1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 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
----------
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
----------
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 August 3, 2000. . .55,690,559
2
Index
PAGE
Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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 24
Part II - Other Information
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities and Use of Proceeds 24
Item 3 - Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of Security Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
2
3
Part I. Financial Information
Item 1. Financial Statements
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 56,070 $ 53,310
Short term investments 67,439 125,420
Accounts receivable, net of allowance for doubtful accounts of $165
and $63, respectively 854 393
Prepaid expenses and other current assets 4,096 4,308
------------ ------------
Total current assets 128,459 183,431
Property, equipment and improvements, net 54,541 39,308
Intangible assets, net 2,748 3,300
Deferred distribution agreement costs, net 9,484 4,042
Other assets 1,540 345
------------ ------------
Total assets $ 196,772 $ 230,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,716 $ 10,226
Accrued compensation and related expenses 3,850 3,842
Other current liabilities 8,198 3,916
Long-term debt, current portion 2,486 1,527
Capital lease obligations, current portion 4,385 3,176
------------ ------------
Total current liabilities 28,635 22,687
Long-term debt 3,417 4,035
Capital lease obligations 6,961 7,574
------------ ------------
Total liabilities 39,013 34,296
------------ ------------
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, 55,688,234
and 54,276,130 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 557 543
Class A common stock, 100,000,000 shares authorized, none issued
and outstanding
Additional paid-in-capital 635,955 618,823
Deferred compensation (240) (288)
Accumulated deficit (479,035) (422,807)
Accumulated other comprehensive income (loss) 522 (141)
------------ ------------
Total stockholders' equity 157,759 196,130
------------ ------------
Total liabilities and stockholders' equity $ 196,772 $ 230,426
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
4
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net revenue $ 2,757 $ 641 $ 4,751 $ 940
Costs and expenses:
Operating 14,844 4,027 30,790 6,150
Engineering 5,479 2,071 10,391 3,556
Sales and marketing 6,249 3,619 12,465 5,657
General and administrative (excluding non-cash compensation expense
from stock options) 5,107 2,361 9,140 3,647
Non-cash compensation expense from stock options 24 1,157 48 2,680
Amortization of distribution agreement costs 891 3,305 1,116 3,305
------------ ------------ ------------ ------------
Total costs and expenses 32,594 16,540 63,950 24,995
------------ ------------ ------------ ------------
Loss from operations (29,837) (15,899) (59,199) (24,055)
Investment income 1,866 647 3,991 766
Interest expense (530) (1,020)
------------ ------------ ------------ ------------
Net loss (28,501) (15,252) (56,228) (23,289)
Mandatorily redeemable convertible preferred stock dividends -- (604) -- (1,122)
Accretion to redemption value of mandatorily redeemable convertible
preferred stock -- (123,916) -- (229,148)
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (28,501) $ (139,772) $ (56,228) $ (253,559)
============ ============ ============ ============
Basic and diluted net loss available to common stockholders per share $ (0.52) $ (7.47) $ (1.03) $ (20.30)
============ ============ ============ ============
Weighted average shares used in computation of basic and diluted net loss
available to common stockholders per share 55,232,317 18,711,305 54,780,674 12,490,214
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
5
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
--------- ---------
OPERATING ACTIVITIES
Net loss $ (56,228) $ (23,289)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 7,599 2,237
Non-cash compensation expense from stock options 48 2,680
Amortization of distribution agreement costs 1,116 3,305
Changes in operating assets and liabilities excluding the effects of acquisitions:
Accounts receivable (461) (380)
Prepaid expenses and other current assets 212 (1,328)
Other non-current assets (1,195) (656)
Accounts payable 309 2,904
Accrued compensation and related expenses 8 396
Other current liabilities 4,282 1,539
--------- ---------
Net cash used in operating activities (44,310) (12,592)
--------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments (65,883) --
Sales and maturities of short-term investments 124,527 --
Purchase of property, equipment and improvements, net of leases (19,525) (11,612)
Purchase of customer base -- (290)
--------- ---------
Net cash provided by (used in) investing activities 39,119 (11,902)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 10,000 197,754
Net proceeds from issuance of mandatorily redeemable convertible preferred stock -- 24,987
Payments on capital lease obligations (2,978) (73)
Proceeds from long-term debt 1,213 1,682
Payments on long-term debt (872) (104)
Proceeds from exercise of stock options 588 --
Other -- 560
--------- ---------
Net cash provided by financing activities 7,951 224,806
--------- ---------
Net change in cash and cash equivalents 2,760 200,312
Cash and cash equivalents, beginning of period 53,310 17,888
--------- ---------
Cash and cash equivalents, end of period $ 56,070 $ 218,200
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 3,574 $ 1,780
Property and equipment purchases payable $ 2,547 $ 3,006
Distribution of Darwin Networks, Inc. subsidiary to shareholders $ -- $ 923
Warrants issued in connection with acquisitions $ -- $ 208
Warrants issued in connection with Microsoft Corp. agreements $ -- $ 3,235
Warrants earned in connection with distribution agreements $ 6,558 $ 684
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
6
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 modem to
residential and commercial customers primarily 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 or "Network
Services" solution. In a partial turnkey solution, the Company delivers fewer
services and incurs 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 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.
