================================================================================
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 September 30, 2002.
[ ] 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 Number)
incorporation or organization)
9900 CORPORATE CAMPUS DRIVE, SUITE 3000
LOUISVILLE, KENTUCKY 40223
(Address of principal executive offices, including zip code)
502/657-6340
(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 October 31, 2002...40,294,783
INDEX
<Table>
<Caption>
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Item 4 - Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
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 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 64,346 $ 11,714
Short-term investments 1,224 6,067
Restricted cash -- 1,654
Accounts receivable, net of allowance for doubtful accounts of $584
at December 31, 2001 -- 7,080
Charter holdback 2,000 --
Prepaid expenses and other current assets 230 7,124
--------------- ---------------
Total current assets 67,800 33,639
Property, equipment and improvements, net -- 25,673
Deferred distribution agreement costs, net -- 8,439
Other non-current assets -- 4,917
--------------- ---------------
Total assets $ 67,800 $ 72,668
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 81 $ 2,962
Accrued compensation and related expenses 1,110 5,409
Other current liabilities 2,301 9,687
Long-term debt, current portion -- 2,201
Capital lease obligations, current portion -- 7,317
--------------- ---------------
Total current liabilities 3,492 27,576
Long-term debt -- 100
Capital lease obligations -- 2,759
--------------- ---------------
Total liabilities 3,492 30,435
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value (aggregate liquidation
preference of $75.0 million), 10,000,000 shares authorized; 75,000
shares issued and outstanding at December 31, 2001 -- 1
Common stock, $.01 par value, 400,000,000 shares authorized; 40,294,783 and
60,394,835 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively 403 604
Class A common stock, 100,000,000 shares authorized, none issued
and outstanding -- --
Additional paid-in capital 734,269 742,144
Deferred compensation (66) (1,763)
Accumulated deficit (670,298) (698,791)
Accumulated other comprehensive income -- 38
--------------- ---------------
Total stockholders' equity 64,308 42,233
--------------- ---------------
Total liabilities and stockholders' equity $ 67,800 $ 72,668
=============== ===============
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
General and administrative operating expenses:
General and administrative expenses $ 509 $ 1,234 $ 4,461 $ 4,280
Non-cash compensation expense from restricted stock 12 214 1,673 431
------------ ------------ ------------ ------------
Total general and administrative operating expenses 521 1,448 6,134 4,711
------------ ------------ ------------ ------------
Loss from continuing operations before other income
(expense), discontinued operations and extraordinary item (521) (1,448) (6,134) (4,711)
Investment income 328 536 852 2,835
Interest expense -- (551) (226) (1,778)
------------ ------------ ------------ ------------
Loss from continuing operations before discontinued
operations and extraordinary item (193) (1,463) (5,508) (3,654)
Discontinued operations:
Loss from discontinued operations, net -- (49,828) (4,217) (115,036)
Gain on sale of operations to Charter -- -- 40,259 --
Extraordinary item:
Loss on early extinguishment of debt and capital lease
obligations -- -- (2,041) --
------------ ------------ ------------ ------------
Net income (loss) $ (193) $ (51,291) $ 28,493 $ (118,690)
============ ============ ============ ============
Basic and diluted net income (loss) per share:
Loss from continuing operations $ (0.01) $ (0.02) $ (0.13) $ (0.06)
Loss from discontinued operations -- (0.85) (0.10) (1.96)
Gain on sale of operations to Charter -- -- 0.92 --
Loss on early extinguishment of debt and capital lease
obligations -- -- (0.04) --
------------ ------------ ------------ ------------
Net income (loss) $ (0.01) $ (0.87) $ 0.65 $ (2.02)
============ ============ ============ ============
Weighted average shares used in computation of basic and
diluted net income (loss) per share 40,208,580 58,811,036 43,938,876 58,755,437
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 28,493 $(118,690)
Adjustments to reconcile net income (loss) to cash used in operating activities
of continuing operations:
Loss from discontinued operations, net 4,217 115,036
Gain on sale of operations to Charter (40,259) --
Loss on early extinguishment of debt and capital lease obligations 2,041 --
Non-cash compensation expense from restricted stock 1,673 431
Changes in operating assets and liabilities excluding the effect of dispositions:
Prepaid expenses (206) (109)
Accrued compensation and related expenses 74 67
--------- ---------
Net cash used in operating activities of continuing operations (3,967) (3,265)
Net cash used in operating activities of discontinued operations (8,936) (69,481)
--------- ---------
Net cash used in operating activities (12,903) (72,746)
--------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments (67,324) (40,740)
Sales and maturities of short-term investments 72,129 31,411
--------- ---------
Net cash provided by (used in) investing activities of continuing operations 4,805 (9,329)
Net cash provided by (used in) investing activities of discontinued operations 76,160 (12,870)
--------- ---------
Net cash provided by (used in) investing activities 80,965 (22,199)
--------- ---------
FINANCING ACTIVITIES
Repurchase of common stock (4,449) --
Proceeds from exercise of stock options 36 --
--------- ---------
Net cash used in financing activities of continuing operations (4,413) --
Net cash used in financing activities of discontinued operations (11,017) (7,770)
--------- ---------
Net cash used in financing activities (15,430) (7,770)
--------- ---------
Net change in cash and cash equivalents from continuing operations (3,575) (12,594)
Net change in cash and cash equivalents from discontinued operations 56,207 (90,121)
--------- ---------
Net change in cash and cash equivalents 52,632 (102,715)
Cash and cash equivalents, beginning of period 11,714 114,847
--------- ---------
Cash and cash equivalents, end of period $ 64,346 $ 12,132
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 351
Property and equipment purchases payable $ 1,401
Warrants earned in connection with distribution agreements $ 2,621
Issuance of common stock in connection with distribution agreement $ 375
Issuance of common stock in connection with restricted stock grants $ 1,853
Issuance of common stock in connection with employer match for 401(k) Plan $ 97
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of High Speed
Access Corp. and its subsidiaries (herein referred to as the Company, we, us, or
our) included herein reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly 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 September 30, 2002 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 2002. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
The Company does not own or operate any revenue-generating businesses.
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.
These estimates are based on knowledge of current events and anticipated future
events. Actual results could differ from those estimates.
RECLASSIFICATION
The condensed consolidated statement of operations for the three and nine
months ended September 30, 2001, and the condensed consolidated statement of
cash flows for the nine months ended September 30, 2001, have been reclassified
for the effects of the discontinued operations of the Company's high speed
Internet access and related services and international Internet Service Provider
("ISP") infrastructure services business segments.
NOTE 2 - DISCONTINUED OPERATIONS
HIGH SPEED INTERNET ACCESS AND RELATED SERVICES
On February 28, 2002, the Company consummated the sale of substantially all
of its assets (the "Asset Sale") to CC Systems, LLC immediately after obtaining
the required approval of the Company's stockholders. The Asset Sale was effected
pursuant to an asset purchase agreement (the "Asset Purchase Agreement"), dated
September 28, 2001, between the Company and Charter Communications Holding
Company, LLC. Subsequent to September 28, 2001, Charter Communications Holding
Company, LLC assigned to CC Systems, LLC the rights to purchase assets and
certain other rights under the Asset Purchase Agreement and certain other
related agreements. Except as otherwise specifically noted or unless the context
otherwise requires, any reference herein to "Charter" should be deemed a
reference individually and/or collectively to any of the following Charter
entities: Charter Communications Holding Company, LLC, Charter Communications,
Inc., CC Systems, LLC, and Charter Communications Ventures, LLC.
The assets acquired by Charter pursuant to the Asset Purchase Agreement were
used by the Company primarily in the provision of high speed Internet access to
residential and commercial customers of Charter via cable modems. Subsequent to
the Asset Sale, we do not own or operate any revenue-generating businesses.
Pursuant to the terms of the Asset Purchase Agreement, Charter acquired
certain assets from us in consideration for (i) the payment to us of a cash
amount equal to $81.1 million, subject to certain adjustments, (ii) the
assumption of certain of our operating liabilities, and (iii) the tender to us
of all our outstanding shares of Series D Preferred Stock and warrants held by
Charter to purchase shares of common stock. On February 28, 2002, Charter held
back an aggregate of $3.4 million of the purchase price to secure certain
purchase price adjustments and indemnity claims against the Company under the
Asset Purchase Agreement. Of this amount, $1.4 million was
6
paid to us on April 30, 2002. The remaining $2.0 million, less any amounts used
to secure or satisfy actual indemnification claims, is payable to us on or about
February 28, 2003. We currently believe most of this amount will ultimately be
released to us in accordance with the Asset Purchase Agreement.
