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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
COMMISSION FILE NUMBER 000-26153
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HIGH SPEED ACCESS CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1324009
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
4100 EAST MISSISSIPPI AVENUE
DENVER, COLORADO 80246
(Address of principal executive offices, including zip code)
303/256-2000
(Registrant's telephone number, including area code)
FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:
NOT APPLICABLE
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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 [ ]
Number of shares of Common Stock outstanding as of May 10, 2000...55,668,025
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Index
Page
Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the three-months ended
March 31, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three-months ended March 31, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities and Use of Proceeds 23
Item 3 - Defaults upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures
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Item I - Financial Information
Part 1 - Financial Statements
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 55,524 $ 53,310
Short term investments 89,304 125,420
Accounts receivable, net of allowance for doubtful accounts of $103
and $63, respectively 606 393
Prepaid expenses and other current assets 3,966 4,308
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Total current assets 149,400 183,431
Property, equipment and improvements, net 47,955 39,308
Intangible assets, net 3,024 3,300
Deferred distribution agreement costs, net 3,817 4,042
Other assets 666 345
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Total assets $ 204,862 $ 230,426
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,921 $ 10,226
Accrued compensation and related expenses 2,971 3,842
Other current liabilities 6,130 3,916
Long-term debt, current portion 1,921 1,527
Capital lease obligations, current portion 3,344 3,176
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Total current liabilities 26,287 22,687
Long-term debt 4,440 4,035
Capital lease obligations 5,848 7,574
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Total liabilities 36,575 34,296
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
issued and outstanding
Common stock, $.01 par value, 400,000,000 shares authorized, 54,397,042
and 54,276,130 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 544 543
Class A common stock, 100,000,000 shares authorized, none issued
and outstanding
Additional paid-in-capital 619,198 618,823
Deferred compensation (264) (288)
Accumulated deficit (450,534) (422,807)
Accumulated other comprehensive loss (657) (141)
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Total stockholders' equity 168,287 196,130
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Total liabilities and stockholders' equity $ 204,862 $ 230,426
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
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HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2000 1999
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Net revenue $ 1,994 $ 299
Costs and expenses:
Operating 15,946 2,123
Engineering 4,912 1,485
Sales and marketing 6,216 2,038
General and administrative (excluding non-cash compensation expense from stock options) 4,033 1,286
Non-cash compensation expense from stock options 24 1,523
Amortization of distribution agreement costs 225 --
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Total costs and expenses 31,356 8,455
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Loss from operations (29,362) (8,156)
Investment income 2,125 144
Interest expense (490) (25)
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Net loss (27,727) (8,037)
Mandatorily redeemable convertible preferred stock dividends -- (518)
Accretion to redemption value of mandatorily redeemable convertible
preferred stock -- (105,232)
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Net loss available to common stockholders $ (27,727) $ (113,787)
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Basic and diluted net loss available to common stockholders per share $ (0.51) $ (18.35)
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Weighted average shares used in computation of basic and diluted net loss
available to common stockholders per share 54,329,031 6,200,000
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
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OPERATING ACTIVITIES
Net loss $ (27,727) $ (8,037)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 3,603 897
Non-cash compensation expense from stock options 24 1,523
Amortization of distribution agreement costs 225 --
Changes in operating assets and liabilities excluding the effects of acquisitions:
Accounts receivable (213) (167)
Prepaid expenses and other current assets 342 (197)
Other non-current assets (321) (871)
Accounts payable (1,482) 763
Accrued compensation and related expenses (871) 374
Other current liabilities 2,214 895
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Net cash used in operating activities (24,206) (4,820)
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INVESTING ACTIVITIES
Purchase of short-term investments (65,883) --
Sales and maturities of short-term investments 101,483 --
Purchase of property, equipment and improvements, net of leases (7,912) (5,497)
Purchase of customer base -- (204)
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Net cash provided by (used in) investing activities 27,688 (5,701)
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FINANCING ACTIVITIES
Payments on capital lease obligations (2,443) (11)
Proceeds from long-term debt 1,213 --
Payments on long-term debt (414) (6)
Proceeds from exercise of stock options 376 --
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Net cash used in financing activities (1,268) (17)
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Net change in cash and cash equivalents 2,214 (10,538)
Cash and cash equivalents, beginning of period 53,310 17,888
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Cash and cash equivalents, end of period $ 55,524 $ 7,350
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 885 $ 84
Property and equipment purchases payable $ 6,543 $ 1,880
Distribution of Darwin Networks, Inc. subsidiary to shareholders $ -- $ 943
Warrants issued in connection with acquisitions $ -- $ 130
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - The Company and Basis of Presentation
The Company
High Speed Access Corp. and Subsidiaries (hereinafter referred to as the
Company, we, us, or our) provides high speed Internet access via cable modems to
residential and commercial customers in exurban areas. The Company enters into
long-term exclusive contracts with cable system operators to provide them with a
comprehensive "turnkey" service. That service enables a cable system's customers
to receive high speed Internet access. In exchange for providing the Company
with access to its customers, the Company pays the cable operator a portion of
the monthly fees received from an end user that subscribes to the services.
The Company also offers to our cable partners a partial turnkey solution.
In a partial turnkey solution, the Company delivers fewer services and incur
lower costs than in a full turnkey solution but also earns a smaller percentage
of the subscription revenue or a fixed fee on a per subscriber basis. The
Company's cable partners will typically bill the end user and will remit the
Company's percentage of the revenue or the fixed fee. The Company anticipates
that partial turnkey solutions will become a more significant part of its
business mix.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly present the Company's
financial position, results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
audited financial information prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations.
The results of operations for the period ended March 31, 2000 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ended December 31, 2000. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
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.
Note 2 - Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for the Company's
year ending December 31, 2001. As the Company does not currently engage in or
plan to engage in derivatives, or hedging transactions there will be no impact
on the Company's results of operations, financial position or cash flows upon
the adoption of SFAS 133.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements". SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles to revenue
recognition. All registrants are expected to apply the accounting and disclosure
requirements that are described in SAB 101 no later than the second quarter of
the fiscal year beginning after December 15, 1999. Management of the Company is
currently analyzing the impact of SAB 101 but anticipates that the adoption of
SAB 101 will not have a material effect on the Company's results of operations
or financial position.
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Note 3 - Net Loss Per Share
The Company computes net loss per share under the provisions of SFAS No.
128 "Earnings per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of SFAS 128, basic and diluted net loss per share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Basic and diluted net
loss available to common stockholders per share for the quarters ended March 31,
2000 and 1999, were $0.51 and $18.35 based on weighted average shares
outstanding of 54,329,031 and 6,200,000, respectively.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's Preferred Stock. In addition, income or
loss is adjusted for dividends and other transactions relating to preferred
shares for which conversion is assumed. The diluted earnings per share amount
equals basic earnings per share because the Company has a net loss, thus the
impact of the assumed exercise of the stock options and the assumed preferred
stock conversion is antidilutive. Options and issued warrants to purchase
3,864,664 shares of common stock at March 31, 2000 were excluded from the
calculation above because they are antidilutive.
In addition, there is a potential to issue additional warrants pursuant to
the agreements set forth in Note 5. These potential warrants have been excluded
from the calculation above because they are not currently measurable and would
be antidilutive. In the future, the Company also may issue additional stock or
warrants to purchase its common stock in connection with its efforts to expand
the distribution of its services. Stockholders could face additional dilution
from these possible future transactions.
Note 4 - Comprehensive Loss
Comprehensive loss, comprised of net loss before mandatorily redeemable
convertible preferred stock dividends and accretion to redemption value of
mandatorily redeemable convertible preferred stock and net unrealized holding
losses on investments totaled $28.2 million and $8.0 for the three months ended
March 31, 2000 and 1999, respectively.
Note 5 - Distribution Agreements
General
As an inducement to certain cable partners to commit systems to the
Company, the Company issues warrants to purchase its common stock in connection
with network service agreements and other agreements, collectively referred to
as distribution agreements.
