======== ========= ========= =========
Basic and diluted net loss per share(1)................. $ (0.08) $ (0.76) $ (1.37) $ (1.93)
======== ========= ========= =========
Price range per share(1):
Low................................................... $ 37.25 $ 39.00 $ 33.13 $ 36.69
High.................................................. $ 81.75 $ 99.00 $ 59.63 $ 59.75
</TABLE>
<TABLE>
<CAPTION>
Three months Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------- ------------- ------------- -------------
(In thousands, except per share and stock price data)
<S> <C> <C> <C>
Total revenue........................................... $ 5,773 $ 9,220 $ 13,815 $ 19,237
Costs and expenses:
Operating costs....................................... 8,615 10,098 12,256 15,996
Product development and engineering................... 3,573 3,891 4,588 4,957
Sales and marketing................................... 3,500 4,356 4,978 5,257
General and administrative............................ 2,874 2,925 3,112 3,518
Cost and amortization of distribution
agreements.......................................... 19,534 13,628 13,628 54,595
Amortization of goodwill, intangible assets
and deferred compensation and other
acquisition-related costs........................... -- -- -- 2,758
-------- -------- -------- --------
Total costs and expenses................................ 38,096 34,898 38,562 87,081
-------- -------- -------- --------
Loss from operations.................................... (32,323) (25,678) (24,747) (67,844)
Interest and other income, net.......................... 1,107 906 1,460 2,940
-------- -------- -------- --------
Net loss................................................ $(31,216) $(24,772) $(23,287) $(64,904)
======== ======== ======== ========
Basic and diluted net loss per share/(1)/............... $ (0.28) $ (0.22) $ (0.20) $ (0.56)
======== ======== ======== ========
Price range per share/(1)/:
Low................................................... $ 10.25 $ 14.88 $ 11.75 $ 17.25
High.................................................. $ 19.06 $ 28.63 $ 27.47 $ 42.38
</TABLE>
/(1)/share and per share data have been adjusted to reflect our two-for-one
stock split effective June 1999.
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
With the exception of the information specifically stated as being
incorporated by reference from our definitive proxy statement for our 2000
annual stockholders' meeting in Part III of this annual report, our proxy
statement is not to be deemed as filed as part of this annual report. In the
event we do not file the definitive proxy statement for our 2000 annual
stockholders' meeting by April 29, 2000, we will amend this annual report to
include information for the following items.
Item 10. Directors and Executive Officers of Registrant
Directors and Executive Officers. The information concerning our directors
required by this item, which will be set forth in the section entitled "Proposal
No. 1 -- Election of Directors" of our definitive proxy statement for our 2000
annual stockholders' meeting, is incorporated into this annual report by
reference. The information concerning our executive officers required by this
item, which will be set forth in the section entitled "Executive Officers" of
our definitive proxy statement for our 2000 annual stockholders' meeting, is
incorporated into this annual report by reference.
Compliance With Section 16(a) of the Exchange Act. Section 16(a) of the
Exchange Act requires our directors and executive officers, and persons who
beneficially own more than 10% of our Series A common stock, to file initial
reports of beneficial ownership and reports of changes in beneficial ownership
with the Commission. These persons are required by regulation to furnish us
with copies of all Section 16(a) forms they file. Based solely on our review of
the copies of such forms furnished to us and written representations from these
persons, we believe that all Section 16(a) filing requirements were met during
1999.
Item 11. Executive Compensation
The information required by this item, which will be set forth in the sections
entitled "Executive Compensation" and "Proposal No. 1 -- Election of Directors"
of our definitive proxy statement for our 2000 annual stockholders' meeting, is
incorporated into this annual report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item, which will be set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" of our
definitive proxy statement for our 2000 annual stockholders' meeting, is
incorporated into this annual report by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item, which will be set forth in the section
entitled "Certain Transactions" of our definitive proxy statement for our 2000
annual stockholders' meeting, is incorporated into this annual report by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this annual report:
1. Financial Statements. See Index to Financial Statements at Item 8 on page
__ of this annual report.
2. Financial Statement Schedules.
<PAGE>
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period......... $ 252 $ -- $ --
Acquired allowance................... 1,705 19 --
Bad debt expense..................... 3,203 190 --
Write-offs, net of recoveries........ (1,706) 43 --
------- ----- --------
Balance at end of period............... $ 3,454 $ 252 $ --
======= ===== ========
</TABLE>
Omitted schedules are not applicable or the required information is shown
in the consolidated financial statements and notes thereto.
3. Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this annual report:
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit --------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
- ----- ------------------- ---- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
2.01 Agreement and Plan of Merger, dated December 17, 1998, among the 8-K -- 2.1 01/14/99
Registrant, Transitory Corporation and Narrative Communications Corp.
2.02 Agreement and Plan of Reorganization, dated January 19, 1999, among the S-4 333-77151 2.01 04/27/99
Registrant, Countdown Acquisition Corp. and Excite, Inc.
2.03 Agreement and Plan of Merger, dated as of July 12, 1999, among the 13D -- 99.A 08/02/99
Registrant, Shop Nevada, Inc. and iMALL, Inc.
2.04 Agreement and Plan of Merger, dated October 27, 1999, between the X
Registrant and Webshots Corporation.
2.05 Agreement and Plan of Merger, dated October 23, 1999, between the 10-Q -- 2.01 11/15/99
Registrant and Hartford House, Ltd.
3.01 Fifth Amended and Restated Certificate of Incorporation of the S-8 333-79883 4.01 06/03/99
Registrant, filed with the Delaware Secretary of State on May 28, 1999.
3.02 Second Amended and Restated Bylaws of the Registrant, as adopted on S-1 333-27323 3.05 06/20/97
July 16, 1997.
3.03 Certificate of Designation of Series A non-voting convertible preferred X
stock of the Registrant, filed with the Delaware Secretary of State on
December 13, 1999.
3.04 Certificate of Designation of Series B non-voting convertible preferred S-3 333-31530 4.04 03/02/00
stock of the Registrant, filed with the Delaware Secretary of State on
February 9, 2000.
3.05 Certificate of Designation of Series C non-voting convertible preferred S-3 333-31530 4.05 03/02/00
stock of the Registrant, filed with the Delaware Secretary of State on
February 9, 2000.
4.01 Form of certificate of the Registrant's Series A common stock. S-1 333-27323 4.05 03/31/99
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit --------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
- ----- ------------------- ---- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
4.02 Indenture, dated December 28, 1998, between the Registrant and 10-K -- 10.38 03/31/99
State Street Bank and Trust Company of California, N.A., as trustee
(contains form of note).
4.03 Registration Rights Agreement, dated December 28, 1998, between the 10-K -- 10.39 03/31/99
Registrant and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan St Goldman and Sachs & Co.
4.04 Indenture, dated as of December 1, 1999, by the Registrant to State S-3 333-32228 4.03 03/10/00
Street Bank and Trust Company of California, N.A., as trustee
(contains form of note).
4.05 Registration Rights Agreement, dated December 1, 1999, between the S-3 333-32228 4.04 03/10/00
Registrant and Morgan Stanley & Co. Incorporated, Goldman Sachs &
Co., Deutsche Bank Securities Inc., Donaldson Lufkin & Jenrette
Securities Corporation, Hambrecht & Quist LLC and BancBoston
Robertson Stephens Inc.
4.06 Third Amended and Restated Registration Rights Agreement, dated S-1 333-27323 4.01 05/16/97
April 11, 1997, among the Registrant and the parties indicated
therein.
4.07 Amended and Restated Stockholders' Agreement, dated August 1, 1996, S-1 333-27323 4.04 06/20/97
among the Registrant and the parties indicated therein, as amended
on May 15, 1997.
4.08 Letter Agreement and Term Sheet, dated as of October 2, 1997 and 8-K -- 10.01 10/22/97
amended as of October 10, 1997, among the Registrant, Cablevision
Systems Corporation, CSC Parent Corporation, Comcast Corporation,
Cox Enterprises, Inc., Kleiner Perkins Caufield & Byers and Tele-
Communications, Inc.
4.09 Letter Agreement, dated April 7, 1999, among the Registrant, AT&T -- 13 04/13/99
AT&T Corp., Tele-Communications, Inc., Cox Communications, 13D
Inc. and Cox@Home, Inc.
9.01 Voting Agreement, dated April 11, 1997 among the Registrant, S-1 333-27323 9.01 05/16/97
TCI Internet Holdings, Inc., Comcast PC Investments, Inc.,
Cox Teleport Providence, Inc., Rogers Cablesystems Limited
and Shaw Cablesystems Ltd.
10.01 Form of Indemnification Agreement between the Registrant and S-1 333-27323 10.09 05/16/97
each of its directors and executive officers.*
10.02 Description of the Registrant's 1998 Executive Incentive Plan.* 10-K -- 10.13 02/19/99
10.03 At Home Corporation 1996 Incentive Stock Option Plan.* S-1 333-27323 10.10 05/16/97
10.04 At Home Corporation 1996 Incentive Stock Option Plan No. 2.* S-1 333-27323 10.11 05/16/97
10.05 At Home Corporation 1997 Equity Incentive Plan, amended as of S-8 333-81477 4.05 06/24/99
April 16, 1999.*
10.06 At Home Corporation 1997 Employee Stock Purchase Plan, amended S-8 333-60037 4.08 07/28/98
as of May 13, 1998.*
10.07 At Home Corporation 2000 Equity Incentive Plan and forms of S-8 333-31532 4.06 - 03/02/00
related agreements.* 4.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit --------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
- ----- ------------------- ---- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
10.08 Narrative Communications Corp. 1998 Equity Incentive Plan, assumed S-8 333-81477 4.04 06/24/99
by the Registrant as of December 30, 1998.*
10.09 Narrative Communications Corp. 1995 Stock Option Plan, assumed by 10-K -- 10.12 02/19/99
Registrant as of December 30, 1998.*
10.10 Excite, Inc. 1995 Equity Incentive Plan.* Excite 333-2328-LA 03/11/96
SB-2
10.11 Excite, Inc. 1996 Equity Incentive Plan.* Excite 333-59329 4.04 07/17/98
S-8
10.12 Excite, Inc. 1996 Directors Stock Option Plan.* Excite 333-2328-LA 03/11/96
SB-2
10.13 Excite, Inc. 1996 Employee Stock Purchase Plan.* Excite 333-59329 4.05 07/17/98
S-8
10.14 Classifieds2000, Inc. 1996 Stock Option Plan.* Excite 333-52001 4.04 05/07/98
S-8
10.15 MatchLogic, Inc. 1997 Equity Compensation Plan.* Excite 333-46591 4.03 02/19/98
S-8
10.16 Netbot, Inc. 1996 Stock Option Plan.* Excite 333-41523 4.04 12/05/97
S-8
10.17 Throw, Inc. 1996 Stock Option Plan.* Excite 333-52001 4.03 05/07/98
S-8
10.18 iMALL, Inc. 1997 Stock Option Plan.* iMALL 333-52905 4.1 05/15/98
S-8
10.19 iMALL, Inc. 1999 Stock Option Plan.* S-8 333-90327 4.04 11/04/99
10.20 Hartford House, Ltd. Amended and Restated 1999 Stock Option/Stock S-8 333-93339 4.03 12/22/99
Issuance Plan.*
10.21 Kendara, Inc. 1999 Stock Plan and forms of related agreements.* S-8 333-31532 4.03- 03/02/00
4.05
10.22 Employment Letter Agreement, dated July 19, 1996, between the S-1 333-27323 10.19 05/16/97
Registrant and Thomas A. Jermoluk.*
10.24 Restricted Stock Purchase Agreement, dated July 31, 1996, between S-1 333-27323 10.14 05/16/97
the Registrant and Thomas A. Jermoluk for the purchase of Series A
common stock.*
10.25 Restricted Stock Purchase Agreement, dated July 31, 1996, between S-1 333-27323 10.15 05/16/97
the Registrant and Thomas A. Jermoluk for the purchase of Series K
preferred stock.*
10.26 Amendment of Employment Agreement, dated November 23, 1999, between X
the Registrant and Thomas A. Jermoluk.*
10.27 Employment Agreement, dated as of May 28, 1999, between the X
Registrant and George Bell.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
----- ------------------- ----- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
10.28 Restricted Stock Purchase Agreement, dated July 29, S-1 333-27323 10.17 05/16/97
1996, between the Registrant and Ken Goldman for the
purchase of Series A common stock.
10.29 Settlement Agreement and General Release, dated June 15, X
1999, between the Registrant and Robert Tomasi, Jr.*
10.30 Option Continuation Agreement, dated June 15, 1999, X
between the Registrant and Robert Tomasi, Jr.*
10.31 Form of Restricted Stock Purchase Agreement and S-1 333-27323 10.18 05/16/97
Promissory Note between the Registrant and other
officers for the purchase of Series A common stock.
10.32 Term Sheet, dated June 4, 1996, among the Registrant, S-1 333-27323 10.06 05/16/97
TCI Internet Holdings, Inc., Kleiner Perkins Caufield &
Byers VII, KPCB Information Sciences Zaibatsu Fund II,
KPCB VII Founders Fund, Comcast PC Investments,
Inc., and Cox Teleport Providence, Inc.
10.33 Letter of Agreement, dated May 15, 1997, among S-1 333-27323 10.20 06/20/97
Registrant and the parties indicated therein, including as
exhibits the Master Distribution Agreement Term Sheet
and the Term Sheet for Form of LCO Agreement.
10.34 Term Sheet, dated March 18, 1997, between the S-1 333-27323 10.06 05/16/97
Registrant and Shaw Cablesystems Ltd. and Rogers
Cablesystems Limited.
10.35 Canadian Purchase Letter Agreement, dated April 11, S-1 333-27323 4.03 05/16/97
1997, among the Registrant, Rogers Cablesystems
Limited and Shaw Cablesystems Ltd.
10.36 Binding Warrant Term Sheet, dated February 24, 1998, 10-Q -- 10.24 05/15/98
among the Registrant, Rogers Communications, Inc. and
Shaw Communications, Inc.
10.37 Warrant Purchase Agreement, dated October 10, 1997, 8-K -- 10.02 10/22/97
between the Registrant and Cablevision Systems
Corporation.
10.38 Warrant to purchase shares of Series A common stock of 8-K -- 10.03 10/22/97
Registrant issued to CSC Parent Corporation as of
October 10, 1997.
10.39 Contingent warrant to purchase shares of Series A 8-K -- 10.04 10/22/97
common stock of the Registrant issued to CSC Parent
Corporation as of October 10, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
- ------ ------------------- ---- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
10.40 Lease, dated October 17, 1996, between the Registrant S-1 333-27323 10.08 05/16/97
and Martin/Campus Associated, L.P.
10.41 Build To Suit Lease, dated September 29, 1997, between 10-K -- 10.35 02/19/99
the Registrant and Martin/ Campus Associates, L.P.,
(440 Broadway, Redwood City, California).
10.42 Build To Suit Lease, dated September 29, 1997, between 10-Q -- 10.21 05/15/98
the Registrant and Martin/ Campus Associates, L.P. (425
Broadway, Redwood City, California).
10.43 Build to Suit Option Agreement, dated October 25, 1996, 10-Q -- 10.22 05/15/98
between Registrant and Martin/Campus Associates, L.P.,
and First Amendment to Build to Suit Option Agreement
10.44 Build to Suit Lease, dated July 14, 1998, between 10-K -- 10.36 02/19/99
Registrant and Martin/Campus Associates, L.P.
(420 Broadway, Redwood City, California)
10.45 Build to Suit Lease between the 10-K -- 10.37 02/19/99
Registrant and Martin/Campus Associates, L.P. (430
Broadway, Redwood City, California)
10.46 Loan and Security Agreement, dated September 30, 10-Q -- 10.23 11/14/97
1997, between the Registrant and Silicon Valley Bank.
10.47 Loan Modification Agreement between the Registrant and 10-K -- 10.34 02/19/99
Silicon Valley Bank
10.48 Master Communications Services Agreement, dated April S-1 333-27323 10.07 05/16/97
2, 1997, between the Registrant and Teleport
Communications Group Inc.
10.49 IRU Capacity Agreement, dated December 19, 1998, 10-K -- 10.33 04/27/99
between the Registrant and AT&T Corp.
10.50 Form of Amendment Number Two to IRU Capacity 10-Q -- 10.01 11/15/99
Agreement, dated September 30, 1999, between the
Registrant and AT&T Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
- ------ ------------------- ---- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
21.01 List of Subsidiaries of the Registrant. X
23.01 Consent of Ernst & Young LLP, Independent Auditors. X
24.01 Power of Attorney executed by each officer and director
(see pg. 90 of this report). X
27.01 Financial data schedule for the year ended December 31, X
1999.
</TABLE>
- --------------
* Management contracts or compensatory plans required to be filed as
an exhibit to this annual report.
(b) Reports on Form 8-K.
On October 27, 1999, we filed a current report on Form 8-K announcing under
Item 5 that we had entered into an Agreement and Plan of Merger with Hartford
House, Ltd., the operator of the Bluemountain.com web site.
On December 6, 1999, we filed a current report on Form 8-K announcing under
Item 5 that we had issued a press release dated December 3, 1999 with respect to
our intention to raise approximately $400 million through a private offering of
convertible subordinated notes within the United States to qualified
institutional buyers.
On December 22, 1999, we filed a current report on Form 8-K announcing
under Item 2 that we had completed our merger with Hartford House, Ltd., the
operator of the Bluemountain.com web site, and announcing under Item 5 that (1)
on December 13, 1999 we had completed the private placement of $500 million of
4.75% Convertible Subordinated Notes Due 2006, (2) on December 14, 1999, we
issued a press release with respect to the completion of the private placement
of the convertible notes, (3) on December 6, 1999, AT&T announced that it would
not extend its exclusivity agreement with us, and (4) on November 22, 1999, we
announced that our Board of Directors had authorized us to investigate the
issuance of a "tracking stock" for our media business.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 AT HOME CORPORATION
By: /s/ Kenneth A. Goldman
--------------------------
Kenneth A. Goldman
Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George Bell, Kenneth A. Goldman and David
G. Pine, jointly and severally, his attorney in fact, each with the full power
of substitution, for such person, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this annual report, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might do or could do in person hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ George Bell President, Chief Executive Officer March 30, 2000
- ---------------------------------------------------- and Director
George Bell
Principal Financial Officer:
/s/ Kenneth A. Goldman Executive Vice President and March 30, 2000
- ---------------------------------------------------- Chief Financial Officer
Kenneth A. Goldman
Chief Accounting Officer:
/s/ Robert A. Lerner Vice President, Chief Accounting March 30, 2000
- ---------------------------------------------------- Officer and Corporate Controller
Robert Lerner
Additional Directors:
/s/ Thomas A. Jermoluk Chairman March 30, 2000
- ----------------------------------------------------
Thomas A. Jermoluk
/s/ William R. Hearst III Director March 30, 2000
- ----------------------------------------------------
William R. Hearst III
Director
- ----------------------------------------------------
C. Michael Armstrong
/s/ L. John Doerr Director March 30, 2000
- ----------------------------------------------------
John L. Doerr
Director
- ----------------------------------------------------
Ray Liguori
/s/ John C. Malone Director March 30, 2000
- ----------------------------------------------------
John C. Malone
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Director
- ----------------------------------------------------
John C. Petrillo
/s/ Brian L. Roberts Director March 30, 2000
- ----------------------------------------------------
Brian L. Roberts
/s/ Ted Rogers Director March 26, 2000
- ----------------------------------------------------
Ted Rogers
/s/ David M. Woodrow Director March 30, 2000
- ----------------------------------------------------
David M. Woodrow
</TABLE>
<PAGE>
EXHIBIT 2.04
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of October 27, 1999 (the "Agreement Date") by and among At Home
Corporation, a Delaware corporation ("At Home"), OceanBeach, Inc., a Delaware
corporation that is a wholly-owned subsidiary of At Home ("Sub"), and Webshots
Corporation, a California corporation ("Webshots") and, solely for purposes of
Articles 4, 11, 12 and 14 and Sections 2.1.4 and 2.5, the persons listed on the
List of Shareholders attached as Exhibit A hereto (collectively, the "Webshots
---------
Shareholders" and each individually an "Webshots Shareholder") each of whom,
immediately prior to the consummation of the Merger (as defined below) was a
shareholder of Webshots.
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, Sub will be merged with and into Webshots in a reverse triangular
merger, with Webshots to be the surviving corporation of such merger, all
pursuant to the terms and conditions of this Agreement and applicable law. The
parties also intend for such merger to be treated as a "reorganization" under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and to be treated as a "purchase" transaction for accounting purposes.
B. Upon the effectiveness of such merger (i) the shares of the common stock
of Webshots that are outstanding immediately prior to the effectiveness of the
merger will be converted into shares of the common stock of At Home and (ii) Sub
will be merged with and into Webshots, all as provided in this Agreement.
NOW, THEREFORE, in consideration of the above-recited facts and the mutual
promises, covenants and conditions contained herein, the parties hereby agree as
follows:
ARTICLE 1
CERTAIN DEFINITIONS
As used in this Agreement, the following terms will have the meanings set
forth below:
1.1 The "Merger" means the statutory merger of Sub with and into Webshots to
be effected pursuant to this Agreement.
1.2 The "Effective Time" means the date and time on which the Merger first
becomes legally effective under the laws of the States of California and
Delaware as a result of (i) the filing with the California Secretary of State of
an Agreement of Merger in substantially the form of Exhibit B hereto (the
---------
"Agreement of Merger") regarding the Merger (and any required related
certificates) pursuant to, and in conformity with, the requirements of Section
1103 of the California Corporations Code ("CCC"); and (ii) the filing with the
Delaware Secretary of State of a Certificate of Merger regarding the Merger (and
any required related certificates) that conforms to the requirements of Section
252 of the Delaware General Corporation Law (the "Certificate of Merger").
<PAGE>
1.3 "Webshots Common Stock" means Webshots' Common Stock, no par value per
share.
1.4 "Webshots Common Stock Amount Per Share" means Fifty-Five Thousand
Dollars ($55,000).
1.5 "At Home Common Stock" means At Home's Series A Common Stock, $0.01 par
value per share.
1.6 "At Home Average Price Per Share" means $40.2375.
1.7 "Conversion Number" means 1,366.884.
1.8 "Webshots Ancillary Agreements" means, collectively, the Agreement of
Merger, the Certificate of Merger, each certificate to be delivered by Webshots
or an officer or officers of Webshots at the Closing pursuant to Article 9 of
this Agreement, and each other agreement (other than this Agreement) which
Webshots is to enter into as a party thereto pursuant to this Agreement.
1.9 "At Home Ancillary Agreements" means, collectively, each certificate to
be delivered by At Home or an officer or officers of At Home at the Closing
pursuant to Article 8 of this Agreement and each agreement (other than this
Agreement) which At Home is to enter into as a party thereto pursuant to this
Agreement.
1.10 "Sub Ancillary Agreements" means, collectively, the Agreement of Merger,
each certificate to be delivered by Sub or an officer or officers of Sub at the
Closing pursuant to Article 8 of this Agreement and each agreement (other than
this Agreement) which Sub is to enter into as a party thereto pursuant to this
Agreement.
1.11 "knowledge," when used with reference to a party, means the collective
actual knowledge, of the officers, directors and employees of such party, after
due inquiry.
1.12 "Material Adverse Change" or "Material Adverse Effect" when used with
reference to any entity or group of related entities, means any event, change,
violation, inaccuracy or effect that is, individually or in the aggregate, or is
reasonably likely to be materially adverse to the condition (financial or
otherwise), capitalization, properties, assets (including intangible assets),
business, operations, results of operations or prospects of such entity and its
subsidiaries, taken as a whole.
1.13 "Termination Date" means November 5, 1999.
1.14 "Webshots Websites" means all websites or other sites accessed via the
internet or any other electronic network, including without limitation any
cable-based network or private network, owned or operated by Webshots and/or any
of its subsidiaries (either alone or jointly
-2-
<PAGE>
with others), either as of the Agreement Date or in the past, including without
limitation those certain websites currently accessible at the following URL
addresses:
http://www.webshots.com
http://www.dailyphoto.com
http://www.daily.webshots.com
http://www.postcards.webshots.com
Other capitalized terms defined elsewhere in this Agreement and not defined in
this Article 1 will have the meanings assigned to such terms in this Agreement.
ARTICLE 2
PLAN OF REORGANIZATION
2.1 Conversion of Shares.
--------------------
2.1.1 Conversion of Sub Stock. At the Effective Time, each share of the
-----------------------
Common Stock of Sub that is issued and outstanding immediately prior to the
Effective Time will, by virtue of the Merger and without the need for any
further action on the part of the holder thereof, be converted into and become
one (1) share of Webshots Common Stock that is issued and outstanding
immediately after the Effective Time, and the shares of Webshots Common Stock
into which the shares of Sub Common Stock are so converted in the Merger will be
the only shares of capital stock of Webshots that are issued and outstanding
immediately after the Effective Time.
2.1.2 Conversion of Webshots Common Stock. Subject to the terms and
-----------------------------------
conditions of this Agreement, at the Effective Time (i) each share of Webshots
Common Stock that is issued and outstanding immediately prior to the Effective
Time will, by virtue of the Merger and without the need for any further action
on the part of the holder thereof (except as expressly provided herein), be
converted into a number of shares of At Home Common Stock that is equal to the
Conversion Number (subject to the provisions of Section 2.1.3 regarding the
elimination of fractional shares); and (ii) each fractional one-half share of
Webshots Common Stock that is issued and outstanding immediately prior to the
Effective Time will, by virtue of the Merger and without the need for any
further action on the part of the holder thereof (except as expressly provided
herein), be converted into a number of shares of At Home Common Stock that is
equal to the quotient obtained by dividing the Conversion Number by two (2)
(subject to the provisions of Section 2.1.3 regarding the elimination of
fractional shares).
2.1.3 Fractional Shares. No fractional shares of At Home Common Stock
-----------------
will be issued in connection with the Merger. In lieu thereof, each holder of
Webshots Common Stock who would otherwise be entitled to receive a fraction of a
share of At Home Common Stock pursuant to Section 2.1.2, computed after
aggregating all shares of At Home Common Stock to be received by such holder
---
pursuant to Section 2.1.2, will instead receive from At Home, within ten (10)
business days after the Effective Time, an amount of cash (rounded to the
nearest cent) equal to the product obtained by multiplying (i) the At Home
Average Price Per Share (as adjusted to reflect any Capital Change (as defined
in Section 2.2 below) of At Home) by (ii) the fraction of a share of At Home
Common Stock that such holder would otherwise have been entitled to receive. No
fractions of a cent will be paid in connection with the Merger.
-3-
<PAGE>
2.1.4 [Reserved.]
2.2 Adjustments for Capital Changes. Notwithstanding the provisions of
-------------------------------
Section 2.1, if At Home recapitalizes, either through a subdivision (or stock
split) of any of its outstanding shares of At Home Common Stock into a greater
number of such shares, or a combination (or reverse stock split) of any of its
outstanding shares of At Home Common Stock into a lesser number of such shares,
or reorganizes, reclassifies or otherwise changes its outstanding shares of At
Home Common Stock into the same or a different number of shares of other classes
or series of At Home stock (other than through a subdivision or combination of
shares provided for in the preceding clause), or declares a dividend on its
outstanding shares payable in shares of At Home Common Stock or in shares or
securities convertible into shares of At Home Common Stock (each, a "Capital
Change") at any time after the Agreement Date and prior to the Effective Time,
then the At Home Average Price Per Share and the Conversion Number, will each be
proportionally and equitably adjusted.
2.3 Effects of the Merger. At and upon the Effective Time of the Merger:
---------------------
(a) the separate existence of Sub will cease and Sub will be merged with
and into Webshots, and Webshots will be the surviving corporation of the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") pursuant to
the terms of this Agreement, the Agreement of Merger and the Certificate of
Merger;
(b) the Articles of Incorporation of Webshots will continue unchanged
and be the Articles of Incorporation of the Surviving Corporation immediately
after the Effective Time;
(c) the Bylaws of Sub will become the Bylaws of the Surviving
Corporation immediately after the Effective Time;
(d) each share and fractional one-half share of Webshots Common Stock
that is outstanding immediately prior to the Effective Time will be converted as
provided in this Article 2;
(e) each share of Sub Common Stock that is outstanding immediately prior
to the Effective Time will be converted into one (1) share of Webshots Common
Stock as provided in Section 2.1.1;
(f) the officers of the Surviving Corporation immediately after the
Effective Time will be those individuals who were the officers of Sub
immediately prior to the Effective Time, and each such individual shall,
immediately after the Effective Time, hold the same office or offices of the
Surviving Corporation as the office or offices that such individual held with
Sub immediately prior to the Effective Time;
(g) the members of the Board of Directors of the Surviving Corporation
immediately after the Effective Time will be the members of the Board of
Directors of Sub; and
(h) the Merger will, from and after the Effective Time, have all of the
effects provided by applicable law.
-4-
<PAGE>
2.4 Securities Law Issues. At Home shall issue the shares of At Home Common
---------------------
Stock to be issued to the Webshots Shareholders in the Merger pursuant to
Section 2.1.2 pursuant to an exemption or exemptions from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act") and/or
Regulation D promulgated under the 1933 Act and the exemption from qualification
under Section 25120 of the CCC provided by Section 25100(o) of the CCC. At Home
and Webshots shall comply with all applicable provisions of, and rules under,
the 1933 Act in connection with offering and issuance of shares of At Home
Common Stock in the Merger.