The Company received from Charter on February 28, 2002, a net cash amount
equal to $69.5 million. The payment consisted of the following (in millions):
<Table>
Cash purchase price per the Asset Purchase Agreement...... $ 81.1
--------
Adjustments:
Current assets acquired by Charter, as adjusted per
the Asset Purchase Agreement........................ 4.5
Capital leases, debt and other liabilities assumed
or paid by Charter.................................. (12.7)
Indemnity holdbacks.................................... (3.4)
--------
Total adjustments................................ (11.6)
--------
Net cash proceeds from sale to Charter................. $ 69.5
========
</Table>
Under the Asset Purchase Agreement:
o We sold substantially all of our revenue-generating fixed assets with a net
book value of $22.8 million at February 28, 2002.
o We sold all accounts receivable related to Charter systems with a net book
value of $4.1 million at February 28, 2002 for which we received a purchase
price adjustment.
o The Company paid to Charter $5.1 million for outstanding launch fees.
o Charter paid to the Company $2.2 million for expenses incurred by the
Company on Charter's behalf prior to September 28, 2001.
o Charter assumed certain of the Company's operating and capital lease
obligations with future minimum lease payments of $13.5 million.
o The Company paid $2.2 million to retire all outstanding long-term debt and
$8.1 million to pay-off substantially all of the Company's remaining
capital lease obligations. In connection with these payments, the Company
recorded a loss on the early extinguishment of debt and capital lease
obligations of $2.0 million during the first quarter of 2002.
o Warrants to purchase 2,650,659 shares of our Company's common stock earned
by Charter under various distribution agreements were cancelled.
o All of the Company's 75,000 outstanding shares of Series D Preferred Stock
were cancelled.
o Charter assumed certain commitments relating to circuits with a national
telecommunications company with future minimum payments of $7.4 million
through 2003.
o On February 28, 2002, the Company paid an additional $3.4 million of
expenses related to the Asset Sale. The total expenses paid were $6.4
million.
The Company recorded a gain on the Asset Sale to Charter of $40.3 million
during the first quarter of 2002. The components of the gain are as follows (in
millions):
<Table>
Net cash proceeds from sale to Charter...... $ 69.5
Fair value of preferred stock............... 3.7
Liabilities assumed by Charter.............. 14.4
Book value of assets acquired by Charter.... (44.3)
Indemnity holdbacks......................... 3.4
Transaction expenses........................ (6.4)
--------
Gain on Asset Sale.......................... $ 40.3
========
</Table>
Also on February 28, 2002, the Company purchased 20,222,139 shares of our
common stock from Vulcan Ventures Incorporated ("Vulcan") for an aggregate
purchase price of $4.4 million, or $0.22 per share. The consummation of the
Asset Sale was a condition precedent to the purchase of common stock from
Vulcan. The Board of Directors approved the cancellation of these shares in
March, 2002 and they were officially retired in September, 2002. Following the
consummation of the Asset Sale and the purchase of common stock from Vulcan,
none of Vulcan, Charter or any of their respective affiliates hold any equity
interest in the Company. Accordingly, the Company is no longer affiliated with
Vulcan, Charter, or any of their respective affiliates.
7
The Asset Sale completed the discontinuance of the Company's high speed
Internet access and related services business. During 2001, the Company exited
all of its cable system agreements except for those with Charter, sold the
assets of Digital Chainsaw, and discontinued its efforts to enter the digital
subscriber line ("DSL") market. In connection with these actions, the Company
recorded an asset impairment charge of $28.8 million for the write-down of fixed
assets and goodwill during the third quarter of 2001.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144)
on January 1, 2002. SFAS 144 supersedes Emerging Issues Task Force Issue No.
95-18 "Accounting and Reporting for a Discontinued Business Segment When the
Measurement Date Occurs after the Balance Sheet Date but before the Issuance of
Financial Statements" and requires a discontinued operation to be accounted for
under SFAS 144 if a measurement date for the discontinued operations is not
reached under Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business" prior
to the entity's period-end. The measurement date for the discontinuance of the
Company's high speed Internet access and related services business that included
the Asset Sale occurred on February 28, 2002, the date on which the Company's
stockholders approved the Asset Sale. Consequently, the results of operations of
the high speed Internet access and related services business have been presented
as discontinued operations and prior periods have been restated.
INTERNATIONAL ISP INFRASTRUCTURE SERVICES
On December 31, 2001, the Company terminated its agreement with Kabel
Nordrhein-Westfalen GmbH & Co. KG ("KNRW") in Germany for the provision of
international ISP infrastructure services. In connection with the discontinuance
of the international ISP services business segment, we incurred a one-time
charge of $0.6 million in the fourth quarter 2001 for the accrual of estimated
losses during the phase-out period, including personnel, travel, and facility
costs. The results of this operation have been classified as discontinued and
prior periods have been restated.
8
NOTE 3 - STOCKHOLDERS' EQUITY
Activity in stockholders' equity for the nine months ended September 30, 2002
was as follows (in thousands except share amounts):
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK
------------------- ---------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
Balance at December 31,
2001 75,000 $ 1 60,394,835 $ 604 $742,144 $(1,763) $(698,791)
Amortization of deferred
compensation 1,697
Exercise of stock
options 122,087 1 35
Purchase of treasury
stock
Retirement of
treasury stock (20,222,139) (202) (4,247)
Retirement of
preferred Stock (75,000) (1) (3,663)
Net unrealized loss on
Investments
Net income 28,493
------- --- ----------- ----- -------- ------- ---------
Balance at September 30,
2002 -- $-- 40,294,783 $ 403 $734,269 $ (66) $(670,298)
======= === =========== ===== ======== ======= =========
<Caption>
TREASURY STOCK OTHER
---------------------- COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT INCOME EQUITY
Balance at December 31,
2001 -- $ -- $ 38 $ 42,233
Amortization of deferred
compensation 1,697
Exercise of stock
options 36
Purchase of treasury
stock 20,222,139 (4,449) (4,449)
Retirement of
treasury stock (20,222,139) 4,449 --
Retirement of
preferred Stock (3,664)
Net unrealized loss on
Investments (38) (38)
Net income 28,493
----------- ------- ------ ----------
Balance at September 30,
2002 -- $ -- $ -- $ 64,308
=========== ======= ====== ==========
</Table>
9
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), comprised of net income (loss) and net
unrealized holding gains and losses on investments, totaled $(0.2) million and
$(51.3) million for the three months ended September 30, 2002 and 2001,
respectively, and $28.5 million and $(118.8) million for the nine months ended
September 30, 2002 and 2001, respectively.
NOTE 4 - INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share under the provisions of
SFAS No. 128, "Earnings per Share," ("SFAS 128"). Under the provisions of SFAS
128, basic net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of shares of common stock
outstanding during the period.
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 using the treasury stock method and assuming
vesting of restricted stock awards. The calculation of diluted net income (loss)
per share excludes potential common shares if the effect is anti-dilutive.
Basic and diluted net loss per share for the three months ended September
30, 2002 and 2001, were $(0.01) and $(0.87) based on weighted average shares
outstanding of 40,208,580 and 58,811,036, respectively. For the nine months
ended September 30, 2002 and 2001, basic and diluted net income (loss) per share
were $0.65 and $(2.02) based on weighted average shares outstanding of
43,938,876 and 58,755,437, respectively. Diluted net income (loss) per share
equals basic net income (loss) per share because the assumed exercise of the
Company's stock options and the vesting of restricted stock is anti-dilutive to
the loss from continuing operations per share. Stock options and warrants to
purchase 2,873,996 and 10,874,224 shares of our common stock at September 30,
2002 and 2001, respectively, were excluded from the calculation of diluted net
income (loss) per share as they were anti-dilutive.