The Company values warrants to purchase its common stock using an accepted
options pricing model based on the value of the stock when the warrants are
earned. The Company recognizes an addition to equity for the fair value of any
warrants issued, and recognizes the related expense over the term of the
agreement with the cable system to which the warrants relate, generally four to
five years, in accordance with Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to other than Employees for
Acquiring or in Conjunction with Selling, Goods or Services."
As of March 31, 2000, various cable partners had earned 198,744 warrants
under network service agreements. Deferred distribution agreement costs of $3.8
million, net of accumulated amortization of $0.7 million were recorded in
conjunction with these warrants at March 31, 2000. Amortization of distribution
agreement costs of $0.2 million was recognized in the statement of operations
for the quarter ended March 31, 2000. Additional deferred distribution agreement
costs may be recorded and amortized in future periods should the cable partners
earn the right to purchase additional common shares based on the number of homes
passed committed to the Company. At March 31, 2000 there were 8.4 million
additional warrants available to be earned under network service agreements.
Note 6 - Commitments and Contingencies
The Company is not a party to any material legal proceedings. In the
opinion of management, the amount of ultimate liability with respect to any
known actions will not materially affect the financial position of the Company.
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Note 7 - Subsequent Events
In May 2000, Lucent Technologies (Lucent) purchased 1,250,000 shares of the
Company's common stock for $10.0 million. In addition Lucent and the Company
entered into a general agreement whereby Lucent will provide equipment and
services to the Company with an initial purchase commitment by the Company of
$5.0 million.
In May 2000, the Company entered into a network services agreement with
Charter Communications (Charter). Under this agreement, Charter committed to
provide the Company exclusive right to provide network services related to the
delivery of Internet access to homes passed in certain cable systems. The
Company will provide partial turnkey services, including system monitoring and
security as well as call center support. Charter will receive the warrants
described in the following paragraph as an incentive to provide the Company
additional homes passed, although it is not obligated to do so. Charter can
terminate these exclusivity rights, on a system-by-system basis, if the Company
fails to meet performance specifications or otherwise breaches the agreement.
The agreement has an initial term of five years and may be renewed at Charter's
option for additional successive five-year terms.
In connection with the network services agreement, the Company and Charter
entered into an amended and restated warrant to purchase up to 12,000,000 shares
of our common stock at an exercise price of $3.23 per share and terminated two
warrants that had been issued to Charter in November 1998. The new warrant
becomes exercisable at the rate of 1.55 shares for each home passed committed to
us by Charter under the network services agreement entered into by Charter and
us in November 1998. The warrant also becomes exercisable at the rate of .775
shares for each home passed committed to us by Charter under the network
services agreement entered into in May 2000 up to 5,000,000 homes passed and at
a rate of 1.55 shares for each home passed in excess of 5,000,000. Charter also
has the opportunity to earn additional warrants to purchase shares of our common
stock upon any renewal of the May 2000 agreement. Such a renewal warrant will
have an exercise price of $10 per share and will be exercisable to purchase
one-half of a share for each home passed in the systems for which the May 2000
agreement is renewed.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions, involve risks
and uncertainties, and actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below under the heading
"Risk Factors" as well as those discussed in other filings with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
Overview
We are a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas. In our full turnkey
solution, we generate revenue primarily from the monthly fees we receive from
end users for our cable modem-based Internet access service and for the
traditional dial-up services we offer as part of our end user acquisition
strategy. In our full turnkey solution we generally bill the end user directly
and pay our cable partners a portion of the monthly fee we receive; in these
instances we report our revenues net of the percentage split we pay to our cable
partners. In some instances we receive a flat fee per subscriber from our cable
partners. For promotional purposes, we often provide new end users with 30 days
of free Internet access when they subscribe to our services. As a result, our
revenue does not reflect new end users until the end of the promotional period.
We also receive revenues from renting cable modems to end users.
We also offer to our cable partners a partial turnkey solution. In a
partial turnkey solution, we deliver fewer services and incur lower costs than
in a full turnkey solution but will also earn a smaller percentage of the
subscription revenue or a fixed fee on a per subscriber basis. Our cable
partners typically will bill the end user and remit to us our percentage of the
revenue or the fixed fee. We anticipate that partial turnkey solutions will
become a more significant part of our business mix. In May 2000, the Company
entered into a network services agreement with Charter in which the Company has
agreed to provide partial turnkey services.
We also provide certain services, primarily engineering services related to
design and installation of data network hardware and software necessary to offer
Internet service via cable modems, on a fee for service basis.
Our revenue from dial up services currently is a significant part of our
total revenue. However, we expect this business mix to shift over time as our
dial-up end users migrate to high speed Internet access as end users generally
become aware of the benefits of high speed Internet access. Moreover, although
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we expect cable modem rentals to be a significant part of our revenue during
the next few years, we expect our cable modem rental income to decline as cable
modems become commercially available at lower costs through retail stores and
as they become standard features of personal computers. However, we will save
the cost of purchasing and installing cable modems for end users. In the future
we expect to earn revenues from the local content we provide and, subject to
our agreement with Vulcan Ventures, Incorporated, ("Vulcan"), from additional
services such as Internet telephony.
Our expenses consist of the following:
o Operating costs, which consist primarily of salaries for help desk and
network operations center employees; telecommunications expenses,
including charges for Internet backbone and telecommunications
circuitry; allocated cost of facilities; costs of installing cable
modems for our end users; and depreciation and maintenance of
equipment. In one-way cable systems, where the end user transmits data
back to the cable headend via a standard telephone line, we must
support the telephone return path from the local telephone company's
central office to the cable headend. Accordingly, we incur greater
telecommunications costs in a one-way system than we incur in a
two-way system. Consequently, the rate at which our cable partners
upgrade their systems to two-way capability will affect our operating
margins. We expect our operating costs to grow significantly as we
roll out services in new systems. We may also incur significant fees
if we cancel our telecommunications contracts in advance of the
expiration of the term of the contract. Many of our operating costs
are relatively fixed in the short term. However, as we add new end
users we hope to be able to spread these costs over a larger revenue
base, and, accordingly, decrease our costs per subscriber and improve
our operating margins.
o Engineering expenses, which consist primarily of salaries and related
costs for network design and installation of the telecommunications
and data network hardware and software; system testing and project
management expenses; the development and support of our information
systems; allocated cost of facilities; and depreciation and
maintenance on the equipment used in our engineering processes. We
expect our engineering expenses to grow significantly as we introduce
our services in new markets and expand our network.
o Sales and marketing expenses, which consist primarily of salaries,
commissions and related personnel expenses and costs associated with
the development of sales and marketing materials, database market
analytics, direct mail and telemarketing. We expect that our sales and
marketing expenses will increase significantly as we pursue our growth
strategy.
o General and administrative expenses, which consist primarily of
salaries for our executive, administrative, finance and human resource
personnel; amortization of goodwill; and fees for professional
services. In order to support our planned expansion, we expect to hire
more legal and accounting personnel.
o Non-cash compensation expense from stock options, which equals the
excess of the fair market value of our stock at the time of grant over
the exercise price of the stock options granted to employees and
directors amortized over the vesting period.
o Amortization of distribution agreement costs, which relates to
warrants issued to cable and strategic partners in connection with
network services and other distribution related agreements,
collectively referred to as distribution agreements. We measure the
cost of warrants issued to cable and strategic partners based on the
fair values of the warrants when earned by those partners. Because the
fair value of the warrant is dependent to a large extent on the price
of our common stock, the cost of warrants earned in the future may
vary significantly. Costs of warrants granted in connection with
distribution agreements are amortized over the term of the underlying
agreement. Warrants not directly associated with long-term
distribution agreements are expensed as earned.
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future due to a variety
of factors, many of which are outside our control. In addition, the results of
any quarter do not indicate the results to be expected for a full fiscal year.
These factors are set forth generally under the caption "Risk Factors" and
particularly in that section under the heading "Our quarterly operating results
are likely to fluctuate significantly and may be below the expectations of
analysts and investors". As a result of the foregoing factors, our annual or
quarterly results of operations may be below the expectations of public market
analysts or investors, in which case the market price of the common stock could
be materially and adversely affected.