2.5 Tax-Free Reorganization; No Representations. The parties intend to adopt
-------------------------------------------
this Agreement as a tax-free plan of reorganization and to consummate the Merger
in accordance with the provisions of Section 368(a)(1)(A) of the Code by virtue
of the provisions of Section 368(a)(2)(E) of the Code. The parties shall not
take any position on any tax returns or for any federal income tax purposes that
is inconsistent with the treatment of this Agreement as a tax-free plan of
reorganization as described above (except to the extent required to do so by
applicable tax laws pursuant to a determination (as defined in Section 1313 of
the Code) or any state equivalent); however, the parties make no representation
regarding the tax treatment of the Merger, whether the Merger will qualify as a
tax-free plan of reorganization under the Code, or any of the tax consequences
to any Webshots Shareholder of this Agreement, the Merger or any of the other
transactions or agreements contemplated hereby, and Webshots and the Webshots
Shareholders acknowledge that Webshots and the Webshots Shareholders are relying
solely on their own tax advisors in connection with this Agreement, the Merger
and the other transactions contemplated by this Agreement. At Home represents
that as of the date of this Agreement, and as of the Closing Date, (i) it
presently intends to continue Webshots' historic business or to use a
significant portion of Webshots' business assets in a business, (ii) it has no
plan or intention following the Merger to cause Webshots to issue additional
shares of its stock that would result in At Home losing control of Webshots
within the meaning of Section 368(c) of the Code, and (iii) it has no plan or
intention to liquidate Webshots, to merge Webshots with or into another
corporation (other than Sub), to sell or otherwise dispose of the stock of
Webshots, to cause Webshots to sell or otherwise dispose of any substantial
portion of the assets of Webshots other than in the ordinary course of business.
At Home will not, in connection with the Merger, redeem its stock furnished in
exchange for the Webshots Common Stock.
2.6 Further Assurances. If, at any time before or after the Effective Time,
------------------
At Home believes or is advised that any further instruments, deeds, assignments
or assurances are reasonably necessary or desirable to consummate the Merger or
to carry out the purposes and intent of this Agreement at or after the Effective
Time, then At Home, Webshots, the Surviving Corporation and their respective
officers and directors shall execute and deliver all such proper deeds,
assignments, instruments and assurances and do all other things necessary or
desirable to consummate the Merger and to carry out the purposes and intent of
this Agreement, in the name of Webshots or otherwise.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF WEBSHOTS
Webshots represents and warrants to At Home that, except as set forth in the
letter addressed to At Home from Webshots and dated as of the Agreement Date
(including all schedules thereto) which has been delivered by Webshots to At
Home concurrently with the parties'
-5-
<PAGE>
execution of this Agreement (the "Webshots Disclosure Letter"), each of the
representations, warranties and statements contained in the following sections
of this Article 3 is true and correct as of the Agreement Date and will be true
and correct on and as of the Closing Date. For all purposes of this Agreement,
the statements contained in the Webshots Disclosure Letter and its schedules
shall also be deemed to be representations and warranties made and given by
Webshots under Article 3 of this Agreement.
3.1 Organization and Good Standing. Webshots is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California and has continuously been in good standing under the laws of
California at all times since its inception. Webshots has the corporate power
and authority to own, operate and lease its properties and to carry on its
business as now conducted and as proposed to be conducted, and, except as would
not be material, is qualified to transact business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities make such qualification
necessary. Webshots has delivered to At Home and its counsel, Fenwick & West
LLP, true and correct copies of the currently effective Articles of
Incorporation and Bylaws or other charter documents, as applicable, of Webshots
and each of its subsidiaries (if any), each as amended to date. Neither
Webshots nor any of its subsidiaries is in violation of its Articles of
Incorporation, Bylaws or other charter documents.
3.2 Subsidiaries. Webshots does not have any subsidiary or any equity or
------------
ownership interest, whether direct or indirect, in any corporation, partnership,
limited liability company, joint venture or other business entity, including
without limitation, any interest in an entity referred to in due diligence
documents delivered by Webshots to At Home as "Dancing $ LLC." Webshots does
not have any liabilities or obligations of any kind to "Dancing $ LLC."
3.3 Power, Authorization and Validity.
---------------------------------
3.3.1 Power and Authority. Webshots has all requisite corporate power
-------------------
and authority to enter into, execute, deliver, and perform its obligations
under, this Agreement and all Webshots Ancillary Agreements and to consummate
the Merger. The execution, delivery and performance by Webshots of this
Agreement and each of the Webshots Ancillary Agreements have been duly and
validly approved and authorized by Webshots' Board of Directors and Webshots'
shareholders in full compliance with applicable law (including without
limitation the CCC) and Webshots' Articles of Incorporation and Bylaws, each as
amended.
3.3.2 No Consents. No consent, approval, order or authorization of, or
-----------
registration, declaration or filing with, any court, administrative agency,
commission or other governmental authority (each, a "Governmental Authority"),
or any other person or entity, governmental or otherwise (including without
limitation any consent, approval, order, authorization, registration,
declaration or filing pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act")), is necessary or required to be made or
obtained by Webshots to enable Webshots to lawfully execute and deliver, enter
into, and to perform its obligations under, this Agreement and each of the
Webshots Ancillary Agreements, or to consummate the Merger, except for: (a) the
------ ---
filing of the Certificate of Merger with the Delaware Secretary of State as
required under the Delaware General Corporation Law to effect the Merger; and
(b) the filing of the Agreement of Merger with the California Secretary of State
as required under the CCC to effect the Merger.
-6-
<PAGE>
3.3.3 Enforceability. This Agreement and each of the Webshots Ancillary
--------------
Agreements are, or when executed by Webshots and the Webshots Shareholders will
be, valid and binding obligations of Webshots and the Webshots Shareholders,
enforceable against Webshots and the Webshots Shareholders in accordance with
their respective terms, subject to the effect of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors generally and (b) rules of
law and equity governing specific performance, injunctive relief and other
equitable remedies.
3.4 Capitalization of Webshots.
--------------------------
3.4.1 Outstanding Stock. The authorized capital stock of Webshots
-----------------
consists entirely of: (i) One Hundred Thousand (100,000) shares of Common Stock,
no par value, of which a total of One Thousand Five Hundred (1,500) shares are
issued and outstanding as of the Agreement Date. The numbers of issued and
outstanding shares of Webshots Common Stock held by each of the Webshots
Shareholders are set forth in Exhibit A. Except as expressly set forth in
---------
Exhibit A, no shares of Webshots capital stock are issued or outstanding.
- ---------
Webshots holds no treasury shares. Each of the Webshots Shareholders has good
and marketable title to that number of shares of Webshots Common Stock as set
forth beside his/her name on Exhibit A, free and clear of all mortgages, deeds
---------
of trust, security interests, pledges, liens, title retention devices,
collateral assignments, claims, charges, restrictions or other encumbrances of
any kind, except as may be imposed pursuant to the express terms of written
------
agreements, copies of which have been delivered to At Home and its counsel,
Fenwick & West LLP, or as may be imposed by applicable federal or state
securities laws.
As of the Closing Date, there will have been no change in the authorized or
outstanding capital stock of Webshots as represented in the foregoing sentences
of this Section 3.4.1 All issued and outstanding shares of Webshots' Common
Stock have been duly authorized and validly issued, are fully paid and
nonassessable, are not subject to any claim, lien, preemptive right, right of
first refusal, right of first offer or right of rescission, and have been
offered, issued, sold and delivered by Webshots in compliance with all
registration or qualification requirements (or applicable exemptions therefrom)
of all applicable federal and state securities laws. All shares of capital stock
of Auralis (as defined below) that were issued and outstanding at the effective
time of the Auralis Merger (as defined below) had been duly authorized and
validly issued by Auralis, were, as of the time of the Auralis Merger, fully
paid and nonassessable, and had been offered, issued, sold and delivered by
Auralis in compliance with all registration, qualification and other
requirements of all applicable federal and state securities laws(or applicable
exemptions therefrom).
3.4.2 No Options, Warrants or Rights. There are no options, warrants,
------------------------------
convertible securities or other securities, calls, commitments, conversion
privileges, preemptive rights, rights of first refusal, rights of first offer or
other rights or agreements outstanding to purchase or otherwise acquire (whether
directly or indirectly) any shares of Webshots' authorized but unissued capital
stock or any securities convertible into or exchangeable for any shares of
Webshots' capital stock or obligating Webshots to grant, issue, extend, or enter
into any such option, warrant, convertible security or other security, call,
commitment, conversion privilege, preemptive right, right of first refusal,
right of first offer or other right or agreement. To Webshots' knowledge , no
person or entity holds, or has any option, warrant or other right to acquire,
any issued and
-7-
<PAGE>
outstanding shares of the capital stock of Webshots from any holder of shares of
the capital stock of Webshots.
3.4.3 No Voting Arrangements or Registration Rights. There are no
---------------------------------------------
voting agreements, voting trusts, proxies, preemptive rights, rights of first
refusal, rights of first offer or other restrictions (other than normal
restrictions on transfer under applicable federal and state securities laws)
applicable to any of Webshots' outstanding stock or other securities or to the
conversion of any shares of Webshots' capital stock in the Merger pursuant to
any agreement or obligation to which Webshots is a party or, to Webshots'
knowledge, pursuant to any other agreement or obligation. Webshots is not under
any obligation to register under the 1933 Act any of its presently outstanding
shares of stock or other securities or any stock or other securities that may be
subsequently issued.
3.5 No Conflict. Neither the execution and delivery of this Agreement nor
-----------
any of the Webshots Ancillary Agreements by Webshots, nor the consummation of
the Merger or any of the other transactions contemplated hereby or thereby, will
conflict with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of: (i) any provision of the
Articles of Incorporation or Bylaws or other charter documents of Webshots or
any of its subsidiaries (if any) as currently in effect; (ii) any federal,
state, local or foreign judgment, writ, decree, order, statute, rule or
regulation applicable to Webshots or any of its subsidiaries (if any) or any of
their respective material assets or properties; or (iii) any material
instrument, agreement, contract, undertaking, understanding, letter of intent,
memorandum of understanding or commitment (whether verbal or in writing) to
which Webshots or any of its subsidiaries (if any) is a party or by which
Webshots or any of its subsidiaries (if any) or any of their respective assets
or properties are bound. Neither Webshots' entering into this Agreement nor the
consummation of the Merger will give rise to, or trigger the application of, any
rights of any third party that would come into effect upon the effectiveness of
the Merger. The consummation of the Merger by Webshots will not require the
consent, release, waiver or approval of any third party (including without
limitation the consent of any party required to be obtained in order to keep any
agreement or contract between such party and Webshots (or any of its
subsidiaries) in effect following the Merger or to provide that Webshots (and/or
any of its subsidiaries) is not in breach or violation of any such contract or
agreement following the Merger), other than the required approval of Webshots'
shareholders.
3.6 Litigation. There is no action, claim, suit, arbitration, mediation,
----------
proceeding, claim or investigation pending against Webshots or any of its
subsidiaries (or against any officer, director, employee or agent of Webshots or
any of its subsidiaries in their capacity as such or relating to their
employment, services or relationship with Webshots or such subsidiary) before
any court, administrative agency or arbitrator, nor, to Webshots' knowledge, has
any such action, suit, proceeding, arbitration, mediation, claim or
investigation been threatened. There is no judgment, decree, injunction, rule
or order of any governmental entity or agency, court or arbitrator outstanding
against Webshots. There is no basis for any person, firm, corporation or other
entity to assert a claim against Webshots based upon: (a) Webshots' entering
into this Agreement or any Webshots Ancillary Agreement or consummating the
Merger or any of the transactions contemplated by this Agreement or any Webshots
Ancillary Agreement; (b) a claim of ownership of, or options, warrants or other
rights to acquire ownership of, any shares of the capital stock of Webshots or
any rights as a Webshots shareholder, including any option, warrant or
preemptive rights or rights to notice or to vote; except for the normal rights
------
of the Webshots
-8-
<PAGE>
Shareholders with respect to the Webshots Common Stock shown as being owned by
such persons Exhibit A.
---------
3.7 Taxes.
-----
3.7.1 Effective as of February 19, 1995, Webshots' predecessor in
interest ("Auralis," as defined below) made a valid election under Section 1362
of the Code and any corresponding state or local tax provision to be an S
corporation within the meaning of Sections 1361 and 1362 of the Code effective
for all taxable periods beginning on or subsequent to February 19, 1995 which S
corporation status was assumed by Webshots effective upon the Auralis Merger (as
defined below) and which election is still currently in effect. Auralis and the
shareholders of Auralis and Webshots and the Webshots Shareholders have not
taken any action inconsistent with the requirements of Auralis's and then
Webshots' S corporation status, nor have Auralis or any of the shareholders of
Auralis or Webshots or any of the Webshots Shareholders failed to take any
action required in order to maintain Auralis', then Webshots' S Corporation
status, and Auralis' S corporation election has not been terminated (whether
inadvertently or otherwise) since such effective date.
3.7.2 Webshots has timely filed all federal, state, local and foreign
tax returns required to be filed by it, has timely paid all taxes required to be
paid by it for which payment is due, has established an adequate accrual or
reserve for the payment of all taxes payable in respect of the periods
subsequent to the periods covered by its most recent applicable tax returns
(which accrual or reserve as of the Balance Sheet Date (as defined in Section
3.8 below) is fully reflected on the Balance Sheet (as defined in Section 3.8
below) and in any more recent balance sheet of Webshots provided by Webshots to
At Home on or before the Agreement Date), has made all necessary estimated tax
payments, and has no liability for taxes for any periods ending prior to or
including the Closing Date in excess of the amount so paid or accruals or
reserves so established. Webshots is not delinquent in the payment of any tax or
in the filing of any tax returns, and no deficiencies for any tax have been
threatened, claimed, proposed or assessed against Webshots, any of its
subsidiaries, or any of the officers, employees or agents of Webshots or any of
its subsidiaries in their capacity as such. All tax liabilities of the Webshots'
Shareholders or Webshots arising by virtue of Auralis' S Corporation election
(which was assumed by Webshots effective upon the Auralis Merger) (including
without limitation the corporate level built in gain taxes described in Section
1374 of the Code) have been paid or will be paid by the Webshots Shareholders no
matter when assessed. Webshots has not received any notification from the
Internal Revenue Service or any other taxing authority regarding any material
issues that: (a) are currently pending before the Internal Revenue Service or
any other taxing authority (including but not limited to any sales or use tax
authority) regarding Webshots or any of its subsidiaries or (b) have been raised
by the Internal Revenue Service or other taxing authority and not yet finally
resolved. No tax return of Webshots or any of its subsidiaries is under audit by
the Internal Revenue Service or any state or local taxing agency or authority
and any such past audits (if any) have been completed and fully resolved to the
satisfaction of the applicable tax authority conducting such audit and all taxes
and any penalties or interest determined by such audit to be due from Webshots
or any of its subsidiaries have been paid in full to the applicable taxing
authorities. No tax liens are currently in effect against any assets of Webshots
or any of its subsidiaries. There is not in effect any waiver by Webshots of any
statute of limitations with respect to any taxes or agreed to any extension of
time for filing any tax return which has not been filed; and Webshots has not
consented to extend to a date later than the date hereof the period in
-9-
<PAGE>
which any tax may be assessed or collected by any taxing authority. Webshots is
not a "personal holding company" within the meaning of the Code. Webshots has
not filed any election under Section 341(f) of the Code. Section 1374 of the
Code will not apply to any gain realized by Webshots as a result of the Merger.
Webshots and its subsidiaries have each withheld with respect to each of its
employees and independent contractors all taxes, including but not limited to
federal and state income taxes, FICA, Medicare, FUTA and other taxes, required
to be withheld, and paid such withheld amounts to the appropriate tax authority
within the time prescribed by law.
3.7.3 For the purposes of this Section, the terms "tax" and "taxes"
include all federal, state, local and foreign income, alternative or add-on
minimum income, gains, franchise, excise, property, property transfer, sales,
use, employment, license, payroll, ad valorem, documentary, stamp, withholding,
occupation, recording, value added or transfer taxes, governmental charges,
fees, customs duties, levies or assessments (whether payable directly or by
withholding), and, with respect to any such taxes, any estimated tax, interest,
fines and penalties or additions to tax and interest on such fines, penalties
and additions to tax.
3.8 Webshots Financial Statements. Webshots has delivered to At Home as an
-----------------------------
attachment to the Webshots Disclosure Letter the unaudited consolidated balance
sheets of Webshots as of December 31, 1995, December 31, 1996 and December 31,
1997 as set forth in the 1995 U.S. Income Tax Return for Auralis and as of
December 31, 1996, December 31, 1996 and December 31, 1997, respectively, the
unaudited consolidated balance sheets of Webshots as of December 31, 1998 and
June 30, 1999 and Webshots' unaudited consolidated statements of operations for
the year ended December 31, 1998 and the six month period ended June 30, 1999
(all such financial statements of Webshots and any notes thereto are hereinafter
collectively referred to as the "Webshots Financial Statements"). The Webshots
Financial Statements (a) are derived from and in accordance with the books and
records of Webshots, (b) fairly present the financial condition of Webshots at
the dates therein indicated and the results of operations for the periods
therein specified and (c) have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior periods
except for any absence of notes thereto. Webshots has no material debt,
liability or obligation of any nature, whether accrued, absolute, contingent or
otherwise, and whether due or to become due, except for (i) those shown on
Webshots' unaudited balance sheet as of June 30, 1999 included in the Webshots
Financial Statements (the "Balance Sheet"), and (ii) those that may have been
incurred after June 30, 1999 (the "Balance Sheet Date") in the ordinary course
of Webshots' business consistent with its past practices, and that are not
material in amount, either individually or collectively, and are not required to
be set forth in the Balance Sheet under generally accepted accounting
principles. All reserves established by Webshots that are set forth in or
reflected in the Balance Sheet are reasonably adequate. At the Balance Sheet
Date, there were no material loss contingencies (as such term is used in
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which are not adequately provided for
in the Balance Sheet as required by said Statement No. 5.
3.9 Title to Properties. Webshots and each of its subsidiaries have good and
-------------------
marketable title to all of their respective assets and properties (including but
not limited to those shown on the Balance Sheet), free and clear of all
mortgages, deeds of trust, security interests, pledges, liens, title retention
devices, collateral assignments, claims, charges, restrictions or other
encumbrances of any kind (other than liens for current taxes that are not yet
due and payable). All machinery, vehicles, equipment and other tangible
personal property owned or leased by Webshots
-10-
<PAGE>
and its subsidiaries or used in its business are in good condition and repair,
normal wear and tear excepted, and all leases of real or personal property to
which Webshots or any of its subsidiaries is a party are fully effective and
afford Webshots or its subsidiary, as applicable, peaceful and undisturbed
leasehold possession of the real or personal property that is the subject of the
lease. Neither Webshots or any of its subsidiaries is in violation of any
zoning, building, safety or, to Webshots' knowledge, environmental ordinance,
regulation or requirement or other law or regulation applicable to the operation
of its owned or leased properties, nor has Webshots received any notice of
violation of law with which it has not complied. Neither Webshots nor any of its
subsidiaries owns any real property.
3.10 Absence of Certain Changes. Since the Balance Sheet Date, there has not
--------------------------
been with respect to Webshots or any of its subsidiaries any:
(a) Material Adverse Change;
(b) amendment or change in the Articles of Incorporation or Bylaws of
Webshots;
(c) incurrence, creation or assumption by Webshots or any of its
subsidiaries of (i) any mortgage, deed of trust, security interest, pledge,
lien, title retention device, collateral assignment, claim, charge, restriction
or other encumbrance of any kind on any of the assets or properties of Webshots
or any of its subsidiaries; or (ii) any obligation or liability or any
indebtedness for borrowed money;
(d) grant or issuance of any options, warrants or other rights to
acquire from Webshots or any of its subsidiaries, directly or indirectly, or any
offer, issuance or sale by Webshots of any debt or equity securities of Webshots
or any of its subsidiaries;
(e) any acceleration or release of any vesting condition to the right
to exercise any option, warrant or other right to purchase or otherwise acquire
any shares of Webshots' capital stock, or any acceleration or release of any
right to repurchase shares of Webshots' capital stock upon the shareholder's
termination of employment or services with Webshots or any subsidiary of
Webshots or pursuant to any right of first refusal;
(f) payment or discharge by Webshots or any of its subsidiaries of any
security interest, lien, claim, or encumbrance of any kind on any asset or
property of Webshots or any of its subsidiaries, or the payment or discharge of
any liability that was not either shown on the Balance Sheet or incurred in the
ordinary course of Webshots' business after the Balance Sheet Date in an amount
not in excess of $20,000 for any single liability to a particular creditor;
(g) purchase, license, sale, assignment or other disposition or
transfer, or any agreement or other arrangement for the purchase, license, sale,
assignment or other disposition or transfer, of any of the assets, properties or
goodwill of Webshots other than a license of any product or products of Webshots
or any of its subsidiaries made in the ordinary course of Webshots' business;
(h) damage, destruction or loss of any property or asset, whether or
not covered by insurance, having (or likely with the passage of time to have) a
Material Adverse Effect on Webshots;
-11-
<PAGE>
(i) declaration, setting aside or payment of any dividend on, or the
making of any other distribution in respect of, the capital stock of Webshots,
any split, combination or recapitalization of the capital stock of Webshots or
any direct or indirect redemption, purchase or other acquisition of any capital
stock of Webshots or any change in any rights, preferences, privileges or
restrictions of any outstanding security of Webshots;
(j) change or increase in the compensation payable or to become payable
to any of the officers, directors, or employees of Webshots or any of its
subsidiaries, or any bonus or pension, insurance or other benefit payment or
arrangement (including without limitation stock awards, stock option grants,
stock appreciation rights or stock option grants) made to or with any of such
officers, employees or agents except in connection with normal employee salary
or performance reviews or otherwise in the ordinary course of Webshots'
business;
(k) change with respect to the management, supervisory or other key
personnel of Webshots;
(l) obligation or liability incurred by Webshots or any of its
subsidiaries to any of its officers, directors or shareholders, except for
normal and customary compensation and expense allowances payable to officers in
the ordinary course of Webshots' business;
(m) making by Webshots or any of its subsidiaries of any loan, advance
or capital contribution to, or any investment in, any officer, director or
shareholder of Webshots or any firm or business enterprise in which any such
person had a direct or indirect material interest at the time of such loan,
advance, capital contribution or investment;
(n) entering into, amendment of, relinquishment, termination or non-
renewal by Webshots of any contract, lease, transaction, commitment or other
right or obligation other than in the ordinary course of its business or any
written or oral indication or assertion by the other party thereto of any
material problems with Webshots' (or any of its subsidiaries') services or
performance under such contract, lease, transaction, commitment or other right
or obligation or its desire to so amend, relinquish, terminate or not renew any
such contract, lease, transaction, commitment or other right or obligation;
(o) material change in the manner in which Webshots or any of its
subsidiaries extends discounts, credits or warranties to customers or otherwise
deals with its customers;
(p) entering into by Webshots or any of its subsidiaries of any
transaction, contract or agreement that by its terms requires or contemplates a
current and/or future financial commitment, expense (inclusive of overhead
expense) or obligation on the part of Webshots or any of its subsidiaries
involving in excess of $100,000 or that is not entered into in the ordinary
course of Webshots' business, or the conduct of any business or operations other
than in the ordinary course of Webshots' business;
(q) any license, transfer or grant of a right under any Webshots IP
Rights (as defined in Section 3.13 below), other than those licensed,
transferred or granted in the ordinary course of Webshots' business consistent
with its past practices; or
(r) any agreement or arrangement made by Webshots or any of its
subsidiaries to take any action which, if taken prior to the Agreement Date,
would have made any
-12-
<PAGE>
representation or warranty of Webshots set forth in Article 3 of this Agreement
untrue or incorrect as of the date when made.
3.11 Contracts and Commitments/Licenses and Permits. Schedule 3.11 to the
---------------------------------------------- -------------
Webshots Disclosure Letter sets forth a list of each of the following (i)
written or oral contracts, agreements, commitments or other instruments to which
Webshots or any of its subsidiaries is a party or to which Webshots or any of
its subsidiaries or any of their respective assets or properties is bound and
(ii) licenses and permits held by Webshots:
(a) any website hosting, website linking, content or data sharing, data
feed, information exchange, advertising, fee sharing, lead or customer referral,
commerce, co-branding, framing, service, order or transaction processing or
similar agreement relating to any aspect or element of any of the Webshots
Websites or any other website;
(b) any distributor, OEM (Original Equipment Manufacturer), VAR (Value
Added Reseller), sales representative or similar agreement under which any third
party is authorized to sell, sublicense, lease, distribute, market or take
orders for, any product, service or technology of Webshots or any of its
subsidiaries;
(c) any continuing contract for the future purchase, sale, license,
provision or manufacture of products, material, supplies, equipment or services
requiring payment to or from Webshots or any of its subsidiaries in an amount in
excess of $50,000 per annum which is not terminable on ninety (90) or fewer
days' notice without cost or other liability to Webshots;
(d) any contract or commitment in which Webshots or any of its
subsidiaries has granted or received most favored customer pricing provisions or
exclusive marketing or on-line distribution rights relating to any product or
service, group of products or services, market or geographic territory;
(e) any contract providing for the development of any software, content
(including without limitation textual content and visual or graphics content),
technology or intellectual property for (or for the benefit or use of) Webshots
and/or any of its subsidiaries, or providing for the purchase or license of any
software, content (including without limitation textual content and visual or
graphics content), technology or intellectual property to (or for the benefit or
use of) Webshots and/or any of its subsidiaries, which software, content,
technology or intellectual property is in any manner used or incorporated (or is
contemplated by Webshots to be used or incorporated) (i) in connection with any
aspect or element of any of the Webshots Websites; (ii) in any product or
service currently sold, licensed, provided, leased, distributed or marketed by
Webshots or any of its subsidiaries (other than software generally available to
----- ----
the public at a per copy license fee of less than $2,000 per copy);
(f) any joint venture or partnership contract or agreement or other
agreement which has involved, or is reasonably expected to involve, a sharing of
profits, expenses or losses with any other party;
(g) any contract or commitment for or relating to the employment of any
officer, employee or consultant of Webshots or any of its subsidiaries or any
other type of contract or understanding with any officer, employee or consultant
of Webshots or any of its subsidiaries
-13-
<PAGE>
that is not immediately terminable by Webshots or the applicable Webshots
subsidiary without cost or other liability;
(h) any indenture, mortgage, trust deed, promissory note, loan
agreement, security agreement, guarantee or other agreement or commitment for
the borrowing of money, for a line of credit or for a leasing transaction of a
type required to be capitalized in accordance with Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board;
(i) any lease or other agreement under which Webshots or any of its
subsidiaries is lessee of or holds or operates any items of tangible personal
property or real property owned by any third party and under which payments to
such third party exceed $10,000 per annum;
(j) any agreement or arrangement for the sale, licensing or leasing of
any assets, properties, products, services or rights having a value in excess of
$20,000;
(k) any agreement that restricts Webshots or any of its subsidiaries
from engaging in any aspect of its business, from participating or competing in
any line of business or market or that restricts Webshots or any of its
subsidiaries from engaging in any business in any market or geographic area;
(l) any Webshots IP Rights Agreement (as defined in Section 3.13);
(m) any agreement relating to the sale, issuance, grant, exercise,
award, purchase, repurchase or redemption of any shares of capital stock or
other securities of Webshots or any of its subsidiaries or any options, warrants
or other rights to purchase or otherwise acquire any such shares of stock, other
securities or options, warrants or other rights therefor;
(n) consulting or similar agreement under which Webshots or any of its
subsidiaries provides any advice or services to a third party for an annual
compensation to Webshots of $20,000 per year or more;
(o) any contract with or commitment to any labor union;
(p) any contract or arrangement under which Webshots or any of its
subsidiaries has made any commitment to develop any new technology, to deliver
any software currently under development or to enhance or customize any
software;
(q) any other agreement, contract, commitment or instrument that is
material to the business of Webshots or any of its subsidiaries or that involves
a future commitment by Webshots or any of its subsidiaries in excess of $50,000;
and
(r) any Governmental Permit (as defined in Section 3.14.6).
A true and complete copy of each agreement or document required by this
subsections (a) through (q) of this Section to be listed on Schedule 3.11 to the
-------------
Webshots Disclosure Letter (such agreements and documents being hereinafter
collectively referred to as the "Webshots Material Agreements") and a copy of
each Governmental Permit required by
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<PAGE>
subsection (r) of this Section to be listed on Schedule 3.11 to the Webshots
-------------
Disclosure Letter has been delivered to At Home's counsel, Fenwick & West LLP.
3.12 No Default; No Consent Required; No Restrictions. Neither Webshots nor
------------------------------------------------
any of its subsidiaries is in material breach or default under any Webshots
Material Agreement. Neither Webshots nor any of its subsidiaries is a party to
any contract, agreement or arrangement which has had, or could reasonably be
expected to have, a Material Adverse Effect on Webshots. Neither Webshots nor
any of its subsidiaries has any material liability for renegotiation of
government contracts or subcontracts, if any. Except as set forth in Schedule
--------
3.12 to the Webshots Disclosure Letter, no consent or approval of any third
- ----
party is required to ensure that, following the Effective Time, any Webshots
Material Agreement will continue to be in full force and effect without any
breach or violation thereof caused by virtue of the Merger or by any other
transaction called for by this Agreement or any Webshots Ancillary Agreement.
Neither Webshots nor any of its subsidiaries is a party to, and no asset or
property of Webshots or any of its subsidiaries is bound or affected by, any
judgment, injunction, order, decree, contract, covenant or agreement (noncompete
or otherwise) that restricts or prohibits (or purports to restrict or prohibit)
Webshots or any of its subsidiaries from freely engaging in any business now
conducted by any of them or from competing anywhere in the world (including
without limitation any contracts, covenants or agreements restricting the
geographic area in which Webshots or any of its subsidiaries may sell, license,
market, distribute or support any products or technology or provide services, or
restricting the markets, customers or industries that Webshots or any of its
subsidiaries may address in operating their respective businesses), or includes
any grants by Webshots of exclusive licenses. No event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time)
will, or would reasonably be expected to, (a) result in a violation or breach of
any of the provisions of any Webshots Material Agreement, (b) give any third
party (i) the right to declare a default or exercise any remedy under any
Webshots Material Agreement, (ii) the right to a rebate, chargeback, penalty or
change in delivery schedule under any Webshots Material Agreement, (iii) the
right to accelerate the maturity or performance of any obligation of Webshots or
any of its subsidiaries under any Webshots Material Agreement, or (iv) the right
to cancel, terminate or modify any Webshots Material Agreement, except in each
such case for such defaults, acceleration rights, termination rights and other
rights that have not had and would not reasonably be expected to have a Material
Adverse Effect on Webshots. Neither Webshots nor any subsidiary of Webshots has
received any notice or other communication regarding any actual or possible
violation or breach of, or default under, any Webshots Material Agreement.