NOTE 5 - OTHER CURRENT LIABILITIES
The components of other current liabilities at September 30, 2002 and
December 31, 2001 were as follows (in thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ----------
International operations.................. $ 345 $ 1,563
Other taxes............................... 260 780
Payable to cable partners................. -- 2,045
Lease and circuit termination expenses.... 399 2,478
Litigation................................ 168 1,516
Other..................................... 1,129 1,305
-------- --------
$ 2,301 $ 9,687
======== ========
</Table>
During the three months ended June 30, 2002, the Company paid to the former
stockholders of Digital Chainsaw, a company we acquired in August, 2000, and
subsequently sold the assets of in 2001, $1.5 million to settle their potential
claims against us. Of this amount, $1.25 million was expensed during the three
months ended December 31, 2001, and $0.25 million was expensed during the three
months ended March 31, 2002. This payment covered the claims of substantially
all of the former Digital Chainsaw stockholders. Additionally, the Company
expensed and paid an additional $0.2 million in litigation settlement costs
during the three months ended June 30, 2002. Included in Other Current
Liabilities at September 30, 2002, was $166,500 to reimburse plaintiffs' counsel
for the fees and expenses incurred in pursuit of the pending Delaware Class
Action Lawsuit settlement discussed below.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Delaware Class Action Lawsuits. The Company, our directors, certain
former directors as well as Charter and Paul Allen have been named as defendants
in four putative class action lawsuits filed in the Court of Chancery of the
State of Delaware (Denault v. O'Brien, et. al., Civil Action No. 19045-NC,
Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v. O'Brien, et.
al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil Action
19478-NC). All four lawsuits, which allege breach of fiduciary duty by the
individual defendants and Charter, have been consolidated. The complaints in the
first three lawsuits (with the Denault complaint the operative complaint in the
Consolidated Action) allege, among other things, that the cash purchase price
initially proposed by Charter, $73.0 million, was grossly inadequate and that
"[t]he purpose of the proposed acquisition is to enable Charter and Allen to
acquire [the Company's] valuable assets for their own benefit at the expense of
[the Company's] public stockholders." The fourth
10
lawsuit, Krim v. Allen, alleges that the $81.1 million purchase price under the
Asset Purchase Agreement was "grossly inadequate," and that Charter and Paul
Allen acted in a manner calculated to benefit themselves at the expense of HSA's
public shareholders.
The plaintiffs ask to represent the interests of all common stockholders of
the Company and seek (except in the case of Krim v. Allen) injunctive relief
preventing the Company from consummating the Asset Sale. All four lawsuits seek
to rescind the transaction and seek unspecified monetary damages.
We believe these lawsuits are entirely without merit. Nevertheless, lawyers
for the defendants in these lawsuits have had discussions with attorneys
representing the plaintiffs in the first three lawsuits concerning, among other
topics, financial and other changes to the terms of the draft Asset Purchase
Agreement that addressed the matters raised by the plaintiffs. As a result of
these discussions, a tentative agreement was reached to settle the first three
lawsuits subject to the completion of confirmatory discovery. The tentative
settlement is embodied in a Memorandum of Understanding (the "MOU"), dated as of
January 10, 2002, executed by counsel to all parties to the first three
lawsuits,. The MOU provides, among other things, that the settlement is premised
upon defendants' acknowledgment that the prosecution of the first three
litigations was a "substantial causal factor" underlying defendants' decision to
condition the Asset Sale on the public stockholder majority vote and was "one of
the causal factors" underlying Charter's decision to increase the consideration
to be paid to the Company in connection with the Asset Sale. The MOU further
provides that defendants shall, upon Court approval, pay up to $390,000, which
amount will be allocated among the defendants, to reimburse plaintiffs' counsel
for the fees and expenses incurred in pursuit of these litigations. At September
30, 2002, the Company had $166,500 accrued for its proportional share of these
fees and expenses.
Confirmatory discovery now has been completed. The settlement is subject to
final documentation and approval of the Delaware Chancery Court following notice
to class members. The claims asserted in the fourth lawsuit, Krim v. Allen, will
be covered by the settlement if it is ultimately approved by the Court.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. Willett) and one of our former Presidents (Mr.
Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan Securities, Inc.,
CIBC World Markets Corp., and Banc of America Securities, Inc., were named as
defendants in a purported class action lawsuit filed in the United States
District Court for the Southern District of New York (Ruthy Parnes v. High Speed
Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit alleges that our
Registration Statement, dated June 3, 1999, and Prospectus, dated June 4, 1999,
for the issuance and initial public offering of 13,000,000 shares of our common
stock to investors contained material misrepresentations and/or omissions,
alleging that our four underwriters engaged in a pattern of conduct to
surreptitiously extract inflated commissions greater than those disclosed in the
offering materials, among other acts of misconduct. The allegations against
Messrs. Willett and Pitcock were dismissed without prejudice on October 11, 2002
pursuant to a Reservation of Rights and Tolling Agreement dated as of July 20,
2002. With respect to allegations against the Company, we believe this lawsuit
is without merit and intend to vigorously defend against the claims made
therein. We express no opinion as to the allegations lodged against Lehman
Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp., and Banc
of America Securities Inc.
We do not believe that the results of the above-noted legal proceedings will
have a material adverse effect on our financial condition or cash flows.
However, the Company's defense of and/or attempts to settle favorably these
proceedings and claims may affect the timing and amount of any distribution of
proceeds from the Asset Sale.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued FASB Statement
No. 146 (SFAS 146), Accounting for Exit or Disposal Activities. SFAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 will be effective for exit or
disposal activities of the Company that are initiated after December 31, 2002.
In May 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of SFAS
Nos. 4, 44, 64, Amendment of SFAS 13, and Technical Corrections as of April
2002." SFAS 145 rescinds SFAS No. 4 ("SFAS 4"), "Reporting Gains and Losses from
Extinguishment of Debt," which required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. Under SFAS 145,
11
gains or losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in Accounting Principal's
Board Opinion No. 30 ("APB 30"), "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". Applying the
criteria in APB 30 will distinguish transactions that are part of an entity's
recurring operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. SFAS 145 will be
applicable to the Company for all periods beginning after December 31, 2002. Any
gains or losses on extinguishment of debt that were classified as extraordinary
items in prior periods presented that do not meet the criteria of APB 30 for
classification as extraordinary items will be reclassified to income from
operations.
NOTE 8 - SUBSEQUENT EVENT
On October 21, 2002, the Company filed a Definitive Proxy with the
Securities and Exchange Commission announcing its annual meeting of stockholders
to be held November 27, 2002. At the annual meeting, stockholders of record on
October 21, 2002 will be asked, among other items, to approve a Plan of
Liquidation and Dissolution (the "Plan") as recommended by the Company's Board
of Directors. If the Plan is approved, we intend to pay or provide for our
remaining obligations, liquidate our remaining assets, continue winding up the
Company's affairs and make periodic cash distributions to our stockholders. We
expect to make an initial cash distribution of between $1.35 per share and $1.40
per share to our stockholders in March 2003 (the "Initial Distribution").
Subsequent to this Initial Distribution, we expect to distribute any remaining
available cash proceeds, minus appropriate reserves for liabilities, to our
stockholders within 12 months of the date of the adoption of the Plan. We expect
to make a final liquidating distribution of any reserves not paid out to
creditors during the dissolution process to our stockholders three (3) years
after the date of adoption of the Plan and we complete the wind up of our
affairs. We estimate that the total aggregate amount of cash distributions made
subsequent to the Initial Distribution will be from $0.01 to $0.15 per share (in
the case of a $1.40 per share Initial Distribution) OR from $0.06 to $0.20 per
share (in the case of a $1.35 per share Initial Distribution).
At September 30, 2002, the Company has not adopted a liquidation basis of
accounting. The Company will adopt liquidation accounting as of the date on
which shareholder approval of the liquidation and dissolution is obtained. At
such time, we will record a Contingency Reserve in our financial statements as
required under Delaware law. We currently estimate that the Contingency Reserve
will range between $0.5 million to $6.0 million. However, we cannot assure you
that the Contingency Reserve we will establish will be adequate to cover all of
our expenses and liabilities expected to be incurred through completion of our
liquidation. Additionally, under the liquidation basis of accounting, we will
adjust our individual assets and liabilities to their estimated net realizable
values, which may result in either a net write-up or write-down of our equity.
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 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - 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, 2001.
OVERVIEW
On February 28, 2002, High Speed Access Corp. (hereinafter referred to as
the Company, we, us or our) consummated the sale of substantially all of its
assets (the "Asset Sale") to CC Systems, LLC immediately after obtaining the
required approval of our stockholders. The Asset Sale was effected pursuant to
an asset purchase agreement (the "Asset Purchase Agreement"), dated September
28, 2001, between the Company and Charter Communications Holding Company, LLC.
Subsequent to September 28, 2001, Charter Communications Holding Company, LLC
assigned to CC Systems, LLC the rights to purchase assets and certain other
rights under the Asset Purchase Agreement and certain other related agreements.
Except as otherwise specifically noted or unless the context otherwise requires,
any reference herein to "Charter" should be deemed a reference individually
and/or collectively to any of the following Charter entities: Charter
Communications Holding Company, LLC, Charter Communications, Inc., CC Systems,
LLC, and Charter Communications Ventures, LLC.