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Results Of Operations For The Quarter Ended March 31, 2000 Compared With The
Quarter Ended March 31, 1999
Revenues
Net revenue consists primarily of net monthly subscription fees for cable
modem based and traditional dial-up Internet services, cable modem rental
income, fees for engineering services provided to cable partners and
installation fees and other up front fees from end users. Total net revenue for
the quarter ended March 31, 2000 was $2.0 million, an increase of $1.7 million
over net revenue of $0.3 million for the first quarter of 1999. For the quarters
ended March 31, 2000 and 1999, cable modem based subscription fees contributed
approximately 49% and 48% of the net revenue, traditional dial up service fees
contributed 20% and 35%, cable modem rental fees contributed 25% and 15%,
engineering services provided to cable partners contributed 3% and 0%, and
other fees from end users contributed 3% and 2%, respectively.
Costs and Expenses
Operating. Operating costs for the quarter ended March 31, 2000 were $15.9
million, an increase of $13.8 million over operating costs of $2.1 million for
the first quarter of 1999. The increase in operating costs resulted primarily
from an increase in personnel and personnel related costs for additional staff
in our network operations centers, help desk and field technical support
departments, an increase in telecommunications expense from the rollout of our
service to new markets, our larger subscriber base, depreciation of capital
equipment from the expansion of our network and the installation of cable modems
for additional subscribers.
Engineering. Engineering expenses for the quarter ended March 31, 2000 were
$4.9 million, an increase of $3.4 million over engineering expenses of $1.5
million for the first quarter of 1999. The increase in engineering expenses
resulted from continued network design, system testing, development and support
of information systems and project management, for the evaluation of new
equipment and possible new product offerings and from personnel and personnel
related costs for additional technical staff to support the installation of
cable headend hardware and software in our cable partners' systems.
Sales and Marketing. Sales and marketing expenses for the quarter ended
March 31, 2000 were $6.2 million, an increase of $4.2 million over sales and
marketing expenses of $2.0 million for the first quarter of 1999. The increase
in sales and marketing expenses resulted primarily from an increase in personnel
and personnel related costs to expand our residential and commercial end user
sales force, new cable partner sales force and telemarketing sales force, as
well as an increase in direct marketing and advertising expenses, as we expanded
into more geographic markets.
General and Administrative. General and administrative expenses, excluding
non-cash compensation expense from stock options and amortization of
distribution agreement costs, were $4.0 million for the quarter ended March 31,
2000, an increase of $2.7 million over general and administrative expenses of
$1.3 million for the first quarter of 1999. The increase in general and
administrative expenses resulted from additional personnel and personnel related
costs as we hired personnel to implement procedures and controls to support our
planned expansion and to administer finance, legal and human resource functions.
Non-cash compensation expense from stock options. Non-cash compensation
expense from stock options for the quarter ended March 31, 2000 was $24,000, a
decrease of $1.5 million from the first quarter of 1999 totaling $1.5 million.
These expenses represent the excess of the fair market value of our common stock
over the exercise price of the stock options granted to employees and directors
amortized over the vesting period. The 1999 expense is principally related to a
$1.5 million charge for 189,875 compensatory options issued to our directors
which vested upon grant.
Amortization of Distribution Agreement Costs. Amortization of
distribution agreement costs for the quarter ended March 31, 2000 was $0.2
million, consisting of the amortization of the value of 198,744 warrants earned
under distribution agreements for commitments of homes passed. There was no
expense of this nature during the first quarter of 1999. We expect to incur
additional material non-cash charges related to further issuances of common
stock purchase warrants to our cable and strategic partners in the future. We
will recognize an addition to equity for the fair value of any warrants issued,
and recognize the related expense over the term of the service agreement with
the cable or strategic partner to which the warrants relate. The amount of any
such charges is not determinable until the related warrants are earned. The use
of warrants in these and similar transactions may increase the volatility of our
earnings in the future.
In May 2000, the Company and Charter entered into an amended and restated
warrant to purchase up to 12,000,000 shares of our common stock at an exercise
price of $3.23 per share and terminated two warrants that had been issued to
Charter in November 1998. The new warrant becomes exercisable at the rate of
1.55 shares for each home passed committed to us by Charter under the network
services agreement entered into by Charter and us in November 1998. The warrant
also becomes exercisable at the rate of .775 shares for each home passed
committed to us by Charter under the network services agreement entered into in
May 2000 up to 5,000,000 homes passed and at a rate of 1.55 shares for
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each home passed in excess of 5,000,000. Charter also has the opportunity to
earn additional warrants to purchase shares of our common stock upon any renewal
of the May 2000 agreement. Such a renewal warrant will have an exercise price of
$10 per share and will be exercisable to purchase one-half of a share for each
home passed in the systems for which the May 2000 agreement is renewed.
Net Investment Income. Net investment income was $1.6 million for the
quarter ended March 31, 2000, compared to net investment income of $0.1 million
for the first quarter of 1999. Net investment income represents interest earned
on cash, cash equivalents and short term investments. The increase in investment
income is the result of interest on investments purchased using the net proceeds
of our initial public offering.
Income Taxes. At December 31, 1999, we had accumulated net operating loss
carryforwards for federal and state tax purposes of approximately $63.6 million,
which will expire beginning in 2018. At December 31, 1999, we had net deferred
tax assets of $26.5 million, relating principally to our accumulated net
operating losses. Our ability to realize the value of our deferred tax assets
depends on our future earnings, if any, the timing and amount of which are
uncertain. We have recorded a valuation allowance for the entire net deferred
tax asset as a result of those uncertainties. Accordingly, we did not record any
income tax benefit for net losses incurred for the year ended December 31, 1999
or for the quarter ended March 31, 2000.
Liquidity and Capital Resources
At March 31, 2000, we had cash and cash equivalents of $55.5 million, and
short term investments of $89.3 million, compared with $53.3 million of cash and
cash equivalents and $125.4 million of short term investments at December 31,
1999. We had significant negative cash flow from operating activities for the
quarter ended March 31, 2000. Cash used in operating activities was $24.2
million for the quarter ended March 31, 2000, caused primarily by a net loss of
$27.7 million offset by depreciation and amortization of $3.6 million.
Cash provided by investing activities was $27.7 million for the quarter
ended March 31, 2000, the result of sales and maturities of short term
investments of $101.5 million offset by purchases of short term investments of
$65.9 million. Also, cash paid for capital expenditures totaled $7.9 million for
the quarter ended March 31, 2000. The principal capital expenditures incurred
during this period were for the purchase of headend data network hardware and
software, billing and customer care systems, cable modems and central network
hardware and software, reflecting our expansion into new markets.
Cash used in financing activities for the quarter ended March 31, 2000 was
$1.3 million, a result of payments on capital lease obligations and long-term
debt of $2.9 million offset by $1.2 million in proceeds from long-term debt and
$0.4 million proceeds from the exercise of stock options.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow from investing activities for at least the
next several years due to continued deployment of our services into new markets
and the enhancement of our network and operations. Our future cash requirements
will depend on a number of factors including:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and related
operating expenses;
o The rate at which we enter into contracts with cable operators for
additional systems;
o The rate at which end users subscribe to our services;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o The mix of services offered by us including whether we provide our
services on a full or partial turnkey basis;
o Capital expenditures and costs related to infrastructure expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
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o End user turnover rates;
o Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
o Changes in our operating expenses including, in particular, personnel
expenses;
o The introduction of new products or services by us or our competitors;
o Our ability to enter into strategic alliances with content providers;
and
o Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
Investment Portfolio. Cash equivalents are highly liquid investments with
insignificant interest rate risk and original 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 money
market accounts with financial institutions and highly liquid investment-grade
debt securities of corporations and the United States government.
Short term investments are classified as available-for-sale and, as a
result, are stated at fair value. Short term investments are principally
comprised of highly liquid debt securities of corporations and the U.S.
government. We record changes in the fair market value of securities held for
short term investment as an equal adjustment to the carrying value and equity.
Loan and Lease Facilities. The Company has $8.0 million in loan facilities
under which $6.7 million has been drawn down at March 31, 2000. Additionally,
the Company has $30.0 million in lease facilities under which $11.6 million has
been used at March 31, 2000.