3.13 Intellectual Property.
---------------------
3.13.1 Webshots and its subsidiaries own, or have the valid right or
license to use, possess, sell or license, all Intellectual Property (as defined
below) necessary or required for the conduct of the business of Webshots and its
subsidiaries as presently conducted and as presently proposed to be conducted,
including without limitation, the operation of each of the Webshots Websites
(such Intellectual Property being hereinafter collectively referred to as the
"Webshots IP Rights"), and such rights to use, possess, sell or license are
sufficient for such conduct of such business. As used herein, the term
"Intellectual Property" means, collectively, all worldwide industrial and
intellectual property rights, including, without limitation, patents, patent
applications, patent rights, trademarks, trademark registrations and
applications therefor, trade dress rights, trade names, service marks, service
mark registrations and applications therefor, Internet domain names, Internet
and World Wide Web URLs or addresses, copyrights, copyright
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<PAGE>
registrations and applications therefor, mask work rights, mask work
registrations and applications therefor, franchises, licenses, inventions, trade
secrets, know-how, customer lists, supplier lists, proprietary processes and
formulae, software source code and object code, algorithms, net lists,
architectures, structures, screen displays, layouts, inventions, development
tools, designs, blueprints, specifications, technical drawings (or similar
information in electronic format) and all documentation and media constituting,
describing or relating to the foregoing, including, without limitation, manuals,
programmers' notes, memoranda and records.
3.13.2 Neither the execution, delivery and performance of this
Agreement, the Agreement of Merger, the Certificate of Merger, or the
consummation of the Merger and the other transactions contemplated hereby and/or
by Webshots Ancillary Agreements will: (a) constitute a material breach of or
default under any instrument, contract, license or other agreement governing any
Webshots IP Right to which Webshots or any of its subsidiaries is a party
(collectively, the "Webshots IP Rights Agreements"); (b) cause the forfeiture or
termination of, or give rise to a right of forfeiture or termination of, any
Webshots IP Right; or (c) materially impair the right of Webshots or the
Surviving Corporation to use, possess, sell or license any Webshots IP Right or
portion thereof. There are no royalties, honoraria, fees or other payments
payable by Webshots or any of its subsidiaries to any third person by reason of
the ownership, use, possession, license, sale, marketing, advertising or
disposition of any Webshots IP Rights by Webshots or any of its subsidiaries.
3.13.3 Neither the manufacture, marketing, license, sale, furnishing or
intended use of any product or service (including without limitation any service
offered to users of any of the Webshots Websites) currently licensed, utilized,
sold, provided or furnished by Webshots or any of its subsidiaries or currently
under development by Webshots or any of its subsidiaries violates any license or
agreement between Webshots and any third party or infringes or misappropriates
any Intellectual Property Right of any other party; and there is no pending or,
to the knowledge of Webshots, threatened, claim or litigation contesting the
validity, ownership or right of Webshots or any of its subsidiaries to use,
possess, sell, market, advertise, license or dispose of any Webshots IP Right
nor, to the knowledge of Webshots, is there any basis for any such claim, nor
has Webshots received any notice asserting that any Webshots IP Right or the
proposed use, sale, license or disposition thereof conflicts or will conflict
with the rights of any other party, nor, to the knowledge of Webshots, is there
any basis for any such assertion.
3.13.4 To Webshots' knowledge, no employee, consultant or independent
contractor of Webshots or any subsidiary of Webshots: (a) is in material
violation of any term or covenant of any employment contract, patent disclosure
agreement, invention assignment agreement, non-disclosure agreement,
noncompetition agreement or any other contract or agreement with any other party
by virtue of such employee's, consultant's, or independent contractor's being
employed by, or performing services for, Webshots or such subsidiary or using
trade secrets or proprietary information of others, or that would be likely to
have a Material Adverse Effect on Webshots; or (b) has developed any technology,
software or other copyrightable, patentable, or otherwise proprietary work for
Webshots or any of its subsidiaries that is subject to any agreement under which
such employee, consultant or independent contractor has assigned or otherwise
granted to any third party any rights (including without limitation Intellectual
Property) in or to such technology, software or other copyrightable, patentable
or otherwise proprietary work or any Intellectual Property related thereto. To
Webshots' knowledge, the employment of any employee of Webshots or any
subsidiary of Webshots or the use by
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Webshots or any subsidiary of Webshots of the services of any consultant or
independent contractor does not subject Webshots or any such subsidiary to any
liability to any third party.
3.13.5 Webshots has taken all necessary and appropriate steps to
protect, preserve and maintain the secrecy and confidentiality of the Webshots
IP Rights and all Webshots' ownership interests and proprietary rights therein.
All officers, employees and consultants of Webshots and its subsidiaries having
access to proprietary information of Webshots or its subsidiaries, its customers
or business partners, have executed and delivered to Webshots an agreement
regarding the protection of such proprietary information and the assignment of
inventions to Webshots; and copies of the form of all such agreements have been
delivered to At Home's counsel. Webshots has secured written assignments from
all consultants, contractors and employees who were involved in, or who
contributed to, the creation or development of any Webshots IP Rights, of the
rights to such contributions that may be owned by such persons or that Webshots
does not already own by operation of law. No current or former employee,
officer, director, consultant or independent contractor of Webshots or of any
subsidiary of Webshots has any right, license, claim or interest whatsoever in
or with respect to any Webshots IP Rights.
3.13.6 Schedule 3.13.6 to the Webshots Disclosure Letter contains a
---------------
complete list of (i) all worldwide registrations of any patents, copyrights,
mask works, trademarks, service marks, Internet domain names or Internet or
World Wide Web URLs or addresses with any governmental or quasi-governmental
authority; (ii) all applications, registrations, filings and other formal
actions made or taken pursuant to federal, state and foreign laws by Webshots to
secure, perfect or protect its interest in Webshots IP Rights, including,
without limitation, all patent applications, copyright applications, and
applications for registration of trademarks and service marks, (iii) all
unregistered copyrights, trademarks and service marks. All patents, and all
registered trademarks, service marks, Internet domain names, Internet or World
Wide Web URLs or addresses and copyrights held by Webshots or its subsidiaries
are valid, enforceable and subsisting.
3.13.7 Schedule 3.13.7 to the Webshots Disclosure Letter contains a
---------------
complete list of (i) all licenses, sublicenses and other agreements as to which
Webshots or any of its subsidiaries is a party and pursuant to which any person
or entity is authorized to use any Webshots IP Rights, and (ii) all licenses,
sublicenses and other agreements as to which Webshots or any of its subsidiaries
is a party and pursuant to which Webshots or any of its subsidiaries is
authorized to use any third party patents, trademarks, Internet domain names,
Internet or World Wide Web URLs or addresses, or copyrights, including but not
limited to software ("Third Party IP Rights") which would be infringed by, or
are incorporated in, or form a part of, any product or service sold, licensed,
distributed, provided or marketed by Webshots or any of its subsidiaries.
3.13.8 Neither Webshots nor any of its subsidiaries, nor any other
party acting on its or their behalf, has disclosed or delivered to any party, or
permitted the disclosure or delivery to any escrow agent or other party, of any
Webshots Source Code (as defined below). No event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time)
will, or would reasonably be expected to, result in the disclosure or delivery
to any party of any Webshots Source Code (as defined below). Schedule 3.13.8 of
---------------
the Webshots Disclosure Letter identifies each contract, agreement and
instrument (whether written or oral) pursuant to which Webshots has deposited,
or is or may be required to deposit, with an escrowholder or any other party,
any Webshots Source Code and further describes whether the execution of this
Agreement
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or the consummation of the Merger or any of the other transactions contemplated
hereby, in and of itself, would reasonably be expected to result in the release
from escrow of any Webshots Source Code. As used in this Section 3.13.8,
"Webshots Source Code" means, collectively, any software source code, or any
material portion or aspect of the software source code, or any material
proprietary information or algorithm contained in or relating to any software
source code, of any Webshots IP Rights or any other product marketed by
Webshots.
3.13.9 To Webshots' knowledge, there is no unauthorized use,
disclosure, infringement or misappropriation of any Webshots IP Rights or any of
its subsidiaries by any third party, including any employee or former employee
of Webshots or any of its subsidiaries. Neither Webshots nor any of its
subsidiaries has agreed to indemnify any person for any infringement of any
Intellectual Property of any third party by any product or service that has been
sold, licensed, leased, supplied, marketed, distributed, or provided by
Webshots.
3.13.10 To Webshots' knowledge, all software developed by Webshots
and licensed by Webshots or any of its subsidiaries to customers and all other
products manufactured, sold, licensed, leased or delivered by Webshots or any of
its subsidiaries to customers and all services provided by Webshots or any of
its subsidiaries to customers on or prior to the Closing Date conform in all
material respects to applicable contractual commitments, express and implied
warranties, product specifications and product documentation and to any
representations provided to customers and neither Webshots nor any of its
subsidiaries has any material liability (and, to Webshots' knowledge, there is
no basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against Webshots or any of its
subsidiaries giving rise to any liability that could have a Material Adverse
Effect on Webshots) for replacement or repair thereof or other damages in
connection therewith in excess of any reserves therefor reflected on the Balance
Sheet.
3.13.11 All of the software developed, owned, licensed and/or
marketed or distributed by Webshots or any of its subsidiaries or utilized by
Webshots in connection with any of the Webshots Websites are Year 2000 Compliant
(as defined below) "Year 2000 Compliant" means, as applied to a software, that:
(i) such software will operate and correctly store, represent and process
(including sort) all dates (including single and multi-century formulas and leap
year calculations), such that errors will not occur when the date being used is
in the Year 2000, or in a year preceding or following the Year 2000; (ii) such
software has been written and tested to support numeric and date transitions
from the twentieth century to the twenty-first century, and back (including
without limitation all calculations, aging, reporting, printing, displays,
reversals, disaster and vital records recoveries) without error, corruption or
impact to current and/or future operations; and (iii) such software will
function without error or interruption related to any date information,
specifically including errors or interruptions from functions which may involve
date information from more than one century.
3.14 Compliance with Laws.
--------------------
3.14.1 Webshots and each of its subsidiaries has complied, and is
now and at the Closing Date will be in compliance with, all applicable federal,
state, local or foreign laws, ordinances, regulations, and rules, and all
orders, writs, injunctions, awards, judgments, and decrees applicable to it or
to its assets, properties, and business (and any regulations promulgated
thereunder) (collectively, "Applicable Law") except for such non-compliance
which, in the
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aggregate, could not reasonably be considered material. Webshots and each of its
subsidiaries hold all valid licenses and other governmental permits that are
necessary and/or legally required to be held by them to conduct their respective
businesses as presently conducted.
3.14.2 Each of the Webshots Websites and all materials distributed or
marketed by Webshots have at all times made all disclosures to users or
customers required by Applicable Law and none of such disclosures made or
contained in any Webshots Website or in any such materials have been materially
inaccurate, misleading or deceptive.
3.14.3 Webshots and each of its subsidiaries has at all times been in
compliance with Applicable Laws relating to the privacy of users of each of the
Webshots Websites.
3.14.4 Webshots and each of its subsidiaries holds all permits,
licenses and approvals from, and has made all filings with, government (and
quasi-governmental) agencies and authorities, that are necessary for Webshots to
conduct its present business without any violation of Applicable Law
("Governmental Permits") and all such Governmental Permits are in full force and
effect. Neither Webshots nor any of its subsidiaries has received any notice or
other communication from any Governmental Authority (or quasi-governmental
authority) regarding (a) any actual or possible violation of law or any
Governmental Permit or any failure to comply with any term or requirement of any
Governmental Permit, or (b) any actual or possible revocation, withdrawal,
suspension, cancellation, termination or modification of any Governmental
Permit.
3.14.5 Neither Webshots nor any of its subsidiaries, nor any
director, officer, agent or employee of Webshots and/or any of its subsidiaries,
has, for or on behalf of Webshots or any of its subsidiaries, (i) used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, (ii) made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns or violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended, or (iii) made any other unlawful payment.
3.15 Certain Transactions and Agreements. None of the officers, directors,
-----------------------------------
employees or shareholders of Webshots, nor any member of their immediate
families, has any direct or indirect ownership interest in any firm or
corporation that competes with, or does business with, or has any contractual
arrangement with, Webshots (except with respect to any interest in less than one
percent (1%) of the stock of any corporation whose stock is publicly traded).
None of said officers, directors, employees or shareholders or any member of
their immediate families, is a party to, or otherwise directly or indirectly
interested in, any contract or informal arrangement with Webshots, except for
normal compensation for services as an officer, director or employee thereof
that have been disclosed to At Home and except for agreements related to the
purchase of the stock of Webshots by such persons. None of said officers,
directors, employees, shareholders or family members has any interest in any
property, real or personal, tangible or intangible (including but not limited to
any Webshots IP Rights or any other Intellectual Property) that is used in, or
that pertains to, the business of Webshots, except for the normal rights of a
shareholder.
3.16 Employees, ERISA and Other Compliance.
-------------------------------------
3.16.1 Webshots and its subsidiaries are in compliance in all
material respects with all applicable laws, agreements and contracts relating to
employment, employment practices, immigration, wages, hours, and terms and
conditions of employment, including, but not limited to,
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employee compensation matters. A list of all employees, officers and consultants
of Webshots and its subsidiaries and their current title and/or job description
and compensation is set forth on Schedule 3.16.1 to Webshots Disclosure Letter.
---------------
Webshots and its subsidiaries do not have any employment contracts or consulting
agreements currently in effect that are not terminable at will (other than
agreements with the sole purpose of providing for the confidentiality of
proprietary information or assignment of inventions).
3.16.2 Neither Webshots nor any of its subsidiaries (i) now is, nor
has ever been, subject to a union organizing effort, (ii) is subject to any
collective bargaining agreement with respect to any of its employees, (iii) is
subject to any other contract, written or oral, with any trade or labor union,
employees' association or similar organization or (iv) has any current labor
disputes. Webshots and its subsidiaries have good labor relations, and have no
knowledge of any facts indicating that the consummation of the Merger or any of
the other transactions contemplated hereby will have a material adverse effect
on such labor relations, and have no knowledge that any of their key employees
intends to leave their employ. All of the employees of Webshots and its
subsidiaries are legally permitted to be employed by Webshots or its
subsidiaries in the United States of America in their current job capacities.
3.16.3 Neither Webshots nor any of its subsidiaries has any pension
plan which constitutes, or has since the enactment of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") constituted, a "multiemployer
plan" as defined in Section 3(37) of ERISA. No pension plan of Webshots or any
of its subsidiaries is subject to Title IV of ERISA.
3.16.4 (a) Schedule 3.16.4 to the Webshots Disclosure Letter lists
---------------
each employment, severance or other similar contract, arrangement or policy,
each "employee benefit plan" as defined in Section 3(3) of ERISA and each plan
or arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors which is entered into, maintained or
contributed to by Webshots or any of its subsidiaries and covers any employee or
former employee of Webshots or any of its subsidiaries. Such contracts, plans
and arrangements as are described in this Section 3.16.4 are hereinafter
collectively referred to as "Webshots Benefit Arrangements."
(b) Each Webshots Benefit Arrangement has been maintained in
compliance in all material respects with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations that are
applicable to such Webshots Benefit Arrangement, and each such Webshots Benefit
Arrangement that is an "employee pension benefit plan" as defined in Section
3(2) of ERISA which is intended to qualify under Section 401(a) of the Code has
received a favorable determination letter that such plan satisfied the
requirements of the Tax Reform Act of 1986 (a copy of which letter(s) have been
delivered to At Home and its counsel).
(c) Webshots has delivered to At Home or its counsel a
complete and correct copy and description of each Webshots Benefit Arrangement.
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(d) Webshots (and/or its subsidiary, if applicable) has
timely filed and delivered to At Home and its counsel the most recent annual
report (Form 5500) for each Webshots Benefit Arrangement that is an "employee
benefit plan" as defined under ERISA.
(e) Neither Webshots nor any of its subsidiaries has ever
been a participant in any "prohibited transaction", within the meaning of
Section 406 of ERISA with respect to any employee pension benefit plan (as
defined in Section 3(2) of ERISA) which Webshots or any of its subsidiaries
sponsors as employer or in which Webshots or any of its subsidiaries
participates as an employer, which was not otherwise exempt pursuant to Section
408 of ERISA (including any individual exemption granted under Section 408(a) of
ERISA), or which could result in an excise tax under the Code.
(f) All contributions due from Webshots or any of its
subsidiaries with respect to any of Webshots Benefit Arrangements have been made
or have been accrued on Webshots' financial statements (including without
limitation the Webshots Financial Statements), and no further contributions will
be due or will have accrued thereunder as of the Closing Date.
(g) All individuals who, pursuant to the terms of any
Webshots Benefit Arrangement, are entitled to participate in any such Webshots
Benefit Arrangement, are currently participating in such Webshots Benefit
Arrangement or have been offered an opportunity to do so and have declined in
writing.
3.16.5 There has been no amendment to, written interpretation or
announcement (whether or not written) by Webshots relating to, or change in
employee participation or coverage under, any Webshots Benefit Arrangement that
would increase materially the expense of maintaining such Webshots Benefit
Arrangement above the level of the expense incurred in respect thereof for
Webshots' fiscal year ended December 31, 1998.
3.16.6 The group health plans (as defined in Section 4980B(g) of the
Code) that benefit employees of Webshots are in compliance, in all material
respects, with the continuation coverage requirements of Section 4980B of the
Code as such requirements affect Webshots, its subsidiaries and their employees.
As of the Closing Date, there will be no material outstanding, uncorrected
violations under the Consolidation Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), with respect to any of Webshots Benefit Arrangements, covered
employees, or qualified beneficiaries that could result in a Material Adverse
Effect on Webshots, or in a Material Adverse Effect on At Home after the
Effective Time.
3.16.7 No benefit payable or which may become payable by Webshots or
any of its subsidiaries pursuant to any Webshots Benefit Arrangement or as a
result of or arising under this Agreement or the Agreement of Merger will
constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of
the Code) which is subject to the imposition of an excise Tax under Section 4999
of the Code or which would not be deductible by reason of Section 280G of the
Code. Neither Webshots nor any subsidiary of Webshots is a party to any: (a)
agreement with any executive officer or other key employee thereof (i) the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving Webshots or such Webshots
subsidiary in the nature of the Merger or any of the other transactions
contemplated by this Agreement or any Webshots Ancillary Agreement, (ii)
providing any term of employment or compensation guarantee, or (iii) providing
severance benefits or other benefits
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after the termination of employment of such employee regardless of the reason
for such termination of employment; or (b) agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of the Merger or any of
the other transactions contemplated by this Agreement or any Webshots Ancillary
Agreement, or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement or any
Webshots Ancillary Agreement.
3.17 Corporate Documents. Webshots has made available to At Home for
-------------------
examination all documents and information listed in the Webshots Disclosure
Letter or in any schedule thereto or in any other exhibit or schedule called for
by this Agreement which have been requested by At Home's legal counsel,
including, without limitation, the following: (a) copies of Webshots' Articles
of Incorporation and Bylaws as currently in effect; (b) Webshots' Minute Book
containing all records of all proceedings, consents, actions, and meetings of
Webshots' shareholders, board of directors and any committees thereof; (c)
Webshots' stock ledger and journal reflecting all stock issuances and transfers;
(d) all permits, orders, and consents issued by, and filings by Webshots with,
any regulatory agency with respect to Webshots, or any securities of Webshots,
and all applications for such permits, orders, and consents; and (e) all the
Webshots Material Agreements.
3.18 No Brokers. Neither Webshots, any subsidiary of Webshots nor any
----------
affiliate of Webshots or any of its subsidiaries is obligated for the payment of
any fees or expenses of any investment banker, broker, finder or similar party
in connection with the origin, negotiation or execution of this Agreement or in
connection with the Merger or any other transaction contemplated by this
Agreement, and At Home will not incur any liability, either directly or
indirectly, to any such investment banker, broker, finder or similar party as a
result of, this Agreement, the Merger or any act or omission of Webshots, any of
its employees, officers, directors, shareholders, agents, subsidiaries or
affiliates.
3.19 Books and Records.
-----------------
3.19.1 The books, records and accounts of Webshots (a) are in all
material respects true, complete and correct, (b) have been maintained in
accordance with good business practices on a basis consistent with prior years,
(c) are stated in reasonable detail and accurately and fairly reflect the
transactions and dispositions of the assets of Webshots, and (d) accurately and
fairly reflect the basis for the Webshots Financial Statements.
3.19.2 Webshots has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that: (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with generally accepted
accounting principles or any other criteria applicable to such statements, and
(ii) to maintain accountability for assets; and (c) the amount recorded for
assets on the books and records of Webshots is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
3.20 Insurance. During the prior two years, Webshots and its subsidiaries
---------
have maintained, and now maintain, policies of insurance and bonds of the type
and in amounts customarily carried by persons conducting businesses or owning
assets similar in type and size to
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those of Webshots and its subsidiaries, including without limitation all legally
required workers' compensation insurance and errors and omissions, casualty,
fire and general liability insurance. There is no material claim pending under
any of such policies or bonds as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been timely paid and Webshots and
its subsidiaries are otherwise in compliance with the terms of such policies and
bonds. Webshots has no knowledge of any threatened termination of, or material
premium increase with respect to, any of such policies. All policies of
insurance now held by Webshots or any of its subsidiaries are set forth in
Schedule 3.20 to Webshots Disclosure Letter, together with the name of the
- -------------
insurer under each policy, the type of policy, the policy coverage amount and
any applicable deductible.
3.21 Environmental Matters.
---------------------
3.21.1 To Webshots' knowledge, Webshots and its subsidiaries are in
compliance with all applicable Environmental Laws (as defined below), which
compliance includes the possession by Webshots and its subsidiaries of all
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof.
Neither Webshots nor any of its subsidiaries has received any notice or other
communication (in writing or otherwise), whether from a governmental body,
citizens groups, employee or otherwise, that alleges that Webshots or any of its
subsidiaries is not in compliance with any Environmental Law, and there are no
circumstances that may prevent or interfere with the compliance by Webshots or
any of its subsidiaries with any current Environmental Law in the future. To
Webshots' knowledge, no current or prior owner of any property leased or
possessed by Webshots or any of its subsidiaries has received any notice or
other communication (in writing or otherwise), whether from a government body,
citizens group, employee or otherwise, that alleges that such current or prior
owner or Webshots or any of its subsidiaries is not in compliance with any
Environmental Law. All governmental authorizations currently held by Webshots
or any of its subsidiaries pursuant to any Environmental Law (if any) are
identified in Schedule 3.21 of Webshots Disclosure Letter.
-------------
3.21.2 For purposes of this Section 3.21: (i) "Environmental Law"
means any federal, state, local or foreign statute, law regulation or other
legal requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (ii) "Material of Environmental Concern" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is currently regulated by an
Environmental Law or that is otherwise a danger to health, reproduction or the
environment.
3.22 Board Approval. The Board of Directors of Webshots has unanimously
--------------
(i) approved this Agreement and the Merger and all the agreements, transactions
and actions contemplated hereby, (ii) determined that the Merger is in the best
interests of the shareholders of Webshots and is on terms that are fair to such
shareholders and (iii) submitted this Agreement, the Merger, the Merger and the
transactions and agreements contemplated by this Agreement to the vote and
approval of Webshots' shareholders.
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3.23 Shareholder Approval. All of the Webshots Shareholders have
--------------------
unanimously voted or given written consent for approval of this Agreement, the
Merger and the other transactions and agreements contemplated by this Agreement.
3.24 No Existing Discussions. Neither Webshots nor any director, officer,
-----------------------
shareholder, employee or agent of Webshots is engaged, directly or indirectly,
in any discussions or negotiations with any third party relating to any
Alternative Transaction (as defined in Section 5.10).
3.25 Merger of Auralis into Webshots. Auralis, Inc., a formerly existing
-------------------------------
Delaware corporation that is a predecessor of Webshots ("Auralis"), was duly and
validly merged with and into Webshots in a statutory merger that was consummated
in compliance with the applicable laws of the State of Delaware and the State of
California and the corporate charters of Auralis and Webshots, in which Webshots
acquired and succeeded to the assets and properties of Auralis (the "Auralis
Merger").
3.26 Appointment of Initial Director. The incorporator of Auralis, Inc.,
-------------------------------
duly and validly appointed Andrew Laakmann as the initial and sole director of
Auralis on February 3, 1995 in accordance with Delaware law.
3.27 Disclosure. Neither this Agreement, its exhibits and schedules and
----------
the Webshots Disclosure Letter, nor any of the certificates or documents to be
delivered by Webshots to At Home under this Agreement, taken together, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained herein and therein, in light
of the circumstances under which such statements were made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES AND CERTAIN
COVENANTS OF WEBSHOTS SHAREHOLDERS
Each Webshots Shareholder hereby severally represents and warrants to At Home
that, each of the following representations, warranties and statements contained
in the following Sections of this Article 4 are true and correct as to such
Webshots Shareholder as of the Agreement Date and will be true and correct on
and as of the Closing Date.
4.1 Binding Agreement; Authority. This Agreement constitutes such Webshots
----------------------------
Shareholder's valid and legally binding obligation, enforceable in accordance
with its terms except as may be limited by (i) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies. Each Webshots
Shareholder represents that such Webshots Shareholder has all legal power,
authority and capacity to execute, deliver and perform his/her obligations
under, this Agreement.
4.2 Title; No Other Securities. Such Webshots Shareholder has good and
--------------------------
marketable title to that number of shares of Webshots Common Stock as set forth
beside his/her name on Exhibit A free and clear of all mortgages, deeds of
---------
trust, security interests, pledges, liens, title retention devices, collateral
assignments, claims, charges, restrictions or other encumbrances of any kind
(other than encumbrances imposed by the express terms of written agreements
between
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such Webshots Shareholder and Webshots, true and correct copies of which have
been delivered to At Home and its counsel, Fenwick & West LLP). Except as set
forth in the preceding sentence and as provided by law and in Webshots' Articles
of Incorporation and Bylaws with respect to such his/her shares of Webshots
Common Stock described therein, such Webshots Shareholder has no interest in, or
right of any kind to, any securities of Webshots or Auralis, including without
limitation any options, warrants, convertible securities or other securities,
calls, commitments, conversion privileges, preemptive rights, rights of first
refusal, rights of first offer or other rights or agreements outstanding to
purchase or otherwise acquire (whether directly or indirectly) any shares of
Webshots' capital stock or any securities convertible into or exchangeable for
any shares of Webshots' capital stock or obligating Webshots to grant, issue,
extend, or enter into any such option, warrant, convertible security or other
security, call, commitment, conversion privilege, preemptive right, right of
first refusal, right of first offer or other right or agreement.
4.3 Purchase for Own Account. The shares of At Home Common Stock to be
------------------------
issued to such Webshots Shareholder hereunder will be acquired for investment
for such Webshots Shareholder's own account, not as a nominee or agent, and not
with a view to the public resale or distribution thereof within the meaning of
the 1933 Act, and such Webshots Shareholder has no present intention of selling,
granting any participation in, or otherwise distributing the same.
4.4 Disclosure of Information. Such Webshots Shareholder has received or
-------------------------
has had full access to all the information he/she considers necessary or
appropriate to make an informed investment decision with respect to the shares
of At Home Common Stock to be issued to such Webshots Shareholder under this
Agreement. Such Webshots Shareholder further has had an opportunity to ask
questions and receive answers from At Home regarding the terms and conditions of
the offering of such shares of At Home Common Stock and to obtain additional
information (to the extent At Home possessed such information or could acquire
it without unreasonable effort or expense) necessary to verify any information
furnished to such Webshots Shareholder or to which such Webshots Shareholder had
access. The foregoing, however, does not in any way limit or modify the
representations and warranties made by At Home in Article 5.
4.5 Investment Experience. Such Webshots Shareholder understands that the
---------------------
purchase of the shares of At Home Common Stock pursuant to this Agreement
involves substantial risk. Such Webshots Shareholder can bear the economic risk
of such Webshots Shareholder's investment in the shares of At Home Common Stock
and has such knowledge and experience in financial or business matters that such
Webshots Shareholder is capable of evaluating the merits and risks of this
investment in the shares of At Home Common Stock and protecting its own
interests in connection with this investment.
4.6 Restricted Securities. Such Webshots Shareholder understands that the
---------------------
shares of At Home Common Stock are characterized as "restricted securities"
under the 1933 Act inasmuch as they are being acquired from At Home in a
transaction not involving a public offering and that under the 1933 Act and
applicable regulations thereunder such securities may be resold without
registration under the 1933 Act only in certain limited circumstances. In this
connection, such Webshots Shareholder represents that he/she is familiar with
Rule 144 of the SEC, as presently in effect, and understands the resale
limitations imposed thereby and by the 1933 Act. Such Webshots Shareholder
understands that, except as set forth in Article 13, At Home is under no
obligation to register any of the securities sold hereunder.