The assets acquired by Charter pursuant to the Asset Purchase Agreement were
used by us primarily in the provision of high speed Internet access to
residential and commercial customers of Charter via cable modems. Subsequent to
the Asset Sale, we do not own or operate any revenue-generating businesses.
12
Pursuant to the terms of the Asset Purchase Agreement, Charter acquired
certain assets from us in consideration for (i) the payment to us of a cash
amount equal to $81.1 million, subject to certain adjustments, (ii) the
assumption of certain of our operating liabilities, and (iii) the tender to us
of all our outstanding shares of Series D Preferred Stock and warrants held by
Charter to purchase shares of common stock. At the closing, Charter agreed to
certain reductions in our indemnification obligations under the Asset Purchase
Agreement. On February 28, 2002, Charter held back an aggregate of $3.4 million
of the purchase price to secure certain purchase price adjustments and indemnity
claims against the Company under the Asset Purchase Agreement. Of this amount,
$1.4 million was paid to us on April 30, 2002. The remaining $2.0 million, less
any amounts used to secure or satisfy actual indemnification claims, is payable
on or about February 28, 2003. After taking account of the various purchase
price adjustments, obligations paid by Charter on our behalf and the $3.4
million purchase price and indemnification holdbacks, the Company received from
Charter on February 28, 2002, a net cash amount equal to $69.5 million.
Also on February 28, 2002, we purchased 20,222,139 shares of our common
stock from Vulcan Ventures Incorporated ("Vulcan") for an aggregate purchase
price of $4.4 million, or $0.22 per share. The consummation of the Asset Sale
was a condition precedent to the purchase of our common stock from Vulcan. The
Board of Directors approved the cancellation of these shares in March, 2002 and
they were officially retired in June, 2002. Following the consummation of the
Asset Sale and the purchase of our common stock from Vulcan, none of Vulcan,
Charter or any of their respective affiliates hold any equity interest in the
Company. Accordingly, we are no longer affiliated with Vulcan, Charter, or any
of their respective affiliates.
As a result of the Asset Sale and other actions, we do not presently own or
manage any revenue-generating businesses. After reviewing various strategic
alternatives for the Company, our Board of Directors concluded that the
liquidation of the Company was the best available alternative for maximizing
stockholder value and, accordingly, was advisable and in the best interest of
the Company and it's stockholders. On August 13, 2002, our Board of Directors
unanimously adopted a resolution recommending that a plan of liquidation and
dissolution be submitted to our stockholders.
On October 21, 2002, the Company filed a Definitive Proxy with the
Securities and Exchange Commission announcing its annual meeting of stockholders
to be held November 27, 2002. At the annual meeting, stockholders of record on
October 21, 2002 will be asked, among other items, to approve a Plan of
Liquidation and Dissolution (the "Plan") as recommended by the Company's Board
of Directors. Certain material features of the Plan are summarized below; these
summaries are not complete and are subject in all respects to the provisions of,
and are qualified in their entirety by reference to, the Plan. The Plan is
subject to uncertainties and risks discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" as well as those discussed in other filings with the Securities and
Exchange Commission, including the Definitive Proxy on Form 14A filed on October
21, 2002.
If the Plan is approved, we intend to pay or provide for our remaining
obligations, liquidate our remaining assets, continue winding up the Company's
affairs and make periodic cash distributions to our stockholders. We expect to
make an initial cash distribution of between $1.35 per share and $1.40 per share
to our stockholders in March 2003 (the "Initial Distribution"). Subsequent to
this Initial Distribution, we expect to distribute any remaining available cash
proceeds, minus appropriate reserves for liabilities, to our stockholders within
12 months of the date of the adoption of the Plan. We expect to make a final
liquidating distribution of any reserves not paid out to creditors during the
dissolution process to our stockholders three (3) years after the date of
adoption of the Plan and we complete the wind up of our affairs. We estimate
that the total aggregate amount of cash distributions made subsequent to the
Initial Distribution will be from $0.01 to $0.15 per share (in the case of a
$1.40 per share Initial Distribution) OR from $0.06 to $0.20 per share (in the
case of a $1.35 per share Initial Distribution). For further information on the
proposed Plan, see "Liquidation Analysis and Estimates" under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
The Company is not soliciting the vote of any of its stockholders with
respect to the Plan pursuant to this Quarterly Report on Form 10-Q.
Our expenses during the wind up phase of the Company consist of the
following:
o General and administrative expenses, which consist primarily of
salaries for, and overhead costs associated with, our remaining
employees, legal and accounting fees, rent, miscellaneous office
expenses, insurance and severance benefits;
o Non-cash compensation expense from restricted stock, which consists of
the value of restricted stock issued to employees amortized over the
vesting period; and
o Liquidation transaction costs, which will consist primarily of legal,
printing, insurance, trustee fees, other professional fees and
miscellaneous costs associated with the proposed liquidation discussed
above.
13
At September 30, 2002, the Company has not adopted a liquidation basis of
accounting. The Company will adopt liquidation accounting as of the date on
which shareholder approval of the liquidation and dissolution is obtained. At
such time, we will record a Contingency Reserve in our financial statements as
required under Delaware law. We currently estimate that the Contingency Reserve
will range between $0.5 million to $6.0 million. However, we cannot assure you
that the Contingency Reserve we will establish will be adequate to cover all of
our expenses and liabilities expected to be incurred through completion of our
liquidation. Additionally, under the liquidation basis of accounting, we will
adjust our individual assets and liabilities to their estimated net realizable
values, which may result in either a new write-up or write-down of our equity.
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. As a result of such 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. In addition, the
results of any quarter do not indicate the results to be expected for a full
fiscal year.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED WITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 2002 and 2001 were $0.5 million and $1.2
million, respectively, a decrease of $0.7 million. The decrease in general and
administrative expenses for the three months ended September 30, 2002, was
primarily a result of a decrease in personnel costs to administer the accounting
and finance functions, as well as other wind up personnel, and lower outside
services including legal fees, partially offset by a charge of $170,000 related
to severance obligations for our former General Counsel. General and
administrative expenses for the nine months ended September 30, 2002 and 2001
were $4.5 million and $4.3 million, respectively, an increase of $0.2 million.
The increase in general and administrative expenses for the nine months ended
September 30, 2002, resulted primarily from $2.0 million in severance and
severance-related costs associated with the termination of certain employees,
including our former President and Chief Executive Officer and our former Chief
Operating Officer, and $0.2 in legal settlement expenses, offset by a decrease
in personnel costs to administer the accounting and finance functions, as well
as other wind-down personnel, and lower outside services including legal fees.
NON-CASH COMPENSATION EXPENSE FROM RESTRICTED STOCK. Non-cash compensation
expense from restricted stock for the three months ended September 30, 2002 and
2001 were $12,000 and $0.2 million, respectively, an decrease of $0.2 million.
Non-cash compensation expense from restricted stock for the nine months ended
September 30, 2002 and 2001 were $1.7 million and $0.4 million, respectively, an
increase of $1.3 million. This expense represents the fair market value of the
restricted stock at the time of grant amortized over the vesting period. The
decrease in the expense for the three months ended September 30, 2002, was the
result of the immediate vesting of restricted stock grants upon the termination
of our former President and Chief Executive Officer and our former Chief
Operating Officer on April 30, 2002. A charge of $1.3 million was recorded
during the second quarter of 2002 relating to this accelerated vesting thereby
lowering the expense in subsequent quarters.
NET INVESTMENT INCOME. Net investment income represents interest earned on
cash, cash equivalents and short-term investments, offset by interest expense
associated with debt and capital lease obligations. Net investment income
(expense) for the three months ended September 30, 2002 and 2001 was $0.3
million and $(15,000), respectively, an increase of $0.3 million. This increase
is primarily the result of having no outstanding debt or capital leases during
the period and therefore no interest expense. Net investment income for the nine
months ended September 30, 2002 and 2001 was $0.6 million and $1.1 million,
respectively, a decrease of $0.5 million. The decrease in investment income for
the nine months ended September 30, 2002 is the result of lower average
investment balances and lower interest rates during 2002. Offsetting the
reduction in investment income was a reduction in interest expense resulting
from the payoff of long-term debt and capital lease obligations during the first
quarter of 2002.
INCOME TAXES. At December 31, 2001, we had net deferred tax assets of $131.4
million primarily related to federal and state net operating loss carryforwards.
The net deferred tax asset has been fully offset by a valuation allowance based
upon the Company's history of operating losses. At December 31, 2001, we
accumulated net operating loss carryforwards for federal and state tax purposes
of approximately $287.1 million, which will expire beginning in 2018.