We expect to incur approximately $45 million of capital expenditures in
2000 principally related to the installation of headend data network hardware
and software, cable modems, central network hardware and software for e-mail,
network monitoring, provisioning, web hosting, billing and customer care systems
and furniture and telephone and computer equipment for a new leased customer
care and corporate headquarters facilities. Actual capital expenditures will be
significantly affected by the rate at which end users subscribe for our cable
modem internet access services, which requires us to purchase a cable modem for
each new end user where we provide full turnkey services, as well as the pace of
the rollout of our systems, which requires us to purchase headend data network
hardware and software. Additionally, the amount of capital expenditures will be
affected by the number of systems deployed under the partial turnkey services
model, where the investment in equipment is significantly less than those
choosing full turnkey services. Since Inception, we have financed our operations
primarily through a combination of private and public sales of equity
securities, capital equipment leases and debt.
In May 2000 we entered into an agreement with Lucent under which we will
purchase equipment and services in connection with our deployment of IP
telephony services. Our minimum commitment under this agreement is $5 million.
In addition, Lucent has agreed to assist us in arranging third party equipment
financing. The development of our business may require significant additional
capital in the future to fund our operations, to finance the substantial
investments in equipment and corporate infrastructure needed for our planned
expansion, to enhance and expand the range of services we offer and to respond
to competitive pressures and perceived opportunities, such as investment,
acquisition and international expansion activities. To date, our cash flow from
operations has been insufficient to cover our expenses and capital needs. We
believe our current cash, cash equivalents and short term investments, together
with the proceeds from unused loan facilities totaling $1.3 million, and $18.4
million of available lease financing through various facilities, as well as
additional loan and lease financing facilities will be sufficient to meet our
working capital requirements, including operating losses, and capital
expenditure requirements into 2001, assuming we achieve our business plan. At
such time, or sooner, if we do not achieve our business plan, we will require
additional equity and/or debt financing. There can be no assurance that
additional financing will be available on terms favorable to us, or at all.
Charter can require any lender with liens on our equipment placed in Charter
head ends to deliver to Charter a non-disturbance agreement as a condition to
such financings. We can offer no assurance that we will be able to obtain
additional secured equipment financing for Charter systems subject to such a
condition or that a potential lender will be able to negotiate acceptable terms
of non-disturbance with Charter. The sale of additional equity or convertible
debt securities may result in additional dilution. If adequate funds are not
available on acceptable terms, we may be forced to curtail our operations.
Moreover, even if we are able to continue our operations, the failure to obtain
additional financing could have a material and adverse effect on our business
and financial results and we may need to delay the deployment of our services.
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Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging
Activities (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for our year ending
December 31, 2001. As we do not currently engage in or plan to engage in
derivatives, or hedging transactions there will be no impact on our results of
operations, financial position or cash flows upon the adoption of SFAS 133.
On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles to revenue
recognition. All registrants are expected to apply the accounting and disclosure
requirements that are described in SAB 101 no later than the second quarter of
the fiscal year beginning after December 15, 1999. Management of the Company is
currently analyzing the impact of SAB 101 but anticipates that the adoption of
SAB 101 will not have a material effect on the Company's results of operations
or financial position.
Risk Factors
You should carefully consider the following factors and other information
in this Form 10-Q and other filings we make with the Securities and Exchange
Commission before trading in our common stock. If any of the following risks
actually occur, our business and financial results could be materially and
adversely affected. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
Risks Related To Our Operations
Our Business Is Difficult To Evaluate Because We Have A Limited Operating
History.
Our predecessor companies began offering services to cable operators in
October 1997. Most of our cable modem deployments occurred within the last
twelve months. We do not consider any of the market in which we operate to be
mature. We have recognized limited revenues since our inception. In addition,
our senior management team and other employees have worked together at our
company for only a short period of time. Consequently, we have a limited
operating history upon which our business can be evaluated.
We Have Not Been Profitable And Expect Future Losses.
Since our founding, we have not been profitable. We have incurred
substantial costs to create and introduce our broadband Internet access
services, to operate these services, and to grow our business. We incurred net
losses of approximately $98.6 million from April 3, 1998 (Inception) through
March 31, 2000. Our limited operating history, the dynamic nature of our
industry and our ambitious growth plans make predicting our operating results,
including operating expenses, difficult.
We expect to incur substantial losses and experience substantial negative
cash flow from operations for at least the next several years as we expand our
business. The principal costs of expanding our business will include:
o Substantial direct and indirect selling, marketing and promotional
costs;
o System operational expenses, including the lease of our Internet
backbone, which has a traffic capacity in excess of our current needs;
o Costs incurred in connection with higher staffing levels to meet our
growth;
o The acquisition and installation of the equipment, software and
telecommunications circuits necessary to enable our cable partners to
offer our services; and
o Costs in connection with acquisitions, divestitures, business
alliances or changing technologies.
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If any of these costs or expenses is not accompanied by an increase in
revenues, then our business and financial results could be materially and
adversely affected.
We Cannot Predict Our Success Because Our Business Model Is Unproven, Has
Changed In The Past And May Continue To Change.
Our success depends on continued growth in the use of the Internet and high
speed access services. Although Internet usage and popularity have grown
rapidly, we cannot be certain that this growth will continue in its present
form, or at all. Critical issues concerning the increased use of the
Internet--including security, reliability, cost, ease of access, ease of
installation and customer acquisition and quality of service--remain unresolved
and are likely to affect the development of the market for our services. We do
not believe any cable-based internet access services currently offered by cable
companies have been profitable. Moreover, many industry analysts believe that
Internet access providers will become increasingly reliant upon advertising,
barter and subscription-based revenues from content due to competitive pressures
to provide low cost or even free Internet access.
The success of our business ultimately will depend upon the acceptance of
our services by end users, who in our comprehensive turnkey service will
purchase or rent a cable modem from us and pay both monthly service and
installation fees. As of March 31, 2000 we deployed our services in only 128
cable systems and we have approximately 26,000 residential cable modem end
users. We began offering our services on a partial turnkey basis in the third
quarter of 1999. As of the March 31, 2000, we had initiated partial turnkey
services in 14 systems. In our partial turnkey solution, we deliver fewer
services and incur lower costs than in a full turnkey solution but will also
earn a smaller percentage of the subscription revenue or a fixed fee on a per
subscriber basis. As a result of our new Network Services Agreement with
Charter, we anticipate that partial turnkey services will become a more
significant part of our business mix. Accordingly, we expect that partial
turnkey services will become a larger portion of our business mix, affecting our
future revenues and profitability per subscriber.
Although our primary service offering is high bandwidth Internet access, we
currently derive a substantial portion of our revenues from standard dial-up
Internet access, which we offer as a feeder for our high speed offerings. We
cannot predict whether demand for our high speed Internet access services will
develop, particularly at the volume or prices we need to become profitable. Nor
can we predict whether we can adequately supply services to satisfy that demand
if it develops. We may also not be able to acquire and install customers quickly
enough to meet demand, and the bandwidth we provide may prove to be inadequate.
We have begun to offer DSL on a limited basis, as a reseller for NorthPoint
Communications. We have conducted several trials of IP Telephony equipment and
services with Charter, and have announced our intent to offer IP Telephony as
additional services for our cable partners to offer their customers. In May 2000
we announced our agreement with Lucent to purchase services and equipment in
connection with our deployment of IP telephony services. Our minimum commitment
under this agreement is $5 million. We currently intend to continue the roll out
of DSL and IP telephony, although we do not know whether these services will
become significant to our business or whether we will continue to offer them at
all. Moreover, we may continue to introduce new services or to make changes to
our product offerings to meet our customer demands or to respond to changes in
our evolving industry. Consequently, our business model is likely to continue to
change.
Our Ability To Attract And Retain End Users Depends On Many Factors We Cannot
Control.