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4.7 Further Limitations on Disposition. Without in any way limiting the
----------------------------------
representations set forth above, such Webshots Shareholder further agrees not to
make any disposition of all or any portion of the shares of At Home Common Stock
issued to him/her in the Merger unless and until:
(a) there is then in effect a registration statement under the 1933
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) such Webshots Shareholder shall have notified At Home of the
proposed disposition and shall have furnished At Home with a statement of
the circumstances surrounding the proposed disposition, and, at the expense
of such Webshots Shareholder or his/her transferee, with an opinion of
counsel, reasonably satisfactory to At Home, that such disposition will not
require registration of such securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required: (i) for any
transfer of any shares of At Home Common Stock issued in the Merger in
compliance with SEC Rule 144 or Rule 144A, or (ii) for the transfer of such
shares by gift, will or intestate succession by any Webshots Shareholder to his
or her spouse or lineal descendants or ancestors or any trust for any of the
foregoing (each a "Permitted Transferee"); provided that the Permitted
--------
Transferee agrees in writing to be subject to the terms of this Section 4 to the
same extent as if the transferee were an original Webshots Shareholder
hereunder.
4.8 Legends. It is understood that the certificates evidencing the shares
-------
of At Home Common Stock issued in the Merger will bear the legends set forth
below:
The securities represented hereby have not been registered under
the Securities Act of 1933, as amended (the "Act"), or under the
securities laws of certain states. These securities are subject to
restrictions on transferability and resale and may not be transferred
or resold except as permitted under the Act and the applicable state
securities laws, pursuant to registration or exemption therefrom.
investors should be aware that they may be required to bear the
financial risks of this investment for an indefinite period of time.
The issuer of these securities may require an opinion of counsel in
form and substance satisfactory to the issuer to the effect that any
proposed transfer or resale is in compliance with the Act and any
applicable state securities laws.
The legend set forth above shall be removed by At Home from any certificate
evidencing the At Home Common Stock upon receipt by At Home of an opinion by its
counsel, that a registration statement under the 1933 Act is at that time in
effect with respect to the legended security or upon delivery to At Home of an
opinion by its counsel, or counsel reasonably satisfactory to At Home, that such
security can be freely transferred in a public sale without such a registration
statement being in effect.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF AT HOME AND SUB
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At Home and Sub hereby represent and warrant to Webshots that, except as
set forth in the letter addressed to Webshots from At Home and dated as of the
Agreement Date which has been delivered by At Home to Webshots concurrently
herewith (the "At Home Disclosure Letter"), each of the following
representations, warranties and statements contained in the following Sections
of this Article 5 are true and correct as of the Agreement Date and will be true
and correct on and as of the Closing Date. For all purposes of this Agreement
(including without limitation Article 9), the statements contained in the At
Home Disclosure Letter and its schedules shall also be deemed to be
representations and warranties made and given by At Home and Sub under Article 5
of this Agreement).
5.1 Organization and Good Standing. At Home is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power and authority to own, operate and lease
its properties and to carry on its business as now conducted and as proposed to
be conducted. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has the corporate power
and authority to own, operate and lease its properties and to carry on its
business. At Home owns all of the issued and outstanding stock of Sub.
5.2 Power, Authorization and Validity.
---------------------------------
5.2.1 Power and Authority. At Home has all requisite corporate power
-------------------
and authority to enter into, execute, deliver and perform its obligations under,
this Agreement and all the At Home Ancillary Agreements. The execution, delivery
and performance of this Agreement and each of the At Home Ancillary Agreements
by At Home will, as of the time of the Closing (as defined below) have been duly
and validly approved and authorized by At Home's Board of Directors in
compliance with applicable law (including without limitation the Delaware
General Corporation Law) and At Home's Certificate of Incorporation and Bylaws,
each as amended. Sub has all requisite corporate power, capacity and authority
to execute, deliver and perform its obligations under, this Agreement and all
the Sub Ancillary Agreements and to consummate the Merger. The execution,
delivery and performance of this Agreement and each of the Sub Ancillary
Agreements by Sub have been duly and validly approved and authorized by Sub's
Board of Directors and sole stockholder in full compliance with applicable law
(including without limitation the Delaware General Corporation Law) and Sub's
Certificate of Incorporation and bylaws, each as amended.
5.2.2 No Consents. No consent, approval, order or authorization of,
-----------
or registration, declaration or filing with, any court, administrative agency,
commission or other Governmental Authority is necessary or required to be made
or obtained by At Home or Sub to enable At Home and Sub to enter into, and to
perform their respective obligations under, this Agreement, the At Home
Ancillary Agreements or the Sub Ancillary Agreements, respectively, and for Sub
to consummate the Merger, except for: (a) the filing of the Certificate of
------
Merger with the Delaware Secretary of State as required under the Delaware
General Corporation Law to effect the Merger (if any filing thereof is required
by At Home or Sub); (b) the filing of the Agreement of Merger with the
California Secretary of State as required under the CCC to effect the Merger (if
any filing thereof is required by At Home or Sub); (c) the filing by At Home
with the Securities and Exchange Commission ("SEC") or any state securities law
authorities of any notices or filings required in connection with the exemptions
from the registration or qualification requirements of the 1933 Act and/or
applicable state securities laws which At Home relies on in
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issuing shares of At Home Common Stock pursuant to this Agreement; (d) the
filing by At Home of such reports and information with the SEC under the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and
regulations promulgated by the SEC thereunder, as may be required in connection
with this Agreement, the Merger and the other transactions contemplated by this
Agreement; (e) the filing by At Home with the SEC of the Form S-3 registration
statement to be filed by At Home pursuant to this Agreement; (f) such other
filings as may be required by the Nasdaq Stock Market with respect to the Merger
and the other transactions contemplated by this Agreement, and the issuance of
the shares of At Home Common Stock to be issued by At Home in the Merger; and
(g) such other filings, if any, as may be required in order for At Home to
comply with applicable federal and state securities laws; provided, however,
that with respect to any consent, approval, order, authorization, registration,
declaration or filing pursuant to the HSR Act, the foregoing representation
assumes and relies upon the accuracy of the information set forth in the
Webshots Financial Statements (including without limitation the Balance Sheet)
and the information set forth in that certain letter from Andrew Laakmann to At
Home dated October 27, 1999 regarding the fair market value of his assets.
5.2.3 Enforceability. This Agreement and the At Home Ancillary
--------------
Agreements are, or when executed by At Home will be, valid and binding
obligations of At Home, enforceable against At Home in accordance with their
respective terms, subject to the effect of (a) applicable bankruptcy and other
similar laws affecting the rights of creditors generally and (b) rules of law
and equity governing specific performance, injunctive relief and other equitable
remedies. This Agreement and the Sub Ancillary Agreements are, or when executed
by Sub will be, valid and binding obligations of Sub, enforceable against Sub in
accordance with their respective terms, subject to the effect of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally
and (b) rules of law and equity governing specific performance, injunctive
relief and other equitable remedies.
5.3 At Home and Sub Capital Structure.
---------------------------------
(a) The authorized capital stock of At Home consists of 719,719,414
shares of common stock, par value $0.01 per share, of which 683,700,000 shares
have been designated Series A Common Stock (or At Home Common Stock), 30,800,000
shares have been designated Series B Common Stock and 5,219,414 shares have been
designated Series K Common Stock, of which there were 331,563,340 shares of
Series A Common Stock, 30,800,000 shares of Series B Common Stock and 5,219,414
shares of Series K Common Stock issued and outstanding as of June 30, 1999, and
9,650,000 shares of Preferred Stock, par value $0.01 per share, of which no
shares are issued or outstanding as of June 30, 1999. All outstanding shares of
At Home Common Stock are duly authorized, validly issued, fully paid and
nonassessable. As of June 30, 1999: (i) there were options outstanding to
purchase an aggregate of 50,608,261 shares of At Home Common Stock pursuant to
At Home's stock option plans; and (ii) 1,775,542 shares of At Home Common Stock
reserved for future issuance under At Home's 1997 Employee Stock Purchase Plan.
All shares of At Home Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable.
(b) The authorized capital stock of Sub consists of 1,000 shares of
common stock, no par value, all of which, as of the date hereof, are issued and
outstanding and are held by At Home. All of the outstanding shares of Sub's
common stock have been duly authorized and
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validly issued, and are fully paid and nonassessable. Sub was formed for the
purpose of consummating the Merger and has no material assets or liabilities
except as necessary for such purpose.
(c) The At Home Common Stock to be issued in the Merger, when issued
in accordance with the provisions of this Agreement, will be validly issued,
fully paid and nonassessable.
5.4 No Conflict. Neither the execution and delivery of this Agreement nor
-----------
any of the At Home Ancillary Agreements or Sub Ancillary Agreements by At Home
or Sub, nor the consummation of the transactions contemplated hereby or thereby,
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of: (i) any provision of the
Certificate of Incorporation or Bylaws or other charter documents of At Home or
Sub as currently in effect; (ii) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to At Home or Sub or
any of their respective assets or properties; or (iii) any material instrument,
agreement or contract to which At Home or any of its subsidiaries is a party or
by which At Home or any of its subsidiaries or any of their respective assets or
properties are bound.
5.5 SEC Filings.
-----------
(a) At Home has filed all forms, reports and documents required to be
filed by At Home with the SEC since January 1, 1998, and has made available to
Company such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that At Home may
file subsequent to the date hereof) are referred to herein as the "At Home SEC
Reports." As of their respective dates, the At Home SEC Reports (i) were
prepared in accordance with the requirements of the 1933 Act or the 1934 Act, as
the case may be, and the rules and regulations of the SEC thereunder applicable
to such At Home SEC Reports, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, except to the extent corrected prior to the date of
this Agreement by a subsequently filed At Home SEC Report.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the At Home SEC Reports (the "At
Home Financials"), including any At Home SEC Reports filed after the date hereof
until the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 1O-Q, 8-K or any successor form under the Exchange Act) and (iii) fairly
presented in all material respects the consolidated financial position of At
Home and its subsidiaries as at the respective dates thereof and the
consolidated results of At Home's operations and cash flows for the periods
indicated, except that the unaudited interim financial statements may not
contain footnotes and were or are subject to normal and recurring year-end
adjustments. The audited balance sheet of At Home contained in
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<PAGE>
At Home SEC Reports as of June 30, 1999 is hereinafter referred to as the "At
Home Balance Sheet." Except as disclosed in the At Home Financials, since June
30, 1999 neither At Home nor any of its subsidiaries has any liabilities
required under GAAP to be set forth on a balance sheet (absolute, accrued,
contingent or otherwise) which are, individually or in the aggregate, material
to the business, results of operations or financial condition of At Home and its
subsidiaries taken as a whole, except for (i) liabilities incurred since the
date of the At Home Balance Sheet in the ordinary course of business consistent
with past practices; (ii) liabilities incurred in connection with this Agreement
and (iii) liabilities which do not represent or constitute a Material Adverse
Change since June 30, 1999 with respect to At Home and its affiliates, taken as
a whole.
5.6 Disclosure. At Home has made available to Webshots an investor
----------
disclosure package consisting of At Home's annual report on Form 10-K for its
fiscal year ending December 31, 1998 (the "Fiscal Year End"), all Forms 10-Q and
8-K filed by At Home with the SEC since the Fiscal Year End and up to the date
of this Agreement and all proxy materials distributed to At Home's stockholders
since the Fiscal Year End and up to the date of this Agreement (the "At Home
Disclosure Package").
ARTICLE 6
PRE-CLOSING COVENANTS OF WEBSHOTS
During the time period from the Agreement Date until the earlier to occur
of (i) the Effective Time or (ii) the termination of this Agreement in
accordance with the provisions of Article 11, Webshots covenants and agrees with
At Home as follows:
6.1 Advice of Changes. Webshots will promptly advise At Home in writing
-----------------
(a) of any event occurring subsequent to the Agreement Date that would render
any representation or warranty of Webshots contained in Article 3 of this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate and (b) of any Material Adverse Change in Webshots.
6.2 Maintenance of Business. Webshots will carry on and preserve its
-----------------------
business and its relationships with customers, advertisers, suppliers,
employees, users of the Webshots Websites and others with whom Webshots has
contractual relations in substantially the same manner as it has prior to the
Agreement Date. If Webshots becomes aware of a material deterioration in the
relationship with any key customer, key advertiser, key supplier or key
employee, it will promptly bring such information to the attention of At Home in
writing and, if requested by At Home, will exert reasonable commercial efforts
to promptly restore the relationship.
6.3 Conduct of Business. Webshots will continue to conduct its business
-------------------
and maintain its business relationships in the ordinary and usual course and
neither Webshots nor any of its subsidiaries will, without the prior written
consent and approval of At Home:
(a) borrow or lend any money, other than reasonable and normal
advances to employees for bona fide travel expenses that are incurred in the
ordinary course of Webshots' business consistent with Webshots' past practices;
(b) enter into any material transaction or agreement or take any
other action not in the ordinary course of Webshots' business;
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<PAGE>
(c) grant any lien, security interest, or other encumbrance on any of its
assets;
(d) sell, transfer or dispose of any of its assets except in the ordinary
course of Webshots' business consistent with Webshots' past practices;
(e) enter into any material lease or contract for the purchase or sale of
any property, whether real or personal, tangible or intangible;
(f) pay any bonus, increased salary or special remuneration to any
officer, director, employee or consultant (except for normal salary increases
consistent with Webshots' past practices and not to exceed 5% of such officer's,
employee's or consultant's base annual compensation, and except pursuant to
existing arrangements previously disclosed to and approved in writing by At
Home) or enter into any new employment or consulting agreement with any such
person;
(g) change any of its accounting methods;
(h) declare, set aside or pay any cash or stock dividend or other
distribution in respect of its capital stock, redeem, repurchase or otherwise
acquire any of its capital stock or other securities (except for the repurchase
of stock from employees, directors, consultants or contractors of Webshots in
connection with the termination of their services with Webshots at the original
purchase price of such stock, pay or distribute any cash or property to any
shareholder or security holder of Webshots or make any other cash payment to any
shareholder or security holder of Webshots that is unusual, extraordinary, or
not made in the ordinary course of Webshots' business consistent with its past
practices;
(i) amend or terminate any contract, agreement or license to which
Webshots or any of its subsidiaries is a party except those amended or
terminated in the ordinary course of Webshots' business, consistent with its
past practices, and which are not material in amount or effect;
(j) guarantee or act as a surety for any obligation of any third party;
(k) waive or release any material right or claim except in the ordinary
course of Webshots' business, consistent with Webshots' past practice;
(l) issue, sell, create or authorize any shares of its capital stock of
any class or series or any other of its securities, or issue, grant or create
any warrants, obligations, subscriptions, options, convertible securities, or
other commitments to issue shares of its capital stock or any securities that
are potentially exchangeable for, or convertible into, shares of its capital
stock;
(m) subdivide or split or combine or reverse split the outstanding shares
of its capital stock of any class or series or enter into any recapitalization
affecting the number of outstanding shares of its capital stock of any class or
series or affecting any other of its securities;
(n) merge, consolidate or reorganize with, or acquire, or enter into any
other business combination with, any corporation, partnership, limited liability
company or any other
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entity (other than At Home or Sub) or enter into any negotiations, discussions
-----------
or agreement for such purpose;
(o) amend its Articles of Incorporation or Bylaws;
(p) license any of its technology or Intellectual Property, or acquire any
Intellectual Property (or any license thereto) from any third party except for
any such license in the ordinary course of Webshots' business;
(q) materially change any insurance coverage;
(r) agree to any audit assessment by any tax authority or file any federal
or state income or franchise tax return unless copies of such returns have first
been delivered to At Home for its review at a reasonable time prior to filing;
(s) modify or change the exercise or conversion rights or exercise or
purchase prices of any capital stock of Webshots, any Webshots stock options,
warrants or other Webshots securities, or accelerate or otherwise modify (i) the
right to exercise any option, warrant or other right to purchase any capital
stock or other securities of Webshots or (ii) the vesting or release of any
shares of capital stock or other securities of Webshots from any repurchase
options or rights of refusal held by Webshots or any other party or any other
restrictions; or
(t) agree to do any of the things described in the preceding clauses 6.3(a)
through 6.3(s).
6.4 Regulatory Approvals. Webshots will promptly execute and file, or
--------------------
join in the execution and filing, of any application, notification or any other
document that may be necessary in order to obtain the authorization, approval or
consent of any Governmental Authority, whether federal, state, local or foreign,
which may be reasonably required, or which At Home may reasonably request, in
connection with the consummation of the Merger or any other transactions
contemplated by this Agreement or any Webshots Ancillary Agreement. Webshots
will use its best efforts to obtain, and to cooperate with At Home to promptly
obtain, all such authorizations, approvals and consents.
6.5 Necessary Consents. Webshots will use its best efforts to promptly
------------------
obtain such written consents and authorizations of third parties, give notices
to third parties and take such other actions as may be necessary or appropriate
in addition to those set forth in the foregoing Sections of this Article 5 in
order to effect the consummation of the Merger and the other transactions
contemplated by this Agreement, to enable At Home to carry on Webshots' business
immediately after the Effective Time and to keep in effect and avoid the breach,
violation of, termination of, or adverse change to, any agreement or contract to
which Webshots or any of its subsidiaries is a party or is bound or by which any
of their assets is bound.
6.6 Litigation. Webshots will notify At Home in writing promptly after
----------
learning of any claim, action, suit, arbitration, mediation, proceeding or
investigation by or before any court, arbitrator or arbitration panel, board or
governmental agency, initiated by or against it or any of its subsidiaries, or
known by it to be threatened against Webshots or any of its subsidiaries or any
of their officers, directors, employees or shareholders in their capacity as
such.
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6.7 No Other Negotiations. During the time period commencing at the time
---------------------
of the signing of this Agreement and ending on the earlier to occur of (a)
termination of this Agreement in accordance with the provisions of Article 11 or
(b) consummation of the Merger, Webshots will not, and Webshots will not
authorize, encourage or permit any officer, director, employee, shareholder,
affiliate or agent of Webshots or any subsidiary of Webshots or any other person
on Webshots' or their behalf to, directly or indirectly: (i) solicit, initiate,
encourage or induce the making, submission or announcement of, any offer or
proposal from any party concerning any Alternative Transaction (as defined
below) or take any other action that could reasonably be expected to lead to an
Alternative Transaction or a proposal therefor; (ii) consider any inquiry, offer
or proposal received from any party concerning any Alternative Transaction;
(iii) furnish any information regarding Webshots to any person or entity in
connection with or in response to any inquiry, offer or proposal for or
regarding any Alternative Transaction; (iv) participate in any discussions or
negotiations with any person or entity with respect to any Alternative
Transaction; (v) otherwise cooperate with, facilitate or encourage any effort or
attempt by any person or entity (other than At Home) to effect any Alternative
Transaction; or (vi) execute, enter into or become bound by any letter of
intent, agreement, commitment or understanding between Webshots and any third
party that is related to, provides for or concerns any Alternative Transaction.
During the foregoing time period identified in the preceding sentence, Webshots
will promptly notify At Home orally and in writing of any inquiries or proposals
received by Webshots or any of its subsidiaries, directors, officers,
shareholders, employees or agents regarding any Alternative Transaction and
will, identify the party making the inquiry or proposal and the nature and terms
of any inquiry or proposal. As used herein, the term "Alternative Transaction"
means any commitment, agreement or transaction involving or providing for (a)
the possible disposition of all or any substantial portion of Webshots'
business, assets or capital stock, whether by way of merger, consolidation, sale
of assets, sale of stock, stock exchange, tender offer and/or any other form of
business combination or (b) any initial public offering of capital stock or
other securities of Webshots pursuant to a registration statement filed under
the 1933 Act.
6.8 Access to Information. Until the earlier of the Closing or the
---------------------
termination of this Agreement in accordance with the provisions of Article 11,
Webshots will allow At Home and its agents access at reasonable time to the
files, books, records, technology, contracts, personnel and offices of Webshots,
including, without limitation, any and all information relating to Webshots'
taxes, commitments, contracts, leases, licenses, and real, personal and
intangible property and financial condition, subject to the terms of the Non-
Disclosure Agreement between Webshots and At Home dated as of July 28, 1999 (the
"Confidentiality Agreement"). Webshots will cause its accountants to cooperate
with At Home and its agents in making available all financial information
reasonably requested by At Home, including without limitation the right to
examine all working papers pertaining to all financial statements prepared or
audited by such accountants.
6.9 Satisfaction of Conditions Precedent. Webshots will use its diligent
------------------------------------
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Articles 9 and 10, and Webshots will use its diligent efforts
to cause the Merger and the other transactions contemplated by this Agreement to
be consummated in accordance with this Agreement.
6.10 Webshots Employee Plans and Benefit Arrangements. Upon the request
------------------------------------------------
of At Home, Webshots will terminate any Webshots Benefit Plan immediately prior
to the Effective Time.
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ARTICLE 7
AT HOME COVENANTS
During the time period from the Agreement Date until the earlier to occur
of (i) the Effective Time or (ii) the termination of this Agreement in
accordance with Article 11, At Home covenants and agrees as follows:
7.1 Advice of Changes. At Home will promptly advise Webshots in writing
-----------------
of any event occurring subsequent to the date of this Agreement that would
render any representation or warranty of At Home or Sub contained in this
Agreement, if made on or as of the date of such event or the Closing Date, to be
untrue or inaccurate in any material respect.
7.2 Regulatory Approvals. At Home will execute and file, or join in the
--------------------
execution and filing, of any application, notification or other document that
may be necessary in order to obtain the authorization, approval or consent of
any governmental body, federal, state, local or foreign, which may be reasonably
required, in connection with the consummation of the Merger and the other
transactions contemplated by this Agreement and the At Home Ancillary Agreements
and Sub Ancillary Agreements in accordance with the terms of this Agreement. At
Home will use diligent efforts to obtain all such authorizations, approvals and
consents.
7.3 Satisfaction of Conditions Precedent. At Home will use its diligent
------------------------------------
efforts to satisfy or cause to be satisfied all of the conditions precedent
which are set forth in Article 10, and At Home will use its diligent efforts to
cause the transactions contemplated by this Agreement to be consummated in
accordance with the terms of this Agreement.
7.4 Listing of Additional Shares. At Home will use its diligent efforts
----------------------------
to cause the shares of At Home Common Stock issuable upon conversion of Webshots
Common Stock to be issued in the Merger to be approved for listing (subject to
notice of issuance) on the Nasdaq Stock Market.
ARTICLE 8
CLOSING MATTERS
8.1 The Closing. Subject to termination of this Agreement as provided in
-----------
Article 11 below, the closing of the transactions to consummate the Merger (the
"Closing") will take place at the offices of Fenwick & West LLP, Two Palo Alto
Square, Palo Alto, California 94306 at 10:00 a.m., Pacific Standard Time on the
second business day after all of the conditions to Closing set forth in Articles
9 and 10 hereof have been satisfied and/or waived in accordance with this
Agreement, or on such other day as At Home and Webshots may mutually agree on
(the "Closing Date"). Concurrently with the Closing, the Agreement of Merger
will be filed with the California Secretary of State and the Certificate of
Merger will be filed with the Delaware Secretary of State.
8.2 Exchange of Certificates.
------------------------
8.2.1 At the Closing, each holder of shares of Webshots Common Stock
will surrender the certificate(s) for such shares (each an "Webshots
Certificate"), duly endorsed to At Home for cancellation as of the Effective
Time. Promptly after the Effective Time and receipt of such Webshots
Certificates: (a) At Home or its transfer agent will issue to each tendering
holder of a Webshots Certificate a certificate (a "Tendering Webshots Holder")
for the number of shares
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of At Home Common Stock to which such holder is entitled pursuant to Section
2.1.2, subject to any escrow arrangements in effect prior to the Merger; and (b)
At Home or its transfer agent will pay by check to each Tendering Webshots
Holder cash in the amounts payable to such holder in accordance with the
provisions of Sections 2.1.3.
8.2.2 No dividends or distributions payable to holders of record of
At Home Common Stock after the Effective Time will be paid to the holder of any
unsurrendered Webshots Certificate unless and until the holder of such
unsurrendered Webshots Certificate surrenders such Webshots Certificate to At
Home as provided above. Subject to the effect, if any, of applicable escheat and
other laws, following surrender of any Webshots Certificate, there will be
delivered to the person entitled thereto, without interest, the amount of any
dividends and distributions theretofore paid with respect to At Home Common
Stock so withheld as of any date subsequent to the Effective Time and prior to
such date of delivery.
8.2.3 After the Effective Time there will be no further registration
of transfers on the stock transfer books of Webshots or its transfer agent of
any shares of capital stock of Webshots that were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Webshots Certificates are
presented for any reason, they will be canceled and exchanged as provided in
this Section 8.2.
8.2.4 Until Webshots Certificates representing shares of Webshots
Common Stock that are outstanding immediately prior to the Effective Time are
surrendered pursuant to Section 8.2.1 above, such Webshots Certificates will be
deemed, for all purposes, to evidence ownership of the number of shares of At
Home Common Stock into which such shares of Webshots Common Stock will have been
converted pursuant to Section 2.1.2.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF WEBSHOTS
Webshots' obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Webshots, but only in a writing signed by
Webshots):
9.1 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of At Home and Sub set forth in Article 5 (as qualified by the At
Home Disclosure Letter) (a) that are qualified as to materiality will be true
and correct and (B) that are not qualified as to materiality shall be true and
correct in all material respects, in each case on and as of the Closing with the
same force and effect as if they had been made at the Closing Date (except for
any such representations or warranties that, by their terms, speak only as of a
specific date or dates, in which case such representations and warranties shall
be true and correct on and as of such specified date or dates), and Webshots
will have received a certificate to such effect executed by an officer of At
Home.
9.2 Covenants. At Home will have performed and complied in all material
---------
respects with all of its covenants contained in Article 7 on or before the
Closing (to the extent that such covenants require performance by At Home on or
before the Closing), and Webshots will have received a certificate to such
effect signed by an officer of At Home.
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9.3 Requisite Approvals. The principal terms of this Agreement, the
-------------------
issuance of shares of At Home Common Stock in the Merger, in accordance with
this Agreement, will have been duly and validly approved and adopted by At
Home's Board of Directors in accordance with applicable law and At Home's
Certificate of Incorporation and Bylaws, each as amended. This Agreement will
have been approved and adopted by Sub's Board of Directors and sole stockholder
in accordance with applicable law and Sub's Certificate of Incorporation and
Bylaws, each as amended.
9.4 Compliance with Law; No Legal Restraints; No Litigation. No
-------------------------------------------------------
litigation or proceeding will be threatened or pending for the purpose or with
the probable effect of enjoining or preventing the consummation of the Merger or
any of the other material transactions contemplated by this Agreement. There
will not be issued or enacted or adopted, or threatened in writing by any
Governmental Authority, any order, decree, temporary, preliminary or permanent
injunction, legislative enactment, statute, regulation, action or proceeding, or
any judgment or ruling by any Governmental Authority that prohibits or renders
illegal or imposes limitations on the Merger or any other material transaction
contemplated by this Agreement.
9.5 Government Consents. There will have been obtained at or prior to the
-------------------
Closing Date such permits or authorizations, and there will have been taken all
such other actions by any regulatory authority having jurisdiction over the
parties and the actions herein proposed to be taken, as may be required to
lawfully consummate the Merger, including but not limited to requirements under
applicable federal and state securities laws.
9.6 Opinion of At Home's Counsel. Webshots will have received from
----------------------------
Fenwick & West LLP, counsel to At Home, a favorable opinion regarding the
matters set forth in Exhibit C.
---------
9.7 Nasdaq Listing. The shares of At Home Common Stock that are issuable
--------------
upon the conversion of outstanding shares of Webshots Common Stock shall be
authorized for listing on the Nasdaq Stock Market (subject to notice of
issuance).
9.8 Shareholder Agreements. At Home shall have executed and delivered to
----------------------
each of Andrew Laakmann, Danna Stuven, Nicholas Wilder and Alexis Rocherolle a
Shareholder's Agreement in the form attached as Exhibit G.
---------
9.9 At Home Board Approval. The execution, delivery and performance of
----------------------
this Agreement and each of the At Home Ancillary Agreements by At Home shall be
been duly and validly approved and authorized by At Home's Board of Directors in
compliance with applicable law (the "At Home Board Approval") and Webshots will
have received a certificate to such effect executed by an officer of At Home. In
the event that At Home has not obtained the At Home Board Approval by 12:00 p.m.
(P.S.T.) on Monday, November 1, 1999, Webshots shall have the right to terminate
this Agreement whereupon At Home shall within three (3) business days pay One
Million Dollars ($1,000,000) to Webshots and such payment shall in no way affect
the prior termination.
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ARTICLE 10
CONDITIONS TO OBLIGATIONS OF AT HOME
The obligations of At Home hereunder are subject to the fulfillment or
satisfaction on, and as of the Closing, of each of the following conditions (any
one or more of which may be waived by At Home, but only in a writing signed by
At Home):
10.1 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of Webshots set forth in Article 3 (as qualified by the Webshots
Disclosure Letter) (a) that are qualified as to materiality will be true and
correct and (B) that are not qualified as to materiality shall be true and
correct in all material respects, in each case on and as of the Closing with the
same force and effect as if they had been made at the Closing Date (except for
any such representations or warranties that, by their terms, speak only as of a
specific date or dates, in which case such representations and warranties shall
be true and correct on and as of such specified date or dates), and At Home will
have received a certificate to such effect executed by Webshots' President or
Chief Executive Officer and by Webshots' Chief Financial Officer. The
representations and warranties of each of the Webshots Shareholders set forth in
Article 4 shall be true and correct.
10.2 Covenants. Webshots will have performed and complied in all material
---------
respects with all of its covenants contained in Article 6 on or before the
Closing, and At Home will have received a certificate to such effect signed by
Webshots' President and by Chief Financial Officer.
10.3 No Material Adverse Change. There will not have been any Material
--------------------------
Adverse Change in Webshots, and At Home will have received a certificate to such
effect signed by Webshots' President or Chief Executive Officer and Webshots'
Chief Financial Officer.