The Company also provides standard Internet access through traditional
dial-up service to residential and commercial customers. We are also expanding
our offering of services to include digital subscriber line ("DSL") Internet
access on a reseller basis, as well as expanded web site hosting and a range of
other value-added and ongoing support services, all primarily for commercial
customers. We recently entered into an agreement to acquire Digital Chainsaw,
Inc., d/b/a NetPerformance ("NetPerformance"), a one-stop provider of strategic
Internet services primarily to small and medium sized enterprises, including web
hosting, web site and creative design, legacy systems integration and overall
strategic consulting. Moreover, we are conducting technical and customer trials
for voice-over-Internet-Protocol ("VoIP") telephone service in collaboration
with Lucent Technologies ("Lucent") and other major vendors. We also intend to
continue expanding our suite of core connectivity and related value-added
services as broadband technology proliferates and additional services become
viable.
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 June 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending 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 and 138, is effective for the
Company's year ending December 31, 2001. As the Company does not currently
engage in or plan to engage in derivative, 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.
6
7
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, as amended, no later than the fourth 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.
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 three months ended June 30, 2000 and 1999, were $0.52 and $7.47 based on
weighted average shares outstanding of 55,232,317 and 18,711,305, respectively.
For the six months ended June 30, 2000 and 1999, basic and diluted net loss
available to common stockholders were $1.03 and $20.30 based on weighted average
shares outstanding of 54,780,674 and 12,490,214, 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
5,387,718 shares of common stock at June 30, 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
gains and losses on investments, totaled $27.3 million and $55.6 million for the
three and six months ended June 30, 2000, respectively, and $15.3 million and
$23.3 million for the three and six months ended June 30, 1999, respectively.
Note 5 - Distribution Agreements
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 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."
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 or "Network Services", including
system monitoring and
7
8
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. With respect to each home passed launched or intended to
be launched on or before the second anniversary date of the second network
services agreement, the Company will pay Charter, at Charter's option, a launch
fee of $3.00 per home passed committed. As of June 30, 2000, Charter had
requested payment of approximately $2.7 million of launch fees related to
systems to be deployed in the near future.
As of June 30, 2000, various cable partners had earned 1,215,623 warrants
under distribution agreements of which 1,016,879 of these warrants were earned
at a cost of $6.6 million in the three months ended June 30, 2000. Deferred
distribution agreement costs of $9.4 million, net of accumulated amortization of
$1.6 million were recorded in conjunction with these warrants at June 30, 2000.
Amortization of distribution agreement costs of $0.9 million and $1.1 million
was recognized in the statement of operations for the three and six months ended
June 30, 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 June 30, 2000 there were 16.6 million additional warrants
available to be earned under distribution 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.