Our ability to increase the number of our end users, and our ability to
retain end users, will depend on a number of factors, many of which are beyond
our control. These factors include:
o Our ability to enter into and retain agreements with cable operators;
o The speed at which we are able to deploy our services, particularly if
we cannot obtain on a timely basis the telecommunications circuitry
necessary to connect our cable headend equipment to our Internet
backbone;
o Our success in marketing our service to new and existing end users;
o Competition, including new entrants advertising free or lower priced
Internet access and/or alternative access technologies;
o Whether our cable partners maintain their cable systems or upgrade
their systems from one-way to two-way service;
o The quality of the customer and technical support we provide; and
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o The quality of the content we offer.
In addition, our service is currently priced at a premium to many other
online services and many end users may not be willing to pay a premium for our
service. Because of these factors, our actual revenues or the rate at which we
will add new end users may differ from past increases, the forecasts of industry
analysts, or a level that meets the expectations of investors.
Our Quarterly Operating Results Are Likely To Fluctuate Significantly And May Be
Below The Expectations Of Analysts And Investors.
Our revenues and expenses, and in particular our quarterly revenues,
expenses and operating results have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and related
operating expenses;
o Whether and the rate at which we enter into contracts with cable
operators for additional systems;
o The rate at which new end users subscribe to our services, the rate at
which these customers are installed and provisioned for service, and
the rate at which we retain these customers net of customers who
disconnect ;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o The extent to which we provide partial, rather than full turnkey
access;
o Capital expenditures and costs related to infrastructure expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
o Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
o Changes in our operating expenses including, in particular, personnel
expenses;
o The introduction of new products or services by us or our competitors;
o Our ability to enter into strategic alliances with content providers;
and
o Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
In addition, our operating expenses are based on our expectations of the
future demand for our services and are relatively fixed in the short term. We
may be unable to adjust spending quickly enough to offset any unexpected demand
surge or shortfall in demand. A shortfall in revenues in relation to our
expenses could have a material and adverse effect on our business and financial
results.
The quarter-to-quarter comparisons of our results of operations should not
be relied upon as an indication of future performance. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In that event, the price of our common
stock is likely to fall.
We May Not Be Able To Establish Or Maintain Acceptable Relationships With Cable
Operators.
Our success depends, in part, on our ability to gain access to cable
customers. We gain that access through our agreements with cable operators.
There can be no assurance that we will be able to establish or maintain
relationships with cable operators. Even if we are able to establish and
maintain those relationships, there can be no assurance that we will be able to
do so on terms favorable to us or in the quantities we need to become
profitable. If we fail to form partnerships rapidly with a large number of cable
operators, we can be effectively excluded from providing our services in the
systems owned by those operators. Not only can other cable-based broadband
service providers compete against us for an exclusive contract, the cable
operator may decide to offer cable-based Internet
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services directly without assistance from us or our competitors. Delays in
forming relationships and deploying our cable-based services also create windows
of time for alternative broadband access providers to enter the market and
acquire customers.
Furthermore, in order to rapidly deploy our services within a market, we
typically begin installation of our equipment and related telecommunications
circuits prior to the execution of final documentation. If we are unable to
finalize our contractual relationship with a cable operator, if the exclusive
relationship between us and our cable partners, or between our cable partners
and their cable customers, is impaired, or if we do not become affiliated with a
sufficient number of cable operators, our business and financial results could
be materially and adversely affected.
Our Largest Cable Partner Can Terminate Its Contract With Us.
Our largest cable partner is Charter. Charter is an affiliate of Vulcan,
which owns 37.2% of our outstanding common stock as of March 31, 2000. We have
entered into several agreements with Charter, including two network services
agreements. The first network services agreement was entered into in November
1998 and the second in May 2000. Under both agreements, Charter committed to
provide the Company exclusive rights to provide network services related to the
delivery of Internet access to homes passed in certain cable systems.
Under the May 2000 agreement, the Company will provide partial turnkey
services, including call center support for cable modem customers as well as
network monitoring, troubleshooting and security services. The agreement has an
initial term of five years and may be renewed at Charter's option for
additional successive five-year terms. In a partial turnkey solution, we
deliver fewer services and incur lower costs than in full turnkey solutions,
but will also earn a smaller percentage of the subscription revenue based on a
fixed fee per subscriber. Under the November 1998 agreement the Company has
primarily provided comprehensive turnkey services.
Subject to the provisions of the network service agreements, Charter can
terminate our exclusivity rights, on a system-by-system basis, if we fail to
meet performance specifications or otherwise breach our, agreement. Moreover,
Charter can terminate the November 1998 agreement, for any reason, as long as it
purchases the associated cable headend equipment and modems at book value and
pays us a termination fee based on the net present value of the revenues we
otherwise would earn for the remaining term of the agreement from those end
users subscribing to our services as of the date of termination. There can be no
assurances we will meet the benchmarks related to our customer penetration rates
or that Charter will not decide to terminate either agreement for any other
reason. If Charter were to terminate either agreement, in whole or for any
material system, regardless of any termination fee we may receive, our business
and financial results would be materially and adversely affected.
Our agreements with Vulcan Ventures could constrain our ability to generate
revenues from providing content and future services our end users may demand.
Under our programming content agreement with Vulcan, Vulcan has the right
to require us to carry, on an exclusive basis in all cable systems we serve,
content it designates. Vulcan content may include start-up and related web
pages, electronic programming guides, other multimedia information and telephony
services. We will not share in any revenues Vulcan may earn through the content
or telephony services it provides. We must provide all equipment necessary for
the delivery of Vulcan content, although Vulcan will reimburse us for any costs
we incur in excess of $3,000 per cable headend. Vulcan cannot charge us for any
Vulcan content through November 25, 2008; after that date we will be obligated
to pay Vulcan for this content at the lowest fee charged to any Internet service
provider who subscribes to Vulcan content.
Vulcan has the right to prohibit us from providing content or telephony
services that compete with Vulcan content in Vulcan's discretion and can require
us to remove competing content. Many industry analysts believe that Internet
access will become increasingly reliant upon revenues from content due to
competitive pressures to provide low cost or even free Internet access. If
Vulcan were to require us to remove our content or substitute its telephony
services for any we might provide, we could lose a source of additional revenues
and might not recover all related costs of providing our content or telephony
services. Vulcan's ability to prohibit us from providing content and telephony
services means that Vulcan's interests are not necessarily aligned with those of
our other stockholders.
Our Agreement With Road Runner May Not Benefit Us.
Under our agreement with ServiceCo LLC, the entity that provides Road
Runner's cable Internet access and content aggregation services, we may provide
our services as a Road Runner subcontractor to cable operators that we and Road
Runner jointly designate to
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receive our services. We can offer no assurances that Road Runner will agree to
designate any cable operator systems to receive our services. Two of Road
Runner's strategic partners, Time Warner and Media One Group, are in the process
of being acquired and we cannot predict the effect these acquisitions will have
on our contract or on Road Runner. We may not be able to meet any system
deployment schedule proposed by Road Runner. Even if asked to provide services
to a Road Runner-contracted system, we may be asked to deploy far fewer full
turnkey homes than we originally anticipated. In a partial turnkey solution, we
deliver fewer services and incur lower costs than in a full turnkey solution,
but will also earn a smaller percentage of the subscription revenue. Since the
agreement provides that Road Runner will earn one warrant per home passed in
cable systems designated to receive service regardless of whether we deploy a
partial or full turnkey solution, our stockholders could suffer dilution in
exchange for potentially less profitable homes. Consequently, our agreement with
Road Runner may be of no material benefit to us.
Investors May Suffer Substantial Dilution From Other Transactions.
As an inducement to cause Charter to commit additional systems to us in
connection with network services agreements entered into in November 1998 and
May 2000, we have granted Charter a warrant to purchase up to 12,000,000 shares
of our common stock at an exercise price of $3.23 per share. The warrant becomes
exercisable at the rate of 1.55 shares for each home passed committed to us by
Charter under the November 1998 agreement. The warrant also becomes exercisable
at the rate of .775 shares for each home passed committed to us by Charter under
the network services agreement entered into in May 2000 up to 5,000,000 homes
passed and at a rate of 1.55 shares for each home passed in excess of 5,000,000.