10.4 Compliance with Law; No Legal Restraints; No Litigation. There will
-------------------------------------------------------
not be any outstanding or threatened in writing, or enacted or adopted, any
order, decree, temporary, preliminary or permanent injunction, legislative
enactment, statute, regulation, action or proceeding by any Governmental Agency
that prohibits or renders illegal or imposes limitations on: (i) the Merger or
any other material transaction contemplated by this Agreement or any Webshots
Ancillary Agreement; or (ii) At Home's right (or the right of any At Home
subsidiary) to own, retain, use or operate any of its products, properties or
assets (including but not limited to properties or assets of Webshots) on or
after consummation of the Merger or seeking a disposition or divestiture of any
such properties or assets. No litigation or proceeding will be threatened or
pending for the purpose or with the probable effect of enjoining or preventing
the consummation of any of the transactions contemplated by this Agreement, or
which could be reasonably expected to have a Material Adverse Effect on
Webshots.
10.5 Government Consents. There will have been obtained at or prior to
-------------------
the Closing Date such permits or authorizations, and there will have been taken
all such other actions, as may be required to consummate the Merger by any
governmental or regulatory authority having jurisdiction over the parties and
the actions herein proposed to be taken.
10.6 Opinion of Webshots' Counsel. At Home will have received from
----------------------------
Solomon Ward Seidenwurm & Smith, LLP, counsel to Webshots, a favorable opinion
substantially in the form of Exhibit D.
---------
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10.7 Consents. At Home will have received duly executed copies of all
--------
material third-party consents, approvals, assignments, waivers, authorizations
or other certificates (including without limitation those set forth in Schedule
3.12 to the Webshots Disclosure Letter) contemplated by this Agreement or the
Webshots Disclosure Letter or reasonably deemed necessary by At Home's legal
counsel to provide for the continuation in full force and effect of any and all
material contracts, agreements and leases of Webshots and its subsidiaries after
the Merger and the preservation of Webshots' IP Rights and other assets and
properties after the Merger and for At Home to consummate the Merger and the
other transactions contemplated by this Agreement, the At Home Ancillary
Agreements and the Webshots Ancillary Agreements in form and substance
reasonably satisfactory to At Home.
10.8 Requisite Approvals. This Agreement, the Merger and the Webshots
-------------------
Ancillary Agreements will have been duly and validly approved and adopted, as
required by applicable law and Webshots' Articles of Incorporation and Bylaws,
by (a) Webshots' Board of Directors, (b) the valid and affirmative vote of 100%
of the outstanding shares of Webshots Common Stock.
10.9 Exemptions Available. At Home: (a) must be reasonably satisfied
--------------------
that there are not more than thirty-five (35) Webshots Shareholders who are not
"accredited investors" within the meaning of Regulation D promulgated under the
1933 Act; and (b) must be reasonably satisfied that the issuance of shares of At
Home Common Stock pursuant to this Agreement is exempt from the registration
requirements of the 1933 Act by virtue of the exemptions provided by Section
4(2) of the 1933 Act and/or Regulation D under the 1933 Act and any exemptions
from the registration and/or qualification requirements of all applicable state
"blue sky" securities laws.
10.10 Continued Employment of Certain Personnel. Each of Andrew Laakmann,
-----------------------------------------
Danna Stuven, Nicholas Wilder and Alexis Rocherolle, who are currently employees
of Webshots (a) shall have continued to be employed as full-time employees of
Webshots at all times from the Agreement Date through the Effective Time and (b)
shall have executed and delivered to At Home an Employment Agreement and a Non-
Competition Agreement in the forms attached as Exhibit E and Exhibit F,
--------- ---------
respectively.
10.11 Resignation of Directors. The directors of Webshots in office
------------------------
immediately prior to the Effective Time of the Merger will have resigned as
directors of the Surviving Corporation in writing effective as of the Effective
Time.
10.12 At Home Board Approval. At Home shall have obtained the At Home
----------------------
Board Approval.
10.13 Shareholder Agreements. Each of Andrew Laakmann, Danna Stuven,
----------------------
Nicholas Wilder and Alexis Rocherolle shall have executed and delivered to At
Home a Shareholder's Agreement in the form attached as Exhibit G.
---------
ARTICLE 11
TERMINATION OF AGREEMENT
11.1 Termination by Mutual Consent. This Agreement may be terminated at
-----------------------------
any time prior to the Effective Time by the mutual written consent of At Home
and Webshots.
11.2 Unilateral Termination.
----------------------
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11.2.1 Either At Home or Webshots, by giving written notice to the
other, may terminate this Agreement if a court of competent jurisdiction or
other Governmental Authority shall have issued a nonappealable final order,
decree or ruling or taken any other action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger.
11.2.2 Either At Home or Webshots, by giving written notice to the
other, may terminate this Agreement if the Merger shall not have been
consummated by midnight Pacific time on the Termination Date; provided, however,
-------- -------
that the right to terminate this Agreement pursuant to this Section 11.2.2 shall
not be available to any party whose failure to perform in any material respect
any of its obligations or covenants under this Agreement results in the failure
of any condition set forth in Article 9 or Article 10 or if the failure of such
condition results from facts or circumstances that constitute a material breach
of a representation or warranty or covenant made under this Agreement by such
party, if the other party has performed in all material respects its obligations
under this Agreement and if the representations and warranties of such other
party to this Agreement are true and correct in all material respects as of the
Termination Date.
11.2.3 Either At Home or Webshots may terminate this Agreement at any
time prior to the Closing if the other has committed (or, in the case of a
termination by Webshots, Sub has committed) a material breach of (a) any of its
representations and warranties under Article 3 or Article 5 of this Agreement,
as applicable; or (b) any of its covenants under Article 4 or Article 7 of this
Agreement, as applicable, or if any of the Webshots Shareholders has materially
breached any of his/her representations or warranties under Article 4 and, in
any such case, the breaching party has not cured such material breach within ten
(10) days after the party seeking to terminate this Agreement has given the
other party written notice of the material breach and its intention to terminate
this Agreement pursuant to this Section 11.2.3.
11.2.4 Webshots may terminate this Agreement if At Home has not
obtained the At Home Board Approval by the deadline established in Section 9.9
above.
11.3 No Liability for Termination. Termination of this Agreement by a
----------------------------
party (the "Terminating Party") in accordance with the provisions of this
Section 11 will not give rise to any obligation or liability on the part of the
Terminating Party on account of such termination; provided, however, that
-------- -------
nothing herein shall relieve a party from liability for a willful breach of this
Agreement.
ARTICLE 12
SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION
AND REMEDIES, CONTINUING COVENANTS
12.1 Survival of Representations. All representations, warranties and
---------------------------
covenants of Webshots and each Webshots Shareholder contained in this Agreement
will remain operative and in full force and effect, regardless of any
investigation made by or on behalf of At Home, until that date (the "Release
Date") which is the earlier of (i) the termination of this Agreement or (ii) the
first anniversary of the Effective Time; provided, however, that notwithstanding
-------- -------
the foregoing, At Home may seek recovery of Special Damages (as defined below)
(other than Special Damages arising from a failure of the representations and
- ------
warranties of Webshots set forth in Section 3.13, which representations and
warranties remain operative and in full force and effect until the Release Date)
and recovery of Damages arising from a Withholding Failure (as defined below) at
any time
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<PAGE>
prior to the expiration of the applicable statute of limitations (as such
statute of limitations may be extended or its expiration otherwise stayed by any
agreement (including without limitation any agreement between At Home or the
Surviving Corporation and any Governmental Authority relating to taxes)) for
bringing the Claim (as defined below), which seeks recovery of such Special
Damages or for such Withholding Failure.
12.2 Agreement to Indemnify. The Webshots Shareholders will severally,
----------------------
and not jointly, on a pro rata basis based on their respective percentage
ownership interests in the Webshots Common Stock set forth beside their names on
Exhibit A, indemnify and hold harmless At Home and the Surviving Corporation and
- ---------
their respective officers, directors, agents, stockholders and employees, and
each person, if any, who controls or may control At Home or the Surviving
Corporation within the meaning of the 1933 Act or the 1934 Act (each hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against any and all claims, demands, suits,
actions, causes of actions, losses, costs, damages, liabilities and expenses
including, without limitation, reasonable attorneys' fees, other professionals'
and experts' reasonable fees and court or arbitration costs (hereinafter
collectively referred to as "Damages") directly or indirectly incurred,
resulting or and arising out of: (a) any inaccuracy, misrepresentation, breach
of, or default in, any of the representations, warranties or covenants given or
made by Webshots in this Agreement or in the Webshots Disclosure Letter or in
any certificate delivered by or on behalf of Webshots or an officer of Webshots
pursuant hereto (if such inaccuracy, misrepresentation, breach or default
existed at the Closing Date); (b) any Excess Transaction Expenses (as defined in
Section 14.7) or (c) any failure of Webshots, with respect to stock-based
consideration delivered to any of the Webshots Shareholders in exchange for
services rendered, to have withheld and deposited, or otherwise paid, to the
appropriate tax authorities in calendar year 1999, all taxes (including but not
limited to federal and state income taxes, FICA, Medicare, FUTA and other taxes)
required to be withheld and deposited, or otherwise paid, in 1999 (a
"Withholding Failure"). Each Webshots Shareholder will indemnify and hold
harmless each of the Indemnified Persons from and against any and all Damages
directly or indirectly incurred, resulting or arising out of (i) any inaccuracy,
misrepresentation, breach of, or default in, any of the representations,
warranties or covenants given or made by such Webshots Shareholder in Article 4
(if such inaccuracy, misrepresentation, breach or default existed at the Closing
Date) or (ii) any breach of any covenant of such Webshots Shareholder set forth
in Section 14.2. Except with respect to claims arising from Special Damages (as
defined below) and claims arising from a Withholding Failure, which may be
raised after the Release Date, any claim of indemnity made by an Indemnified
Person under this Section 12.2 must be raised in a writing delivered to the
Representative (as defined below) by no later than the Release Date, and, if
raised by such date, such claim shall survive the Release Date until final
resolution thereof.
12.3 Limitation.
----------
(a) Basic Cap On Indemnity Obligation. Except with respect to
---------------------------------
claims for indemnification for Special Damages (as defined below) or for a
Withholding Failure, in no event will the maximum aggregate liability of any
Webshots Shareholder exceed the dollar amount that results from multiplying (a)
the At Home Average Price Per Share by (b) 50% of the total number of shares of
At Home Common Stock issuable at the Effective Time to such Webshots Shareholder
pursuant to Section 2. In seeking indemnification under Section 12.2, the
Indemnified Persons will exercise their remedies first against any shares of At
Home Common
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Stock held of record by such Webshots Shareholder that may be held in escrow by
At Home (or the Surviving Corporation) pursuant to any employment, option,
restricted stock purchase, vesting or other agreement between such Webshots
Shareholder and Webshots, the Surviving Corporation or At Home ("Escrow") and
the value of each share of At Home Common Stock shall, for such purposes and for
purposes of determining the number of shares that may continue to be held in an
Escrow by the Surviving Corporation or At Home as provided in subparagraph (b)
below, be deemed to be equal to the At Home Average Price Per Share, regardless
of its actual fair market value as of the time that a claim for indemnification
may be made against such share. Only to the extent that a claim for
indemnification exceeds such deemed value of any of such Webshots Shareholder's
shares of At Home Common Stock then held in an Escrow by At Home (or the
Surviving Corporation) may At Home seek recovery on a claim for indemnification
against any other assets of such Webshots Shareholder. Each Webshots Shareholder
agrees that claims for indemnification against him/her under this Article 12 may
be satisfied by the forfeiture of his/her shares of At Home Common Stock held in
an Escrow as provided for in this Section 12.3 and that no Indemnified Person
shall have any obligation to exercise its remedies against any other assets of
such Webshots Shareholder prior to exercising them against such shares of At
Home Common Stock. In the event of a Capital Change after the Effective Time,
the At Home Average Price Per Share will, for purposes of this Section 12.3 and
Section 12.8(viii), be proportionally and equitably adjusted.
(b) Continuing Escrow. Notwithstanding any terms to the contrary in any
-----------------
other agreement between an Webshots Shareholder and Webshots, the Surviving
Corporation and At Home shall have the absolute right to continue to hold in any
Escrow beyond the time such shares would otherwise be required to be released
pursuant to such agreement, that number of shares of At Home Common Stock of an
Webshots Shareholder that is sufficient to satisfy 120% of such Webshots
Shareholder's pro rata share (as provided for in Section 12.2) of the full
amount of any Damages claimed in each Notice of Claim (as defined below)
delivered pursuant to this Article 12 for so long as the full amount of such
Webshots Shareholder's pro rata share of the Damages set forth in each such
Notice of Claim has not yet been recovered by At Home pursuant to a Settlement
Agreement (as defined below) relating thereto between At Home and the
Representative (as defined below) or pursuant to a Final Award (as defined
below); provided, however, that the foregoing right to continue to hold such
-------- -------
shares in an Escrow shall not apply to claims for Damages to the extent that (i)
such claims are subsequently released by At Home in a Settlement Agreement, (ii)
any Final Award on such claim for Damages is for an amount that is less than the
full amount of Damages sought or (iii) recovery has subsequently been obtained
against such Webshots Shareholder with respect to such Damages. Notwithstanding
the foregoing, in the event that Damages are sought in a Notice of Claim for a
breach by an Webshots Shareholder of such shareholder's representations and
warranties in Article 4, then the number of shares of At Home Common Stock of
such shareholder that shall continue to be held in an Escrow pursuant to the
foregoing provisions shall be the number that is sufficient to satisfy 120% of
the entire amount of Damages sought.
------
(c) Basket. The indemnification provided for in Section 12.2 shall not
------
apply unless and until the aggregate Damages for which one or more Indemnified
Persons seeks or has sought indemnification hereunder exceeds a cumulative
aggregate of Two Hundred Thousand Dollars ($200,000) (the "Basket"), in which
event Webshots Shareholders shall, subject to the foregoing limitations, be
liable to indemnify the Indemnified Persons for all Damages; provided, however,
-------- -------
that the Basket and the foregoing provisions of this sentence shall not apply to
any
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indemnification claim for Damages for Excess Transaction Expenses or for any
Withholding Failure. As used in this Agreement, "Special Damages" means Damages
resulting from (a) any fraudulent conduct, fraudulent misrepresentation or other
willful misconduct on the part of Webshots or any officer, director, employee or
agent, Webshots Shareholder, or any subsidiary of Webshots, (b) any failure of
such Webshots Shareholder to have good, valid and marketable title to any issued
and outstanding shares of Webshots Common Stock held (or asserted to have been
held) by such Webshots Shareholder, free and clear of all liens, claims and
encumbrances, or to have the full right, capacity and authority to vote such
person's shares of stock of Webshots stock in favor of the Merger and any other
transaction contemplated by this Agreement, (c) any failure of the
representations and warranties of Webshots set forth in Section 3.4, Section
3.7, or Section 3.26, or (d) any failure of the representations and warranties
of Webshots set forth in Section 3.13, except for any such failure arising out
------
of a claim of patent infringement by a third party of which Webshots had no
knowledge prior to the Closing (which claim shall be indemnifiable hereunder,
but shall not constitute Special Damages).
(d) Special Cap On Indemnity Obligation. Except with respect to
-----------------------------------
claims for indemnification for any fraudulent conduct, fraudulent
misrepresentation or other willful misconduct on the part of Webshots or any
officer, director, or shareholder employee, Webshots Shareholder or any
subsidiary of Webshots and claims for indemnification for any failure of the
representations and warranties of Webshots set forth in Section 3.26 (1) in no
event will the maximum aggregate liability of any Webshots Shareholder for
Special Damages or arising from a Withholding Failure exceed the dollar amount
that results from multiplying (a) the At Home Average Price Per Share by (b)
100% of the total number of shares of At Home Common Stock issuable at the
Effective Time to such Webshots Shareholder pursuant to Section 2 and (2) in no
event will the maximum aggregate liability of any Webshots Shareholder for any
combination of Damages that are not Special Damages and Damages that are
--- ---
Special Damages exceed the dollar amount that results from multiplying (a) the
At Home Average Price Per Share by (b) 100% of the total number of shares of At
Home Common Stock issuable at the Effective Time to such Webshots Shareholder
pursuant to Section 2.
12.4 Appointment of Representative. Each of the Webshots Shareholders
-----------------------------
hereby irrevocably designates Andrew Laakmann, or if for any reason Andrew
Laakmann is unable or unwilling to serve as such, Danna Stuven, as the
representative of the Webshots Shareholders (the "Representative") and as the
attorney-in-fact, coupled with an interest, and agent for and on behalf of each
Webshots Shareholder with respect to claims for indemnification under Article 12
and the taking by the Representative of any and all actions and the making of
any decisions required or permitted to be taken by the Representative under this
Agreement, including, without limitation, the exercise of the power to: (a)
authorize delivery to At Home of shares of At Home Common Stock in satisfaction
of indemnity claims by At Home or any other Indemnified Person (as defined
herein) pursuant to Article 12; (b) agree to, negotiate, enter into settlements
and compromises of, demand arbitration of, and comply with orders of courts and
awards of arbitrators with respect to, such claims; (c) arbitrate, resolve,
settle or compromise any claim for indemnity made pursuant to Article 12; and
(d) take all actions necessary in the judgment of the Representative for the
accomplishment of the foregoing. The Representative will have authority and
power to act on behalf of each Webshots Shareholder with respect to the
disposition, settlement or other handling of all claims under Article 12 hereof
and all rights or obligations arising under Article 12. The Webshots
Shareholders will be bound by all actions taken and documents executed by the
Representative in connection with Article 12, and At Home will be
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entitled to rely on any action or decision of the Representative. In performing
the functions specified in this Agreement, the Representative will not be liable
to any Webshots Shareholder in the absence of gross negligence or willful
misconduct on the part of the Representative. Any out-of-pocket costs and
expenses reasonably incurred by the Representative in connection with actions
taken by the Representative pursuant to the terms of Article 12 (including
without limitation the hiring of legal counsel and the incurring of legal fees
and costs) will be paid by the Webshots Shareholders to the Representative pro
rata in proportion to their respective percentage equity interests as reflected
in Exhibit A, except in the case of Claims asserted against individual Webshots
---------
Shareholders, in which case such costs and expenses shall be paid by such
individual Webshots Shareholder.
12.5 Notice of Claim. As used herein, the term "Claim" means a claim for
---------------
indemnification of At Home or any other Indemnified Person for Damages under
Article 12. At Home (and only At Home) may give notice of a Claim under this
Agreement whether for its own Damages or for Damages incurred by any other
Indemnified Person, and At Home will give written notice of a Claim executed by
an officer of At Home (a "Notice of Claim") to the Representative promptly after
At Home becomes aware of the existence of any potential claim by an Indemnified
Person for indemnity from Webshots Shareholders, or any of them, under Article
12, but in any event before the Release Date arising from or relating to:
(i) (a) any inaccuracy, misrepresentation, breach of, or
default in, any of the representations, warranties or covenants given or made by
Webshots or any Webshots Shareholder in this Agreement or in the Webshots
Disclosure Letter, or in any certificate delivered by or on behalf of Webshots
or an officer of Webshots pursuant to any provision of Article 10 (if such
inaccuracy, misrepresentation, breach or default existed at the Closing Date);
(b) the incurring of any Excess Transaction Expenses; or (c) any Withholding
Failure (to the extent such Withholding Failure is not fully cured by each
Reporting Shareholder's (as defined below) compliance with the requirements of
Section 14.2); or
(ii) the assertion, whether orally or in writing, against At
Home or against any other Indemnified Person of a claim, demand, suit, action,
arbitration, investigation, inquiry or proceeding brought by a third party
against such Indemnified Person that is based upon, or includes assertions that
would, if true, constitute (in each such case, a "Third-Party Claim"): (a) any
inaccuracy, misrepresentation, breach of, or default in, any of the
representations, warranties or covenants given or made by Webshots or any
Webshots Shareholder in this Agreement or in the Webshots Disclosure Letter, or
in any certificate delivered by or on behalf of Webshots or an officer of
Webshots pursuant to any provision of Article 10 (if such inaccuracy,
misrepresentation, breach or default existed at the Closing Date); or (b) any
Excess Transaction Expenses.
At Home agrees that it will make Claims only as permitted by Article 12. No
delay on the part of At Home in giving the Representative a Notice of Claim will
relieve the Representative or any Webshots Shareholder from any of its
obligations under Article 12 unless (and then only to the extent) that the
Representative or the Webshots Shareholders are materially prejudiced thereby.
12.6 Defense of Third-Party Claims.
-----------------------------
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(a) At Home shall defend any Third-Party Claim, and the costs and
expenses incurred by At Home in connection with such defense (including but not
limited to reasonable attorneys' fees, other professionals' and experts' fees
and court or arbitration costs) shall be included in the Damages for which At
Home may seek indemnity pursuant to a Claim made by any Indemnified Person
hereunder.
(b) The Representative (1) shall have the right to receive copies of
all pleadings, notices and communications with respect to the Third-Party Claim
to the extent that receipt of such documents by the Representative does not
affect any privilege relating to the Indemnified Person, and (2) may participate
in settlement negotiations with respect to the Third-Party Claim and At Home,
and the Indemnified Person(s) shall not enter into any settlement of such Third-
Party Claim without the prior written consent of the Representative (which
consent shall not be unreasonably withheld), provided, that if the
--------
Representative shall have consented to any such settlement, then the
Representative shall have no power or authority to object to any claim by any
Indemnified Person for indemnity under Section 12.2 of the Plan for the amount
of such settlement; and (3) the Webshots Shareholders will remain responsible to
indemnify all Indemnified Person(s) for all Damages they may incur arising out
of, resulting from or caused by the Third-Party Claim to the fullest extent
provided in Article 12.
12.7 Contents of Notice of Claim. Each Notice of Claim by At Home
---------------------------
given pursuant to Section 12.5 will contain the following information:
(i) At Home's good faith estimate of the reasonably
foreseeable maximum amount of the alleged Damages arising from such Claim (which
amount may be the amount of damages claimed by a third party in an action
brought against any Indemnified Person based on alleged facts, which if true,
would give rise to liability for Damages to such Indemnified Person under
Article 12); and
(ii) a brief description, in reasonable detail (to the
extent reasonably available to At Home), of the facts, circumstances or events
giving rise to the alleged Damages based on At Home's good faith belief thereof,
including, without limitation, the identity and address of any third-party
claimant (to the extent reasonably available to At Home) and copies of any
formal demand or complaint.
12.8 Resolution of Notice of Claim. Any Notice of Claim received by
-----------------------------
the Representative pursuant to Section 12.5 and Section 12.7 above will be
resolved as follows:
(a) Contested Claims. In the event and to the extent that the
----------------
Representative does not, within thirty (30) calendar days after the Notice of
Claim containing a statement of the claimed Damages is received by the
Representative pursuant to Section 12.5 and Section 12.7, enter into a written
settlement agreement executed by At Home and the Representative (a "Settlement
Agreement") settling the claims of the parties with respect to the full amount
of Damages specified in such Notice of Claim (such portion of the claim for
Damages in the Notice of Claim as to which there is no Settlement Agreement
being hereafter referred to as a "Contested Claim"), then: such Contested Claim
will be resolved by binding arbitration between At Home and the Representative
in accordance with the terms and provisions of this Section 12.8.
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Nothing in this Section 12.8(a) shall be deemed to preclude At Home and the
Representative from entering into a subsequent Settlement Agreement with respect
to a Contested Claim.
(b) To the extent that Damages sought in a Notice of Claim arise from
a Third Party Claim that is being defended by At Home pursuant to Section 12.6
(a "Defended Claim") and such Defended Claim is also a Contested Claim, then any
arbitration that is initiated under this Article 12 with respect to such
Defended Claim shall, after its initiation, be stayed by the arbitrator until
the resolution, by settlement or binding, non-appealable, final judgment or
award, of the proceeding in which the Defended Claim is being defended by At
Home (the "Resolution"). Promptly upon any such Resolution, the arbitration of
the Defended Claim shall be resumed hereunder. Without limiting the right of At
Home to seek recovery for, and the arbitrator to award damages for, other
Incurred Damages or Estimated Damages (as such terms are defined below), to the
extent that the Resolution included an award of damages against, or agreement to
pay monies by, any Indemnified Persons, the arbitrator shall, in the Final Award
(as defined below), set forth and award to At Home the full amount of any such
award of damages or the amount of monies agreed to be paid.
(c) Arbitration of Contested Claims. Each of At Home, Webshots and
-------------------------------
the Webshots Shareholders agree that any Contested Claim will be submitted to
mandatory, final and binding arbitration before J.A.M.S./ENDISPUTE or its
successor ("J.A.M.S."), pursuant to the United States Arbitration Act, 9 U.S.C.,
Section 1 et seq. and that any such arbitration will be conducted in San Mateo
County, California. Either At Home or the Representative may commence the
arbitration process called for by this Agreement by filing a written demand for
arbitration with J.A.M.S. and giving a copy of such demand to each of the other
parties to this Agreement. The arbitration will be conducted in accordance with
the provisions of J.A.M.S's Streamlined Arbitration Rules and Procedures in
effect at the time of filing of the demand for arbitration, subject to the
provisions of Section 12.8(c) of this Agreement. The parties will cooperate with
J.A.M.S. and with each other in promptly selecting an arbitrator from J.A.M.S.'s
panel of neutrals, and in scheduling the arbitration proceedings in order to
fulfill the provisions, purposes and intent of this Agreement. The parties
covenant that they will participate in the arbitration in good faith, and that
they will share in its costs in accordance with subparagraph (i) below. The
provisions of this Section 12.8(c) may be enforced by any court of competent
jurisdiction, and the party seeking enforcement will be entitled to an award of
all costs, fees and expenses, including attorneys' fees, to be paid by the party
against whom enforcement is ordered. Subject to the provisions of subparagraph
(vii) below, judgment upon the award rendered by the arbitrator may be entered
in any court having competent jurisdiction.
(i) Payment of Costs. At Home on the one hand, and the
----------------
applicable Webshots Shareholders (through the Representative), on the other
hand, will bear the expense of deposits and advances required by the arbitrator
in equal proportions, but either party may advance such amounts, subject to
recovery as an addition or offset to any award. The arbitrator will award to the
prevailing party, as determined by the arbitrator, all reasonable costs, fees
and expenses related to the arbitration, including reasonable fees and expenses
of attorneys, accountants and other professionals incurred by the prevailing
party. If such an award would result in manifest injustice, however, the
arbitrator may apportion such costs, fees and expenses between the parties in
such a manner as the arbitrator deems just and equitable.
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<PAGE>
(ii) Burden of Proof. Except as may be otherwise expressly
---------------
provided in the Plan, for any Contested Claim submitted to arbitration, the
burden of proof will be as it would be if the claim were litigated in a judicial
proceeding governed by California law exclusively.
(iii) Award. Upon the conclusion of any arbitration proceedings
-----
hereunder, the arbitrator will render findings of fact and conclusions of law
and a final written arbitration award setting forth the basis and reasons for
any decision reached (the "Final Award") and will deliver such documents to the
Representative and At Home, together with a signed copy of the Final Award.
Subject to the provisions of subparagraph (vii) below, the Final Award will
constitute a conclusive determination of all issues in question, binding upon
the Webshots Shareholders, the Representative and At Home, and will include an
affirmative statement to such effect. To the extent that the Final Award
determines that At Home or any other Indemnified Person has actually incurred
Damages in connection with the Contested Claim through the date of the Final
Award ("Incurred Damages"), the Final Award will set forth and award to At Home
the amount of such Incurred Damages. In addition, the Final Award will set forth
and award to At Home an additional amount of Damages equal to the reasonably
foreseeable amount of alleged Damages that the arbitrator determines (based on
the evidence submitted by the parties in the arbitration) are reasonably likely
to be incurred by At Home and any other Indemnified Person as a result of the
facts giving rise to the Contested Claim ("Estimated Damages"), which amount of
Estimated Damages may, without limitation, include the amount of damages claimed
by a third party in an action brought against any Indemnified Person based on
alleged facts which, if true, would give rise to Damages. Awards of Damages will
be subject to the provisions regarding the "Basket" (as defined in Section
12.3); provided, however, that awards of Damages for Excess Transaction Expenses
-------- -------
will not be subject to such provisions regarding the "Basket". Nothing in
Section 12 shall be deemed to relieve any Indemnified Person from any duty that
may be imposed on such person by applicable law to attempt to mitigate such
person's damages.
(iv) Timing. Subject to Section 12.8(b), the Representative,
------
At Home and the arbitrator will conclude each arbitration pursuant to this
Section 12.8 as promptly as possible for the Contested Claim being arbitrated.
(v) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement.
(vi) Exclusive Remedy. Except as specifically otherwise
----------------
provided in this Agreement or the Plan, arbitration conducted in accordance with
this Agreement will be the sole and exclusive remedy of the parties for any
Claim made pursuant to Article 12.
(vii) Treatment of Damages. Subject to subparagraph (viii)
--------------------
below, upon issuance and delivery of the Final Award as provided in subparagraph
(iii) above, At Home will immediately be entitled to recover (A) the amount of
any Incurred Damages determined and awarded to At Home under such Final Award
and (B) the amount of Estimated Damages determined and awarded under such Final
Award and such Incurred Damages and such Estimated Damages will be deemed to be
owed to At Home for purposes of this Agreement. Both Incurred Damages and
Estimated Damages owed to Indemnified Persons are deemed to be Damages for
purposes of this Agreement.