Utilization of these net operating losses will be subject to a substantial
annual limitation based upon the changes in the Company's ownership that
occurred on February 28, 2002, as provided in
14
Section 382 of the Internal Revenue Code of 1986 and similar state provisions.
We currently expect to generate taxable income in 2002 as a result of the Asset
Sale. This income will be offset by our net operating loss carryforwards.
LOSS FROM DISCONTINUED OPERATIONS, NET. There was no net loss from
discontinued operations for the three months ended September 30, 2002. The net
loss from discontinued operations for the three months ended September 30, 2001
was $49.8 million, including an asset impairment charge of $29.1 million, lease
termination charges of $3.9 million and severance costs of $3.2 million. The net
losses from discontinued operations for the nine months ended September 30, 2002
and 2001 were $4.2 million and $115.0 million, respectively, a decrease of
$110.8 million. The decreases are partially the result of two months of
operations in 2002, versus nine months of operations in 2001. Also, to preserve
cash, we implemented a series of significant cost reduction measures throughout
the second half of 2001 that had a significant impact on the operating results
in the first quarter of 2002. Among these actions, we:
o exited all of our cable system agreements except for those with
Charter;
o sold the operations of Digital Chainsaw;
o discontinued our efforts to enter the DSL market;
o exited all unnecessary leased space, and;
o reduced our workforce to include only those employees that Charter
agreed to hire in connection with the Asset Sale.
Additionally, in connection with the Asset Purchase Agreement, we entered in a
management agreement with Charter, pursuant to which Charter became solely
responsible for the purchase and installation of cable modems and related
equipment, while sharing responsibility for product marketing. The management
agreement terminated upon the consummation of the Asset Sale.
GAIN ON SALE OF OPERATIONS TO CHARTER. The Company recorded a non-recurring
gain on the Asset Sale to Charter of $40.3 million during the first quarter of
2002. The components of the gain are as follows (in millions):
<Table>
Net cash proceeds from sale to Charter....... $ 69.5
Fair value of preferred stock................ 3.7
Liabilities assumed by Charter............... 14.4
Book value of assets acquired by Charter..... (44.3)
Indemnity holdbacks.......................... 3.4
Transaction expenses......................... (6.4)
--------
Gain on Asset Sale........................... $ 40.3
========
</Table>
LOSS ON EARLY EXTINGUISHMENT OF DEBT AND CAPITAL LEASE OBLIGATIONS. The
Company recorded a non-recurring loss on the early extinguishment of debt and
capital lease obligations of $2.0 million during the first quarter of 2002. The
Company paid a total of $10.3 million to terminate debt and certain capital
leases with future minimum payments of $10.5 million. The $2.0 million loss
represents the amount of cash paid over the recorded net book value of $8.3
million.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had cash and cash equivalents of $64.3 million and
short-term investments of $1.2 million, compared with $11.7 million of cash and
cash equivalents and $6.1 million of short-term investments at December 31,
2001.
Cash used in operating activities of continuing operations for the nine
months ended September 30, 2002 was $4.0 million, consisting of a net loss from
continuing operations of $5.5 million and changes in operating assets and
liabilities of $0.1 million, offset by non-cash compensation expense from
restricted stock of $1.7 million.
Cash used in operating activities of discontinued operations for the nine
months ended September 30, 2002 was $8.9 million, which consisted of the
following (in millions):
<Table>
Loss from discontinued operations $ (4.2)
Depreciation and amortization 2.5
Collection of accounts receivable 2.1
Payment of liabilities related to discontinued operations (10.7)
Decreases in other assets 1.4
-------
Net cash used in operating activities of discontinued operations $ (8.9)
=======
</Table>
15
Cash provided by investing activities of continuing operations for the nine
months ended September 30, 2002 was $4.8 million, the result of sales and
maturities of short-term investments of $67.3 million, offset by purchases of
short-term investments of $72.1 million.
Cash provided by investing activities of discontinued operations for the
nine months ended September 30, 2002 was $76.2 million, primarily the result of
cash proceeds from the Charter transaction of $76.6 million, calculated as
follows:
<Table>
Net cash proceeds from sale to Charter....... $ 69.5
Capital leases assumed by Charter............ 2.1
Capital leases paid by Charter included in
financing activities of discontinued
operations.............................. 7.0
Indemnity holdback received.................. 1.4
Transaction expenses......................... (3.4)
-------
Net cash proceeds included in investing
activities of discontinued operations... $ 76.6
=======
</Table>
Cash used in financing activities of continuing operations for the nine
months ended September 30, 2002 was $4.4 million, primarily the result of the
repurchase of 20,222,139 shares of our common stock from Vulcan on February 28,
2002.
Cash used in financing activities of discontinued operations for the nine
months ended September 30, 2002 was $11.0 million, calculated as follows:
<Table>
Capital leases paid by Charter $ 7.0
Other early extinguishment capital leases payments 1.1
Scheduled capital leases payments 0.5
Early extinguishment debt payments 2.2
Scheduled debt payments 0.2
-------
Net cash used in financing activities of discontinued operations $ 11.0
=======
</Table>
EFFECTS OF THE ASSET SALE. As discussed above, the Company received from
Charter on February 28, 2002, a net cash amount equal to $69.5 million. The
payment consisted of the following (in millions):
<Table>
Cash purchase price per the Asset Purchase Agreement........ $ 81.1
--------
Adjustments:
Current assets acquired by Charter, as adjusted per
the Asset Purchase Agreement........................ 4.5
Capital leases, debt and other liabilities assumed or
paid by Charter..................................... (12.7)
Indemnity holdbacks................................... (3.4)
--------
Total adjustments............................. (11.6)
--------
Net cash proceeds from sale to Charter................ $ 69.5
========
</Table>
The Company recorded a gain on the Asset Sale to Charter of $40.3 million
during the first quarter of 2002. The components of the gain are as follows (in
millions):
<Table>
Net cash proceeds from sale to Charter....... $ 69.5
Fair value of preferred stock................ 3.7
Liabilities assumed by Charter............... 14.4
Book value of assets acquired by Charter..... (44.3)
Indemnity holdbacks.......................... 3.4
Transaction expenses......................... (6.4)
--------
Gain on Asset Sale........................... $ 40.3
========
</Table>
Also on February 28, 2002, the Company purchased 20,222,139 shares of its
common stock from Vulcan for an aggregate purchase price of $4.4 million, or
$0.22 per share. These shares were retired during the second quarter of 2002.
16
LIQUIDATION ANALYSIS AND ESTIMATES. If a plan of liquidation and dissolution
is approved, we intend to pay or provide for our remaining obligations,
liquidate our remaining assets, continue winding up the Company's affairs and
make periodic cash distributions to our stockholders. In the table below, we
have set forth the balances of our cash and liabilities as of September 30,
2002, and our current estimated range of the following:
o the Company's projected quarterly net losses, excluding liquidation
transaction costs, through March 31, 2003;
o the Company's liquidation transaction costs;
o the expected receipt of the Charter holdback; and
o the Contingency Reserve as discussed below.
WE EMPHASIZE THAT THESE ARE MERELY ESTIMATES. We cannot assure you that we will
be able to settle all of our liabilities and resolve our outstanding litigation
at the indicated values or within the indicated range or collect all of the
Charter holdback.
<Table>
<Caption>
RANGE
-------------------------------
LOW HIGH
-------------- --------------
(IN THOUSANDS)
EXCEPT PER SHARE DATA
-------------------------------
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AS OF
SEPTEMBER 30, 2002:
Cash and cash equivalents(1) $ 64,346 $ 64,346
Short-term investments(1) 1,224 1,224
-------------- --------------
Total cash, cash equivalents and short-term investments
as of September 30, 2002 65,570 65,570
-------------- --------------
LIABILITIES AS OF SEPTEMBER 30, 2002:
Accounts payable(1) 81 81
Accrued compensation and related expenses(1) 1,110 1,110
Other current liabilities(1) 2,301 2,301
-------------- --------------
Total liabilities as of September 30, 2002 3,492 3,492
-------------- --------------
Cash, cash equivalents and short-term investments in excess of total
liabilities as of September 30, 2002 62,078 62,078
-------------- --------------
Projected net losses, excluding liquidation transaction costs, for
the quarters ending(2):
December 31, 2002 (150) (25)
March 31, 2003 (150) (25)
Estimated obligations pursuant to severance terms of a Management Contract(3) (200) (200)
Liquidation transaction costs(4) (900) (700)
Charter holdback(5) 2,000 2,000
Contingency Reserves(6) (6,000) (500)
Estimated proceeds from the exercise of stock options(7) 77 --
-------------- --------------
Projected cash available for distribution to stockholders $ 56,755 $ 62,628
============== ==============
Shares of common stock outstanding as of October 31, 2002(7) 40,294,783 40,294,783
Estimated additional shares issued upon exercise of stock
Options 98,947 --
-------------- --------------
Total estimated fully-diluted shares of outstanding common
Stock 40,393,730 40,294,783
============== ==============
Projected liquidation value per share(8) $ 1.41 $ 1.55
============== ==============
</Table>
(1) Amounts per the unaudited September 30, 2002 financial statements
included herein.