Charter also has the opportunity to earn additional warrants to purchase shares
of our common stock upon any renewal of the May 2000 agreement. Such a renewal
warrant will have an exercise price of $10 per share and will be exercisable to
purchase one-half of a share for each home passed in the systems for which the
May 2000 agreement is renewed.
To the extent that Charter becomes eligible to exercise all or a
significant portion of these warrants, our stockholders will experience
substantial dilution. In addition, we have granted Microsoft a warrant to
purchase 387,500 shares of our common stock at an exercise price of $16.25, with
additional warrants issuable for homes passed above 2,500,000 homes passed
committed to us by Comcast. Our agreement with ServiceCo LLC provides for
granting of warrants to purchase one share of our common stock at a price of $5
per share up to a maximum of 5 million shares. We have issued and may in the
future issue additional stock or warrants to purchase our common stock in
connection with our efforts to expand the distribution of our services.
Stockholders could face additional dilution from these possible future
transactions.
One-way cable systems increase our operating costs and may not provide the
quality necessary to attract customers.
Although our service can operate in one-way cable systems, where data can
be transmitted at high speeds from the cable headend to the end user, the end
user in a one-way system can only transmit data back to the cable headend via a
standard phone line. Because we must support the telephone return component of
the system, we incur higher operating costs in one-way systems. Presently only
one-third of the systems where we are or will soon operate our services are
two-way systems. Over time, however, we expect most, if not all, of our cable
partners to upgrade and or rebuild their plants to provide increased bandwidth
and two-way capabilities. We believe faster uploads and the elimination of phone
line return costs make our service more valuable and may lead to higher customer
penetration rates, which in turn benefits the cable operator through higher
revenue. However, upgrading a cable system can be expensive and time-consuming
for the cable operator. Delays in upgrading one-way cable plants also makes our
services vulnerable to competition from alternative broadband technologies, and
may make our cable partner vulnerable to overbuilds by competitors.
Moreover, we do not require our cable partners to make these upgrades and they
have no legal obligation to do so. Consequently, if our cable partners do not
upgrade to two-way capability at the rate we anticipate, our financial results
may be negatively affected.
We May Have Difficulty Managing Our Growth Plans.
To manage our anticipated growth, we must continue to implement and improve
our operational, financial and management information systems; hire, train and
retain additional qualified personnel; continue to expand and upgrade core
technologies; and effectively manage our relationships with our end users,
suppliers and other third parties. Our expansion could place a significant
strain on our services and support operations, sales and administrative
personnel, and other resources. While we believe that we generally have
adequate controls and procedures in place for our current operations, our
billing software is not adequate to meet our growth plans. We are in the
process of replacing our billing software with an integrated billing and
customer care software system that we believe is capable of meeting our planned
future needs. We could also experience difficulties meeting demand for our
products and services. Additionally, if we are unable to provide training and
support for our products, the implementation process will be longer and
customer satisfaction may be
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lower. Our growth plan may include acquisitions. If we acquire a company, we
could have difficulty assimilating its operations, or assimilating and retaining
its key personnel. In addition if the demand for our service exceeds our ability
to provide our services on a timely basis, we may lose customers. There can be
no assurance that our systems, procedures or controls will be adequate to
support our operations or that our management will be capable of exploiting
fully the market for our products and services. The failure to manage our growth
effectively could have a material adverse effect on our business and financial
results.
The Market For Internet Services Is Highly Competitive.
We face competition from many competitors with significantly greater
financial, sales and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships
with advertisers, content and application providers and/or other strategic
partners than we have. We expect the level of this competition in cable and DSL
Internet access markets to intensify in the future. We face competition from
both cable modem service providers and from providers of other types of data, IP
telephony and Internet services for end users. Due to this intense competition,
there may be a time-limited market opportunity for our cable-based high speed
access and IP telephony services. There can be no assurance that we will be
successful in achieving widespread acceptance of our services before competitors
offer services similar to our current offerings, which might preclude or delay
purchasing decisions by potential customers.
Our competitors in the cable-based Internet access and IP Telephony markets
are those companies that have developed their own cable-based services and
market those services to cable system operators. Other competitors in the
cable-based Internet access and IP telephony markets are those companies seeking
to establish distribution arrangements with cable system operators in exurban
markets and/or provide one-way system capability. In addition, other cable
system operators have launched their own cable-based Internet services that
could limit the market for our services. Our agreement with Charter and other
operators provides us exclusive rights to provide high speed Internet access to
the customer's personal computer. However, Charter and other online service
providers may deploy TV-based Internet access services through set-top boxes or
other devices. Widespread commercial acceptance of any of these competitors'
products could significantly reduce the potential customer base for our
services, which could have a material adverse effect on our business and
financial results.
We also compete with traditional Internet service providers and other
competing broadband technologies including ISDNs, DSLs, wireless and satellite
data services. Moreover, our competitors include long distance inter-exchange
carriers, regional Bell operating companies and other local exchange carriers.
Many of these carriers are offering diversified packages of telecommunications
services, including Internet access, and could bundle these services together,
putting us at a competitive disadvantage. Widespread commercial acceptance of
any of these competing technologies or competitors' products could significantly
reduce the potential customer base for our services, which could have a material
adverse effect on our business and financial results.
Our Ability To Increase The Capacity And Maintain The Speed Of Our Network Is
Unproven.
We may not be able to increase the transmission capacity of our network to
meet expected end user levels while maintaining superior performance. While peak
downstream data transmission speeds across the cable infrastructure approach 10
Mbps in each 6 megahertz (Mhz) channel, actual downstream data transmission
speeds are almost always significantly slower depending on a variety of factors.
These factors include our intentional throttling of data traffic flowing through
the local network out in order to optimize the use our network capacity and to
sell tiered price-service packages, bandwidth capacity constraints between the
cable headend and the Internet backbone, the type and location of content,
Internet traffic, the number of active end users on a given cable network node,
the number of 6 Mhz channels allocated to us by our cable partner, the
capabilities of the cable modems used and the service quality of the cable
operators' fiber-coax facilities. The actual data delivery speed that an end
user realizes also will depend on the end user's hardware, operating system and
software configurations. There can be no assurance that we will be able to
achieve or maintain a speed of data transmission sufficiently high to enable us
to attract and retain our planned number of end users, especially as the number
of the end users grows. Because end users will share the available capacity on a
cable network node, we may underestimate the capacity we need to provide in
order to maintain peak transmission speeds. A perceived or actual failure to
achieve or maintain sufficiently high speed data transmission could
significantly reduce end user demand for our services or increase costs
associated with customer complaints and have a material adverse effect on our
business and financial results.
Our Network May Be Vulnerable To Security Risks.
Despite our implementation of industry-standard security measures the
networks we operate may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. Internet and online service providers in the past
have experienced, and in the future may experience, interruptions in service as
a result of the accidental or intentional actions of Internet users. Because the
cable infrastructure is a shared medium, it is inherently more vulnerable to
security risks than dedicated telephony technologies such as digital subscriber
lines. Moreover, we have no control over the security measures that our cable
partners and end users adopt.
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Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems maintained by us and our
end users. These events may result in liability to us or harm to our end users.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to our end users, which could have
a material adverse effect on our business and financial results. In addition,
the threat of these and other security risks may deter potential end users from
purchasing our services, which could have a material adverse effect on our
business and financial results.
We Will Need Additional Capital In The Future And It May Not Be Available On
Acceptable Terms.