Note 7 - Business Developments
In May 2000, Lucent Technologies (Lucent) purchased 1,250,000 shares of the
Company's common stock at fair value for total proceeds to the Company of $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 June 2000, the Company entered into an agreement to acquire Digital
Chainsaw, Inc. (Digital), a Florida-based web hosting and systems integration
company doing business as NetPerformance. The Company expects to issue
approximately 3.1 million shares of common stock in connection with this
transaction in exchange for all of the outstanding shares of Digital. Up to
$25.0 million of additional purchase price consideration in the form of the
Company's common stock may be issued to Digital shareholders if certain
performance targets are met by Digital during 2000 and 2001. The transaction is
expected to close in the third quarter of 2000, subject to the approval of
Digital's shareholders. The transaction will be accounted for under the purchase
method of accounting.
Note 8 - Subsequent Event
In August 2000 we announced an agreement in principle with Vulcan and
Charter, under which Vulcan and Charter would make an aggregate preferred equity
investment of $75 million. Under the agreement in principle Vulcan and Charter
will invest approximately equal amounts.
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 to residential and
commercial end users primarily using cable modem
8
9
technology. We primarily focus on residential and commercial end users in
exurban areas although we have recently begun to provide broadband services in
some urban markets. 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
second 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 dial up revenue, as a percentage of total
revenue, to decline over time as our high speed business and other service
revenue grows. Moreover, although 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
additional services such as Internet telephony, and to a lesser extent, from
local content. We are also expanding our offering of services to include DSL
Internet access on a reseller basis.
Currently, we receive no revenue from the provision of high speed internet
access in DSL but we expect to provide service via DSL to commercial customers
in the future. We offer DSL service as a reseller for Northpoint Communications
on a limited basis. We anticipate that our business will become more dependent
upon providing DSL service to commercial customers in the future.
We recently entered into an agreement to acquire NetPerformance, a one-stop
provider of strategic Internet services primarily to small- and medium-sized
enterprises, including web hosting, web site and creative design, legacy systems
integration and overall strategic consulting. Moreover, we are conducting
technical and customer trials for VoIP telephone service in collaboration with
Lucent and other major vendors, and plan to introduce second-line VoIP services
late this year. We also intend to continue expanding our suite of core
connectivity and related value-added services as broadband technology
proliferates and additional services become viable.
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.
9
10
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.
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.
The factors that may contribute to fluctuations in our operations 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.
Results Of Operations For The Three and Six Months Ended June 30, 2000 Compared
With The Three and Six Months Ended June 30, 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 three months ended June 30, 2000 and 1999 was $2.8
million and $0.6 million respectively, an increase of $2.2 million. For the
quarters ended June 30, 2000 and 1999, cable modem based subscription fees
contributed approximately 51% and 33% of the net revenue, traditional dial up
service fees contributed 16% and 47%, cable modem rental fees contributed 22%
and 16%, engineering services provided to cable partners contributed 4% and 0%,
and other fees from end users contributed 7% and 4%, respectively.
Total net revenue for the six months ended June 30, 2000 and 1999 was $4.8
million and $0.9 million respectively, an increase of $3.9 million. For the six
months ended June 30, 2000 and 1999, cable modem based subscription fees
contributed approximately 51% and 47% of the net revenue, traditional dial up
service fees contributed 18% and 32%, cable modem rental fees contributed 23%
and 16%, engineering services provided to cable partners contributed 3% and 0%,
and other fees from end users contributed 5% and 5%, respectively
Costs and Expenses
Operating. Operating costs for the three months ended June 30, 2000 and 1999
were $14.8 million and $4.0 million respectively, an increase of $10.8 million.
Operating costs for the six months ended June 30, 2000 and 1999 were $30.8
million and $6.2 million respectively, an increase of $24.6 million. 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.
10
11
Engineering. Engineering expenses for the three months ended June 30, 2000
and 1999 were $5.5 million and $2.1 million respectively, an increase of $3.4
million. Engineering expenses for the six months ended June 30, 2000 and 1999
were $10.4 million and $3.6 million respectively, an increase of $6.8 million.
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, including the offering of service via DSL, 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 three months ended
June 30, 2000 and 1999 were $6.2 million and $3.6 million respectively, an
increase of $2.6 million. Sales and marketing expenses for the six months ended
June 30, 2000 and 1999 were $12.5 million and $5.7 million respectively, an
increase of $6.8 million. 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, for the three months ended June 30, 2000 and 1999
were $5.1 million and $2.4 million respectively, an increase of $2.7 million.