(2) We expect that before any cash distribution to stockholders and any
liquidation administrative costs, our projected net loss after
September 30, 2002, exclusive of any unforeseen or unusual items, will
not exceed $50,000 per month. These losses will be incurred in
connection with the continued employment of, and overhead costs
associated with, our remaining two (2) employees, legal and accounting
fees, rent, miscellaneous office expenses and insurance. We expect to
partially fund these losses from the proceeds of, and interest income
earned on the proceeds of, the Asset Sale, but such interest income
alone generated by the proceeds of the Asset Sale will not be adequate
to fully offset these continuing general and administrative costs,
especially after we make the expected Initial Distribution.
17
(3) Consists of estimated aggregate severance benefits to which our
President and Chief Financial Officer is entitled under his existing
employment agreement if his employment is terminated.
(4) Consists of estimated legal, printing, insurance, trustee fees, other
professional fees and miscellaneous costs associated with the proposed
liquidation.
(5) Amount represents the potential indemnity claims that Charter held
back under the Asset Purchase Agreement, most of which we currently
believe will ultimately be released to us in accordance with the Asset
Purchase Agreement.
(6) A Contingency Reserve has not been recorded in our September 30, 2002
financial statements. If the stockholders approve the Plan, we will
adopt a liquidation basis of accounting. At such time, we will record
the Contingency Reserve in our financial statements as required under
Delaware law. Under the liquidation basis of accounting, we will also
make adjustments to our individual assets and liabilities to their
estimated net realizable values that may result in either a net
write-up or write-down of our equity. We currently estimate that the
Contingency Reserve will range between $0.5 million to $6.0 million.
However, we cannot assure you that the Contingency Reserve we will
establish will be adequate to cover all of our expenses and
liabilities expected to be incurred through completion of our
liquidation.
(7) The Company currently has 98,947 outstanding and exercisable stock
options with a strike price of less than $1.28 per share, the closing
price of a share of our common stock on October 31, 2002. For purposes
of calculating the "Low" range of the "Projected liquidation value per
share," we have assumed that all of these options will be exercised
and the estimated cash proceeds of $77,000 are paid to the Company,
even though their financial impact is not material to the "Projected
liquidation value per share."
In addition, there are 334,081 outstanding and exercisable stock
options with a strike price of $1.30 or $1.38 per share (the average
is $1.31 per share) which are excluded from the "Projected liquidation
per share value." We do not know and cannot predict whether any or all
of these options will be exercised, and in any event do not expect
their exercise to impact materially the "Projected liquidation value
per share."
All other outstanding stock options have a strike price in excess of
the "High" range of the "Projected liquidation value per share."
(8) The "Low" range estimate of $1.41 per share has increased by $.01 per
share from that previously estimated by management due to lower than
expected losses during the quarter ended September 30, 2002, and cash
proceeds from the sale of fixed assets.
The actual amount of cash available for distribution to stockholders and the
liquidation value per share may vary depending on various factors, including but
not limited to, final payout amounts on known, unknown and contingent
liabilities and the level of cash used in our operations. We cannot assure you
that our projected liquidation value per share of approximately $1.41 to $1.55
will be reflected in the trading price of our common stock or will be received
as a cash distribution.
The prospective financial information included in this Form 10-Q has been
prepared by, and is the responsibility of, the Company's management.
PricewaterhouseCoopers LLP has neither examined nor compiled the accompanying
prospective financial information and, accordingly, PricewaterhouseCoopers LLP
does not express an opinion or any other form of assurance with respect thereto.
This prospective financial information was not prepared with a view toward
compliance with the published guidelines of the Securities and Exchange
Commission or the guidelines established by the American Institute of Certified
Public Accountants for preparation and presentation of prospective financial
information.
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 of investments in interest-bearing money market
accounts with financial institutions.
Short-term investments are classified as available-for-sale and, as a
result, are stated at fair value. Short-term investments at September 30, 2002
are comprised solely of certificates of deposit. We record changes in the fair
market value of securities held for short-term investment as an equal adjustment
to the carrying value of the security and stockholders' equity.
LOAN FACILITIES. On February 28, 2002, in conjunction with the Asset Sale to
Charter, we paid off all remaining amounts due on our loan facilities.
18
LEASE OBLIGATIONS. During 2002, we paid $1.5 million to terminate certain
operating leases with future minimum lease payments of $2.7 million. In
addition, $10.2 million of future operating lease payments were assigned to
Charter as a result of the Asset Purchase Agreement that closed on February 28,
2002.
Also during 2002, we paid $8.6 million to terminate certain capital leases
with future minimum lease payments of $8.5 million. Also, $3.3 million of future
capital lease payments were assigned to Charter as a result of the Asset
Purchase Agreement that closed on February 28, 2002.
LEGAL PROCEEDINGS. The Delaware Class Action Lawsuits. The Company, our
directors, certain former directors as well as Charter and Paul Allen have been
named as defendants in four putative class action lawsuits filed in the Court of
Chancery of the State of Delaware (Denault v. O'Brien, et. al., Civil Action No.
19045-NC, Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v.
O'Brien, et. al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil
Action 19478-NC). All four lawsuits, which allege breach of fiduciary duty by
the individual defendants and Charter, have been consolidated. The complaints in
the first three lawsuits (with the Denault complaint the operative complaint in
the Consolidated Action) allege, among other things, that the cash purchase
price initially proposed by Charter, $73.0 million, was grossly inadequate and
that "[t]he purpose of the proposed acquisition is to enable Charter and Allen
to acquire [the Company's] valuable assets for their own benefit at the expense
of [the Company's] public stockholders." The fourth lawsuit, Krim v. Allen,
alleges that the $81.1 million purchase price under the Asset Purchase Agreement
was "grossly inadequate," and that Charter and Paul Allen acted in a manner
calculated to benefit themselves at the expense of HSA's public shareholders.
The plaintiffs ask to represent the interests of all common stockholders of
the Company and seek (except in the case of Krim v. Allen) injunctive relief
preventing the Company from consummating the Asset Sale. All four lawsuits seek
to rescind the transaction and seek unspecified monetary damages.
We believe these lawsuits are entirely without merit. Nevertheless, lawyers
for the defendants in these lawsuits have had discussions with attorneys
representing the plaintiffs in the first three lawsuits concerning, among other
topics, financial and other changes to the terms of the draft Asset Purchase
Agreement that addressed the matters raised by the plaintiffs. As a result of
these discussions, a tentative agreement was reached to settle the first three
lawsuits subject to the completion of confirmatory discovery. The tentative
settlement is embodied in a Memorandum of Understanding (the "MOU"), dated as of
January 10, 2002, executed by counsel to all parties to the first three
lawsuits,. The MOU provides, among other things, that the settlement is premised
upon defendants' acknowledgment that the prosecution of the first three
litigations was a "substantial causal factor" underlying defendants' decision to
condition the Asset Sale on the public stockholder majority vote and was "one of
the causal factors" underlying Charter's decision to increase the consideration
to be paid to the Company in connection with the Asset Sale. The MOU further
provides that defendants shall, upon Court approval, pay up to $390,000, which
amount will be allocated among the defendants, to reimburse plaintiffs' counsel
for the fees and expenses incurred in pursuit of these litigations. At September
30, 2002, the Company had $166,500 accrued for its proportional share of these
fees and expenses.
Confirmatory discovery now has been completed. The settlement is subject to
final documentation and approval of the Delaware Chancery Court following notice
to class members. The claims asserted in the fourth lawsuit, Krim v. Allen, will
be covered by the settlement if it is ultimately approved by the Court.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. Willett) and one of our former Presidents (Mr.
Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan Securities, Inc.,
CIBC World Markets Corp., and Banc of America Securities, Inc., were named as
defendants in a purported class action lawsuit filed in the United States
District Court for the Southern District of New York (Ruthy Parnes v. High Speed
Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit alleges that our
Registration Statement, dated June 3, 1999, and Prospectus, dated June 4, 1999,
for the issuance and initial public offering of 13,000,000 shares of our common
stock to investors contained material misrepresentations and/or omissions,
alleging that our four underwriters engaged in a pattern of conduct to
surreptitiously extract inflated commissions greater than those disclosed in the
offering materials, among other acts of misconduct. The allegations against
Messrs. Willett and Pitcock were dismissed without prejudice on October 11, 2002
pursuant to a Reservation of Rights and Tolling Agreement dated as of July 20,
2002. With respect to allegations against the Company, we believe this lawsuit
is without merit and intend to vigorously defend against the claims made
therein. We express no opinion as to the allegations lodged against Lehman
Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp., and Banc
of America Securities Inc.
19
We do not believe that the results of the above-noted legal proceedings will
have a material adverse effect on our financial condition or cash flows.
However, the Company's defense of and/or attempts to settle favorably these
proceedings and claims may affect the timing and amount of any distribution of
proceeds from the Asset Sale.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued FASB Statement
No. 146 (SFAS 146), Accounting for Exit or Disposal Activities. SFAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 will be effective for exit or
disposal activities of the Company that are initiated after December 31, 2002.
In May 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of SFAS
Nos. 4, 44, 64, Amendment of SFAS 13, and Technical Corrections as of April
2002." SFAS 145 rescinds SFAS No. 4 ("SFAS 4"), "Reporting Gains and Losses from
Extinguishment of Debt," which required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. Under SFAS 145, gains or losses from extinguishment
of debt should be classified as extraordinary items only if they meet the
criteria in Accounting Principal's Board Opinion No. 30 ("APB 30"), "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". Applying the criteria in APB 30 will distinguish transactions
that are part of an entity's recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as an extraordinary
item. SFAS 145 will be applicable to the Company for all periods beginning after
December 31, 2002. Any gains or losses on extinguishment of debt that were
classified as extraordinary items in prior periods presented that do not meet
the criteria of APB 30 for classification as extraordinary items will be
reclassified to income from operations.
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 WIND DOWN ACTIVITIES AND OUR PROPOSED LIQUIDATION AND
DISSOLUTION
WE EXPECT TO CONTINUE TO SPEND THE PROCEEDS OF THE ASSET SALE WHILE WE SEEK
SHAREHOLDER APPROVAL FOR A PLAN OF LIQUIDATION AND DISSOLUTION
We expect to incur a net loss of approximately $25,000 to $150,000 for the
quarter ending December 31, 2002. We expect that before any cash distribution to
stockholders and any liquidation administrative cost, after October 1, 2002, our
normal net loss, exclusive of any unforeseen or unusual items, including
severance charges, will not exceed $50,000 per month. These losses will be
incurred in connection with the continued employment of, and overhead costs
associated with, our remaining employees, fees for professional services and
insurance. We expect to partially fund these losses from the proceeds of, and
interest income earned on the proceeds of, the Asset Sale, but such interest
income alone generated by the proceeds of the Asset Sale will not be adequate to
fully offset these continuing overhead costs. To the extent we are unable to or
are delayed in obtaining stockholder approval of a plan of liquidation and
dissolution, we will likely continue to incur these losses and our net cash
value, and any amounts available for distribution to stockholders, will
decrease.
ALTHOUGH WE INTEND TO MAKE A DISTRIBUTION TO STOCKHOLDERS, WE HAVE NOT
DETERMINED THE EXACT AMOUNT OR TIMING OF THE LIQUIDATION DISTRIBUTION
The methods the Board and management used to estimate the value of our net
assets do not result in an exact determination of value nor are they intended to
indicate definitively the amount of cash you will receive in liquidation. We
cannot assure you that the amount you will receive in liquidation will equal or
exceed the price or prices at which the common stock has recently traded or may
20
trade in the future. Any distributions to you may be reduced by additional
liabilities we may incur and the ultimate settlement amounts of our liabilities.
The expected distribution of our cash to stockholders, including the
anticipated initial cash distribution of between $1.35 and $1.40 per share (the
"Initial Distribution") in March 2003, may be delayed from the timing we
discussed in the proxy statement for any number of reasons. These reasons
include the following:
1. It may take us longer than we anticipate to settle or finally resolve our
outstanding litigation. We do not intend to make the Initial Distribution
until the Delaware Class Action Suits (see "Legal Proceedings") are
finally settled. While we expect final settlement of those cases to occur
later this year, we cannot guarantee you that they will. Moreover, we
need additional time to evaluate and assess the progress of the IPO
Litigation (see "Legal Proceedings") in order to more accurately gauge
and reserve for our non-insured exposure, if any, in those cases.
2. Uncertainty remains regarding our expected collection of a $2.0 million
indemnity holdback due to us from Charter on February 28, 2003, minus the
amount of any claims Charter asserts against us under the Asset Purchase
Agreement. We are presently not aware of any claims that Charter intends
to assert against us under the Asset Purchase Agreement, nor are we aware
of any reason or basis upon which Charter would refuse or be unable to
pay us the $2.0 million indemnity holdback when due. Nevertheless, many
of our covenants, representations and warranties survived the closing of
the Asset Sale and will continue in effect until February 28, 2003, and
many others will not expire until several months, and in some cases,
another year, after the expected collection of the $2.0 million holdback
on February 28, 2003.
3. Additionally, even though we are not aware of any such pending or
threatened claims, a creditor of the Company might obtain an injunction
against our making the proposed distributions to you under the Plan on
the grounds that the amounts to be distributed are needed to provide for
the payment of our expenses and liabilities, including those that may
later be in dispute.
WE MIGHT MISCALCULATE OR FAIL TO ADEQUATELY RESERVE AN AMOUNT SUFFICIENT TO
COVER OUR CONTINGENT LIABILITIES.
Under Delaware law, the Board must establish a reserve for known and unknown
liabilities expected to be incurred through completion of our liquidation (the
"Contingency Reserve"), and the adequacy of that reserve will be reviewed prior
to making cash distributions to you. If we fail to create an adequate
Contingency Reserve for payment of our expenses and liabilities, you could be
held liable for payment to the Company's creditors of your proportional share of
amounts owed to creditors in excess of the Contingency Reserve. In that regard,
your liability would be limited to the amounts previously received by you from
us or a liquidating trust established by us. Accordingly, you could be required
to return some or all distributions previously made to you. In such an event,
you could receive nothing from the Company under the Plan. Moreover, you could
incur a net tax cost if you paid taxes on the amounts received from us and then
have to repay such amounts back to the Company's creditors. Unless you are able
to get a corresponding reduction in taxes in connection with your repayment, you
may end up having paid taxes on monies that you have had to return.
A Contingency Reserve has not been recorded in our September 30, 2002
financial statements. If the stockholders approve the Plan, we will adopt a
liquidation basis of accounting. At such time, we will record the Contingency
Reserve in our financial statements as required under Delaware law. Under the
liquidation basis of accounting, we will also make adjustments to our individual
assets and liabilities to their estimated net realizable values that may result
in either a net write-up or write-down of our equity. We currently estimate that
the Contingency Reserve will range between $500,000 to $6,000,000 (see
"Liquidation Analysis and Estimates"). However, we cannot assure you that the
Contingency Reserve we will establish will be adequate to cover all of our
expenses and liabilities expected to be incurred through completion of our
liquidation.
If the Plan is approved by the stockholders, a Certificate of Dissolution
will be promptly filed with the State of Delaware dissolving the Company.
According to Delaware General Corporation Law, we will continue to exist for
three years after the dissolution becomes effective or for a longer period if
the Delaware Court of Chancery requires us to, for the purpose of prosecuting
and defending suits against us and enabling us to dispose of our property,
discharge our liabilities and distribute to our stockholders any remaining
assets.
WE WERE DELISTED FROM THE NASDAQ NATIONAL MARKET, WHICH MAY ADVERSELY AFFECT THE
TRADING PRICE OF OUR COMMON STOCK
21
As of July 9, 2002, our common stock trades on the Over the Counter Bulletin
Board and Pink Sheets. These are generally considered less efficient markets,
and our stock price, as well as the liquidity of our common stock, may be
adversely affected as a result.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
At the present time, our stock price is trading at a substantial discount to
our net cash value per share. If we were to announce a substantial distribution
of proceeds from the Asset Sale, our stock could fluctuate suddenly and widely
depending on the amount and timing of such distribution and the amount of funds
retained by the Company for the payment of claims. In the past, companies that
have experienced volatility in the market price of their stock have been the
objects of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs to our
stockholders and a diversion of our management's attention and resources.