The development of our business will require significant additional capital
in the future to fund our operations, to finance the substantial investments in
equipment and corporate infrastructure needed for our planned expansion, to
enhance and expand the range of services we offer and to respond to competitive
pressures and perceived opportunities, such as investment, acquisition and
international expansion activities. To date, our cash flow from operations has
been insufficient to cover our expenses and capital needs. We believe our
current cash, cash equivalents and short term investments, together with the
proceeds from unused loan facilities totaling $1.3 million, and $18.4 million of
available lease financing through various facilities, as well as additional loan
and lease financing facilities will be sufficient to meet our working capital
requirements, including operating losses, and capital expenditure requirements
into 2001, assuming we achieve our business plan. At such time, or sooner if we
do not achieve our business plan, we will require additional equity and/or debt
financing. There can be no assurance that additional financing will be available
on terms favorable to us, or at all. Charter can require any lender with liens
on our equipment placed in Charter headends to deliver to Charter a
non-disturbance agreement as a condition to such financings. We can offer no
assurance that we will be able to obtain additional secured equipment financing
for Charter systems subject to such a condition or that a potential lender will
be able to negotiate acceptable terms of non-disturbance with Charter. The sale
of additional equity or convertible debt securities may result in additional
dilution. If adequate funds are not available on acceptable terms, we may be
forced to curtail our operations. Moreover, even if we are able to continue our
operations, the failure to obtain additional financing could have a material and
adverse effect on our business and financial results and we may need to delay
the deployment of our services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
We may become subject to risks of international operations.
We are currently at the early stages of evaluating international expansion
opportunities. If we expand internationally, we would become subject to the
risks of conducting business internationally, including:
o Foreign currency fluctuations, which could result in reduced revenues
or increased operating expenses;
o Inability to locate qualified local partners and suppliers;
o The burdens of complying with a variety of foreign laws and trade
standards;
o Tariffs and trade barriers;
o Difficulty in accounts receivable collection;
o Potentially longer payment cycles;
o Foreign taxes;
o Unexpected changes in regulatory requirements including the regulation
of Internet access; and
o Uncertainty regarding liability for information retrieved and
replicated in foreign countries.
If we expand internationally, we will also be subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. There can be no assurance that the risks
associated with our proposed international operations will not materially and
adversely affect our business and financial results.
Risks Related To The Market For High Speed Internet Access
Our Cable Partners Could Sell Their Systems Or Be Acquired.
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In recent years, the cable television industry has undergone substantial
consolidation. If one of our cable partners is acquired by a cable operator that
already has a relationship with one of our competitors or that does not enter
into a contract with us, we could lose the ability to offer our cable modem
access services in the systems formerly served by our cable partner, which could
have a material and adverse effect on our business and financial results. Many
of the cable operators with whom we have contracts operate multiple systems,
thus increasing the risk to us if they are acquired. Moreover, it is common in
the cable industry for operators to swap systems, which could cause us to lose
our contract for a swapped system. Even though many of our contracts obligate
our cable partners to pay us a termination fee if they sell their system to
another operator who does not assume our contract, the potential termination fee
may not be adequate to ensure that the successor operator assumes our contract,
or to compensate us fully for the loss of future business in that system.
Our Cable Partners Could Lose Their Franchises.
Cable television companies operate under franchises granted by local or
state authorities that are subject to renewal and renegotiation from time to
time. A franchise is generally granted for a fixed term ranging from five to 15
years, although in many cases the franchise is terminable if the franchisee
fails to comply with the material provisions of its franchise agreement. No
assurance can be given that the cable operators that have contracts with us will
be able to retain or renew their franchises. The non-renewal or termination of
any of these franchises would result in the termination of our contract with the
applicable cable operator. Moreover, cable television operators are sometimes
subject to overbuilding by competing operators who offer competing video and
Internet access services. Moreover, many direct broadcast satellite (DBS)
operators can compete with cable operators and provide Internet access services
to their subscribers. Any such dilution of our cable operator market base can
adversely affect our potential market base.
Our Market Is Characterized By Rapid Technological Change And Our Services Could
Become Obsolete Or Fail To Gain Market Acceptance.
The market for our services is characterized by rapid technological
advances, evolving industry standards, changes in end user requirements and
frequent new service introductions and enhancements. For example, the North
American cable industry has adopted a set of interface specifications, known as
"DOCSIS," for hardware and software to support cable-based data delivery using
cable modems. Our ability to adapt to rapidly changing technology and industry
standards, such as DOCSIS, and to develop and introduce new and enhanced
products and service offerings will be significant factors in maintaining or
improving our competitive position reducing our costs, and our prospects for
growth. If technologies or standards applicable to our services become obsolete
or fail to gain widespread consumer acceptance, then our business and financial
results will be materially and adversely affected.
We currently anticipate that we will use a significant portion of our
working capital to acquire headend, cable modem and other related capital
equipment. The technology underlying that equipment is continuing to evolve. It
is possible that the equipment we acquire could become obsolete prior to the
time we would otherwise intend to replace it, which could have a material
adverse effect on our business and financial results.
We Depend On A Data Transmission Infrastructure Largely Maintained By Third
Parties Or Subject To Disruption By Events Outside Our Control.
Our success will depend upon the capacity, reliability and security of the
infrastructure used to carry data between our end users and the Internet. A
significant portion of that infrastructure is owned by third parties.
Accordingly, we have no control over its quality and maintenance. For example,
we rely on our cable partners to maintain their cable infrastructures. We also
rely on other third parties to provide a connection from the cable
infrastructure to the Internet. Currently, we have transit agreements with
UUNet, a division of MCI WorldCom, and others to support the exchange of traffic
between our data servers, the cable infrastructure and the Internet. Our
operations also depend on our ability to avoid damages from fires, earthquakes,
floods, power losses, telecommunications failures, network software flaws,
transmission cable cuts, Year 2000 problems and similar events. The occurrence
of any of these events could interrupt our services. The failure of the Internet
backbone, our servers, or any other link in the delivery chain, whether from
operational disruption, natural disaster or otherwise, resulting in an
interruption in our operations could have a material adverse effect on our
business and financial results.
We May Be Held Liable For Defamatory Or Indecent Content, As Well As Information
Retrieved Or Replicated.
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In part, our business involves supplying information and entertainment to
customers over the cable systems of our cable system partners. Accordingly we
face the same types of risks that apply to all businesses that publish or
distribute information, such as potential liability for defamation, libel,
invasion of privacy and similar claims, as well as copyright or trademark
infringement and similar claims. A number of third parties have claimed that
they hold patents covering various forms of online transactions or online
technologies. In addition, our errors and omissions and liability insurance may
not cover potential patent or copyright infringement claims and may not
adequately indemnify us for any liability that may be imposed.
The law relating to the liability of Internet and online service providers
for information carried or disseminated through their networks is unsettled.
There are some federal laws regarding the distribution of obscene or indecent
material over the Internet under which we are subject to potential liability.
These risks are mitigated by two federal laws. One, passed in 1996, immunizes
Internet service providers from liability for defamation and similar claims for
materials the Internet service provider did not create, but merely distributed.
The other, passed in 1998, creates a "safe harbor" from copyright infringement
liability for Internet service providers who comply with its requirements, which
we intend to do. These laws apply only in the United States; if we expand our
operations to other countries, our potential liability under the laws of those
countries could be greater.
We May Become Subject To Burdensome Government Regulation Or "Open Access"
Competition.
We may become subject to burdensome government regulation or "open access"
competition. The part of our business that involves installing and maintaining
the equipment used by cable systems to transmit high speed data in a
computer-accessible format is not regulated, but cable businesses are. Changes
in cable regulations, as they relate to our service, could negatively affect our
business in several ways.
First, while cable operators usually classify our service as a "cable
service," the law is unsettled. A federal appeals court recently declined to
treat Internet services as a cable service subject to FCC regulation under the
Telecommunications Act of 1996. If our service is not considered a cable
service, some local cable franchising authorities, in most cases cities or
counties, might claim that our cable partners need a separate franchise to offer
it. This franchise may not be obtainable on reasonable terms, or at all. Even if
the service is treated as cable service, local franchising authorities may seek
to impose "non-discrimination" or "open access" obligations on our cable
partners as a condition of franchise transfer or renewal. A consortium of
dial-up Internet service providers and large telephone companies are encouraging
local franchising authorities to ban the type of exclusive ISP-cable operator
arrangements that we have with our cable partners that make us the exclusive
supplier of high speed data on the cable systems where our service is offered.
If such arrangements are banned, we could face additional competition from other
Internet access providers using the cable system to connect to their customers,
which could have a material adverse effect on our business and financial
results. Moreover, both AOL-Time Warner and AT&T-Mindspring have announced plans
to open their networks to competing Internet service providers in the coming
years. We cannot predict the degree to which such voluntary or involuntary "open
access", will affect our business.