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<PAGE>
(viii) Limitation on Recovery. Upon the execution by the
----------------------
parties thereto of a Settlement Agreement or the issuance and delivery of a
Final Award, At Home shall, at that time, only be entitled to enforce its right
to recover on such Settlement Award or Final Award against an Webshots
Shareholder to the extent that the aggregate total dollar amount of Damages from
which Indemnified Persons have previously recovered against such Webshots
Shareholder pursuant to this Article 12 (whether pursuant to a Settlement
Agreement or a Final Award) by surrender of shares of At Home Common Stock or
otherwise (the "Previously Recovered Amount") is less than:
----
(a) with respect to claims for indemnification for
Damages that are not Special Damages, a dollar amount that results from
---
multiplying (x) the At Home Average Price Per Share by (y) 50% of the total
number of shares of At Home Common Stock issuable at the Effective Time to such
Webshots Shareholder that are not, at that time, subject to a repurchase option
providing that such shares may be repurchased by the Surviving Corporation or At
Home upon any termination of the Webshots Shareholder's employment with the
Surviving Corporation, At Home (or any affiliate of At Home) ("Impounded
Shares"); and
(b) with respect to claims for indemnification for
Damages that are Special Damages (excluding Special Damages arising from claims
---
for fraudulent conduct, fraudulent misrepresentation or other willful misconduct
on the part of Webshots or any officer, director, shareholder employee, or
Webshots Shareholder or any subsidiary of Webshots and claims arising from any
failure of the representations and warranties of Webshots set forth in Section
3.26), a dollar amount that results from multiplying (xx) the At Home Average
Price Per Share by (yy) 100% of the total number of shares of At Home Common
Stock issuable at the Effective Time to such Webshots Shareholder that are not,
at that time, Impounded Shares.
If, after At Home's recovery pursuant to a Settlement Agreement or Final Award
against an Webshots Shareholder is limited by operation of this subparagraph
(viii), any of such Webshots Shareholder's Impounded Shares cease to be
Impounded Shares, such that the dollar amount calculated pursuant to either
subparagraph (viii)(a) or (viii)(b) (the "Dollar Amount") increases and the
Previously Recovered Amount is, at that time, less than such newly calculated
Dollar Amount, then At Home shall have the right, at that time and without the
necessity of further action or consent of the Representative or the arbitrator,
to further exercise its right of recovery against such Webshots Shareholder
pursuant to the Settlement Agreement or Final Award to the extent of the
difference between the then-current Previously Recovered Amount and such newly
calculated Dollar Amount, and At Home may repeatedly exercise this right of
recovery as the Impounded Shares of such Webshots Shareholder are released until
the full amount of the Settlement Agreement or Final Award applicable to such
Webshots Shareholder has been recovered from such Webshots Shareholder.
ARTICLE 13
REGISTRATION RIGHTS
13.1 Certain Definitions. For purposes of this Article 13:
-------------------
(a) Registration. The terms "register," "registered," and
------------
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement.
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<PAGE>
(b) Registrable Securities. The term "Registrable Securities" means:
----------------------
(i) the shares of At Home Common Stock that are issued to the Webshots
Shareholders in the Merger pursuant to Section 2.1.2 upon the conversion of the
outstanding shares of Webshots Common Stock that are owned and held by the
Webshots Shareholders immediately prior to the Effective Time; and (ii) any
shares of At Home Common Stock that may be issued as a dividend or other
distribution (including without limitation shares of At Home Common Stock issued
in a subdivision and split of At Home's outstanding Common Stock) with respect
to, or in exchange for, or in replacement of, shares of At Home Common Stock
described in clause (i) of this Section 13.1(b) or in this clause (ii);
excluding in all cases, however, from the definition of "Registrable Securities"
- ---------
any such shares that are: (w) registered under the 1933 Act other than pursuant
----------
to a registration statement filed pursuant to this Agreement; (x) sold by a
person in a transaction in which rights under this Agreement with respect to
such shares are not assigned in accordance with the terms of this Agreement; (y)
sold pursuant to a registration statement filed pursuant to this Agreement; or
(z) sold pursuant to Rule 144 promulgated under the 1933 Act or otherwise sold
to the public. Only shares of At Home Common Stock shall be Registrable
Securities. Except as provided in clause (ii) of the first sentence of this
Section 13.1(b), without limitation, the term "Registrable Securities" does not
---- ---
include any shares of At Home Common Stock that were not issued in connection
- -------
with the Merger.
(c) Holder. The term "Holder" means an Webshots Shareholder who is
------
the original holder of any Registrable Securities or any assignee of record of
any Registrable Securities to whom rights under this Agreement have been duly
assigned in accordance with the provisions of this Agreement.
(d) Form S-3. The term "Form S-3" means a registration statement
--------
filed under Form S-3 under the 1933 Act, as such is in effect on the Effective
Date, or any successor form of registration statement under the 1933 Act
subsequently adopted by the SEC which permits inclusion or incorporation of a
substantial amount of information by reference to other documents filed by At
Home with the SEC.
(e) Rule 415. The term "Rule 415" means Rule 415 promulgated under
--------
the 1933 Act, as such Rule may be amended from time to time, or any similar or
successor rule or regulation hereafter adopted by the SEC.
13.2 Form S-3 Shelf Registration.
---------------------------
(a) Filing and Registration Period. Subject to the terms and
------------------------------
conditions of this Agreement, as promptly as practicable following the Effective
Time of the Merger, and consistent with the requirements of applicable law, At
Home shall prepare and file with the SEC a registration statement on Form S-3
for an offering to be made on a continuous basis pursuant to Rule 415 covering
all of the then outstanding Registrable Securities (the "Shelf Registration").
At Home shall use its reasonable diligent efforts to have such Shelf
Registration declared effective as soon as practicable after its filing and to
keep the Shelf Registration continuously effective under the 1933 Act for a
continuous period of time (such period of time being hereinafter called the
"Registration Period") commencing on the date the Shelf Registration is declared
effective under the 1933 Act by the SEC (the "Date of Effectiveness") and ending
on the date that is the first anniversary of the Effective Time of the Merger
(subject to the normal blackout policies of At Home). At Home shall have no
duty or obligation to keep the Shelf Registration (or any
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<PAGE>
Subsequent Registration, as defined below) effective after the expiration of the
Registration Period. Accordingly, the Webshots Shareholders acknowledge that the
Registrable Securities will not be registered under the 1933 Act beginning one
(1) year after the Effective Time of the Merger.
(b) Subsequent Registration. If the Shelf Registration is filed with
-----------------------
the SEC and becomes effective under the 1933 Act, and the Shelf Registration or
a Subsequent Registration (as defined below) thereafter ceases to be effective
for any reason at any time during the Registration Period, then At Home shall
use its best efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof, and in any event shall, within thirty (30) days of such
cessation of effectiveness, file an amendment to the Shelf Registration seeking
to obtain the withdrawal of the order suspending the effectiveness thereof, or
file an additional "shelf" registration statement pursuant to Rule 415 covering
all of the then outstanding Registrable Securities (a "Subsequent
Registration"). If a Subsequent Registration is filed, At Home shall use its
best efforts to cause the Subsequent Registration to be declared effective as
soon as practicable after such filing and to keep such registration statement
continuously effective until the end of the Registration Period.
(c) Supplements and Amendments. Subject to the provisions of Section
--------------------------
13.2(g), during the Registration Period At Home shall supplement and amend the
Shelf Registration if, as and when required by the 1933 Act, the rules and
regulations promulgated thereunder or the rules, regulations or instructions
applicable to the registration form used by At Home for such Shelf Registration.
(d) Timing and Manner of Sales. Any sale of Registrable Securities
--------------------------
pursuant to a Shelf Registration or a Subsequent Registration under this Section
13.2 may be made only during a "Permitted Window" (as defined in Section 13.2(g)
below). In addition, any sale of Registrable Securities pursuant to a Shelf
Registration or a Subsequent Registration under this Section 13.2 may only be
made in accordance with the method or methods of distribution of such
Registrable Securities that are described in the registration statement for the
Shelf Registration (or Subsequent Registration, as applicable) and permitted by
such form of registration statement, which methods of distribution will be
specified by the Holders in their Notice of Resale (as defined below). Subject
to any other agreements between the Holder and At Home or Surviving Corporation,
a Holder may also sell Registrable Securities in a bona fide private offering if
the selling Holder provides At Home with a written opinion of counsel,
satisfactory to counsel to At Home, that such offer and sale is an exempt
transaction under the 1933 Act and applicable state securities laws, complies
with all requirements for such exemption(s) and is not made with use of the
prospectus for the Shelf Registration (or Subsequent Registration, if
applicable).
(e) No Underwritings. No sale of Registrable Securities under any
-----------------
Shelf Registration (or Subsequent Registration) effected pursuant to this
Section 13.2 may be effected pursuant to any underwritten offering without At
Home's prior written consent, which may be withheld in its sole and absolute
discretion.
(f) Notice of Resale. Before any Holder may make any sale, transfer
----------------
or other disposition of any Registrable Securities under the Shelf Registration
(or a Subsequent Registration) during the Registration Period, a Holder or
Holders who own at least five percent (5%) of the Registrable Securities then
outstanding must first give written notice to At Home (a
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<PAGE>
"Notice of Resale") of such Holder's or Holders' present intention to so sell,
transfer or otherwise dispose of some or all of such Holder's or Holders'
Registrable Securities, and the number of Registrable Securities such Holder or
Holders propose(s) to so sell, transfer or otherwise dispose of. In addition, a
Notice of Resale shall contain the information required to be included therein
under Section 13.2(g).
(g) Permitted Window; Sale Procedures.
---------------------------------
(i) A "Permitted Window" is a period of ten (10) consecutive
trading days commencing upon At Home's written notification to the Webshots
Shareholders in response to a Notice of Resale that the prospectus contained in
the Form S-3 registration statement filed pursuant to Section 13.2 of this
Agreement is available to be used for resales of Registrable Securities pursuant
to the Shelf Registration (or a Subsequent Registration, as applicable).
(ii) Before a Holder can make a sale of any Registrable
Securities pursuant to the Shelf Registration (or a Subsequent Registration),
and in order to cause a Permitted Window to commence, such Holder must first
give At Home a Notice of Resale indicating such Holder's intention to sell
Registrable Securities pursuant to the Shelf Registration (or Subsequent
Registration, as applicable) and such Holder's intended plan of distribution of
such Registrable Securities (which must conform to the plan of distribution
contained in the prospectus for the Shelf Registration (or Subsequent
Registration, as applicable)).
(iii) Upon receipt of such Notice of Resale (unless a certificate
------
of At Home is delivered as provided in Section 13.3(b) below), At Home will give
written notice to all Holders as soon as practicable, but in no event more than
three (3) business days after At Home's receipt of such Notice of Resale that
either: (A) the prospectus contained in the registration statement for the Shelf
Registration (or Subsequent Registration, if applicable) is current (it being
acknowledged that it may be necessary for At Home to supplement the prospectus
or make an appropriate filing under the 1934 Act so as to cause the prospectus
to become current) and that (as applicable) (1) the Permitted Window will
commence on the date of such notice by At Home; or (B) At Home is required under
the 1933 Act and the regulations thereunder to amend the registration statement
for the Shelf Registration (or Subsequent Registration, as applicable) in order
to cause the prospectus to be current. In the event that At Home determines that
an amendment to the registration statement is necessary as provided above, it
will file and cause such amendment to become effective as soon as practicable;
whereupon it will notify the Holders that the Permitted Window will then
commence.
(iv) At Home shall not be obligated to keep the registration
statement for the Shelf Registration (or any Subsequent Registration) current
during any period other than a Permitted Window. The Holders may elect to
withdraw a request for registration pursuant to a Notice of Resale; provided
--------
however, that if At Home has commenced preparation of any supplement or
- -------
amendment to the registration statement or any part thereof in response to such
Notice of Resale prior to receiving written notice from the Holders' of the
withdrawal of their request for registration, then the Holders who originally
gave At Home such Notice of Resale will promptly reimburse At Home for its
actual costs and expenses incurred in preparing and/or filing such supplement
and/or amendment.
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(h) Trading Window Compliance. The Holders acknowledge that At Home
-------------------------
maintains an Insider Trading Compliance Program and an Insider Trading Policy,
as such may be amended (the "At Home Trading Policy") and that the At Home
Trading Policy requires that those directors, officers and employees of At Home
and its subsidiaries and those other persons whom At Home determines to be
"Access Personnel" or otherwise subject to the "trading window" and pre-
clearance requirements of the At Home Trading Policy (and members of their
immediate families and households) are permitted to effect trades in At Home
securities: (i) only during those specified time periods ("trading windows") in
which such persons are permitted to make sales, purchases or other trades in At
Home's securities under the "trading window" provisions of the At Home Trading
Policy; and (ii) only after pre-clearance of such sales, purchases or other
trades with At Home's Insider Trading Compliance Officer. If a Holder is or
becomes subject to the "trading window" and/or "pre-clearance" provisions of the
At Home Trading Policy described above, then, notwithstanding anything herein to
the contrary, such Holder may sell, transfer and dispose of Registrable
Securities only during those trading windows during which such At Home Access
Personnel are permitted to effect trades in At Home stock under the At Home
Trading Policy and only after pre-clearing such trades with At Home's Insider
Trading Compliance Officer as provided in the At Home Trading Policy.
13.3 Limitations. Notwithstanding the provisions of Section 13.2 above,
-----------
At Home shall not be obligated to effect any registration, qualification or
compliance of Registrable Securities pursuant to Section 13.2 of this Agreement,
and the Holders shall not be entitled to sell Registrable Securities pursuant to
any registration statement filed under Section 13.2 of this Agreement, as
applicable:
(a) if Form S-3 is not then available for such offering by the
Holders;
(b) if At Home shall furnish to the Holders a certificate signed by an
officer of At Home stating that, in the good faith judgment of such officer, it
would be detrimental to At Home and its stockholders for such Permitted Window
to be in effect at such time, due, for example, to the existence of a material
development or potential material development involving At Home which At Home
would be obligated to disclose in the prospectus contained in the Shelf
Registration (or Subsequent Registration, as applicable), which disclosure
would, in the good faith judgment of such officer, be premature or otherwise
inadvisable at such time or would have a material adverse affect upon At Home
and its stockholders, in which event At Home will have the right to defer a
Permitted Window for a period of not more than forty (40) days after receipt of
a Notice of Resale from the Holder or Holders pursuant to this Section 13.3(b);
(c) if At Home is acquired and its Common Stock ceases to be publicly
traded;
(d) in any particular jurisdiction in which At Home would be required
to qualify to do business or to execute a general consent to service of process
in effecting such registration, qualification or compliance, unless At Home is
already subject to service of process in such jurisdiction;
(e) if the SEC refuses to declare such registration effective due to
the participation of any particular Holder in such registration (unless such
Holder withdraws all such Holder's Registrable Securities from such registration
statement); or
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<PAGE>
(f) if the manner in which any Registrable Securities are disposed of
pursuant to the Shelf Registration (or Subsequent Registration, as applicable)
is not included within the plan of distribution set forth in the prospectus for
the Shelf Registration (or Subsequent Registration, as applicable).
13.4 Shares Otherwise Eligible for Resale. Notwithstanding anything
------------------------------------
herein to the contrary, At Home shall not be obligated to effect or continue to
keep effective any such registration, registration statement, qualification or
compliance with respect to the Registrable Securities held by any particular
Holder:
(a) if At Home or its legal counsel shall have received a "no-action"
letter or similar written confirmation from the SEC that all the Registrable
Securities then held by such Holder may be resold by such Holder within a three
(3) month period without registration under the 1933 Act pursuant to the
provisions of Rule 144 promulgated under the 1933 Act (or successor provisions),
or otherwise;
(b) if legal counsel to At Home shall deliver a written opinion to At
Home, its transfer agent and the Holders, in form and substance reasonably
acceptable to At Home, to the effect that all the Registrable Securities then
held by such Holder may be resold by such Holder within a three (3) month period
without registration under the 1933 Act pursuant to the provisions of Rule 144
promulgated under the 1933 Act, or otherwise; or
(c) after expiration or termination of the Registration Period.
13.5 Expenses. At Home shall pay all expenses incurred in connection with
--------
any registration effected by At Home pursuant to this Agreement (excluding
brokers' discounts and commissions), including without limitation all filing,
registration and qualification, printers', legal and accounting fees.
13.6 Obligations of At Home. Subject to Sections 13.2, 13.3 and 13.4
----------------------
above, when required to effect the registration of any Registrable Securities
under the terms of this Agreement, At Home will, as expeditiously as reasonably
possible:
(a) furnish to the Holders such number of copies of the prospectus
for the Shelf Registration (or Subsequent Registration, as applicable),
including a preliminary prospectus (and amendments or supplements thereto), in
conformity with the requirements of the 1933 Act, and such other documents as
they may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by them;
(b) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as will be reasonably requested by the Holders;
provided that At Home will not be required in connection therewith or as a
- --------
condition thereto to qualify to do business or to file a general consent to
service of process in any such state or jurisdiction unless At Home is already
so qualified or subject to service of process, respectively, in such
jurisdiction; and
(c) promptly notify each Holder of Registrable Securities covered by
such registration statement, at any time during a Permitted Window when a
prospectus relating thereto is required to be delivered under the 1933 Act, of
the happening of any event as a result of which
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<PAGE>
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
13.7 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of At Home to take any action pursuant to this Agreement that the
selling Holders will furnish to At Home such information regarding themselves,
the Registrable Securities held by them, and the intended method of disposition
and plan of distribution of such Registrable Securities as shall be required to
timely effect the registration of their Registrable Securities.
13.8 Delay of Registration. No Holder will have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any registration that is
the subject of this Agreement as the result of any controversy that might arise
with respect to the interpretation or implementation of this Agreement.
13.9 Indemnification.
---------------
(a) By At Home. To the extent permitted by law, At Home will
----------
indemnify, defend and hold harmless each Holder against any losses, claims,
damages, or liabilities (joint or several) to which such Holder may become
subject under the 1933 Act, the 1934 Act or other U.S. federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in a registration statement filed by At Home pursuant to
this Agreement pursuant to which Registrable Securities are sold, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(ii) the omission or alleged omission to state in such
registration statement, preliminary prospectus or final prospectus or any
amendments or supplements thereto, a material fact required to be stated
therein, or necessary to make the statements therein not misleading; or
(iii) any violation or alleged violation by At Home of the 1933
Act, the 1934 Act, any U.S. federal or state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any U.S. federal or
state securities law in connection with the offering of Registrable Securities
covered by such registration statement;
provided however, that the indemnity agreement contained in this subsection
- -------- -------
13.9(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the written
consent of At Home (which consent shall not be unreasonably withheld), nor shall
At Home be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder.
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<PAGE>
(b) By Selling Holders. To the extent permitted by law, each selling
------------------
Holder will indemnify and hold harmless At Home, each of its directors, each of
its officers who have signed the registration statement, each person, if any,
who controls At Home within the meaning of the 1933 Act, any underwriter and any
other Holder selling securities under such registration statement, against any
losses, claims, damages or liabilities (joint or several) to which At Home or
any such director, officer, controlling person, underwriter or other such Holder
may become subject under the 1933 Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
indemnify and reimburse At Home or any such director, officer, controlling
person, underwriter or other Holder for any reasonable attorneys' fees and other
expenses reasonably incurred by At Home or any such director, officer,
controlling person, underwriter or other Holder in connection with investigating
or defending any such loss, claim, damage, liability or action, as incurred.
(c) Notice. Promptly after receipt by an indemnified party under
------
this Section 13.9 of notice of the commencement of any action (including any
governmental action) against such indemnified party, such indemnified party
will, if a claim for indemnification or contribution in respect thereof is to be
made against any indemnifying party under this Section 13.9, deliver to the
indemnifying party a written notice of the commencement thereof and, if the
indemnifying party is At Home, At Home shall have the right and obligation to
control the defense of such action, and if At Home fails to defend such action
it shall indemnify and reimburse the selling Holders for any reasonable
attorneys' fees and other expenses reasonably incurred by them in connection
with investigating or defending such action; provided, however, that: (i) At
-------- -------
Home shall also have the right, at its option, to assume and control the defense
of any action with respect to which At Home or any person entitled to be
indemnified by the selling Holders under Section 13.9(b) is entitled to
indemnification from the selling Holders; (ii) the indemnified party or parties
shall have the right to participate at its own expense in the defense of such
action and (but only to the extent agreed in writing with At Home and any other
indemnifying party similarly noticed) to assume the defense thereof with counsel
mutually satisfactory to the parties; and (iii) an indemnified party shall have
the right to retain its own counsel, with the fees and expenses of such counsel
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to an actual or potential conflict of interests between such indemnified
party and any other party represented by such counsel in such proceeding. The
failure of an indemnified party to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
prejudicial to the ability of the indemnifying party to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under this Section 13.9, but the omission so to deliver written notice to the
indemnifying party will not relieve the indemnifying party of any liability that
it may have to any indemnified party otherwise than under this Section 13.9.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity
-------------------------------------
agreements of At Home and the Holders are subject to the condition that, insofar
as they relate to any Violation made in a preliminary prospectus but eliminated
or remedied in the amended or supplemented prospectus on file with the SEC and
effective at the time the sale of Registrable Securities under such registration
statement occurs (the "Amended Prospectus"), such indemnity
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<PAGE>
agreement shall not inure to the benefit of any person if a copy of the Amended
Prospectus was furnished to the indemnified party and was not furnished to the
person asserting the loss, liability, claim or damage in the action giving rise
to indemnity claims under this Section 13.9, at or prior to the time such action
is required by the 1933 Act.
(e) Survival. The obligations of At Home and Holders under this
--------
Section 13.9 shall survive the completion of any offering of Registrable
Securities in a registration statement pursuant to this Agreement, and
otherwise.
13.10 Duration and Termination of At Home's Obligations. At Home will have
-------------------------------------------------
no obligations pursuant to Section 13.2 of this Agreement with respect to any
Notice of Resale or other request or requests for registration (or inclusion in
a registration) made by any Holder or to maintain or continue to keep effective
any registration or registration statement pursuant hereto: (a) after the
expiration or termination of the Registration Period; (b) with respect to a
particular Holder if, in the opinion of counsel to At Home, all such Registrable
Securities proposed to be sold by such Holder may be sold in a three (3) month
period without registration under the 1933 Act pursuant to Rule 144 promulgated
under the 1933 Act or otherwise; or (c) if all Registrable Securities have been
registered and sold pursuant to a registration effected pursuant to this
Agreement and/or have been transferred in transactions in which registration
rights hereunder have not been assigned in accordance with this Agreement.
13.11 Acknowledgment of Other Agreements. The Holders acknowledge that they
----------------------------------
have been informed by At Home that other stockholders of At Home currently hold
certain Form S-3 and other registration rights that may enable such other
stockholders to sell shares of At Home during one or more Permitted Windows or
at other times (thus potentially adversely affecting the receptivity of the
market to the sale of the Registrable Securities pursuant to a registration
effected pursuant to this Agreement).
13.12 Assignment. Notwithstanding anything herein to the contrary, the
-----------
rights of a Holder under Article 13 may be assigned only with At Home's express
prior written consent, which may be withheld in At Home's sole discretion;
provided, however, that the rights of a Holder under Article 13 may be assigned
- -------- -------
without At Home's express prior written consent: (a) to a Permitted Assignee (as
defined below); or (b) (if applicable) by will or by the laws of intestacy,
descent or distribution, provided that the assignee first agrees in writing to
--------
be bound by all the obligations of the Holders under this Agreement. Any
attempt to assign any rights of a Holder under Article 13 without At Home's
express prior written consent in a situation in which such consent is required
by this Section shall be null and void and without effect. Subject to the
foregoing restrictions, all rights, covenants and agreements in Article 13 by or
on behalf of the parties hereto will bind and inure to the benefit of the
respective permitted successors and assigns of the parties hereto. Each of the
following parties are "Permitted Assignees" for purposes of this Section 13.12:
(a) a trust whose beneficiaries consist solely of a Holder and/or such Holder's
immediate family; (b) the personal representative (such as an executor of a
Holder's will), custodian or conservator of a Holder, in the case of the death,
bankruptcy or adjudication of incompetency of that Holder; (c) immediate family
members of a Holder; or (d) partners of a Holder that is a partnership.
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<PAGE>
ARTICLE 14
TAX RETURNS AND PAYMENTS
14.1 Post-Closing Returns. Any tax return that is required to be filed by
--------------------
the Surviving Corporation after the Closing Date and which includes the Closing
Date or a period prior thereto (other than tax returns relating to taxable
periods that begin on or after the Closing Date) (each a "Post-Closing Return")
will be prepared by the Surviving Corporation and will be prepared by treating
items on such returns in a manner consistent with past practices with respect to
such items unless otherwise required by applicable law or regulation. Drafts of
each Post-Closing Return proposed to be filed by the Surviving Corporation will
be delivered to Andrew Laakmann at least ten (10) calendar days prior to their
filing by the Surviving Corporation with the applicable taxing authorities. In
addition, the Surviving Corporation will deliver a copy of each Post-Closing
Return to each of the Webshots Shareholders promptly after its has been filed
with the applicable taxing authorities. The Webshots Shareholders will, to the
extent reasonably requested by the Surviving Corporation or At Home, cooperate
with, and provide any necessary information available to them to, the Surviving
Corporation in its preparation of any Post-Closing Return.
14.2 Tax Reporting and Payment. Each Webshots Shareholder to whom any
-------------------------
shares of Webshots Common Stock were issued in calendar year 1999 in exchange
for services rendered or to be rendered by such shareholder to Webshots (each a
"Reporting Shareholder") shall report on such shareholder's federal and state
tax returns for calendar year 1999 as ordinary income received by him in
calendar year 1999 on account of such issuance of shares the dollar amount for
such shareholder that is set forth in that certain letter between At Home and
each Reporting Shareholder dated of even date herewith (the "Reporting
Shareholder Letter"), (for each such Webshots Shareholder, the "Stock Income
Amount") and the Surviving Corporation shall not, in any Post-Closing Return
and/or form W-2 for 1999 take a position that is inconsistent with such Stock
Income Amount having been paid to the Reporting Shareholder in 1999 by virtue of
the issuance of such shares of Webshots Common Stock to him, except as may be
required by law, applicable regulation or a determination (as defined in Section
1313 of the Code) or any state equivalent). Each Reporting Shareholder shall
pay, when required by law and in no event after April 15, 2000, all federal and
state income taxes due from such shareholder to the applicable federal and state
taxing authorities on account such Stock Income Amount in calendar year 1999
(for each such Webshots Shareholder, the "Stock Income Tax Amount"). Each
Reporting Shareholder shall, promptly after the Shelf Registration is declared
effective and in no event later than April 1, 2000, take all steps necessary to
cause that number of such shareholder's shares of At Home Common Stock to be
sold pursuant to the Shelf Registration as are necessary to satisfy such
shareholder's obligation to pay the Stock Income Tax Amount. The proceeds of
such sale of stock shall be immediately transferred by such shareholder to the
Surviving Corporation to be held in escrow by the Surviving Corporation until
such time as those proceeds are required to be released to the Reporting
Shareholder for payment directly to relevant federal and state taxing
authorities in satisfaction of such Reporting Shareholder's Stock Income Tax
Amount.
ARTICLE 15
MISCELLANEOUS
15.1 Governing Law. The internal laws of the State of California
-------------
(irrespective of its choice of law principles) will govern the validity of this
Agreement, the construction of its terms, and the interpretation and enforcement
of the rights and duties of the parties hereto.
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<PAGE>
15.2 Assignment; Binding Upon Successors and Assigns. Neither party
-----------------------------------------------
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other party hereto. This Agreement will be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
15.3 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, then
the remainder of this Agreement and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
15.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all parties reflected hereon as signatories.
15.5 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party hereunder will be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by law
on such party, and the exercise of any one remedy will not preclude the exercise
of any other.
15.6 Amendment and Waivers. Any term or provision of this Agreement may
---------------------
be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. This Agreement may be amended by the parties hereto as
provided in this Section at any time before or after approval of this Agreement
by the shareholders of Webshots, but, after such approval, no amendment will be
made which by applicable law requires the further approval of the shareholders
of Webshots without obtaining such further approval. At any time prior to the
Effective Time, each of Webshots and At Home, by action taken by its Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other; (ii) waive any
inaccuracies in the representations and warranties made to it contained herein
or in any document delivered pursuant hereto; and (iii) waive compliance with
any of the agreements or conditions for its benefit contained herein. No such
waiver or extension will be effective unless signed in writing by the party
against whom such waiver or extension is asserted. The failure of any party to
enforce any of the provisions hereof will not be construed to be a waiver of the
right of such party thereafter to enforce such provisions.
15.7 Expenses. Each party will bear its respective legal, auditors' and
--------
investment bankers' and financial advisors' fees and other expenses incurred
with respect to this Agreement, the Merger and the transactions contemplated
hereby ("Transaction Expenses"); provided, however, that if the Merger is
-------- -------
successfully consummated, then not more than a maximum of $75,000 of Webshots'
documented and verified Transaction Expenses incurred by Webshots in connection
with services rendered to Webshots by its accountants, attorneys and investment
or
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<PAGE>
financial advisors will be paid by At Home and, and At Home will be entitled to
indemnification from the Escrow Shares in accordance with Section 12.2 for an
amount equal to the amount (if any) by which Webshots' Transaction Expenses
exceed $75,000 (such excess amount being hereinafter called the "Excess
Transaction Expenses"), and such indemnification shall not be subject to the
Basket. Notwithstanding the foregoing, the term "Transaction Expenses" will not
---
include fees and expenses incurred by Webshots (a) to its independent
accountants for normal preparation of Webshots' financial statements or (b) to
other professionals, such as Webshots' legal counsel, for work not related to,
or necessary or appropriate to enable Webshots to negotiate, enter into or
perform, this Agreement, the Merger or any transaction or agreement contemplated
by this Agreement or the Merger.
15.8 Attorneys' Fees. Should suit be brought to enforce or interpret any
---------------
part of this Agreement, the prevailing party will be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees to
be fixed by the court (including without limitation, costs, expenses and fees on
any appeal). The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
15.9 Notices. All notices and other communications required or permitted
-------
under this Agreement will be in writing and will be either hand delivered in
person, sent by facsimile, sent by certified or registered first class mail,
postage pre-paid, or sent by nationally recognized express courier service.