General and administrative expenses, excluding non-cash compensation expense
from stock options and amortization of distribution agreement costs, for the six
months ended June 30, 2000 and 1999 were $9.1 million and $3.6 million
respectively, an increase of $5.5 million. 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 three months ended June 30, 2000 and 1999 was
$24,000 and $1.2 million respectively, a decrease of approximately $1.1 million.
Non-cash compensation expense from stock options for the six months ended June
30, 2000 and 1999 was $48,000 and $2.7 million respectively, a decrease of
approximately $2.6 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 charge for 189,875 compensatory options
issued to our directors which vested upon grant and 227,695 options issued under
the 1998 stock option plan that vested upon execution of the initial public
offering.
Amortization of distribution agreement costs. Amortization of distribution
agreement costs for the three months ended June 30, 2000 and 1999 was $0.9
million and $3.3 million, respectively, a decrease of $2.4 million. Included in
the second quarter of 1999 was $3.2 million of amortization expense related to
387,500 warrants issued to Microsoft. Amortization of distribution agreement
costs for the six months ended June 30, 2000 and 1999 was $1.2 million and $3.3
million, respectively, a decrease of $2.1 million. The costs consist of the
amortization of the value of 1,215,623 warrants earned under distribution
agreements for commitments of homes passed. We expect to incur additional
material non-cash charges related to further issuance 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 will 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. The restated 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 second 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.
Net Investment Income. Net investment income for the three months ended June
30, 2000 and 1999 was $1.3 million and $0.6 million, respectively. Net
investment income for the six months ended June 30, 2000 and 1999 was $3.0
million and $0.8 million, respectively. 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 in June of 1999.
11
12
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 and six months ended June 30, 2000.
Liquidity and Capital Resources
At June 30, 2000, we had cash, cash equivalents and short-term investments
of $123.5 million, compared with $178.7 million of cash, cash equivalents and
short-term investments at December 31, 1999. We had significant negative cash
flow from operating activities for the six months ended June 30, 2000. Cash used
in operating activities for the six months ended June 30, 2000 was $44.3
million, caused primarily by a net loss of $56.2 million offset by depreciation
and amortization of $7.6 million and an increase in other current liabilities of
$4.3 million.
Cash provided by investing activities for the six months ended June 30, 2000
was $39.1 million, the result of sales and maturities of short term investments
of $124.5 million, offset by the purchase of short term investments of $65.9
million. Also, cash paid for capital expenditures totaled $19.5 million for the
six months ended June 30, 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 and furniture and telephone and
computer equipment for new leased customer care and corporate headquarters
facilities, cable modems and central network hardware and software, reflecting
our expansion into new markets.
Cash provided by financing activities for the six months ended June 30, 2000
was $8.0 million, comprised primarily of $10.0 million in proceeds from issuance
of common stock to Lucent, partially offset by net payments on capital lease
obligations and long-term debt.
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 cable modem and DSL
connectivity and web hosting services;
o Changes in revenue splits with our cable partners;
o The terms under which we contract for and resell DSL;
o Price competition in the Internet, telephony and cable industries;
o The mix of services offered by us, including DSL, web hosting, legacy
systems and e-commerce integration, and whether we provide our cable
modem 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;
o End user turnover rates;
o Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
12
13
o Changes in our operating expenses including, in particular, personnel
expenses;
o The introduction of new products or services by us or our competitors
including our initiatives into DSL reseller services, VoIP, web hosting
and other value added services;
o Our ability to enter into strategic alliances with application service
providers and other 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 approximately $16 million in
unused lease facilities at June 30, 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 new leased customer care
and corporate headquarters facilities. Actual capital expenditures will be
significantly affected by the rate at which end users subscribe to 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. We will require additional
equity and/or debt financing in 2000 or early 2001. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
Moreover, the Company may not complete the proposed $75 million financing
announced in August with Vulcan or Charter on acceptable definitive terms, or at
all. The sale of additional equity or convertible debt securities may result in
additional dilution to our current stockholders. In addition, these newly issued
equity securities may have rights, preferences or privileges senior to those of
the existing holders of our common stock. If additional funds are raised through
the issuance of debt securities, these securities would have rights, preferences
and privileges senior to those of the existing holders of our common stock and
the terms of such debt could impose restrictions on our operations.