Additionally, the market price of our common stock may fluctuate
significantly in the future, and these fluctuations may be unrelated to our
performance or actions taken by the board with respect to a recommended plan of
liquidation. General market price declines or market volatility in the future
could adversely affect the price of the our common stock, and thus, the current
market price may not be indicative of future market prices.
WE MAY INADVERTENTLY BECOME AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED, AND AS A RESULT, BECOME SUBJECT TO ADDITIONAL
REGULATION
If we at any time own investment securities (not including U.S. government
securities) that have a value exceeding 40% of our unconsolidated assets (or,
under applicable rules, own investment securities (not including U.S. government
securities) having a value exceeding 45% of our unconsolidated assets and no
more than 45% of our net income is derived from these investment securities) and
do not qualify for an exemption under the Investment Company Act, we may be
required to register as an investment company with the SEC, which would subject
us to extensive additional regulation.
To the extent we may be subject to the registration requirements of the
Investment Company Act, we may be permitted to rely on a temporary exemption
from these registration requirements for a period of up to one year, provided
that we had a bona fide intent to be engaged primarily, as soon as reasonably
possible and in any event at the end of one year, in a business other than that
of investing, reinvesting, owning, holding or trading in investment securities.
We would not be permitted to rely on this exemption more than once in any
three-year period.
If we rely on this exemption from the registration requirements of the
Investment Company Act and continue to own investment securities having a value
exceeding 40% of our unconsolidated assets (or, under applicable rules, own
investment securities (not including U.S. government securities) having a value
exceeding 45% of our unconsolidated assets and no more than 45% of our net
income is derived from these investment securities) at the end of the one-year
exemption period, we may be forced to invest any remaining proceeds from the
Asset Sale in U.S. government securities that have a lesser rate of return than
corporate or other non-U.S. government securities.
YOU MAY NOT BE ABLE TO BUY OR SELL SHARES OF OUR COMMON STOCK IF WE CLOSE OUR
STOCK TRANSFER BOOKS.
We have not had an operating business since February 28, 2002. If we
complete our plans to liquidate and dissolve, we may close our stock transfer
books at some time following the effectiveness of the filing of the Certificate
of Dissolution in Delaware, after which you will no longer be able to transfer
shares. At the present time, we expect to keep our stock transfer books open for
some period of time after we make the Initial Distribution. Additionally, we
will likely close our stock transfer books at such time as we transfer our
remaining assets and liabilities to a liquidating trust, although no
determination has been made yet as to when that might occur. However, if the
Board determines that our continued compliance with the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
unduly burdensome on us or otherwise inconsistent with the Plan, we may close
our stock transfer books sometime prior to the Initial Distribution.
For additional discussion of the Risks associated with the Company's
proposed Plan of Dissolution and Liquidation and related cash distributions, the
creation of a liquidating trust, etc., stockholders are referred to and
encouraged to read in its entirety the Company's Definitive Proxy Statement on
Schedule 14A as filed with the Securities and Exchange Commission on October 21,
2002
22
(available at http://www.sec.gov) in connection with the Company's 2002 Annual
Meeting, which is scheduled for November 27, 2002.
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 instruments.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's principal executive officer and
chief financial officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, he has concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Delaware Class Action Lawsuits. The Company, our directors, certain
former directors as well as Charter and Paul Allen have been named as defendants
in four putative class action lawsuits filed in the Court of Chancery of the
State of Delaware (Denault v. O'Brien, et. al., Civil Action No. 19045-NC,
Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v. O'Brien, et.
al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil Action
19478-NC). All four lawsuits, which allege breach of fiduciary duty by the
individual defendants and Charter, have been consolidated. The complaints in the
first three lawsuits (with the Denault complaint the operative complaint in the
Consolidated Action) allege, among other things, that the cash purchase price
initially proposed by Charter, $73.0 million, was grossly inadequate and that
"[t]he purpose of the proposed acquisition is to enable Charter and Allen to
acquire [the Company's] valuable assets for their own benefit at the expense of
[the Company's] public stockholders." The fourth lawsuit, Krim v. Allen, alleges
that the $81.1 million purchase price under the Asset Purchase Agreement was
"grossly inadequate," and that Charter and Paul Allen acted in a manner
calculated to benefit themselves at the expense of HSA's public shareholders.
The plaintiffs ask to represent the interests of all common stockholders of
the Company and seek (except in the case of Krim v. Allen) injunctive relief
preventing the Company from consummating the Asset Sale. All four lawsuits seek
to rescind the transaction and seek unspecified monetary damages.
We believe these lawsuits are entirely without merit. Nevertheless, lawyers
for the defendants in these lawsuits have had discussions with attorneys
representing the plaintiffs in the first three lawsuits concerning, among other
topics, financial and other changes to the terms of the draft Asset Purchase
Agreement that addressed the matters raised by the plaintiffs. As a result of
these discussions, a tentative agreement was reached to settle the first three
lawsuits subject to the completion of confirmatory discovery. The tentative
settlement is embodied in a Memorandum of Understanding (the "MOU"), dated as of
January 10, 2002, executed by counsel to all parties to the first three
lawsuits,. The MOU provides, among other things, that the settlement is premised
upon defendants' acknowledgment that the prosecution of the first three
litigations was a "substantial causal factor" underlying defendants' decision to
condition the Asset Sale on the public stockholder majority vote and was "one of
the causal factors" underlying Charter's decision to increase the consideration
to be paid to the Company in connection with the Asset Sale. The MOU further
provides that defendants shall, upon Court approval, pay up to $390,000, which
amount will be allocated among the defendants, to reimburse plaintiffs' counsel
for the fees and expenses incurred in pursuit of these litigations. At September
30, 2002, the Company had $166,500 accrued for its proportional share of these
fees and expenses.
23
Confirmatory discovery now has been completed. The settlement is subject to
final documentation and approval of the Delaware Chancery Court following notice
to class members. The claims asserted in the fourth lawsuit, Krim v. Allen, will
be covered by the settlement if it is ultimately approved by the Court.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. Willett) and one of our former Presidents (Mr.
Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan Securities, Inc.,
CIBC World Markets Corp., and Banc of America Securities, Inc., were named as
defendants in a purported class action lawsuit filed in the United States
District Court for the Southern District of New York (Ruthy Parnes v. High Speed
Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit alleges that our
Registration Statement, dated June 3, 1999, and Prospectus, dated June 4, 1999,
for the issuance and initial public offering of 13,000,000 shares of our common
stock to investors contained material misrepresentations and/or omissions,
alleging that our four underwriters engaged in a pattern of conduct to
surreptitiously extract inflated commissions greater than those disclosed in the
offering materials, among other acts of misconduct. The allegations against
Messrs. Willett and Pitcock were dismissed without prejudice on October 11, 2002
pursuant to a Reservation of Rights and Tolling Agreement dated as of July 20,
2002. With respect to allegations against the Company, we believe this lawsuit
is without merit and intend to vigorously defend against the claims made
therein. We express no opinion as to the allegations lodged against Lehman
Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp., and Banc
of America Securities Inc.
We do not believe that the results of the above-noted legal proceedings will
have a material adverse effect on our financial condition or cash flows.
However, the Company's defense of and/or attempts to settle favorably these
proceedings and claims may affect the timing and amount of any distribution of
proceeds from the Asset Sale.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In accordance with the Asset Purchase Agreement, Vulcan and Charter
tendered to the Company all 75,000 shares outstanding of Series D convertible
preferred stock on February 28, 2002.
(b) On February 28, 2002, the Company purchased 20,222,139 shares of its
common stock from Vulcan for an aggregate purchase price of $4.4 million, or
$0.22 per share. The consummation of the Asset Sale was a condition precedent to
the purchase of common stock from Vulcan. The Board of Directors approved the
cancellation of these shares in March 2002, and they were officially retired in
June 2002.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K - None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
High Speed Access Corp.
Date: November 12, 2002 By /s/ George E. Willett
----------------- -----------------------------------
George E. Willett
President and Chief Financial Officer
I, George E. Willett, President and Chief Financial Officer of High Speed Access
Corp., certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of High Speed
Access Corp. (the "Company");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this Quarterly Report;
(4) I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) I have disclosed, based on our most recent evaluation, to the
Company's auditors and the Audit Committee of the Company's Board of
Directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
(6) I have indicated in this Quarterly Report whether there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 By /s/ George E. Willett
----------------- ----------------------------------
George E. Willett
President and Chief Financial Officer
25
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
</Table>