If our service is not considered a cable service, it might be treated as a
"telecommunications service." This classification could subject our cable
partners, and possibly us, to federal and state regulations as
"telecommunications carriers." This could negatively affect our business in
various ways. For example, if we or our cable partners were classified as
telecommunications common carriers, or otherwise subject to common carrier-like
access and non-discrimination requirements in the provision of our Internet over
cable service, we or they could potentially be subject to burdensome
governmental regulations, including those that regulate the terms, conditions
and prices for Internet connection services and interconnections with the public
switched telephone network, and require that we make contributions to the
universal service support fund. The Internet telephony services over cable plant
(commonly known as "Voice over IP") services that we expect to offer and deploy
may also be regulated as a common carrier telecommunications service. We or our
cable partners might then have to get a "telecommunications franchise" or a
license to operate as a "competitive local exchange carrier" from some states or
localities, which might not be available on reasonable terms, or at all. In
addition, regulatory decisions that make DSL technology services easier for
competing telephone companies to deploy over normal telephone lines and less
expensive for customers to buy, could negatively affect our business. The FCC
issued a line-sharing ruling in December 1999 that allows DSL providers to
simply lease the data spectrum of the customer's local loop from the incumbent
carrier. This may obviate the need for the customers to lease a secondary
DSL-provisioned loop from the incumbent carrier in order to obtain high speed
DSL data service, which in turn could make DSL service a more cost-competitive
alternative to our services. Finally, firms controlling digital broadcast
spectrum have announced plans to utilize a portion of that spectrum to offer
consumers high-bandwidth data delivery via broadcast. We cannot predict when or
whether this service will be offered, but if it is offered it could present
material competition to our services and could materially and adversely affect
our success in the marketplace.
We Depend On Our Key Personnel And May Have Difficulty Attracting And Retaining
The Skilled Employees We Need To Execute Our Growth Plan.
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Our future success depends on the continued service of our key personnel,
especially our Chief Executive Officer ("CEO"). Due to recent change in our
executive management, our Chief Operating Officer, Chief Strategy Officer and
Chief Technology Officer positions are currently open. We do not carry key
person life insurance on most of our personnel. Given our early stage and plans
for rapid expansion, the loss of the services of any of our executive officers
or the loss of the services of other key employees could have a material adverse
effect on our business and financial results. Our future success also depends on
our ability to attract, retain and motivate highly skilled employees,
particularly engineering and technical personnel. Competition for employees in
our industry is intense. We may not be able to retain our key employees or
attract, assimilate or retain other highly qualified employees in the future.
From time to time we have experienced, and we expect to continue to experience
in the future, difficulty in hiring and retaining highly skilled employees.
Risk Related To Trading In Our Stock
Because Of Our Relationship With Vulcan Ventures, New Investors Will Have Little
Influence Over Management Decisions.
Vulcan owns 37.2% of our outstanding stock. Vulcan's affiliate, Charter, also
has a warrant to purchase up to 12,000,000 shares of our common stock at an
exercise price of $3.23 per share. The warrant becomes exercisable at the rate
of 1.55 shares for each home passed committed to us by Charter under the network
services agreement entered into by Charter and us in November 1998. The warrant
also becomes exercisable at the rate of .775 shares for each home passed
committed to us by Charter under the network services agreement entered into in
May 2000 up to 5,000,000 homes passed and at a rate of 1.55 shares for each home
passed in excess of 5,000,000. Charter also has the opportunity to earn
additional warrants to purchase shares of our common stock upon any renewal of
the May 2000 agreement. Such a renewal warrant will have an exercise price of
$10 per share and will be exercisable to purchase one-half of a share for each
home passed in the systems for which the May 2000 agreement is renewed.
Accordingly, Vulcan will be able to significantly influence and possibly
exercise control over most matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control. In addition, conflicts of interest
may arise as a consequence of Vulcan's control relationship with us, including:
o Conflicts between Vulcan, as our controlling stockholder, and our
other stockholders, whose interests may differ with respect to, among
other things, our strategic direction or significant corporate
transactions,
o conflicts related to corporate opportunities that could be pursued by
us, on the one hand, or by Vulcan, on the other hand, or
o conflicts related to existing or new contractual relationships between
us, on the one hand, and Vulcan and its other affiliates, on the other
hand.
In particular, Vulcan is affiliated with Charter, currently our largest
cable partner. Additionally, Vulcan has the exclusive right to provide or
designate the first page our end users see when they log on to our service and,
if it provides that first page, will be entitled to all of the related revenues.
Moreover, Vulcan can prohibit us from providing content that competes with
content it chooses to provide, and can prohibit us from providing telephony
service if it chooses to provide those services.
The Future Sale Of Shares May Hurt Our Market Price.
A substantial number of shares of our common stock are available for
resale. If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at
times and prices that we deem appropriate.
There Has Been No Prior Market For Our Common Stock; Our Stock Price Is Likely
To Be Highly Volatile.
Prior to our initial public offering in June 1999, there was no public
market for our common stock. We cannot predict the extent to which investor
interest in us will lead to the development of an active trading market in our
stock or how liquid that market might become. The stock market has experienced
extreme price and volume fluctuations. In particular, the market prices of the
securities of Internet-related companies have been especially volatile. In the
past, companies that have experienced volatility in the market price of their
stock have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and a diversion of our management's attention and resources.
We Have Anti-Takeover Provisions.
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Certain provisions of our certificate of incorporation, our bylaws and
Delaware law, in addition to the concentration of ownership in Vulcan, could
make it difficult for a third party to acquire us, even if doing so might be
beneficial to our other stockholders.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited to interest rate sensitivity, which
is affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high-quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging or other derivative financial
instruments.
Part II - Other Information
Item 1 - Legal Proceedings.
None.
Item 2 - Changes in Securities and Use of Proceeds.
a. On May 3, 2000, Lucent purchased 1,250,000 shares of the Company's common
stock for $10.0 million. This common stock was sold in reliance on the exemption
from registration provided by section 4(2) of the Securities Act.
b. On June 4, 1999, we completed our initial public offering of Common Stock.
Concurrent with the initial public offering, we sold Common Stock to Cisco
Systems, Com21 and Microsoft under stock purchase agreements. The initial
proceeds to the Company after deducting underwriting discounts and commissions
of $13,081,250 were $199,768,750. Through March 31, 2000 the gross proceeds of
the offering have been applied as follows:
Direct or Indirect payment to others for:
Underwriting discounts and commissions $ 13,081,250
Other offering expenses $ 1,828,854
Working Capital $ 53,111,896
None of such payments were direct or indirect payments to investors or officers
or 10% stockholders of the Company. The remainder of the proceeds is invested
in short term, interest bearing investment grade securities.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
None.
Item 5 - Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
No such reports were filed during the quarter ended March 31, 2000.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
High Speed Access Corp.
Date May 15, 2000 By /s/ Daniel J. O'Brien
------------------------------ ---------------------------------
Daniel J. O'Brien
President
Date May 15, 2000 By /s/ George Willett
------------------------------ ---------------------------------
George Willett
Chief Financial Officer
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Exhibit Index
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.1 Network Services Agreement dated May 12, 2000 between Charter
Communications, Inc. and High Speed Access Corp.
10.2 Amended and Restated Securities Purchase Warrant dated May 12, 2000
among charter Communications, Inc., Charter Communications Holding
Company, LLC and High Speed Access Corp.
10.3 Registration Rights Agreement dated May 12, 2000 among Charter
Communications, Inc., Charter Communications Holding Company, LLC and
High Speed Access Corp.
10.4 Stock Purchase Agreement dated as of May 3, 2000 between Lucent
Technology, Inc. and High Speed Access Corp.
10.5 Office Building Lease dated as of February 4, 2000 between Koll-Lsi I,
LLC and High Speed Access Corp.
10.6 Forest Green Corporate Office Park Ormsby I Lease dated as of
February 26, 2000 between Faulkner Hinton/Ormsby I, LLC and High Speed
Access Corp.
27 Financial Data Schedule