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. 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.
13
14
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 and 138, 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, as amended, no later than the fourth
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 markets 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 $127.1 million from April 3, 1998 (Inception) through
June 30, 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.
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.
14
15
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 June 30, 2000 we deployed our services in only 129
cable systems and we have approximately 41,000 residential cable modem end
users. We began offering our services on a partial turnkey basis in the third
quarter of 1999. As of the June 30, 2000, we had initiated partial turnkey
services in 16 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 network services agreement with Charter, we
anticipate that partial turnkey services will become a more significant part 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.
Additionally, we believe that partial turnkey services will become an
increasingly important part of our business. Under the partial turnkey
arrangements, such as the one we signed with Charter in May 2000, covering a
minimum of five million homes passed, we will earn less revenue and absorb less
operating expense per customer than under a full turnkey arrangement.
We have begun to offer DSL on a limited basis, as a reseller for NorthPoint
Communications. We expect to rollout DSL connectivity and related services on a
bundled basis, and will absorb significant operating losses in doing so. In this
effort, the Company intends to target markets in which it has existing DSL
re-seller arrangements and/or existing infrastructure or facilities. We
anticipate that our business will become more dependent upon providing DSL
service to commercial customers in the future.
We recently entered into an agreement to acquire NetPerformance, a one-stop
provider of strategic Internet services primarily to small and medium sized
enterprises, including web hosting, web site and creative design, legacy systems
integration and overall strategic consulting.
We have also initiated technical trials of IP Telephony in collaboration
with Charter and Lucent, as additional services for our cable partners to offer
their customers. 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.
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 and 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.
Moreover, the Company may not complete the proposed $75 million financing
announced in August with Vulcan or Charter on acceptable definitive terms, or at
all. The sale of additional equity or convertible debt securities may result in
additional dilution. If adequate funds are not available on acceptable
15
16
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."
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 and
DSL wholesalers;
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 DSL customers and cable headend equipment to
the Internet;
o Our success in marketing our connectivity, web hosting and other
advanced services 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 Whether our DSL wholesalers and incumbent local exchange carriers
maintain and upgrade their loops to support DSL services;
o The quality of the customer and technical support we provide; and
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 DSL services to end users and our cable
modem 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, Telephony 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;
16
17
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 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 36.3% of our outstanding common stock as of June 30, 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
17
18
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 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.
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 warrants to purchase up to 12,000,000 shares
of our common stock at an exercise price of $3.23 per share. These warrants
become exercisable, in respect of full turnkey systems at the rate of 1.55
shares for each home passed in excess of 750,000, and partial turnkey systems at
the rate of .775 shares for each home passed for up to 5,000,000 homes passed;
and at a rate of 1.55 shares for each additional home passed in excess of
5,000,000. To the extent that Charter becomes eligible to exercise all or a
significant portion of these warrants, the Company's 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. The Company has also granted Classic Cable, Inc.
and CMA Associates, both cable operators, a warrant to purchase 600,000 and
200,000 shares at an exercise price of $13, respectively, in connection with the
distribution of our services. 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 and retain various consulting
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.
18
19
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,
but can offer no assurances that it will successfully achieve such replacement,
or if it does achieve such replacement that it will do so within a time frame
that will permit it to achieve its growth objectives. 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 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 access 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
19
20
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. 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 May Become Subject To Risks Of International Operations.
We are currently at the early stages of evaluating international expansion
opportunities. If we expand internationally or enters into joint venture
arrangements to pursue international business opportunities, 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.
We Have Recently Made Acquisitions And Expect To Make Future Acquisitions Where
Advisable And Acquisitions Involve Numerous Risks.
Our growth is dependent upon market growth, our ability to enhance our
existing products and our ability to introduce new products on a timely basis.
One of the ways we have addressed and will continue to address the need to
develop new products is
20
21
through acquisitions of other companies. In particular, we recently agreed to
acquire Digital Chainsaw, Inc. in order to allow us to offer additional services
to our customers, including web hosting, web site and creative design, legacy
systems integration and overall strategic consulting. Acquisitions involve
numerous risks, including the following:
o difficulties in integration of the operations, technologies, and
products of the acquired companies;
o the risk of diverting management's attention from normal daily
operations of the business;
o potential difficulties in completing projects associated with purchased
in-process research and development;
o risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions; and
o the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition.