Such notices and other communications will be effective upon receipt if hand
delivered or sent by facsimile, five (5) days after mailing if sent by mail, and
one (l) day after dispatch if sent by express courier, to the following
addresses, or such other addresses as any party may notify the other parties in
accordance with this Section:
If to At Home:
At Home
450 Broadway
Redwood City, CA 94063
Attention: General Counsel
Fax Number: (650) 482-4606
with copies to:
Fenwick & West, LLP
Two Palo Alto Square, Suite 800
Palo Alto, CA 94306
Attention: Gordon K. Davidson
Fax Number: (650) 494-1417
If to Webshots:
Webshots
4890 Niagara Avenue
San Diego, CA 92107
Attention: President
Fax Number: (619) 523-0555
with a copy to:
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<PAGE>
Solomon Ward Seidenwurm & Smith, LLP
401 B Street, Suite 1200
San Diego, CA 92101
Attention: Lawrence J. Kaplan
Fax Number: (619) 231-4755
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 15.9.
15.10 Construction of Agreement. This Agreement has been negotiated by
-------------------------
the respective parties hereto and their attorneys and the language hereof will
not be construed for or against either party. A reference to a Section or an
exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only and will not in any manner limit the construction of this Agreement which
will be considered as a whole.
15.11 No Joint Venture. Nothing contained in this Agreement will be
----------------
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other party. No party will hold itself out as having any authority or
relationship in contravention of this Section.
15.12 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
15.13 Absence of Third Party Beneficiary Rights. No provisions of this
-----------------------------------------
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
15.14 Public Announcement. After execution of this Agreement and upon the
-------------------
mutual agreement of At Home and Webshots, At Home and Webshots will issue a
press release approved by both parties announcing the Merger. Thereafter, At
Home may issue such press releases, and make such other disclosures regarding
the Merger, as it determines are required under applicable securities laws or
regulatory rules. Prior to the publication of such initial and mutually agreed
press release, neither party will make any public announcement relating to this
Agreement or the transactions contemplated hereby (except as may be required by
law) and Webshots will use its reasonable efforts to prevent any trading in At
Home Common Stock by its officers, directors, employees, shareholders and
agents. Neither At Home nor Webshots will make any disclosures regarding this
Agreement or the Merger that would jeopardize At Home's ability to timely and
lawfully issue the shares of At Home Common Stock in the Merger pursuant to the
exemptions described in Section 2.4.
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<PAGE>
15.15 Disclosure Letter. The Webshots Disclosure Letter shall be
-----------------
arranged in separate parts corresponding to the numbered and lettered sections
contained in Article 3, and the information disclosed in any numbered or
lettered part shall be deemed to relate to and to qualify only the particular
representation or warranty set forth in the corresponding numbered or lettered
Section in Article 3, and shall not be deemed to relate to or to qualify any
other representation or warranty (unless it is reasonably apparent from the
------
information set forth in Webshots Disclosure Schedule, that such information
qualifies another representation or warranty of Webshots in Article 3).
15.16 Confidentiality. Webshots and At Home each confirm that they have
---------------
entered into the Confidentiality Agreement and that they are each bound by, and
will abide by, the provisions of such Confidentiality Agreement (except that At
Home will cease to be bound by the Confidentiality Agreement after the Merger
becomes effective). If this Agreement is terminated, all copies of documents
containing confidential information of a disclosing party will be returned by
the receiving party to the disclosing party or be destroyed, as provided in the
Confidentiality Agreement.
15.17 Entire Agreement. This Agreement and the exhibits hereto constitute
----------------
the entire understanding and agreement of the parties hereto with respect to the
subject matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect hereto other than the Confidentiality
Agreement. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
<TABLE>
<CAPTION>
AT HOME CORPORATION WEBSHOTS CORPORATION
<S> <C>
By: /s/ David G. Pine By: /s/ Andrew Laakmann
-------------------------- ----------------------------------
Andrew Laakmann, President and CEO
Name: David G. Pine
------------------------
Title: Senior Vice President and General Counsel
-----------------------------------------
OCEANBEACH, INC.
By: /s/ Robert A. Lerner
--------------------------
Name: Robert Lerner
------------------------
Title: Chief Financial Officer
-----------------------
WEBSHOTS SHAREHOLDERS
/s/ Andrew Laakmann /s/ Danna Stuven
- ------------------------------ -------------------------------------
Andrew Laakmann Danna Stuven
/s/ Nicholas Wilder /s/ Alexis Rocherolle
- ------------------------------ -------------------------------------
Nicholas Wilder Alexis Rocherolle
</TABLE>
[Signature Page to Agreement and Plan of Reorganization]
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<PAGE>
EXHIBIT 3.03
CERTIFICATE OF DESIGNATION
of
SERIES A NON-VOTING CONVERTIBLE PREFERRED STOCK
of
AT HOME CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
---------------------------------
At Home Corporation, a Delaware corporation (the "Company"), does hereby
certify that pursuant to the authority granted to and vested in the Board of
Directors of the Company (the "Board of Directors" or the "Board") in accordance
with the provisions of Article IV, Section C of the Fifth Amended and Restated
Certificate of Incorporation of the Company, and in accordance with the
provisions of Section 151 of the Delaware General Corporation Law, the Company's
Board of Directors has duly adopted the following resolutions creating a series
of Preferred Stock, par value $0.01 per share ("Preferred Stock"), of the
Company designated as Series A Non-Voting Convertible Preferred Stock.
RESOLVED, that the Company hereby designates and creates a series of
Preferred Stock of the Company and hereby states the designation and number of
shares, and fixes the relative rights, preferences, and limitations thereof as
follows:
A. Designation and Amount. Of the 9,650,000 shares of Preferred
----------------------
Stock authorized to be issued by the Company, 10,673.549 shares shall be
designated as "Series A Non-Voting Convertible Preferred Stock" ("Series A
Preferred Stock"). Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
--------
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Company convertible
into Series A Preferred Stock.
B. Rights, Preferences and Restrictions of Preferred Stock. The
-------------------------------------------------------
rights, preferences, restrictions and other matters relating to the Series A
Preferred Stock are as follows:
1. Dividends and Distributions.
---------------------------
(a) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any other stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, and subject to Section
5(c)(ii) hereof, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, non-cumulative dividends in an amount
(if any) per share (rounded to the nearest cent), subject to the provision for
adjustment hereinafter set forth, equal to 1000 times the aggregate per share
amount of all cash dividends, and 1000 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Series A Common Stock, par
1
<PAGE>
value $0.01 per share (the "Common Stock"), of the Company, or a subdivision of
the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock. In the event the Company shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Company shall declare a dividend or distribution on the
Series A Preferred Stock as provided in subsection (a) of this Section at the
same time it declares a dividend or distribution on the Common Stock (other than
a dividend payable in shares of Common Stock). The Board of Directors shall fix
a record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
(c) Dividends payable pursuant to subsection (a) of this Section
shall not be mandatory or cumulative (except as provided in subsection (b) of
this Section) and no rights or interest shall accrue to the holders of the
Series A Preferred Stock by reason of the fact that the Company shall fail to
declare or pay dividends on the Preferred Stock in any amount in any calendar
year or any fiscal year of the Company, whether or not earnings of the Company
in any calendar year or fiscal year were sufficient to pay such dividends in
whole or in part.
(d) Except as provided in this Section 1, holders of the Preferred
Stock shall not be entitled to receive any dividends.
2. Voting Rights. Except as otherwise provided by law, holders of
-------------
Series A Preferred Stock shall have no voting rights and their consent shall not
be required for taking any corporate action.
3. Reacquired and Converted Shares. Any shares of Series A
-------------------------------
Preferred Stock purchased, received upon conversion or otherwise acquired by the
Company in any manner whatsoever shall be retired and canceled promptly after
the acquisition thereof and shall not be reissued.
4. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Upon any liquidation, dissolution or winding up of the
Company, the holders of shares of Series A Preferred Stock shall be entitled to
receive an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, on a pro rata pari
passu basis with the Common Stock, plus an amount equal to any declared but
unpaid dividends. In the event the Company shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the
2
<PAGE>
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The foregoing rights upon liquidation, dissolution or winding
up provided to the holders of Series A Preferred Stock shall be subject to the
rights of the holders of any other series of Preferred Stock (or any other
stock) ranking prior and superior to the Series A Preferred Stock upon
liquidation, dissolution or winding up.
5. Conversion Rights. The outstanding shares of Series A
-----------------
Preferred Stock shall be convertible into Common Stock as follows:
(a) Right to Convert. Subject to subsection (c), each share of
----------------
Series A Preferred Stock shall become converted into the right to receive 1000
shares of Common Stock (the "Conversion Ratio") at the office of the Company or
any transfer agent for the Series A Preferred Stock, pursuant to the following
schedule: (i) 5,568.098 shares of Series A Preferred Stock (the "Reserved
Shares") on the two year anniversary of the date of original issuance of the
Series A Preferred Stock, (ii) 500 shares (the "Monthly Conversion Amount") of
Series A Preferred Stock on the date 30 days following the date of original
issuance of the Series A Preferred Stock, and (iii) excluding all Reserved
Shares, the Monthly Conversion Amount of Series A Preferred Stock on the
completion of each successive 30-day period following the initial 30-day period.
Notwithstanding the foregoing provisions of this Section 5(a), no shares of
Series A Preferred Stock held by a holder of Series A Preferred Stock who
transfers shares of Series A Preferred Stock to a Charitable Organization (as
such term is defined in Section 5(i)), which shares of Series A Preferred Stock
automatically convert into the right to receive shares of Common Stock pursuant
to Section 5(i) (such shares of Common Stock, the "Converted Shares"), shall
convert into the right to receive shares of Common Stock pursuant to the
schedule described in this Section 5(a) until the cumulative aggregate number of
shares of Common Stock that would have been issued upon conversion of such
transferred shares of Series A Preferred Stock pursuant to the schedule
described in this Section 5(a) equals the aggregate number of Converted Shares.
The initial Conversion Ratio of the Series A Preferred Stock shall be subject to
adjustment as hereinafter provided.
(b) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the fair market value of such fractional interest as
determined by the Company's Board of Directors. Before any holder of Series A
Preferred Stock shall be entitled to receive any certificates for the whole
shares of Common Stock issuable upon conversion of Series A Preferred Stock
(including, without limitation, any conversion pursuant to Section 5(i)), such
holder shall (i) deliver a certificate or certificates representing shares of
Series A Preferred Stock, if such stock is certificated, or (ii) deliver written
instructions to convert a number of Series A Preferred Stock, if such holder's
shares of Series A Preferred Stock are represented by an interest in a global
security, in each case, which shares of Series A Preferred Stock shall have
become converted into the right to receive shares of Common Stock pursuant to
the schedule set forth in Section 5(a), or the terms of Section 5(i), to the
Company at the office of the Company or of any transfer agent for the Series A
Preferred Stock. The Company shall, as soon as practicable after such delivery,
issue and deliver at such office to such holder of Series A Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
the holder shall be entitled as aforesaid and a check payable to the holder in
the amount of any cash amounts payable as the result of a conversion into
fractional shares of Common Stock. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date such certificate or
certificates are delivered, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
3
<PAGE>
(c) Adjustments to Conversion Ratio for Certain Diluting Issues.
-----------------------------------------------------------
(i) Adjustments for Dividends, Splits, Subdivisions, Combinations
-------------------------------------------------------------
or Consolidation of Common Stock. In the event the outstanding shares of Common
- -----------------------------
Stock shall be increased by stock dividend payable in Common Stock, stock split,
subdivision, or other similar transaction into a greater number of shares of
Common Stock, the Conversion Ratio of the Series A Preferred Stock then in
effect shall, concurrently with the effectiveness of such event, be increased
proportionally. In the event the outstanding shares of Common Stock shall be
decreased by reverse stock split, combination, consolidation, or other similar
transaction into a lesser number of shares of Common Stock, the Conversion Ratio
of the Series A Preferred Stock then in effect shall, concurrently with the
effectiveness of such event, be decreased proportionally.
(ii) Adjustments for Other Distributions. In the event the Company
-----------------------------------
at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in securities of the Company other than shares of Common Stock and other
than any distribution which results in the payment of a dividend described in
Section 1, then and in each such event provision shall be made so that the
holders of Series A Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Company which they would have received had their
Series A Preferred Stock been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the date of conversion, retained such securities receivable by
them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section 5 with respect to the rights of the
holders of the Series A Preferred Stock.
(iii) Adjustments for Reclassification, Exchange and Substitution.
-----------------------------------------------------------
If the Common Stock issuable upon conversion of the Series A Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification,
or otherwise (other than a subdivision or combination of shares provided for
above), then following the effectiveness of such reorganization or
reclassification the Series A Preferred Stock shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or classes of
stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of such Series A Preferred
Stock immediately before that change.
(iv) Monthly Conversion Amount. In the event of any adjustment to
-------------------------
the Conversion Ratio pursuant to this Section 5, the Monthly Conversion Amount
shall be appropriately and proportionately adjusted.
(d) No Impairment. Except as provided in Section 5, the Company
-------------
will not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock against
impairment.
(e) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Ratio for the Series A Preferred
Stock pursuant to this Section 5, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Series A Preferred Stock a certificate setting forth
such
4
<PAGE>
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written request
at any time of any holder of Series A Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the Conversion Ratio at the time in effect, and (iii)
the number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of the Series A
Preferred Stock.
(f) Notices of Record Date. In the event that this Company shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock, or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other corporation, or
sell, lease, or convey all or substantially all its property or business, or to
liquidate, dissolve, or wind up;
then, in connection with each such event, this Company shall send to
the holders of Series A Preferred Stock:
(1) at least 10 days prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (iii) and (iv) above; and
(2) in the case of the matters referred to in (iii) and (iv)
above, at least 20 days' prior written notice of the date when the same shall
take place (and specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event or the record date for the
determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally, or given by
first class mail, postage prepaid, addressed to the holders of the Series A
Preferred Stock at the address for each such holder as shown on the books of
this Company.
(g) Issue Taxes. The Company shall pay any and all issue and
-----------
other taxes (other than income taxes) that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of Series A
Preferred Stock pursuant hereto; provided, however, that the Company shall not
be obligated to pay any transfer taxes resulting from any transfer requested by
any holder in connection with any such conversion.
(h) Reservation of Stock Issuable Upon Conversion. The Company
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued
5
<PAGE>
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite stockholder approval of any
necessary amendment to its Certificate of Incorporation.
(i) Acceleration of Conversion.
--------------------------
(i) Upon the close of business on the date on which the Series B
Common Stock Directors are no longer entitled to exercise the Special Director
Approval Right, all shares of Series A Preferred Stock, other than Reserved
Shares, then outstanding shall automatically be converted into the right to
receive shares of Common Stock according to the Conversion Ratio then in effect.
(ii) Upon the irrevocable transfer of shares of Series A Preferred
Stock, other than Reserved Shares, not to exceed in the aggregate, together with
all such prior transfers, 1,418.2632 shares of Series A Preferred Stock, by an
initial holder of such shares of Series A Preferred Stock to an institution
qualified as tax exempt under Section 501(a) of the Code, as described in
501(c)(3) of the Internal Revenue Code of 1986, as amended (a "Charitable
Organization"), such transferred shares of Series A Preferred Stock shall, upon
the close of business on the date of such transfer, automatically be converted
into the right to receive shares of Common Stock according to the Conversion
Ratio then in effect.
6. Consolidation, Merger, etc. In case the Company shall enter
--------------------------
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. No Redemption. The shares of Series A Preferred Stock shall
-------------
not be redeemable.
6
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Company by its General Counsel and Secretary this 13th day of December,
1999.
AT HOME CORPORATION
By: /s/ David G. Pine
--------------------------------------------
David G. Pine, General Counsel and Secretary
7
<PAGE>
EXHIBIT 10.26
November 23, 1999
Thomas A. Jermoluk
Chief Executive Officer
At Home Corporation
450 Broadway
Redwood City, CA 94063
Re: Amendment of Employment Agreement
---------------------------------
Dear TJ:
This letter will clarify and amend your employment agreement dated July 19,
1996 (the "Employment Agreement") with At Home Corporation (the "Company"). As
you know, the Board of Directors has approved, and the Company is announcing, a
plan for the restructuring of the Company that would include a separation of the
media business from the platform business of the Company and the issuance of a
tracking stock for the media business. The Board recognizes that this
restructuring can be expected to lead to a management structure in which you are
no longer the Chief Executive Officer of the Company or as a result of which you
are placed in a lower stature position than Chief Executive Officer of the
Company. Accordingly, we agree as follows:
1. Should you cease to be Chief Executive Officer of the Company for any
reason, including your resignation, the Company shall be deemed to have
terminated your employment without "cause" pursuant to paragraph 5(c) or (d) of
the Employment Agreement and, as a result, all vesting restrictions with respect
to the Restricted Stock and the Series K Stock referred to in your Employment
Agreement shall lapse on the date of such termination.
2. At such time as you cease to be Chief Executive Officer of the
Company, if requested by the Board, you will become Chairman of the Board of the
Company or its media business subsidiary and you agree to continue to serve in
that capacity (a) up to full time as requested by your successor as Chief
Executive Officer to assist with the restructuring of the Company through July
31, 2000 and (b) thereafter in an active role as requested by the Chief
Executive Officer to assist with the post-restructuring transition through the
period ending one year after the restructuring is accomplished, or if the
restructuring is not accomplished by December 31, 2000, until December 31, 2000.
3. As provided under the terms of the option granted to you in December
1998 to purchase a total of one million shares of the Company's Series A Common
<PAGE>
Stock, that option will continue to vest as long as you continue to serve as a
member of the Board of the Company or its media business subsidiary.
We agree that this letter clarifies and, to the extent set forth herein, amends
the terms of your Employment Agreement.
Very truly yours,
/s/ L. JOHN DOERR
L. John Doerr
for the Board of Directors
of At Home Corporation
Agreed and Accepted:
/s/ THOMAS A. JERMOLUK
- --------------------------
Thomas A. Jermoluk
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is entered into as of the
Closing Date of the Merger Agreement as defined below, by and between At Home
Corporation ("@Home"), a Delaware corporation, with its principal offices
located at 425 Broadway, Redwood City, California 94063, and George Bell, a
resident of Menlo Park, California ("Bell").
RECITALS
--------
A. Bell is and has been the Chief Executive Officer of Excite, Inc.
("Excite") since January 1996.
B. On January 19, 1999, Excite and @Home entered into an Agreement and
Plan of Reorganization (the "Merger Agreement"), pursuant to which
Excite and @Home agreed to merge Excite into @Home, with @Home to
become the parent corporation and Excite to become @Home's wholly-owned
subsidiary.
C. On January 19, 1999, Bell entered into a Company Voting Agreement with
@Home, pursuant to which Bell agreed to vote his shares of Excite's
common stock in favor of the proposed merger of Excite into @Home.
D. The merger of Excite into @Home is expected to be completed on or
before May 31, 1999.
E. @Home desires to retain the services of Bell as the Chief Executive
Officer of Excite after the merger of Excite into @Home and Bell
desires to provide such services.
Therefore, in consideration of the promises and the terms and
conditions set forth in this Agreement, the parties agree as follows:
1. Position. Effective on the Closing Date as defined in the Merger
--------
Agreement (the "Effective Date"), during the term of the Agreement, Bell will
serve @Home in the initial position of Chief Executive Officer of @Home, and,
subject to the terms and conditions of this Agreement, will report to the Chief
Executive Officer of @Home and will have such positions as may from time to time
be assigned to Bell by the Chief Executive Officer of @Home and the Board of
Directors of @Home (the "Board"). On the Effective Date, Bell will be appointed
to the Board in the capacity of Director and will serve in that capacity during
the term of this Agreement, subject at all times to the Articles of
Incorporation, then-current Bylaws and policies applicable to all directors of
@Home that may be adopted by the Board from time to time. @Home shall use its
best efforts to have Bell nominated and elected and re-elected to the Board at
each Annual Stockholder meeting held during his period of service as Chief
Executive Officer of @Home.
2. Duties. Bell will serve @Home in such capacities and with such
------
duties and responsibilities as the Chief Executive Officer of @Home and the
Board may from
<PAGE>
time to time determine. Bell will comply with and be bound by @Home's operating
policies, procedures and practices from time to time in effect during Bell's
employment. Bell hereby represents and warrants that he is free to enter into
and fully perform the Agreement and the agreements referred to herein without
breach of any agreement or contract to which he is a party or by which he is
bound.
3. Exclusive Service. Bell will devote his full time and efforts
-----------------
exclusively to his employment and apply all his skill and experience to the
performance of his duties and advancing @Home's interests in accordance with
Bell's experience and skills.
4. Term of Agreement. This Agreement will commence on the Effective
-----------------
Date and will continue until the earlier of four (4) years after the Effective
Date or when terminated pursuant to Section 5 hereof.
5. Termination.
-----------
5.1 Events of Termination. Bell's employment with @Home may be
---------------------
terminated by @Home for any reason at any time with or without "Cause" as
defined under Section 5.2 below. During his employment hereunder, Bell shall be
an "at-will employee" of @Home.
5.2 "Cause" Defined. For purposes of this Agreement, "Cause" for Bell's
---------------
termination will exist at any time after the happening of one or more of the
following events:
(a) a willful failure or a refusal to comply in any material
respect with the reasonable policies, standards or regulations
of @Home;
(b) a good faith determination by the Board that Bell repeatedly
and willfully has refused to follow the written directions of
the Board of Directors of @Home;
(c) unprofessional, unethical or fraudulent conduct or conduct
that materially discredits Excite or @Home or is materially
detrimental to the reputation, character or standing of Excite
or @Home;
(d) dishonest conduct or a deliberate attempt to do an injury to
Excite or @Home;
(e) Bell's material breach of a term of the Agreement or his
Invention Assignment and Confidentiality Agreement, including,
without limitation, Bell's theft of Excite's or @Home's
proprietary information;
(f) an unlawful or criminal act which would reflect badly on
Excite or @Home in Excite or @Home's reasonable judgment; or
(g) Bell's death or total disability.
-2-
<PAGE>
For purposes of this Section 5.2, Bell will be deemed totally disabled if in the
good faith determination of the Board, based on sound medical advice, Bell has
become physically or mentally incapable of performing his duties for a
continuous period of 120 days, or for a total of 120 days in any consecutive
twelve (12) month period.
5.3 "Constructive Termination" Defined. For the purposes of this
----------------------------------
Agreement, any of the following events or conditions which occur and are not
cured by @Home within thirty (30) days after @Home's receipt of Bell's written
notice (the "Notice") of their occurrence will be considered to constitute
"Constructive Termination" of Bell and will be deemed to terminate the Agreement
on the date which is thirty (30) days after @Home's receipt of such Notice:
(a) a change in Bell's status, title, position or
responsibilities (including reporting responsibilities) that,
in Bell's reasonable judgment, represents a substantial
reduction of status, title, position or responsibilities as in
effect immediately prior thereto; the assignment to Bell of
any duties or responsibilities that, in Bell's reasonable
judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of Bell from or
failure to reappoint or reelect Bell to any such status,
title, position or responsibilities, except in connection with
the termination of Bell's employment for Cause, for Bell's
disability or death or on account of Bell's voluntary
resignation of his status, title, position, responsibilities
or employment; provided that for purposes of all of the
foregoing, any change in status, title, position or
responsibilities as in effect prior to the Effective Date
shall not be considered to be Constructive Termination;
(b) a reduction in Bell's Base Salary without Bell's consent;
(c) requiring Bell (without Bell's consent) to be based at
any place outside a thirty-five (35) mile radius of his place
of employment as of the Effective Date, except for reasonably
required travel related to his employment;
(d) @Home's failure to continue in effect any material
compensation or benefit plan, program or practice (or the
substantial equivalent thereof) in which Bell was
participating as of the Effective Date; or
(e) @Home's failure to continue in effect any material
compensation or benefit plan, program or practice (or the
substantial equivalent thereof) in which Bell will participate
after the Effective Date.
5.4 Effect of Termination for Cause. In the event of any termination of
-------------------------------
this Agreement for Cause ("TERMINATION FOR Cause"), @Home shall pay Bell the
compensation and benefits otherwise payable to Bell under Section 6 of this
Agreement through the date of termination set forth in a termination notice.
Bell's rights under
-3-
<PAGE>
@Home's benefit plans of general application shall be determined under the
provisions of those plans.
5.5 Effect of Termination Without Cause or Constructive Termination. In
---------------------------------------------------------------
the event of any termination of the Agreement upon a termination without Cause
("Termination without Cause") or a Constructive Termination, @Home shall:
(a) pay Bell the compensation and benefits otherwise payable
to Bell under Section 6 through such Termination without Cause
or Constructive Termination;
(b) pay Bell an amount equal to one (1) year of Base Salary
plus one (1) year of any incentive-based bonus in effect at
the target amount at the date of such Termination without
Cause or Constructive Termination;
(c) continue or accelerate the vesting of one (1) year of all
outstanding option grants which have been issued to Bell as of
the date of such Termination without Cause or Constructive
Termination, determined by whether continuation or
acceleration minimizes, if possible, the associated expense
charge to @Home; and
(d) continue for one (1) year Bell's participation in @Home's
benefit plans of general application under the provisions of
those plans at @Home's expense and thereafter provide Bell
with health coverage under the provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended;
provided that such paid coverage shall terminate upon Bell
becoming covered under a similar plan of another employer.
5.6 Tax Defense and Indemnity. It is the intent of the parties that any
-------------------------
payment of compensation to Bell pursuant to Section 5.5 or pursuant to the
Merger Agreement, not expose Bell to any tax liabilities above and beyond those
liabilities associated with the payment of employment compensation generally.
Therefore, in the event that such intended tax treatment is challenged by the
Internal Revenue Service (the "IRS"), @Home will defend Bell from any and all
claims, liability, damages and/or costs (including, but not limited to,
attorneys fees) arising from any such challenge by the IRS. Bell will promptly
notify @Home of any and all such claims and will reasonably cooperate with @Home
with the defense and/or settlement thereof; provided that, if any settlement
requires an affirmative obligation of, results in any ongoing liability to or
prejudices or detrimentally impacts Bell in any way and such obligation,
liability, prejudice or impact can reasonably be expected to be material, then
such settlement shall require Bell's written consent (not to be unreasonably
withheld or delayed) and Bell may have his own counsel in attendance at all
proceedings and substantive negotiations relating to such claim.
5.7 Restrictions on Competition after Termination. In the event of (i)
---------------------------------------------
a Termination without Cause or Constructive Termination and @Home's performance
of the obligations described in Section 5.5 of this Agreement or (ii) a
Termination for Cause pursuant to Section 5.2 of this Agreement and @Home's
performance of the
-4-
<PAGE>
obligations described in Section 5.4 of this Agreement, Bell agrees that, for a
one (1) year period Bell shall not directly or indirectly, either for himself or
for any other person or business entity, participate as a manager, partner,
agent, active investor, consultant, director officer or employee in any business
entity or activity which is directly competitive with the business conducted by
Excite or @Home. This section shall not prohibit an investment by Bell in not
more than three percent (3%) of the securities of any corporation listed on the
New York or American Stock Exchanges or the securities of which are quoted on
the Automatic Quotation System on the National Association of Securities
Dealers, Inc.
6. Compensation and Benefits.
-------------------------
6.1 Compensation. @Home and Bell hereby agree that, commencing on the
------------
Effective Date, @Home will pay Bell the base salary of $210,000 ("Base Salary")
in accordance with @Home's normal payroll procedures.
6.2 Additional Benefits. Bell will be eligible to participate in
-------------------
@Home's employee benefit plans of general application, including without
limitation those plans covering pension and profit sharing, executive bonuses,
stock purchases, stock options, and those plans covering life, health, and
dental insurance in accordance with the rules established for individual
participation in any such plan and applicable law. Bell will receive such other
benefits, including vacation, holidays and sick leave, as @Home generally
provides to its employees. Bell's target bonus shall be $150,000 and tied to
goals agreed to by the Board and Bell. As has been the case for the preceding
three years, Bell shall receive an advance of the $150,000 for 1999 in four
equal installments, repayable after March 2000 if such goals are not obtained.
6.3 Expenses. @Home will reimburse Bell for all reasonable and
--------
necessary expenses incurred by Bell in connection with @Home's business,
provided that such expenses are incurred in accordance with @Home's applicable
policy and are properly documented and accounted for in accordance with the
requirements of the Internal Revenue Service.
7. Proprietary Rights. Bell hereby agrees to execute an Employee
------------------
Invention Assignment and Confidentiality Agreement with @Home in substantially
the form attached hereto as Exhibit A.
---------
8. Employee Solicitation. So long as Bell is an employee of @Home and
---------------------
for one (1) year thereafter, Bell shall not, directly or indirectly, either for
himself or for any other person or entity, directly or indirectly, solicit,
induce or attempt to induce any employee of Excite or @Home and/or their
subsidiaries to terminate his or her employment with Excite or @Home and/or
their subsidiaries.
9. Miscellaneous.
-------------
9.1 Arbitration
(a) Arbitrable Claims. All disputes between Bell (and his
-----------------
attorneys, successors, and assigns) and Excite or @Home (and its affiliates,
shareholders,
-5-
<PAGE>
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of Bell,
including without limitation, all disputes arising under this Agreement,
("Arbitrable Claims") shall be resolved by binding arbitration. All persons and
entities specified in the preceding sentence (other than @Home and Bell) shall
be considered third-party beneficiaries of the rights and obligations created by
this Section 9.1. Arbitrable Claims shall include, but are not limited to,
contract (express or implied) and tort claims of all kinds, as well as all
claims based on any federal, state, or local law, statute, or regulation.
Arbitration shall be final and binding upon the parties and shall be the
exclusive remedy for all Arbitrable Claims.
Claims under applicable workers' compensation law and
unemployment insurance claims are not covered by the Agreement. Similarly,
claims for provisional relief, such as temporary restraining orders, preliminary
injunctions, attachments and the like, are not covered by this Agreement. Such
claims may include, but are not limited to, unfair competition and/or the use
and/or unauthorized disclosure of trade secrets or confidential information.
Bell understands and agrees that either party may seek and obtain relief for
such claims from a court with jurisdiction over the matter.
THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO
TRIAL BY JURY WITH REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. The arbitration will be held under the auspices
---------
of either the American Arbitration Association ("AAA") or Judicial Arbitration &
Mediation Services, Inc. ("JAMS"), with the designation of the sponsoring
organization to be made by the party who did not initiate the claim.
Except as provided in the Agreement, the arbitration
shall be in accordance with the then-current Model Employment Arbitration
Procedures of AAA (if AAA is designated), or the then-current JAMS Employment
Arbitration Rules (if JAMS is designated). The arbitrator shall be either a
retired judge or an attorney licensed to practice law in the state in which the
arbitration is convened (the "Arbitrator"). The arbitration shall take place in
or near the city in which Bell is or was last employed by Excite.
The Arbitrator shall be selected as follows. The
sponsoring organization shall give each party a list of eleven (11) arbitrators
drawn from its panel of employment dispute arbitrators. Each side may strike all
names on the list it deems unacceptable. If only one (1) common name remains on
the lists of all parties, that individual shall be designated as the Arbitrator.
If more than one (1) common name remains on the lists of all parties, the
parties shall strike names alternately from the list of common names until only
one remains.
In any arbitration, the burden of proof shall be
allocated as provided by applicable law. Either party may bring an action in
court to compel arbitration under this Agreement and to enforce an arbitration
award. Otherwise, neither party shall initiate or prosecute any lawsuit or
administrative action in any way
-6-
<PAGE>
related to any Arbitrable Claim. The Federal Arbitration Act shall govern the
interpretation and enforcement of this Section 9.1. The fees of the arbitrator
shall be split between both parties equally.
(c) Confidentiality. All proceedings and all documents
---------------
prepared in connection with any Arbitrable Claim shall be confidential and,
unless otherwise required by law, the subject matter thereof shall not be
disclosed to any person other than the parties to the proceedings, their
counsel, witnesses and experts, the arbitrator, and, if involved, the court and
court staff.
(d) Continuing Obligations. The rights and obligations of
----------------------
Bell and @Home set forth in this Section 9.1 shall survive the termination of
Bell's employment and the expiration of the Agreement.
9.2 Release Prior to Receipt of Termination Benefits. If, pursuant to
------------------------------------------------
Sections 5.5 of this Agreement, Bell's employment with @Home terminates, then
prior to, and as a condition of the receipt of any benefits under this Agreement
on account of such termination, Bell shall, as of the date of such termination,
execute an employee agreement and release in the form attached hereto as Exhibit
-------
B (the "Employee Agreement and Release"). Such Employee Agreement and Release
- -
shall specifically relate to all of Bell's rights and claims in existence at the
time of such execution and shall confirm Bell's obligations under @Home's
standard form of Employee Invention Assignment and Confidentiality Agreement.
Bell has twenty-one (21) days to consider whether to execute such Employee
Agreement and Release and Bell may revoke such Employee Agreement and Release
within seven (7) days after execution of such Employee Agreement and Release. In
the event Bell does not execute such Employee Agreement and Release within the
twenty-one (21) days specified above, or if Bell revokes such Employee Agreement
and Release within the seven (7) day period specified above, no benefits shall
be payable to Bell on account of his termination under Section 5.5 of this
Agreement.
9.3 Severability. If any provision of the Agreement shall be found by
------------
any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent that
it is found to be invalid or unenforceable and to the extent that to do so would
not deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
9.4 Remedies. @Home and Bell acknowledge that the service to be
--------
provided by Bell is of a special, unique, unusual, extraordinary and
intellectual character, which gives it peculiar value, the loss of which cannot
be reasonably or adequately compensated in damages in an action at law.
Accordingly, Bell hereby consents and agrees that for any breach or violation by
Bell of any of the provisions of the Agreement (including, without limitation,
Sections 3, 5.7, 7 and 8), a restraining order and/or injunction may be issued
against Bell, in addition to any other rights and
-7-
<PAGE>
remedies @Home or its subsidiaries may have, at law or equity, including without
limitation the recovery of money damages.
9.5 No Waiver. The failure by either party at any time to require
---------
performance or compliance by the other of any of its obligations or agreements
shall in no way affect the right to require such performance or compliance at
any time thereafter. The waiver by either party of a breach of any provision
hereof shall not be taken or held to be a waiver of any preceding or succeeding
breach of such provision or as a waiver of the provision itself. No waiver of
any kind shall be effective or binding, unless it is in writing and is signed by
the party against whom such waiver is sought to be enforced.
9.6 Assignment. This Agreement and all rights hereunder are personal to
----------
Bell and may not be transferred or assigned by Bell at any time. Any attempt by
Bell to do so will be void and of no effect. @Home may assign its rights,
together with its obligations hereunder, to any parent, affiliate or successor,
or in connection with any sale, transfer or other disposition of all or
substantially all of its business and assets, provided, however, that any such
-------- -------
assignee assumes @Home's obligations hereunder.
9.7 Withholding. All sums payable to Bell hereunder shall be reduced by
-----------
all federal, state, local and other withholding and similar taxes and payments
required by applicable law.
9.8 Entire agreement. The Agreement constitutes the entire and only
----------------
agreement between the parties relating to employment of Bell with @Home and the
nonsolicitation obligations of the Bell and the Agreement supersedes and cancels
any and all previous contracts, arrangements or understandings with respect
thereto.
9.9 Amendment. The Agreement may be amended, modified, superseded,
---------
canceled, renewed or extended only by an agreement in writing executed by
@Home and Bell.
9.10 Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing and hand delivered, sent by
confirmed facsimile, sent by registered mail, postage pre-paid, or sent by
nationally recognized express courier service. Such notices and other
communications shall be effective upon receipt if hand delivered or sent by
confirmed facsimile, five (5) days after mailing if sent by mail, and one (l)
day after dispatch if sent by express courier, to the following addresses, or
such other addresses as any party shall notify the other parties:
If to @Home: @Home, Inc.
425 Broadway
Redwood City, CA 94063
Fax No.: 650-408-4606
Attention: General Counsel
-8-
<PAGE>
If to Bell: George Bell
540 Grace Drive
Menlo Park, California 94025
Fax No.: 650-329-8299
9.11 Binding Nature. The Agreement shall be binding upon, and inure to
--------------
the benefit of, the successors and personal representatives of the
respective parties hereto.
9.12 Headings. The headings contained in the Agreement are for
--------
reference purposes only and shall in no way affect the meaning or interpretation
of the Agreement. In the Agreement, the singular includes the plural, the plural
includes the singular, the masculine gender includes both male and female
referents, and the word "or" is used in the inclusive sense.
9.13 Counterparts. The Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement.
9.14 Governing Law. The Agreement and the rights and obligations of the
-------------
parties hereto shall be construed in accordance with the laws of California,
without giving effect to the principles of conflict of laws.
9.15 Attorney's Fees. In any legal action, arbitration, or other
---------------
proceeding brought to enforce or interpret the terms of the Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
-9-
<PAGE>
IN WITNESS WHEREOF, @Home and Bell have executed the Agreement as of the date
first above written.
"BELL"
/s/ George Bell
- -------------------------------
Sign Name
George Bell
"@HOME"
At Home Corporation
By: /s/ Thomas A. Jermoluk
----------------------------
Its:
---------------------------
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
-10-
<PAGE>
EXHIBIT A
EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
<PAGE>
EXHIBIT B
EMPLOYEE AGREEMENT AND RELEASE
THIS EMPLOYEE AGREEMENT AND RELEASE ("Release") is between George Bell
("Employee") and At Home Corporation ("@Home"), a Delaware corporation, in
accordance with Section 9.2 of the Employment Agreement entered into by the
parties as of the Closing Date (the "Agreement"). Unless otherwise defined
herein, the terms defined in the Agreement shall have the same defined meanings
in this Release.
1. Payment of Salary. The parties acknowledge and agree that as of the
-----------------
Termination Date, all salary, and accrued Flexible Time Off, and any and all
other benefits, commissions or other such sums due Employee were paid to
Employee. In light of the payment by @Home of all wages due, or to become due to
Employee, California Labor Code Section 206.5 is not applicable to the parties
hereto. Said section provides in pertinent part:
No employer will require the execution of any release of any claim or
right on account of wages due, or to become due, or made as an advance
on wages to be earned, unless payment of such wages has been made.
2. Release. Employee and @Home, on behalf of themselves and their
-------
respective heirs, family members, executors, investors, employees, officers,
directors, agents, attorneys, legal successors and assigns, hereby fully and
forever release each other and their respective heirs, family members,
executors, investors, employees, officers, directors, agents, attorneys legal
successors and assigns, from and agree not to sue concerning, any and all
claims, actions, obligations, duties, causes of action, whether now known or
unknown, suspected or unsuspected, that either of them may possess based upon or
arising out of any matter, cause, fact, thing, act, or omission whatsoever
occurring or existing at any time to and including the Effective Date
(collectively, the "Released Matters"), including without limitation,
(1) any and all claims, other than
breaches in Section 5.7 and Section 7 of the Employment Agreement, relating to
or arising from Employee's employment relationship with @Home and the
termination of that relationship;
(2) any and all claims relating to, or
arising from, Employee's right to purchase, or actual purchase of, shares of
stock of @Home, including, without limitation, any claims of fraud,
misrepresentation, breach of fiduciary duty, breach of duty under applicable
state corporate law, and securities fraud under any state or federal law;
(3) any and all claims for wrongful
discharge of employment; termination in violation of public policy;
discrimination; breach of contract, both express and implied; breach of a
covenant of good faith and fair dealing, both
<PAGE>
express and implied; promissory estoppel; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; unfair
business practices; defamation; libel; slander; negligence; personal injury;
assault; battery; invasion of privacy; false imprisonment; and conversion.
(4) any and all claims for violation of
any federal, state or municipal statute, including, but not limited to, Title
VII of the Civil Rights Act of 1964, the Civil rights Act of 1991, the Age
Discrimination in Employment Act of 1967, the Americans with Disabilities Act of
1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act
of 1974, the Worker Adjustment and Retraining Notification Act, Older Workers
Benefit Protection Act, and the California Fair Employment and Housing Act, and
Labor Code section 201, et. seq.;
(5) any and all claims for violation of
the federal, or any state, constitution;
(6) any and all claims arising out of
any other laws and regulations relating to employment or employment
discrimination;
(7) any and all claims for attorneys'
fees and costs; and
(8) any and all claims either @Home or
Employee may have against the other for any acts by either occurring at any time
prior to the execution of this Release.
Each of the parties agrees that the foregoing enumeration of claims released is
illustrative, and the claims hereby released are in no way limited by the above
recitation of specific claims, it being the intent of the parties to fully and
completely release all claims whatsoever in any way relating to the Employee's
employment with @Home and to the termination of such employment. Each of the
parties agrees that the release set forth in this section will be and remain in
effect in all respects as a complete general release as to the matters released.
This release does not extend to any obligations incurred under the Agreement.
a. Employee represents that Employee's has no lawsuits,
claims or actions pending in Employee's name, or on behalf of any other person
or entity, against @Home or any other person or entity referred to herein.
Employee also represents that Employee does not intend to bring any claims on
Employee's own behalf against @Home or any other person or entity referred to
herein.
b. Employee represents that Employee is not aware of
any claim by Employee other than the claims that are released by this Release.
Employee acknowledges that Employee has been advised by legal counsel and is
familiar with Section 1542 of the Civil Code of the State of California, which
states:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING
<PAGE>
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Employee expressly waives any right or benefit which Employee has or may have
under Section 1542 of the California Civil Code or any similar provision of the
statutory or non-statutory law of any other jurisdiction, including Delaware, to
the full extent that Employee may lawfully waive those rights and benefits
pertaining to the subject matter of this Release. The parties acknowledge that
in the future they may discover claims or facts in addition to or different from
those that they now know or believe to exist with respect to the subject matter
of this Release, and that each of Employee and @Home intend to fully, finally,
and forever settle all of the Released matters in exchange for the benefits set
forth in this Release and in the Agreement. This release will remain in effect
as a full and complete release notwithstanding the discovery or existence of any
additional claims or facts.
3. Indemnification. This Release shall not apply with respect to any
---------------
claims arising under Employee's existing rights to indemnification and defense
pursuant to the articles and bylaws of @Home for acts as a director and/or
officer or to Employee's rights of insurance under any director and officer
liability policy in effect covering @Home's directors and officers. @Home agrees
to maintain any such director and officer liability policy in effect with
respect to Employee's for services performed by him as an officer to the same
extent as other @Home officers.
4. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges
---------------------------------------------
that Employee is waiving and releasing any rights Employee's may have under the
Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and @Home agree that this waiver and
release does not apply to any rights or claims that may arise under ADEA after
the Effective Date of this Release, Employee acknowledges that the consideration
given for this waiver and release agreement in addition to anything of value to
which Employee was already entitled. Employee further acknowledges that Employee
has been advised by this writing that:
a. Employee should consult with an attorney prior to
executing this Release;
b. Employee has at least twenty-one (21) days within
which to consider this Release, although Employee may accept the terms of this
Release at any time within those 21 days;
c. Employee has at least seven (7) days following the
execution of this Release by the parties to revoke this Release; and
d. This Release will not be effective until the
revocation period has expired.
<PAGE>
5. Voluntary Execution of Agreement. This Release is executed
--------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with the full intent of releasing all claims. The parties
acknowledge that:
a. they have read this Release;
b. they have been represented in the preparation,
negotiation, and execution of this Release by legal counsel of their own choice
or that they have voluntarily declined to seek such counsel;
c. they understand the terms and consequences of this
Release and of the releases it contains;
d. they are fully aware of the legal and binding effect
of this Release.
EMPLOYEE UNDERSTANDS THAT EMPLOYEE MAY CONSULT WITH
AN ATTORNEY BEFORE SIGNING THIS RELEASE AND
UNDERSTANDS THAT EMPLOYEE IS GIVING UP ANY LEGAL
CLAIMS EMPLOYEE HAS AGAINST @HOME BY SIGNING THIS
RELEASE. EMPLOYEE FURTHER ACKNOWLEDGES THAT EMPLOYEE
DOES SO KNOWINGLY, WILLINGLY, AND VOLUNTARILY IN
EXCHANGE FOR THE BENEFITS DESCRIBED IN SECTION 3 OF
THE AGREEMENT.
EMPLOYEE: AT HOME CORPORATION
George Bell ------------------------------
By:
Title:
- ------------------------------
Signature
Date: Date:
------------------------- -------------------------
<PAGE>
EXHIBIT 10.29
CONFIDENTIAL
SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE (the "Agreement") is
entered into by and between At Home Corporation, a Delaware corporation
("@Home") and Robert Tomasi, Jr. ("Employee") as of June 15, 1999.
NOW, THEREFORE, the parties agree as follows:
1. Step Down Date. On June 30, 1999 (the "Step Down Date"), Employee
--------------
will cease rendering services to @Home and resign from his position as Senior
Vice President, Operations. Employee acknowledges and agrees that his employment
with @Home will terminate as of the Step Down Date.
2. Severance and Other Benefits.
----------------------------
(a) Severance Pay. Home will pay to Employee, in addition to his normal
salary through the Step Down Date, a severance payment of One Hundred Twelve
Thousand and Five Hundred dollars ($112,500.00) gross (which equals Employee's
gross salary for six (6) months, less all applicable tax withholdings and other
standard deductions. Such severance payment will be made on the Step Down Date
provided that the seven day revocation period set forth in Section 14 below has
expired. If such revocation period has not expired by the Step Down Date, the
severance payment will be made immediately following the expiration of the
revocation period.
(b) Accrued Vacation Pay. On Step Down Date, @Home will pay Employee,
less all applicable tax withholdings and other standard deductions, for all
unused and not lost vacation days accrued through the Step Down Date.
(c) Medical and Dental Benefits; COBRA. Until the earlier to occur of
December 31, 1999 or the date that Employee obtains a position with a new
employer providing medical and dental benefits, @Home will provide Employee with
medical and dental coverage by paying Employee's COBRA expenses. Thereafter,
Employee may continue such coverage, at Employee's own expense, to the extent
provided for by COBRA.
3. Expenses. Employee will submit to @Home by the Step Down Date any
--------
unreimbursed @Home authorized business expenses incurred by him on or before the
Step Down Date and @Home will promptly reimburse Employee for such expenses.
4. Stock. @Home granted Employee a stock option to purchase 400,000
-----
shares of @Home Series A Common Stock (the "Original Option Shares") with an
exercise price of $18.4375 per share pursuant to a Stock Option Agreement dated
November 25, 1997 (the "Original Grant"). @Home granted Employee a stock option
to purchase 25,000 shares of @Home Series A Common Stock (the "Additional Option
Shares") with an exercise price of $33.9375 per share pursuant to a Stock Option
Agreement dated May 1, 1998 (the "Additional Grant"). The parties agree that the
Original Option Shares and the Additional Option Shares (collectively, the
"Option Shares") will continue to vest through the Step Down Date in accordance
with the vesting schedule set forth in the Original Grant and the Additional
Grant, respectively (i.e. in both cases 2.083% per month). After the Step Down
Date, no further Option Shares shall vest except as otherwise provided for in
the Option Continuation Agreement entered into by Employee and @Home on even
date herewith. Employee may then exercise and purchase any of his vested Option
Shares that he has not previously exercised until March 31, 2000. Employee
acknowledges that any incentive stock options that he may hold will become
nonqualified stock options if Employee exercises such stock options
-1-
<PAGE>
CONFIDENTIAL
more than three months after the Step Down Date. In all other respects, the
Option Shares will continue to be subject to the terms of the Original Grant or
the Additional Grant. @Home and Employee acknowledge and agree that the share
numbers set forth in this Agreement will be adjusted to take into effect @Home's
two-for-on stock split that will become effective on or about June 16, 1999.
5. Proprietary Information. Employee will remain bound by the Invention
-----------------------
Assignment and Proprietary Information Agreement that he executed with @Home. On
the Step Down Date, Employee will return to @Home all @Home proprietary
information in tangible form (e.g. customer lists, business plans, etc.) and all
other @Home property now in his possession (including, if applicable, his @Home
badge, portable computer, and access cards/keys).
6. Section 401(k) Plan. Employee will no longer be eligible to make
-------------------
contributions to the @Home Network Retirement Savings and Investment Plan (the
"401(k) Plan") after the Step Down Date. On the Step Down Date, Employee's
contributions to the 401(k) Plan, if any, will be distributed to him or left in
the 401(k) Plan in accordance with his instructions and the provisions of 401(k)
Plan.
7. Employee Release. Employee forever fully releases and discharges
----------------
@Home, its predecessors, successors, subsidiaries, officers, directors, agents,
attorneys, employees and assigns (collectively referred to hereafter as
"Releasees") from any and all causes of action, claims, suits, demands or other
obligations or liabilities (except those set forth in this Agreement), whether
known or unknown, that Employee ever had, now has, or may in the future have,
that may be alleged to arise out of or in connection with his employment with
@Home and his separation therefrom (collectively referred to hereafter as the
"Employee Claims"), including, but not limited to: (a) any claims for wages,
stock, bonuses or expense reimbursements; and (b) any claims that any terms of
his employment with @Home or any circumstances of his separation were wrongful,
in breach of any obligation of @Home or in violation of any contractual rights
or any rights arising under any federal, state or local statute (including,
without limitation, the Age Discrimination in Employment Act and the Older
Worker Protection Act). Employee further agrees not to sue or otherwise
institute or cause to be instituted or in any way participate in (except at the
request of @Home) legal or administrative proceedings against the Releasees with
respect to the Employee Claims.
8. Other Claims. This Agreement extends to all claims of every nature and
------------
kind, known or unknown, suspected or unsuspected, past, present, or future,
arising from or attributable to Employee's employment with @Home or the
termination of that employment, and any and all rights granted to Employee under
Section 1542 of the California Civil Code or any analogous state law or federal
law or regulation are hereby expressly waived. Section 1542 of the Civil Code of
the State of California reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST OF MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
9. Stock Purchase Plan. As of the Step Down Date, Employee will no longer
-------------------
be eligible to participate in @Home's 1997 Employee Stock Purchase Plan (the
"ESPP"), and @Home will refund to Employee all of the funds that he contributed
to ESPP after February 1, 1999 (i.e. the beginning of the current ESPP offering
period).
-2-
<PAGE>
CONFIDENTIAL
10. Confidentiality. Both parties agree that they will not disclose the
---------------
terms of this Agreement to any other party except as required by law. This
covenant of non-disclosure is a material inducement to each party for entering
into this Agreement.
11. Arbitration. Both parties agree that any dispute between them
-----------
regarding any aspect of this Agreement or any of the terms or circumstances of
Employee's employment with @Home or the termination of that employment will be
resolved pursuant to confidential arbitration proceedings to be held in San
Mateo County, California, in accordance with the rules of the American
Arbitration Association. The parties agree that the decision of the arbitrator
will be final and binding upon the parties.
12. No Admission of Liability. Nothing in this Agreement shall constitute
-------------------------
an admission by either party of any claim, liability, wrongdoing, or violation
of the law, all of which are denied by both parties.
13. Authorization. The parties agree that they have read and understand the
-------------
foregoing Agreement, and that they affix their signatures hereto voluntarily and
without coercion. Employee further acknowledges that he has been given an
opportunity to consult with an attorney of his own choosing concerning the terms
of this Agreement, and that the waivers he has made and the terms he has agreed
to are knowingly made, conscious, and with full appreciation that he is forever
foreclosed from pursuing any of the rights so waived.
14. Review Period. Employee has been advised (and acknowledges such
-------------
advice) that he may take up to twenty-one (21) days to consider this Agreement
after the date it was delivered to him, that he should consult with an attorney
prior to executing this Agreement, that he may revoke this Agreement within
seven (7) days of execution and that this Agreement shall not be effective or
enforceable until the end of such seven (7) day revocation period. In order to
revoke this Agreement, Employee must deliver to the General Counsel of @Home a
letter stating that he is revoking this Agreement. In the event Employee revokes
this Agreement, the Option Continuation Agreement entered into by Employee and
@Home on even date herewith will also be revoked.
15. Miscellaneous. This Agreement will bind the parties and their
-------------
respective legal representatives, successors and assigns. This Agreement will be
governed by the laws of California. This Agreement may not be modified without
the written consent of both parties. This Agreement contains the entire
agreement and understanding between the parties with respect to this matter and
supersedes all prior discussions, agreements, and understandings except as
expressly provided herein. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties duly execute this Agreement as of the date first
written above.
AT HOME CORPORATION
By: /s/ Leilani Gayles /s/ Robert Tomasi, Jr.
--------------------------------- ------------------------------
Leilani Gayles Robert Tomasi, Jr.
Vice President, Human Resources
-3-
<PAGE>
Exhibit 10.30
CONFIDENTIAL
OPTION CONTINUATION AGREEMENT
THIS OPTION CONTINUATION AGREEMENT (the "Agreement") is entered into by
and between At Home Corporation, a Delaware corporation ("@Home") and Robert
Tomasi, Jr. ("Employee") as of June 15, 1999 ( the "Effective Date").
NOW, THEREFORE, the parties agree as follows:
1. Obligations of @Home. @Home granted Employee a stock option to purchase
--------------------
400,000 shares of @Home Series A Common Stock (the "Original Option Shares")
with an exercise price of $18.4375 per share pursuant to a Stock Option
Agreement dated November 25, 1997 (the "Original Grant"). @Home granted Employee
a stock option to purchase 25,000 shares of @Home Series A Common Stock (the
"Additional Option Shares") with an exercise price of $33.9375 per share
pursuant to a Stock Option Agreement dated May 1, 1998 (the "Additional Grant").
In exchange for the promises set forth in this Agreement, the parties agree that
the Original Option Shares and the Additional Option Shares (collectively, the
"Option Shares") will continue to vest and become exercisable from July 1, 1999
(i.e. the day after Employee ceases employment at @Home) through January 1, 2000
(the "Extended Vesting Period") in accordance with the vesting schedule set
forth in the Original Grant and the Additional Grant, respectively (i.e. in both
cases 2.083% per month). Accordingly, the parties agree that during the Extended
Vesting Period, 50,001 Original Option Shares will vest and 4,165 Additional
Option Shares will vest. Following the Extended Vesting Period, no further
Option Shares shall vest; however, Employee may then exercise and purchase any
of his vested Option Shares that he has not previously exercised until March 31,
2000. Employee acknowledges that any incentive stock options that he may hold
will become nonqualified stock options if Employee exercises such stock options
more than three months after the date that Employee is no longer employed by the
Company. In all other respects, the Option Shares will continue to be subject to
the terms of the Original Grant or the Additional Grant. Employee will not be
entitled to any other shares of @Home's capital stock. @Home and Employee
acknowledge and agree that the share numbers set forth in this Agreement will be
adjusted to take into effect @Home's two-for-on stock split that will become
effective on or about June 16, 1999.
2. Obligations of Employee. In exchange for the benefits described in
-----------------------
Section 1, Employee agrees to the following:
a. Employee agrees to promptly provide @Home with any available
information relating to work previously performed by Employee for @Home upon
reasonable notice and request from @Home until January 1, 2000.
b. Employee agrees that for a period of one (1) year beginning on July
1, 1999 and ending on June 30, 2000 that he will not recruit the services of any
@Home employee, nor encourage or otherwise entice any @Home employee to
terminate his or her employment.
3. Confidentiality. Both parties agree that they will not disclose the
--------------
terms of this Agreement to any other party except as required by law. This
covenant of non-disclosure is a material inducement to each party for entering
into this Agreement.
<PAGE>
4. Arbitration. Both parties agree that any dispute between them regarding
-----------
any aspect of this Agreement or any of the terms or circumstances of Employee's
employment with @Home or the termination of that employment will be resolved
pursuant to confidential arbitration proceedings to be held in San Mateo County,
California, in accordance with the rules of the American Arbitration
Association. The parties agree that the decision of the arbitrator will be final
and binding upon the parties.
5. Miscellaneous. This Agreement will bind the parties and their
-------------
respective legal representatives, successors and assigns. This Agreement will be
governed by the laws of California. This Agreement may not be modified without
the written consent of both parties. This Agreement contains the entire
agreement and understanding between the parties with respect to this matter and
supersedes all prior discussions, agreements, and understandings except as
expressly provided herein. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties duly execute this Agreement as of the date first
written above.
AT HOME CORPORATION
By: /s/ LEILANI GAYLES /s/ ROBERT TOMASI, JR.
------------------------------------ ----------------------------------
Leilani Gayles Robert Tomasi, Jr.
Vice President, Human Resources
<PAGE>
EXHIBIT 21.01
Place of
List of Subsidiaries of the Registrant D.B.A. Incorporation
- -------------------------------------- ------ -------------
Narrative Communications Corporation Enliven DE
Excite, Inc. DE
Netbot, Inc. DE
Matchlogic, Inc. DE
Throw, Inc. WA
Classifieds2000, Inc. CA
iMall, Inc. NV
Webshots Corporation CA
<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 No. 333-31115) pertaining to the 1996 Incentive Stock Option Plan, the
1996 Incentive Stock Option Plan No. 2, the 1997 Employee Stock Purchase Plan,
and the 1997 Equity Incentive Plan of At Home Corporation, the Registration
Statement (Form S-8 No. 333-38833) pertaining to the 1997 Equity Incentive Plan
of At Home Corporation, the Registration Statement (Form S-8 No. 333-60037)
pertaining to the 1997 Equity Incentive Plan of At Home Corporation, the 1995
Equity Incentive Plan, the 1996 Equity Incentive Plan, the 1996 Directors Stock
Option Plan, and the 1996 Employee Stock Purchase Plan of Excite, Inc., the
Stock Option Plan of Netbot, Inc., the 1997 Equity Compensation Plan of
MatchLogic, Inc., the 1996 Option Plan of Throw, Inc., and the 1996 Stock Option
Plan of Classifieds2000, Inc., the Registration Statement (Form S-8 No. 333-
81477) pertaining to the 1995 Stock Option Plan, the 1998 Equity Incentive Plan
of Narrative Communications Corp., the Registration Statement (Form S-8 No. 333-
90327) pertaining to the 1997 Stock Option Plan and the 1999 Stock Option Plan
of iMall, Inc., the Registration Statement (Form S-8 No. 333-93339) pertaining
to the Amended and Restated 1999 Stock Option/Stock Issuance Plan of The
Hartford House, Ltd., the Registration Statement (Form S-8 No. 333-31532)
pertaining to the 2000 Equity Incentive Plan of At Home Corporation, the 1999
Stock Plan of Kendara, Inc. and the 1999 Stock Option/Stock Issuance Plan of The
Hartford House, Ltd., the Registration Statement (Form S-3 No. 333-60049) and
the related Prospectus of At Home Corporation for the registration of 2,875,000
shares of its Series A common stock, the Registration Statement (Amendment No. 3
to Form S-3 No. 333-72669) and the related Prospectus of At Home Corporation for
the registration of 919,000 shares of its Series A common stock, the
Registration Statement (Amendment No. 1 to Form S-3 No. 333-78419) and the
related Prospectus of At Home Corporation for the registration of $437,000,000
principal amount 5.246% Convertible Subordinated Debentures Due 2018 and
5,724,700 shares of its Series A common stock, the Registration Statement
(Amendment No. 1 to Form S-3 No. 333-91001) and the related Prospectus of At
Home Corporation for the registration of 4,769,696 shares of its Series A common
stock, the Registration Statement (Amendment No. 1 to Form S-3 No. 333-94045)
and the related Prospectus of At Home Corporation for the registration of
10,673,549 shares of its Series A common stock, the Registration Statement (Form
S-3 No. 333-31530) and the related Prospectus of At Home Corporation for the
registration of 5,285,600 shares of its Series A common stock, and the
Registration Statement (Form S-3 No. 333-32228) and the related Prospectus of At
Home Corporation for the registration of $500,000,000 principal amount 4.75%
Convertible Subordinated Notes Due 2006 and 8,846,246 shares of its Series A
common stock, of our report dated January 20, 2000, with respect to the
consolidated financial statements and schedules of At Home Corporation included
in this Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Walnut Creek, California
March 30, 2000
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