We must also maintain our ability to manage any such growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions we
made could harm our business and operating results.
Risks Related To The Market For High Speed Internet Access
Our Cable Partners Could Sell Their Systems Or Be Acquired.
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
21
22
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.
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.
The regulatory climate impacting our business is uncertain at this time, and
we may become subject to burdensome governmental regulation in the future.
Historically, the Company and its cable partners believed that for regulatory
purposes we would be considered a cable service provider, or an unregulated
information service provider. However, a federal appeals court (AT&T v. City of
Portland, 9th Cir. 6/22/00) recently concluded that a cable operator's provision
of transmission facilities in some instances is a telecommunications service
under the Communications Act. This classification could subject our cable
partners, and possibly HSA, to federal and state regulation as
"telecommunications carriers." If HSA or its 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, the Company or its cable partners could be subject to burdensome
governmental regulations. In particular, the government might seek to regulate
us and our cable partners with respect to 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, or Voice over
IP, we expect to offer and deploy may also be regulated as a common carrier
telecommunications service. Accordingly, the Company or its 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.
22
23
In addition, some local cable franchising authorities seek to impose
"non-discrimination" or "open access" obligations on our cable partners. Other
local franchising authorities might claim that our cable partners need a
separate franchise to offer our cable service. This franchise may not be
obtainable on reasonable terms, or at all. A consortium of dial-up Internet
service providers and large telephone companies are encouraging local
franchising authorities and the Federal Communications Commission to ban the
type of exclusive ISP-cable operator arrangements that HSA has with its cable
partners that make it the exclusive supplier of high speed data on the cable
systems where our service is offered. If such arrangements are banned, the
Company 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. Both AOL-Time
Warner and AT&T-Mindspring have announced plans to open their networks to
competing Internet service providers in the coming years, and AT&T and Time
Warner Cable have initiated "open-access" trials with selected ISPs in several
markets. Other ISPs are petitioning the FCC and various large cable operators
for access to cable plants. The Company cannot predict the degree to which such
voluntary or involuntary "open access" will affect its business.
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 the Company's business.
The Federal Communications Commission 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 obviates 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.
Some direct broadcast satellite video companies are also deploying
higher-bandwidth data delivery products. The Company cannot predict when or
whether these services will be offered, but if offered they 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.
Our future success depends on the continued service of our key personnel,
especially our Chief Executive Officer ("CEO") and Chief Operating Officer
("COO'). 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 36.3% 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. 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.
23
24
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.
Our Stock Price Is Likely To Be Highly Volatile.
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.
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. In May 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. In June 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 June 30, 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 $74,430,896
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.
24
25
Item 4 - Submission of Matters to a Vote of Security Holders.
The Corporations' Annual Meeting of Shareholders was held on June 6,
2000. Matters submitted to, and approved by, shareholders are listed below, as
is a tabulation of voting.
(1) The following persons nominated as Directors were elected:
Class I For Withheld
------- --- --------
Irving W. Bailey, II 46,703,677 42,520
Stephen E. Silva 45,346,997 1,399,200
Other Directors continuing in office are as follows: Michael E.
Gellert, David A. Jones, Jr. Jerald L Kent, Robert S. Saunders and
William D. Savoy.
There were no broker nonvotes.
(2) An amendment to the Corporation's 1999 Stock Option Plan to
increase the number of shares of Common Stock authorized for issuance
under the Plan was approved by the following vote.
For Withheld Abstain Broker Nonvotes
--- -------- ------- ---------------
30,537,533 344,348 6,337 15,957,979
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 June 30, 2000.
25
26
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 August 14, 2000 By /s/ Daniel J. O'Brien
--------------- ---------------------
Daniel J. O'Brien
President
Date August 14, 2000 By /s/ George Willett
---------------- ---------------------
George Willett
Chief Financial Officer
26
27
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
10.1 NetPerformance Agreement and Plan of Merger dated June 23,
2000
27 Financial Data Schedule